housing outlook

Australian Housing Outlook 20112014 Prepared by BIS Shrapnel October 2011

housing outlook

DISCLAIMER: The information contained in this publication has been obtained from BIS Shrapnel Pty Limited and does not necessarily represent the views or opinions of QBE Lenders Mortgage Insurance Limited (QBE LMI). This publication is provided for informational purposes only and is not intended to constitute legal, financial or other professional advice and has not been provided with regard to the investment objectives or circumstances of any particular reader. While based on information believed to be reliable, no guarantee is given that it is accurate or complete and no warranties are made by QBE LMI as to the accuracy, completeness or usefulness of any of the information in this publication. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) (if any) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The information referred to may not be suitable for specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgment. Recipients should obtain their own appropriate professional advice. Neither QBE LMI nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This material may not be reproduced, redistributed, or copied in whole or in part for any purpose without QBE LMIs prior expressed consent. QBE Lenders Mortgage Insurance Limited ABN 70 000 511 071.

contents
1. Executive summary 2. Economic outlook State of play Interest rates 3. Housing finance Buyer demand Loans to first home buyers Loans to upgraders Loans for residential investment Loan activity and the effect on prices 4. Rental markets Vacancy rates and rental growth Rental growth 5. Home affordability 6. Demand Overseas migration Interstate migration Population Demand and supply 4 12 12 14 16 16 18 18 20 22 24 24 26 28 30 30 32 36 36 7. Capital city overviews and price forecasts Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin 8. Appendix 40 40 42 44 46 48 50 52 54 56

housing outlook

introduction
Welcome to the latest QBE lmiHOUSING OUTLOOK report for Australia, exclusively prepared, researched and written by BIS Shrapnel. As we release our report, volatility in the global economy has never been greater and forecasting never more challenging. Against this background, QBE LMI is cautiously optimistic about the outlook for the Australian housing market, as reflected in the report. The resilience of the Australian economy since the Global Financial Crisis (GFC) can primarily be attributed to the strength of the resource and private sector which should continue to grow, as demand from Asia is expected to continue for sometime. While the housing market has certainly slowed, BIS Shrapnels research shows that the conditions for a significant correction over the forecast period to 2014 are just not there. In our 2011-2014 lmiHOUSING OUTLOOK report, BIS Shrapnel has forecast low price growth in Melbourne of 6%; moderate price growth of between 6% and 8% in Adelaide, Hobart and Canberra; solid price growth of 16% in Brisbane and 17% in Darwin; and strong price growth of around 19%-20% in Perth and Sydney. First home buyer demand, which collapsed in 2010/11, is now forecast to enter a recovery phase in 2012 as buyer confidence slowly improves. This is supported by lower house price growth and interest rates remaining at current levels, which will improve home affordability. QBE LMI has been supporting the Australian mortgage market for more than 45 years. During that time we have experienced many cycles, the recession we had to have (late 80s early 90s) and more recently the GFC (2008/9). The Australian economy and housing market have demonstrated their resilience to deal with such events. Our lmiHOUSING OUTLOOK report confirms that Australia is well placed to deal with any uncertainty that our economy or housing market faces in the next few years. Mortgage lenders, with our support, are able to mitigate any concerns they have about the volatility and uncertainties in the Australian market today. We trust you will find this report informative and insightful at a time when there is widespread pessimism in the market. We have a lot to be grateful for being in a great country with a sound economy which, notwithstanding the global short-term challenges, provides us with much to look forward to in the future.

Ian Graham CEO, QBE LMI

...Australia is well placed to deal with any uncertainty that our economy or housing market faces in the next few years.

housing outlook

1. executive summary
House price growth across the eight capital cities was dampened by weak purchaser sentiment through 2010/11. A setback in economic conditions, with Gross Domestic Product (GDP) growth easing from 2.3% in 2009/10 to 1.8% in 2010/11, and the associated weakness in employment conditions, stymied confidence. Nevertheless, purchaser activity had already started to slow from 2010 as the expiry of the First Home Owners Grant Boost Scheme (FHOGBS) at the end of 2009 substantially reduced the pool of potential first home buyers in 2010 by pulling forward first home buyers into 2009. Non-first home buyer (primarily upgrader) demand subsequently fell away through 2010 without strong demand for entry level dwellings. In addition, the deterioration in home affordability over 2009/10, after strong house price growth and a 160 basis point rise in the standard housing variable interest rate, was exacerbated by another 40 basis point increase in November 2010. This took the housing variable interest rate to 7.8%, where it currently remains. Consequently, owner occupier

...confidence among first home buyers and upgraders is expected to gain some traction and lead to residential price growth in the next 12 months.

demand has continued to weaken in 2011, with total loans to first home buyers in July 2011 being 53% below their peak at November 2009, and 32% below their five year average in the year to July 2011. Loans to non-first home buyers have followed the trend and in July 2011 were 12% beneath their December 2009 high and in the year to July 2011 were 13% below their average over the past five years. The higher costs of borrowing have also impacted on cash flows for investors, while slowing price growth or price falls across the capitals have lowered capital growth expectations and provided an additional disincentive for investors to enter the market. Moreover, rental growth, which had already slowed in Brisbane and Perth in 2009/10, did likewise in Melbourne, Adelaide and Darwin in 2010/11 as high levels of dwelling completions caused vacancy rates to ease. The decline in demand by investors has been reflected by the value of loans for residential investment contracting by 30% over 2010/11.

As a result, median house price growth has been flat to declining across the capital cities over 2010/11. However, marginal rises in the median house price did occur in Sydney (+2%), Hobart (+1%), and Canberra (+1%). A marginal decline came through in Adelaide (0.1%), while the resource centres of Brisbane (5.4%), Perth (6%), and Darwin (7.3%) experienced more severe declines. Melbourne recorded a 5.7% increase in its median house price over 2010/11, although this masks a 1.8% decline over the first six months to June 2011. With the housing variable interest rate forecast to remain stable over 2011/12, and the economic outlook becoming more positive on the back of rising business investment, confidence among first home buyers and upgraders is expected to gain some traction and lead to residential price growth in the next 12 months.

First home buyer demand is expected to enter a recovery phase through 2012. Compared to the five year average of 131,000, loans to first home buyers rose to 191,000 in 2009 - indicating that around 60,000 first home buyers brought forward their purchase to take advantage of the FHOGBS. With loans falling to 96,000 in 2010, around 35,000 of this has been accounted for, with much of the remainder to be worked through 2011 before increasing more significantly through 2012. The weakening economic environment over 2010/11 is likely to have delayed some of the recovery in first home buyers. Nevertheless, as the economic outlook becomes more positive, first home buyer confidence is anticipated to strengthen, supporting rising upgrader activity as demand for their existing properties subsequently improves. This is forecast to drive greater residential property turnover, and to a lesser extent price growth, as demand from upgraders works its way through to higher price points. Investor demand is also expected to begin to increase on the back of further rises to rents and evidence that the current price softness is beginning to turn.

housing outlook

1. executive summary (cont.)

The momentum in prices is forecast to pick up in 2012/13, underpinned by stronger economic conditions that will be primarily attributed to accelerating investment in the mining and resource sector. Strong demand for minerals from China and other Asian countries, who have mostly escaped the debt issues and weak sentiment plaguing America and Europe, has continued to support high commodity prices and the expansion of mining projects. As more projects begin their expansion, it should lead to stronger employment and income growth, particularly in Western Australia, Queensland and the Northern Territory, which have the greatest exposure to the mining sector. The benefits to each of the property markets in these states will be escalating underlying demand, as population growth strengthens due to high net inflows from migration. In addition, with construction forecast to be well below underlying demand in these states over the forecast period, the existing deficiency in these states is projected to become more acute and place further upward pressure on both prices and rents. However, inflationary pressures are also likely to arise due to the projected strong income growth and skills shortages emerging from the mining sector. This is expected to maintain a tightening bias towards monetary policy, with interest rates forecast to rise by 175 basis points during the two years to 2013/14 and forecast to peak at 9% in the first half of 2014. The interest rates rise could sustain a high Australian Dollar and continue to impede the foreign competitiveness of the non-resource sectors of the economy; namely, agriculture, manufacturing, tourism, services, and education. This will be strongly felt in the economies of New South Wales and Victoria, where mining receipts constitute a much smaller part of the revenue base. The increase to interest rates is also expected to have a greater impact on property markets in Sydney and Melbourne where affordability is most constrained, although the significant deficiency of residential dwellings in Sydney should still underpin moderate price growth. Price growth is forecast to be strongest over the next three years in Perth and Sydney, with both capitals experiencing forecast rises of around 19%20% in median house prices. The substantial level of investment in mining and resource capacity in Western Australia will drive solid income and population growth, creating robust demand for housing in Perth. In Sydney, the significant deficiency of residential dwellings is likely to continue to apply upward pressure on both rents and dwelling prices, attracting demand in particular from investors. Constrained affordability has resulted in little annual movement in prices in Sydney since 2004, with the exception of the 14.3% increase in the median house price in 2009/10, which highlights the level of pent up demand that can be released as affordability and the economic outlook improves.

Table 1: Median house prices by capital city Source: Real Estate Institute of Australia, BIS Shrapnel
Quarter ended June 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013* 2014* Sydney $000 220.0 241.0 272.0 296.0 337.0 364.0 452.0 519.0 552.0 528.0 526.8 532.6 546.0 551.2 629.9 644.7 % Var 3.3 9.5 12.9 8.8 13.9 8.0 24.2 14.8 6.4 -4.3 -0.2 1.1 2.5 1.0 14.3 2.3 Melbourne $000 155.0 179.0 208.0 232.0 264.0 302.0 330.5 355.0 365.0 360.0 371.1 415.0 450.0 442.0 560.0 590.0 % Var 3.3 15.5 16.2 11.5 13.8 14.4 9.4 7.4 2.8 -1.4 3.1 11.8 8.4 -1.8 26.7 5.4 Brisbane $000 130.0 134.0 139.0 145.0 155.0 160.0 185.0 235.0 307.3 315.0 326.0 366.3 420.0 419.0 460.0 435.0 % Var 0.0 3.1 3.7 4.3 6.9 3.2 15.6 27.0 30.7 2.5 3.5 12.4 14.7 -0.2 9.8 -5.4 Adelaide $000 111.5 114.9 120.3 125.0 135.0 148.4 170.0 220.0 250.0 275.0 287.0 312.8 370.0 360.0 410.5 410.0 % Var -1.1 3.0 4.7 3.9 8.0 9.9 14.6 29.4 13.6 10.0 4.4 9.0 18.3 -2.7 14.0 -0.1 Perth $000 127.0 135.0 143.3 148.5 157.8 165.7 185.7 210.2 255.0 295.0 400.0 455.0 445.0 450.0 500.0 470.0 % Var -0.8 6.3 6.1 3.6 6.3 5.0 12.1 13.2 21.3 15.7 35.6 13.8 -2.2 1.1 11.1 -6.0 Hobart $000 112.0 105.0 107.0 115.0 130.0 120.3 130.0 180.0 252.0 260.0 277.0 310.0 325.0 336.0 366.5 370.0 % Var 6.7 -6.3 1.9 7.5 13.0 -7.5 8.1 38.5 40.0 3.2 6.5 11.9 4.8 3.4 9.1 1.0 Canberra $000 158.0 155.0 160.0 158.0 184.0 203.0 227.6 320.0 372.4 352.5 380.1 426.5 467.5 450.0 520.0 525.0 % Var 3.9 -1.9 3.2 -1.3 16.5 10.3 12.1 40.6 16.4 -5.3 7.8 12.2 9.6 -3.7 15.6 1.0 Darwin $000 168.0 178.0 180.0 176.0 190.4 187.0 200.0 206.0 255.0 279.8 350.0 395.0 423.3 469.9 555.3 515.0 % Var -6.7 6.0 1.1 -2.2 8.2 -1.8 7.0 3.0 23.8 9.7 25.1 12.9 7.2 11.0 18.2 -7.3

675.0 725.0 770.0

4.7 605.0 7.4 6.2 620.0 623.0

2.5 455.0 2.5 485.0 0.5 505.0

4.6

415.0

1.2 490.0 3.6 530.0 2.3 565.0

4.3

377.0

1.9 535.0 2.1 550.0 2.6 565.0

1.9 2.8 2.7

540.0 570.0 600.0

4.9 5.6 5.3

6.6 430.0 4.1 440.0

8.2 385.0 6.6 395.0

Total Forecast Growth (%) 2011-2014* 19.4 5.6 16.1 7.3 20.2 6.8 7.6 16.5

* BIS Shrapnel forecasts

housing outlook

1. executive summary (cont.)

Solid median house price growth of 16% and 17% is expected over the next three years in Brisbane and Darwin, respectively. Similar to Perth, residential demand in both cities will benefit from booming activity in the mining and resource sectors. However, price growth is anticipated to be slightly behind that for Sydney and Perth in both cities based on the current weaker local economic conditions, and the later commencement of the investment projects in the pipeline and their subsequent flow on effects through to house prices. More moderate house price increases totalling between 6% and 8% are forecast for Adelaide, Hobart and Canberra through to June 2014. All three cities are estimated to experience an excess of housing stock through the forecast period, which will reduce the scope for more solid growth. The weakest house price growth is expected in Melbourne, with its median value forecast to rise by less than 6% over the forecast period. Melbourne is the only major capital where affordability is currently worse than June 2008 levels when housing interest rates peaked at 9.6%. Combined with record levels of new dwelling supply coming through and eroding the current dwelling deficiency, any upward pressure on prices will be minimal. Price forecast comparison The QBE lmiHOUSING OUTLOOK has been compiled by BIS Shrapnel since 2002. The report analyses the drivers of the residential market and draws these together in providing a basis for forecasts of residential house prices. Chart 1 compares the three year median house price forecasts since the inaugural 2002 edition and the actual movement in the national median house price from 2000 to 2011. The national median is derived from a weighted median of each of our capital city forecasts. Charts for comparisons between forecast and actual median house prices for each individual capital city can be found in the Appendix. The median house price forecasts have mostly moved in the same direction as eventual price growth, although the forecasts have typically been slightly more conservative than the actual median price rises over most three year periods. Through the past decade, the sharp rises in prices over 2007 and 2008 were not anticipated. The interest rate rises at the time were expected to have a greater dampening effect on price growth. More recently, forecasts made over 2007 to 2009 have accounted for the rises in prices that subsequently occurred, despite the challenging economic conditions and negative expectations at the time. The national median house price at June 2011 ($553,000) is slightly below that anticipated in the 2010 edition of the QBE lmiHOUSING OUTLOOK ($555,000), largely due to the weaker economic environment over the past twelve months, with shocks to international demand and financial markets weighing down on consumer sentiment. This has pushed out the expected recovery in house prices by twelve months in this QBE lmiHOUSING OUTLOOK compared to that envisaged in last years.

Chart 1: Comparison between actual and three year forecasts, national weighted median house price Source: Australian Bureau of Statistics, Real Estate of Australia, BIS Shrapnel Forecasts
% 650 600 550 500 450 400 350 300 250 200 00

Actual 02 03 04 05 06 07 08 09 10 11 Forecast
01 02 03 04 05 06 07 08 09 10 11 12 13 14 Year ended June

housing outlook

1. executive summary (cont.)

Why Australian house prices wont collapse Purchaser sentiment has been plagued by fears that further downside exists to housing prices across Australia, particularly in light of the substantial declines seen in many other Western countries. It is forecast that the underlying dwelling deficiency will be key to preventing substantial declines as seen in the United States. This is highlighted in Charts 2 and 3, which respectively show the impact of a dwelling stock deficiency on price growth, contrasting price performance in the United States residential market with the English residential market. The property market in England contains a deficiency of dwellings, resulting in prices stabilising rather than experiencing a decline, as occurred in the United States. Price movements across Australia over 2010/11 are similar to the English property market, where the undersupply of dwellings has maintained steady prices. The United States already contained a sizeable dwelling oversupply at June 2006 when prices peaked, before demand fell steeply over the following two years to June 2008 and resulted in the surplus of residential dwellings doubling in this period. This led to house prices experiencing a significant correction of 19%, with prices declining by a further 15% over 2008/09 as demand continued to contract. Prices have stabilised since, with the substantial oversupply being maintained by ongoing weak demand, and removing any scope for prices to rise. Prices in England experienced a rise of similar magnitude to the United States through to a peak in 20072008. However, prices only corrected by 11% in 2009 before recovering in 2010 to just below those of 20072008, and stabilising at this level in 2011. Economically, both the United States and England are in a similar position, with the United States recording an unemployment rate of 9.1% in August 2011, while the unemployment rate in England for the three months to July was 7.9%. Obviously there are also separate local economic factors influencing supply and demand for housing and driving prices, although this comparison would suggest that the underlying deficiency has played a part in supporting prices in England, compared to the United States, where the excess dwelling stock appears to be still having an impact. Consequently, given the substantial underlying dwelling deficiency in most markets in Australia over the three years to 2013/14, we anticipate that positive pressures on prices will remain. This will ensure not only that prices hold up as interest rates rise, but also underpin some growth at least in the initial stages of interest rate rises, as the deficiency feeds through to rental growth and occupancy.

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Chart 2: Underlying demand and supply, dwelling deficiency/oversupply and price growth, United States of America, 2000 to 2011 Source: US Census Bureau, Standard & Poors, BIS Shrapnel estimates
Number of dwellings (000) 3,000 2,500 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 00 Deciency Oversupply Price ($000) 220 200 180 160 140 120 100 80 60 40 20 0 01 02 03 04 05 06 07 08 09 10 11 Year ended June

Underlying demand Dwelling completions Case-Shiller house price index (RHS) Cumulative deficiency/surplus

Chart 3: Underlying demand and supply, dwelling deficiency/oversupply and price growth, England, 2000 to 2011 Source: Office of National Statistics, LSL Property Services/Acadametrics, BIS Shrapnel estimates
Number of dwellings (000) 325 300 275 250 225 200 175 150 125 100 75 50 25 0 00 01 02 03 04 05 06 07 08 09 Deciency Price ($000) 250 225 200 175 150 125 100 75 50 25 0 10 11 Year ended June

Underlying demand Dwelling completions House price index (RHS) Cumulative deficiency/surplus

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housing outlook

2. economic outlook
State of play Since the post Global Financial Crisis (GFC) acceleration in the economy over 2009/10, there has been a pause in economic growth over 2010/11. Federal Government stimulus programs are winding down, while new dwelling starts also eased over 2010/11 after the expiry of the Federal Governments First Home Owners Grant Boost Scheme (FHOGBS) and a decline in publicly funded housing starts. This has created a gap in economic activity, with the next round of resource investment yet to ramp up and drive growth. New jobs growth is now slowing sharply after peaking at 3.6% through the year to November 2010 and has fallen to 1.2% through the year to August 2011. The slowdown in employment growth mirrors the weakening in a range of other indicators since late 2010. Full time employment fell by 12,600 in August 2011 and, although this was slightly offset by an increase in part time employment, the unemployment rate rose 0.2% to 5.3% (seasonally adjusted). Household budgets are also under pressure from sharp rises in food, petrol, electricity and healthcare costs, as well as the prospect of increases in rents and rising mortgage costs. Consequently, consumers are adopting an air of caution and this is resulting in subdued retail spending. The recent global volatility in the share market has also affected consumer and business confidence. However, Australia is expected to be largely insulated from the causes which initiated the overseas shock. Australia does not share the European and American problems of sovereign debt, ratings downgrade action or threats, or weak economic growth, which continue to plague many of the developed world economies. Australias economic drivers are strong, although the markets have been caught in the contagion. This has resulted in growth in precautionary savings, which in turn has affected expenditure and held back the strengthening of the Australian economy. The Reserve Bank of Australia (RBA) has consequently held interest rates stable throughout 2011. Despite current concerns about the economic outlook, the rising investment in new capacity in the resource sector will underpin the economy. Private business investment is forecast to rise close to 10% per annum over the next three years. This is projected to create jobs in the sectors servicing the investment, and eventually drive a gradual strengthening in wider business and consumer confidence. Real Gross Domestic Product (GDP) growth is forecast to strengthen over the coming years, rising from 1.8% in 2010/11, to 3.3% in 2011/12 and 3.8% in each of 2012/13 and 2013/14. In this environment, the unemployment rate is also expected to improve, falling just below 4% at its lowest point in mid 2013, resulting in wage cost inflationary pressures. In the short term, however, the weakness in some sectors of the economy and uncertain international outlook are expected to result in interest rates remaining stable over 2011/12. Rates are then anticipated to begin to rise again from 2012/13. This will be a drag on the economy, but in the initial stages will be partly offset by strong rises in incomes and sentiment as employment conditions improve across the board. It is anticipated that higher interest rates will become an issue through 2013 and into 2014, as mining expansion projects are likely to be at full employment, economic activity is expected to be peaking and inflationary pressures most acute. With inflation outside the RBAs preferred range of 2%3%, the RBA is expected to adopt a more aggressive stance on interest rates. A forecast peak in the variable rate of 9% per annum in the first half of 2014 will impact housing affordability and consumer spending, with economic growth beginning to slow as rates reach their peak.

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Table 2: Key economic indicators Source: Australian Bureau of Statistics, BIS Shrapnel
Year Ended June Expenditure on GDP (at average 2008/09 prices) Consumption Private Consumption Government Consumption Private Investment New Public Investment Gross National Expenditure (GNE) GDP (Average) Inflation & wages (Jun on Jun) CPI Baseline Average Weekly Earnings ( Yr. Ave.) Employment (%) Employment Growth (August on August) Unemployment Rate (August) Interest Rates (% at 30 June) Cash rate Housing (variable) * BIS Shrapnel forecasts 5.75 7.55 6.25 8.05 7.25 9.45 3.00 5.80 4.50 7.40 4.75 7.80 4.75 7.90 5.25 8.30 6.50 9.10 2.5 4.7 3.0 4.3 2.8 4.1 0.2 5.8 3.2 5.1 1.2 5.3 2.3 4.7 3.0 3.9 0.8 4.6 4.0 2.5 3.2 2.1 2.7 5.0 4.5 3.6 4.0 1.5 3.6 6.1 3.1 2.8 5.2 3.6 2.5 4.4 2.6 3.0 4.6 3.9 3.2 5.2 3.4 3.3 5.1 2.8 2.5 8.5 7.9 4.1 3.1 4.3 3.7 5.6 4.7 4.9 3.6 4.7 3.2 10.1 10.5 6.0 3.8 0.2 2.8 -0.1 5.9 0.2 1.4 2.1 1.7 -2.4 26.3 2.4 2.3 3.3 4.2 3.8 6.0 4.0 1.8 3.1 3.5 7.3 -3.9 3.6 3.3 3.7 2.3 11.4 -3.7 4.8 3.8 3.3 2.5 7.8 -2.9 3.8 3.8 2006 2007 2008 2009 2010 2011 2012* 2013* 2014*

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housing outlook

2. economic outlook (cont.)

Interest rates Variable interest rates rose sharply from their post GFC low of 5.8% in September 2009 to 7.4% per annum at May 2010, before a 40 basis point rise in November 2010 to their current level of 7.8% per annum. These rises in the cash rate and higher costs of funds resulted in the variable rate rising at a greater amount than the cash rate. In total, the margin between the cash rate and the housing interest rate widened from 1.8 percentage points in late 2007 to 3.05 percentage points in mid-2011. So far, interest rates have been stable in 2011. At present, risk averse and budget conscious households are adopting a cautious approach to spending, with confidence affected by negative economic and political news. More recently, household and business confidence has been hit by the volatility in stock markets, both here and overseas. This is expected to delay the recovery in confidence and consumer spending. There is a possibility that the RBA could cut interest rates in late 2011 to kick-start a recovery in consumer confidence and spending, and initiate the next phase of recovery in our undersupplied housing markets. However, with baseline inflation likely to remain near the top of the RBAs target band of 2%3%, it is expected that the RBA will maintain a tightening bias to monetary policy, although the next rate rise is not expected until the third quarter of 2012 when it is envisaged consumers will increase their spending. Consumer confidence and spending is forecast to recover through the first half of 2012. By this stage, a number of new resource projects are expected to commence, while the stability in interest rates will begin to encourage new home buyers back into the market. The resultant falling unemployment and increased job security should see the rising savings rates stabilise. This is likely to encourage consumer demand which, combined with record terms of trade stimulus as a result of strong growth in mining incomes, is expected to heighten the RBAs concern about an outbreak of inflation. It is forecast that the first rise in interest rates will be 25 basis points in September quarter 2012, as a preemptive measure to slow the recovery in demand and ensure that other sectors of the economy do not add to the inflationary pressures created by the mining investment boom. The broader economic recovery is forecast to gain traction through 2012/13, although it is not expected to create substantial demand led inflationary pressures until 2013/14, in particular as skills shortages across the economy become more acute. Consequently, the cash rate is projected to lift by 50 basis points in 2012/13, and a more substantial 125 basis points over 2013/14 to peak at 6.5% by June 2014. As economic and financial conditions improve bank margins are also likely to be cut back, with the housing variable interest rate estimated to rise a total 120 basis points to 9% by early 2014.

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Chart 4: Interest rates and inflation Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel
% 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 14 As at June

Cash rate Standard variable rate CPI Forecast

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housing outlook

3. housing finance
Buyer demand Chart 5 illustrates the monthly yearonyear percentage change in residential lending to first home buyers, nonfirst home buyers (i.e. upgraders and downsizers, which encompass all purchases made for owner occupation alone and where the buyer has previously owned another dwelling) and investors. The stimulus created by the introduction of the FHOGBS in October 2008 saw monthly loans to first home buyers experience substantial annual growth starting December 2008 through to November 2009, peaking at year-on-year growth of 109% in June 2009. This also provided nonfirst home buyers (primarily upgraders) with a buoyant market to sell their existing dwelling. An escalation in the number of loans to non-first home buyers followed, with growth in demand peaking over the latter half of 2009. However, the expiry of the FHOGBS at the end of 2009 resulted in a subsequent collapse in first home buyer activity in 2010 as many who would have otherwise been in the market had pulled forward their purchase into 2009. At the same time, the considerable price growth and 115 basis point rise in the standard housing variable interest rate during 2010 meant that future first home buyers had to take more time to put together a deposit. As a result, loans to first home buyers in 2010 were 50% below the elevated levels in 2009 and 31% below the most recent five year average. The number of loans to first home buyers has been slowly stabilising in 2011, with a return to year-on-year growth emerging in Queensland, Western Australia, Tasmania, and the Australian Capital Territory over the June quarter 2011. Nevertheless, with the national number of loans to first home buyers at 90,000 over 2010/11, it will take some time to return to their five year average of around 130,100 per annum. The volume of first home buyer activity is important as it provides the impetus for greater activity by upgraders and downsizers, who form the majority of the market. This was reflected by the recovery in loans to non-first home buyers over 2009 and the subsequent fall in 2010. However, the decline has stabilised and the number of loans to nonfirst home buyers in the June quarter 2011 is only 2% below activity reported in the June quarter 2010. As growth in loans to first home buyers returns, some improvement in non-first home buyer activity should also emerge. The upturn in investor demand lagged the pick up in lending activity to first home buyers. Investor demand is driven by rental yields and price growth, although it is greatest during periods of strong price growth. This occurred through the first half of 2010, as the rise in first home buyer demand led price growth through the remainder of the market. The value of loans to residential investors stabilised during the second half of 2010, before experiencing a decline of more than 10% during the first half in 2011. With capital growth showing a decline in most capital cities, investor demand is likely to remain weak until prices stabilise, which is expected to occur over 2011/12 as first home buyer demand starts to recover and support prices at the entry level end of the market.

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The upturn in investor demand lagged the pick up in lending activity to first home buyers.

Chart 5: Annual growth in home loans percentage change on same month the previous year Source: Australian Bureau of Statistics Note: investor activity based on value of lending while owner occupier data based on number of loans
% 120 100 80 60 40 20 0 -20 -40 -60
Mar 08 Mar 09 Mar 10 Sep 07 Dec 07 Sep 08 Dec 08 Sep 09 Dec 09 Sep 10 Dec 10 Mar 11 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11

Investors Non-FHBs FHBs

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housing outlook

3. housing finance (cont.)

Loans to first home buyers All states experienced a collapse in first home buyer demand in 2010, with a reduction of between 40% and 60% in the number of loans approved, equating to a national decline of 50%. This steep contraction reflected the effect of the Federal Governments FHOGBS, with the incentive pulling forward demand into 2009 that would have normally occurred in 2010, thus resulting in a diminished pool of young purchasers in the market (Table 3). Nationally, there has been an average of around 131,000 first home buyers per annum during the last five years. The FHOGBS resulted in first home buyer numbers increasing to 191,000 during 2009. This would suggest that the incentive pulled forward around 60,000 first home buyers into 2009 to take advantage of the FHOGBS. With first home buyer loans falling to 96,000 in 2010, numbers were around 35,000 below the recent average. This is just over half of the pull forward of demand into 2009 that occurred, and would indicate that after 2011, first home buyer numbers should begin to revert to the long term levels. Data for the first six months of 2011 indicates that although first home buyer loans declined in year-on-year terms, the rate of decline has slowed (Table 3). With loans to first home buyers in the most recent June quarter 2011 only 2% below the same quarter the year before, this suggests that first home buyer demand has effectively bottomed out nationally and year-on-year rises (from a low base) should now emerge. Loans to upgraders Upgraders and downsizers between them represent the largest component of residential demand, at around two to three times the size of the first home buyer market, and therefore have the most influence on the market. However, there is less impetus for potential upgraders to enter the market to move to their next dwelling unless required by life stage movement, or encouraged to by capitalising on a strong market for their current dwelling. Consequently, while there is always an underlying level of upgrader activity taking place, demand from upgraders is greatest when there is strong demand for their current dwelling. Ultimately this needs healthy demand from first home buyers at the entry level to provide demand for their existing dwelling and encourage them to move on. Upgrader activity contracted by 8% nationally over 2010/11 (Table 4), with declines in non-first home buyer loans, ranging from 5% in New South Wales to 26% in Northern Territory. This reflects the reduced demand for their existing dwellings during 2010/11 due to the weak first home buyer market and minimal to no price growth for their existing dwelling. Two regions that bucked the trend were Victoria, where the number of loans to upgraders remained stable; and the Australian Capital Territory, which saw a 5% increase in upgrader activity.

18

Table 3: Number of loans approved to first home buyers for owner occupation, and quarterly change in the number of loans Source: Australian Bureau of Statistics
Calendar 2009 State NSW VIC QLD SA WA TAS NT ACT Australia Avg. Ann. No. 2006/072010/11 40,013 34,297 26,333 8,606 16,510 2,233 946 1,860 130,797 Number 60,603 47,449 37,074 12,906 25,313 3,388 1,208 2,911 190,852 A % Chg 59 50 58 48 58 48 25 100 55 Calendar 2010 Number 28,430 28,894 16,328 6,165 12,323 1,572 608 1,630 95,950 A % Chg -53 -39 -56 -52 -51 -54 -50 -44 -50 2010/11 Number 27,203 25,790 15,746 5,597 12,205 1,497 609 1,563 90,210 A % Chg -35 -34 -36 -39 -37 -34 -29 -28 -35

Table 4: Change in number of loans approved to non-first home buyers (FHBs) Source: Australian Bureau of Statistics
Non-FHBs loans (% change from previous period) State NSW VIC QLD SA WA TAS NT ACT Australia 2008/09 -16 -14 -22 -13 -23 -18 -10 -2 -17 2009/10 7 14 6 -3 14 -1 0 7 8 2010/11 -5 0 -20 -12 -11 -12 -26 5 -8 Percentage change on corresponding quarter Jun-10 -13 3 -20 -20 -6 -25 -27 -1 -11 Sep-10 -16 -4 -26 -20 -14 -25 -26 4 -16 Dec-10 -3 4 -17 -12 -16 -20 -33 10 -7 Mar-11 -1 2 -23 -6 -13 4 -26 -1 -7 Jun-11 2 0 -13 -5 -1 0 -13 8 -2

19

housing outlook

3. housing finance (cont.)

The marginal annual decrease of 2% in loans to upgraders in the June quarter 2011 suggests that activity is close to reaching its trough. Improving economic conditions in 2011/12 and stability in interest rates should encourage a greater presence of upgraders in the property market. However, the scope of any recovery will still be encouraged by the timing and strength of the rebound in first home buyer demand and price growth, which should start to emerge in 2011/12 and gain momentum over 2012/13. Loans for residential investment The Australian Bureau of Statistics provides data on residential investment in terms of the value of total loans rather than the number of loans. The value of loans to investors experienced a postGFC rebound of 15% in 2009/10 (Table 5). Through 2010/11, the total value of residential investment loans contracted by 8%, recording increased year-on-year falls through the year. Weaker sentiment has emerged due to higher borrowing costs more than negating higher rents, as well as creating wider affordability constraints and causing dwelling prices to fall. With interest rates expected to be more stable in 2011/12, and turnover expected to slowly increase, the decline in prices is expected to stabilise in 2011/12, and growth in investor activity is expected to return across most states, although is still expected to be moderate. Northern Territory (-30%), Western Australia (-28%) and Queensland (-22%) were the worst performing states during 2010/11. However, all are likely to experience a greater rebound in the value of residential investment loans. The return of more substantial investment in the resource and mining sectors is expected to lead to accelerating economic growth, which is projected to drive greater employment and income growth. Underlying demand is expected to benefit, as these states attract higher net inflows of migrants from interstate and overseas due to greater job creation and income levels. Whilst demand is anticipated to escalate, new dwelling supply is likely to be weak. Construction activity has contracted since 2007/08 in both Queensland and Western Australia, which is expected to translate into a rising deficiency of dwellings over the next three years to June 2014, therefore resulting in tighter vacancy rates and increasing rental growth. This is also projected to occur in the Northern Territory as demand continues to outpace completions. These cities consequently offer the best potential for capital growth with strengthening economic growth and rising dwelling deficiencies likely to support price rises. Western Australia is forecast to lead the upturn in investor demand, with Queensland lagging due to the relatively weaker state of its local economy before it emerges during the second half of 2012.

20

Table 5: Change in value of investment loans for the purchase of property for rent/resale Source: Australian Bureau of Statistics
Value of Investment Loans (% Change from Previous Period) State NSW VIC QLD SA WA TAS NT ACT Australia 2008/09 -7 -9 -29 -17 -21 -11 11 -3 -15 2009/10 11 21 11 15 15 20 42 36 15 2010/11 -1 3 -22 -10 -28 -14 -30 -1 -8 Percentage Change on Corresponding Quarter Jun-10 3 34 -4 12 3 19 4 6 9 Sep-10 -1 19 -20 5 -23 -21 -24 10 -2 Dec-10 5 11 -15 -8 -29 -3 -38 -8 -3 Mar-11 0 -2 -32 -18 -30 -14 -46 -13 -13 Jun-11 -7 -13 -19 -18 -28 -18 -10 7 -14

21

housing outlook

3. housing finance (cont.)

Although investor demand in New South Wales has not experienced the same declines as the other states over 2010/11, with year-on-year growth coming through in some quarters, investor activity should strengthen in 2011/12. Sydney entered a downturn ahead of the GFC and real house prices are still below its previous peak level at March 2004, providing scope for future price growth as economic conditions strengthen. This downturn in the property market also led to a collapse in dwelling construction and the subsequent emergence of a critical undersupply of housing stock in the city. The continuation of extremely tight vacancy rates should underpin solid rental growth and improve residential investment yields, despite the prospect of rising interest rates from 2012/13. Conversely, Victoria is likely to witness the value of investor loans begin to fall away in 2011/12, after being the only state to show growth in 2010/11 of 3%. Constrained affordability and the forecast of rising interest rates over the two years to 2013/14 are expected to lead to minimal price growth in Melbourne. Without the prospect of capital gain, and with the possibility of capital loss, a reduction in investor demand is likely to eventuate. The current high level of residential construction activity in Melbourne will result in a significant addition of new rental stock, relieving vacancy rates and placing downward pressure on rents. An oversupply of dwellings in Adelaide, Hobart and Canberra is forecast to persist over three years to June 2014 and is also expected to suppress both price and rental growth through this period. With the cost of borrowing expected to rise, investor activity is likely to be dampened in these markets. Loan activity and the effect on prices Chart 6 highlights the relationship between turnover and price growth. The level of turnover has been indicated by the number of owner occupier loans for established dwellings. Periods where turnover has increased have coincided with stronger price growth, while periods of slowing turnover have seen price weakness. The last 24 months have followed this relationship. The monthly average number of loans for established dwellings peaked at 36,000 in the year to November 2009, before continually falling to 26,250 in the year to June 2011. This predicated a downward trend for growth in the Australian median house price, with the yearly rate of increase slowing from a peak of 19% at March 2010 to below 1% at June 2011. However, as highlighted in the previous sections, it appears that a turning point in first home buyer demand across all states has been reached, while the downturn in loans for established dwellings also appears to be bottoming out. With loans for established dwellings consequently projected to begin a recovery phase during 2011/12 (although primarily throughout 2012), the increase in turnover should see prices firstly stabilise, and then begin to pick up through the year, particularly with housing interest rates expected to remain steady.

22

Chart 6: Moving annual monthly loans for established dwellings versus annual price growth, Australia Source: Australian Bureau of Statistics, Real Estate Institute of Australia & BIS Shrapnel
% 120 100 80 60 40 20 0 -20 -40 -60
Mar 08 Mar 09 Mar 10 Sep 07 Dec 07 Sep 08 Dec 08 Sep 09 Dec 09 Sep 10 Dec 10 Mar 11 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11

Investors Non-FHBs FHBs

23

housing outlook

4. rental markets
Vacancy rates and rental growth The vacancy rate in each city reflects the level of rental oversupply or deficiency. A vacancy rate of 3% in a market is considered balanced, where rents will rise roughly in line with inflation. Table 6 highlights the tightening in residential vacancy rates from 2005 to 2008, with rental vacancies being below the balanced market level across all capital cities. Record inflows during this time from overseas migration underpinned strong underlying demand, and led to demand for rentals outpacing new rental supply. Vacancy rates remained tight at below 2% in most capital cities over the two years to June 2010, except in Brisbane and Perth where they reached a high of 3.9% and 4.3%, respectively. Brisbane and Perth experienced a bigger shock to rental demand due to their economies suffering more from the GFC, as mining investment fell in response to falls in commodity prices. The subsequent lower migration impacted on the rate of population growth, while employment uncertainty is likely to have delayed new tenants moving into the newly vacated stock. There was a short term impact on vacancy rates in Brisbane after the floods in January 2011. Vacancy rates tightened across all regions of Brisbane from December quarter 2010 to March quarter 2011, although they have increased again in outer Brisbane (which includes areas such as Ipswich and Moreton Bay) in the June quarter 2011. This would reflect short term accommodation of the displaced population immediately after the floods who have since returned to their place of residence. However, vacancy rates continued to remain tight in inner and middle Brisbane. Over 2010/11, vacancy rates have been trending upwards in Adelaide (from 1.1% at June 2010 to 1.8% at June 2011) and Melbourne (from 1.5% to 2.2%), reflecting increasing new dwelling supply. This still represents a tight market so far, although vacancy rates are likely to continue to rise, with new dwelling supply anticipated to outstrip demand over 2011/12 in these centres. Given the small size of the Darwin market, vacancy rates can be volatile based on the size and timing of new developments. Vacancy rates have been as high as 7.1% in 2003 and as low as 0.8% in 2009. The vacancy rate of 2.0% in the June quarter 2011 reflects a tight market, although it has fallen from 4.6% in the March quarter. Vacancies are now tightening in Brisbane and Perth, and are acute in Sydney and Canberra at 1.5%. The sharp falls in construction activity in Brisbane and Perth in 2010/11 and low level of construction activity in Sydney over the last five years has resulted in additions to the rental stock falling below tenant demand. The Canberra market has been in deficiency up to 2010/11 although vacancy rates are expected to rise through 2010/11 as dwelling completions continue to rise.

24

vacancy rates are likely to continue to rise with new dwelling supply anticipated to outstrip demand over 2011/12

25

housing outlook

4. rental markets (cont.)

Rental growth Table 6 also highlights rental growth in relation to vacancy rates. Rental growth is indicated by increases in the rental component of the Consumer Price Index (CPI). All capital cities achieved solid rental growth, which was greater than CPI, from 2007 to 2009. This was underpinned by strong rental demand, buoyed by robust economic conditions, that outpaced new rental supply and resulted in tight vacancy rates. During the last two years to 2011, though, rental growth in all capital cities has become more moderate, as vacancy rates in most have eased. Part of this was as a result of the boosted Federal and State Government first home buyer incentives, which dampened tenant demand from young people, as they looked to become owner occupiers. Lower interest rates in 2009 also reduced the cash outflow for investors, removing much of the impetus for landlords to push through more substantial rate rises. Capital cities where vacancy rates rose have seen rental growth slow, evident in Brisbane and Perth from 2010 and Melbourne and Darwin from 2011. On the other hand, the increase in rents has been stronger than the other capitals in Sydney and Canberra, where vacancies remain acute. Rental demand in 2011/12 is expected to improve due to economic growth and minimal improvement in affordability, leading to further solid increases in rents. Some downside risk to rental growth exists in Melbourne, Adelaide, Hobart and Canberra, where vacancy rates are likely to ease further in the coming two years due to either the erosion of their dwelling deficiencies or an emergence of excess stock.

26

Table 6: Annual rental growth and vacancy rates Source: Australian Bureau of Statistics & Real Estate Institute of Australia
Sydney As at June 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Vacancy rate (%) 4.6 4.4 3.6 2.5 2.1 1.4 1.1 1.3 1.3 1.5 Perth As at June 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Vacancy rate (%) 4.5 4.5 3.3 2.5 1.9 2.1 2.8 3.5 4.3 3.5 Rental growth (%) 2.0 1.3 2.6 2.3 4.7 9.6 12.5 9.3 3.5 3.4 Rental growth (%) 2.5 0.4 2.2 1.4 2.0 4.2 7.1 7.1 4.8 5.9 Melbourne Vacancy rate (%) 3.8 3.9 3.6 2.6 1.7 1.4 1.0 1.4 1.5 2.2 Hobart Vacancy rate (%) 2.3 2.8 2.2 2.5 2.2 2.3 2.3 2.1 2.2 2.7 Rental growth (%) 2.4 3.1 5.0 3.3 5.1 5.5 4.3 5.3 3.6 4.1 Rental growth (%) 2.6 1.7 1.6 1.5 1.5 4.1 6.2 6.1 4.1 3.9 Brisbane Vacancy rate (%) 4.1 2.3 2.3 2.3 2.2 1.5 2.2 3.0 3.9 2.5 Canberra Vacancy rate (%) 3.6 3.5 4.3 2.2 2.3 2.4 0.5 2.5 1.1 1.6 Rental growth (%) 5.7 4.9 7.4 3.0 2.9 5.4 7.4 6.7 4.1 5.1 Rental growth (%) 2.4 3.5 4.6 4.4 6.2 6.6 9.3 8.1 3.7 2.6 Adelaide Vacancy rate (%) 3.6 2.8 1.9 1.8 1.6 1.3 1.5 1.4 1.1 1.8 Darwin Vacancy rate (%) 5.0 7.1 5.5 1.9 2.4 1.2 2.0 0.8 1.3 2.0 Rental growth (%) 0.2 1.1 1.9 3.2 4.4 8.0 8.7 13.1 8.3 2.8 Rental growth (%) 3.0 3.7 3.0 2.8 3.6 4.0 4.9 5.5 4.2 4.3 CPI Growth (%) 2.8 2.7 2.5 2.5 4.0 2.1 4.5 1.5 3.1 3.6 CPI Growth (%) 2.8 2.7 2.5 2.5 4.0 2.1 4.5 1.5 3.1 3.6

27

housing outlook

5. home affordability
Chart 7 shows the ratio between the monthly repayments required to service a 25year loan of 75% of the national median priced house (at the standard variable interest housing loan interest rate at June 30 each year) in each city, and average disposable household income across their respective states. The affordability ratio reflects the ability of a purchaser to buy a median priced home. Interest rates of 49 year lows over 2008/09 created attractive affordability heading into 2009/10, causing purchaser sentiment to quickly escalate through the year as the economic climate rapidly recovered. This strong demand resulted in more sizeable house price growth and, coupled with a 160 basis point interest rate rise, led to a steep deterioration in home affordability by June 2010. The combination of house prices stabilising in 2010/11 and a 40 basis point rise in housing variable interest rate in November 2010 to 7.8% per annum was offset by rises in income through the year. As a result home affordability remained largely unchanged during the year to June 2011. To place affordability at June 2011 in context, the ratio is: at its best level since 2003 in both Canberra and Hobart, apart from the brief low interest rate period in 2009; at its best level since 2006 in Brisbane and since 2005 in Perth and Darwin apart from the brief low interest rate period in 2009, in line with levels at June 2007 and June 2010 in Sydney; close to its worst level in Adelaide outside of June 2008 when variable interest rates peaked at 9.6%; and worse in Melbourne than when variable interest rated peaked at 9.6% in June 2008. Interest rates are forecast to remain steady through 2011/12, and, with economic and income growth strengthening, affordability is projected to roughly remain steady or improve slightly through the year. As indicated above, affordability levels in most capital cities correspond to periods that have previously been conducive to price growth. This should enable buyer confidence to begin to improve. Nevertheless, tightening interest rates are forecast to return in 2012/13 and 2013/14. Consequently, home affordability is not anticipated to improve significantly, but to become more strained over 2013/14, which will have a dampening effect on house price growth, despite the prospects for strong economic conditions.

28

Chart 7: Mortgage repayments on a median priced home* as a proportion of monthly disposable household income Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel * Mortgage repayment based on 75% of the median house price
% 45 40 35 30 25 20 15 10 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Year ended June % 45 40 35 30 25 20 15 10 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Year ended June

Sydney Melbourne Brisbane Perth Forecast

Adelaide Hobart Canberra Darwin Forecast

29

housing outlook

6. demand
Overseas migration Overseas migration peaked at a record net inflow of 299,900 persons over 2008/09, which was triple the net intake just five years earlier in 2003/04 (Table 7). This surge in overseas migration was underpinned by ongoing robust economic growth and a persistent low unemployment rate, which created a shortage of skilled workers for particular industries that the domestic labour market could not cover. Indeed, the main growth driver in overseas migration in this period was derived from long term overseas visitors, that is, migrants who come for more than twelve months, although do not necessarily stay permanently. The largest component of this group comprises migrants on student visas, or temporary 457 working visas. Net migration from long term overseas visitors also peaked in the year to July 2009 at 232,500 persons (Chart 8). The slower economic conditions since 2008/09 resulted in long term arrivals declining from a peak of 395,600 in July 2009, to a low of 337,200 in October 2010, while departures have steadily increased from 165,500 in July 2009 to 214,000 in July 2011. Long term arrivals have begun to recover since their lows in October 2010, with the increase roughly on par with the rises taking place in departures. As a result, the net long term movement fell to around 130,000 at the end of 2010, and has remained at this level since. This recent rise in overseas departures is attributed to the exodus of people who entered Australia during the rapid upturn in overseas arrivals over 2005 to 2009 on student and 457 working visas, which typically last up to four years (or the length of the degree for students). However, the improvement in long term arrivals now appears to be offsetting the rise in departures, with the net movement having stabilised.

30

...the improvement in long term arrivals now appears to be offsetting the rise in departures, with the net movement having stabilised.

Table 7: Net overseas migration (000) Source: Australian Bureau of Statistics, BIS Shrapnel
Year Ended June 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012* 2013* 2014* * BIS Shrapnel forecasts e BIS Shrapnel estimate NSW 44.4 40.9 29.8 35.2 38.5 73.5 87.2 86.7 66.0 49.5 50.0 55.8 65.8 VIC 20.3 26.8 25.0 32.3 39.6 62.5 73.5 83.5 60.4 47.9 47.6 55.0 64.8 QLD 26.5 27.1 25.4 29.6 33.0 46.3 54.1 59.4 39.7 29.7 31.5 39.0 48.0 SA 2.8 3.9 4.3 7.0 9.8 14.6 15.3 18.0 15.4 9.9 10.2 12.0 15.6 WA 15.0 15.6 13.6 17.2 22.4 31.5 41.2 44.4 28.2 24.6 27.2 34.0 40.8 TAS 0.3 1.0 0.7 1.0 1.2 1.4 1.9 2.2 1.8 1.2 1.2 1.4 1.7 NT 0.7 0.3 0.6 1.0 1.9 1.1 1.6 2.1 1.3 1.0 1.0 1.4 1.7 ACT 0.7 0.9 0.5 0.5 0.5 2.0 2.5 3.6 2.7 1.3 1.4 1.4 1.7 Australia 110.6 116.5 100.0 123.8 146.8 232.8 277.3 299.9 215.6 165.0 170.0 200.0 240.0

31

housing outlook

6. demand (cont.)
After falling to an estimated 165,000 persons in 2010/11, the net inflow (arrivals and departures) from all forms of overseas migrationpermanent migration, movement of long term residents, and long term overseas visitors is expected to remain steady in 2011/12 at 170,000 persons. The upside will come from the permanent migration component, with the Federal Government lifting their skill stream intake in the 2011/12 migration program to almost 126,000 persons (from 114,000 persons in 2010/11). The total intake, including refugee and family reunion, is forecast to increase from 168,700 in 2010/11 to 185,000 in 2011/12. Long term overseas visitors are expected to contribute little to growth in net overseas migration until 2012/13. With economic growth forecast to become more solid from 2012/13, labour capacity constraints are expected to become more pressing, as unemployment falls to below 4% through 2013. This is anticipated to drive stronger growth in overseas arrivals on temporary working visas. Together with further rises in the Federal Government intake, net overseas migration is forecast to subsequently rise to an inflow of 200,000 persons in 2012/13 before escalating further to 240,000 persons in 2013/14. New South Wales is expected to be the initial location for 28% of overseas migrants during the next three years (Table 7). Other states expected share of Australias net overseas migration inflow in the forecast period is 27% in Victoria, 19% in Queensland, 17% in Western Australia, and 6% in South Australia. The proportion of the total net overseas migration inflow in Tasmania, the Northern Territory and the Australian Capital Territory is projected to be less than 1% during the same period. Interstate migration Interstate migration is largely influenced by relative housing affordability and economic conditions between states. In addition, reduced interstate migration overall generally occurs when economic conditions deteriorate i.e. limited job prospects elsewhere encourage people to stay where they are. More moderate economic conditions currently have subdued interstate movements, with states generally recording reduced flows compared to recent years. New South Wales is forecast to average a net outflow of 16,700 persons per annum over the three years to 2013/14. This is a sizeable improvement from the average net outflow of 26,200 persons per annum over the eight years to 2008/09, reflecting some improvement in the state economic outlook relative to the other states, as well as improved affordability after an extended period of weak prices. However, this is higher than the net outflow of 10,000 persons from interstate migration in each of the two years to 2010/11, reflecting the improvement of economic conditions in the main destination states of Queensland and Western Australia. Victoria recorded a net inflow from interstate migration of 2,600 persons in 2009/10 and is expected to do so again in 2010/11, at around 2,000 persons. This highlights the relatively better performance of its economy compared to other states in recent years. However, affordability in Melbourne has deteriorated, and with other states economies expected to be stronger than Victorias over the forecast period, interstate migration is anticipated to fall back to a net zero impact in 2011/12, before averaging a net outflow of 3,500 persons over the two years to 2013/14.

32

Chart 8: Long term overseas movement, moving annual totals, Australia Source: Australian Bureau of Statistics
Persons (000) 400 350 300 250 200 150 100 50 0
Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11

Arrivals Departures Net movement

33

housing outlook

6. demand (cont.)
Net inflow from interstate migration in Queensland has contracted significantly, from an annual average of 30,100 persons over the seven years to 2007/08, to 18,500 persons in 2008/09, and an estimated average of just 8,500 persons per annum in the last two years to 2010/11. This has been due to poor relative affordability, after strong price growth through 2007/08 and, more recently, a severe weakening in state economic conditions. The flooding in regions of Queensland may have had a negative impact on migration at the start of 2011, although this would be temporary. The expected recovery in Queenslands economy, and its climate and lifestyle attractions, should see net interstate migration inflows recover again to a forecast average of 16,800 persons per annum in the three years to 2013/14. South Australia is expected to average a net outflow of 4,000 persons per annum during 2011-2014. This is in line with long term trends and slightly up from the 3,600 persons average annual net outflow in the seven years to 2010/11. Western Australia reverted to a net inflow from interstate migration in 2003/04, which has remained steady, averaging 3,600 persons per annum over the eight years to 2010/11. In the three year forecast period to 2013/14, average annual net interstate migration inflow is projected to improve to 5,300 persons, as major resource expansions reach full employment stage and labour markets become very tight. Tasmania is forecast to experience a balance of interstate arrivals and departures in each of the three years to 2013/14. This compares to average net interstate migration inflow of 400 persons per annum overall in the ten years to 2010/11. The Northern Territory is anticipated to average a net inflow of 800 persons per annum in the forecast period, underpinned by rising resource investment, a reverse from the annual average net outflow of 800 persons during the two years to 2010/11. The Australian Capital Territory is also expected to witness a zero net effect from interstate migration over the three year forecast period to 2013/14, a marginal improvement on the average net outflow of 300 persons per annum from 2007/08 to 2010/11. Despite anticipated cuts to public sector spending, local economic growth is still expected to be roughly on par with the other non-resource states.

34

Table 8: Net interstate migration (000) Source: Australian Bureau of Statistics, BIS Shrapnel
Year ended June 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012* 2013* 2014* * BIS Shrapnel forecasts e BIS Shrapnel estimate NSW -25.1 -32.5 -31.1 -26.3 -25.6 -27.4 -21.9 -19.8 -10.5 -9.5 -13.0 -17.0 -20.0 VIC 3.6 -0.7 -3.1 -3.1 -1.8 -2.4 -2.7 0.7 2.6 2.0 0.0 -2.5 -4.5 QLD 30.0 38.0 35.5 30.4 26.6 27.0 23.1 18.4 9.6 7.5 12.0 17.0 21.5 SA -1.3 -1.2 -2.9 -3.2 -2.7 -3.7 -4.5 -4.7 -3.0 -3.5 -4.0 -4.0 -4.0 WA -3.6 -2.0 2.1 2.2 3.9 5.2 4.8 4.8 2.0 4.0 4.5 5.5 6.0 TAS -1.4 2.0 2.6 0.3 -0.1 -0.9 0.3 0.7 0.3 0.3 0.0 0.0 0.0 NT -2.0 -2.8 -1.5 0.6 -0.6 0.3 1.2 0.7 -0.8 -0.7 0.5 1.0 1.0 ACT -0.2 -0.8 -1.6 -0.8 0.3 1.9 -0.3 -0.8 -0.1 -0.1 0.0 0.0 0.0

35

housing outlook

6. demand (cont.)
Population Australias population is projected to grow at an average rate of 1.6% per annum to 23.8 million at June 2014 (Table 9). This rate will be lower than that recorded over the five years to 2010/11 (1.8% per annum), when a higher net overseas migration inflow was sustained. The more moderate economic environment will see a continued trend in low overseas arrivals until unemployment falls further and labour shortages become more acute. All the regions, except for the Northern Territory, are projected to record slower growth over the forecast period than over the last five years. Western Australia is forecast to achieve the highest annual population growth over the three years to 2013/14, averaging 2.5%. Conversely, Tasmania is anticipated to record the smallest amount of growth, at 0.7% per annum. Population growth in the Northern Territory (2.3% per annum) and Queensland (2% per annum) are also expected to be above the national average. Each of the three fastest growing regions have the highest exposure to the mining and resource industry, which is expected to be the key driver of economic growth, and therefore will likely create a greater number of employment opportunities. Demand and supply The underlying demand for new dwellings is driven largely by the formation of additional households, which in turn is largely underpinned by population growth. The balance between underlying demand and supply has an impact on vacancy rates, rents, prices, and construction. Underlying demand is forecast to average 180,300 new dwellings per annum over the three years to 2013/14, which is above the estimated average for underlying demand of 171,100 dwellings in the 2006/07 to 2010/11 period. Although net overseas migration (and therefore overall population growth) is expected to be lower during the next three years to 2013/14, compared to the previous five years to 2010/11, a projected increase in household formation rates is anticipated to drive underlying demand. The period from 2006 to 2011 was characterised by deteriorating affordability. Traditionally, most individuals have formed new households while aged in their 20s. However, with entry into the housing market (either as renters or owner occupiers) becoming more difficult, household formation for an increasing number has been delayed into their 30s. Although solid population growth occurred in the 20 to 29 year old age group over 2006 to 2011, not all of this was reflected in household formation, as many stayed in the family home longer, or rented in group households. As the strong growth in 20 to 29 year olds over the last five years translates to stronger growth in 30+ year old households, there will be a higher propensity for this to drive growth in households, assisting growth in overall household formation.

36

Table 9: Population projections (000s), 2006 to 2012 Source: Australian Bureau of Statistics, BIS Shrapnel
Year ended June 2006 2007 2008 2009 2010 2011^ 2014* average annual growth 2006-2011 2011-2014* ^ projection * BIS Shrapnel forecasts 1.4 1.2 1.9 1.6 2.3 2.0 1.1 0.9 2.6 2.5 0.9 0.7 2.1 2.3 1.7 1.3 1.8 1.6 NSW 6,816.1 6,904.9 7,014.9 7,127.2 7,232.6 7,322.4 7,593.2 VIC 5,126.5 5,221.3 5,327.0 5,446.6 5,545.9 5,633.4 5,907.6 QLD 4,090.9 4,196.0 4,308.6 4,424.8 4,513.9 4,589.9 4,875.4 SA 1,567.9 1,585.8 1,604.0 1,624.5 1,644.6 1,658.3 1,706.0 WA 2,059.4 2,113.0 2,177.0 2,244.4 2,293.5 2,341.6 2,519.8 TAS 490.0 493.2 497.9 503.3 507.6 511.5 522.6 NT 210.6 214.8 220.5 226.2 229.7 233.3 250.1 ACT 334.1 341.1 346.3 352.3 358.6 363.0 377.1 Australia 20,695.5 21,070.1 21,496.1 21,949.3 22,326.4 22,653.4 23,752.0

37

housing outlook

6. demand (cont.)
In comparison, total dwelling supply still remains well below underlying demand, with an estimated 154,900 dwelling starts in 2010/11. Consequently, the stock deficiency estimate of 124,200 dwellings at June 2011 is expected to escalate further during the forecast period to a projection of 189,200 dwellings at June 2014around one years level of underlying demand. However, the rise in the deficiency will be concentrated in New South Wales, Queensland and Western Australia, where the lowest levels of construction relative to underlying demand are occurring. New South Wales has experienced a sustained severe weakness in new dwelling construction since 2006 that has resulted in the states underlying deficiency of residential housing ballooning to an estimated 87,900 dwellings as at June 2011. Although supply is expected to experience growth in the three years to 2013/14, dwelling starts are not anticipated to match underlying demand until the end of the forecast period, leading to conditions in New South Wales becoming tighter. Given the lags in the planning process, subdivisions in new release areas are not expected to become available to the market in this period. The change in the State Governments first home buyer stamp duty exemption to only apply to new dwellings is likely to shift some first home buyer demand from established to new dwellings, although is not expected to create a substantial increase in new construction in the short term, particularly given the current lower pool of first home buyers currently in the market. Both Queensland and Western Australia are experiencing a moderate deficiency of residential housing, estimated at 5,700 dwellings and 8,300 dwellings at June 2011 respectivelynot enough to create any pressure on construction or prices at the moment. However, as economic conditions improve in these states, the resultant pick up in population and underlying demand is expected to initially outpace new dwelling construction, resulting in the shortage rising rapidly to a forecast 29,900 dwellings in Queensland and 20,800 dwellings in Western Australia by June 2014. The flooding in parts of Queensland appears to have had a more limited impact on dwelling supply than initially speculated, with less than 2,000 dwellings in total destroyed and requiring replacementalthough many will require substantial refurbishment. Consequently this has not had a substantial impact on the current demand/supply balance. Conversely, Victoria has achieved record levels of dwelling commencements over the past two years to 2010/11, which is already starting to reduce the deficiency built up between 2006/07 and 2009/10. The shortage of housing stock has fallen to an estimated 20,200 dwellings at June 2011, and is likely to continue to be reduced, lowering to a projected 12,800 dwellings at June 2013. The deficiency in the Northern Territory is forecast to rise at a more modest rate, although, significantly, it is anticipated to be twice as much as the three year forecast of underlying demand by June 2014. Alternatively, some underlying oversupply of residential housing is projected to persist through the three year forecast period in South Australia, Tasmania, and the Australian Capital Territory.

38

Table 10: Underlying demand, commencements and stock deficiency, by state Source: Australian Bureau of Statistics, BIS Shrapnel
Ave Ann Underlying Demand (000s) State NSW VIC QLD SA WA TAS NT ACT Australia 2011/12 to 2013/14 47.5 48.7 39.0 10.4 27.6 2.5 2.1 2.6 180.3 Dwelling commencements 2010/11 ('000s) 30.1 57.5 26.9 10.7 20.6 2.9 1.3 5.1 154.9 Ann. % Chg. -5.8 5.5 -19.1 -11.3 -18.2 -7.1 4.3 15.0 -6.4 As at June 2010 75.7 30.8 5.6 0.2 8.7 -0.9 1.7 1.6 123.4 Deficiency of Stock (est.) (000) As at June 2011 87.9 20.2 5.7 -1.7 8.3 -1.7 2.0 -0.4 124.5 As at June 2012* 103.9 13.5 14.3 -2.3 13.0 -2.1 2.7 -2.3 145.0 As at June 2013* 113.3 12.8 22.9 -2.2 17.0 -2.2 3.5 -2.6 166.8 As at June 2014* 116.5 18.7 29.9 -0.4 20.8 -2.0 4.4 -2.4 189.5

* BIS Shrapnel estimate based on construction approvals to June 2010

39

housing outlook

7. capital city overviews and price forecasts

Sydney Strong house price growth, averaging 12% per annum over the eight years through to 2003/04, pushed the median house value in Sydney to $552,000 at June 2004. This caused a severe deterioration in affordability, with mortgage repayments on 75% of a median priced house accounting for 41.6% of average disposable household income at June 2004 the worst level since 1989 when variable interest rates peaked at 17% and 49% of household income was required to meet mortgage repayments on a median priced home. Consequently, Sydneys residential property market entered a slump in construction activity and prices, with weakened demand persisting as housing interest rates increased from late 2003 to the middle of 2008, and the GFC-induced economic downturn over 2008/09 further impacted affordability and purchaser sentiment. This was highlighted by dwelling commencements falling to 50 year lows in 2008/09, whilst the median house price at June 2009 was identical to that of five years earlier. House price growth has returned in the two years to 2010/11, with the combination of a reduction in interest rates during 2008/09 and the FHOGBS creating a surge in first home buyer demand through 2009. This was followed by an upturn in upgrader and investor demand as both economic conditions and capital growth improved. The median house value rose by 14.5% over 2009/10 and a further 2.3% in 2010/11 to $644,700. However, despite these rises, real houses prices remain below their peak. In todays dollar terms the peak in the median house price in the March quarter 2004 would be equivalent to $707,000, or nearly 10% above the June 2011 median. Despite an improvement coming through, residential construction activity in Sydney still remains at its lowest level since the early 1990s recession, and the resultant undersupply of residential housing has caused tight vacancy rates of less than 2% since 2007. This has already underpinned solid rental growth totalling 27% between June 2007 and June 2011, with further growth expected. Tenant demand is likely to also receive a boost as more young persons are priced out of the residential market, in particular with interest rates forecast to rise to 9% by June 2014, placing additional upward pressure on rents. In its 2011/12 budget released in September, the newly elected NSW Coalition Government announced that from 1 January 2012 the existing full stamp duty exemption to first home buyers would be restricted to offtheplan or newly constructed dwellings. This is expected to cause a short spurt in demand for dwellings under the $600,000 threshold from first home buyers for established dwellings up to the end of 2011 while the exemption is still in place. However, with the pool of first home buyers already reduced after the FHOGBS, it is not expected to have a significant impact on demand or prices. It is also likely to delay the recovery in first home buyer demand in early 2012 as future first home buyers of established dwellings will have to save more money to cover the stamp duty. This will dampen some of the price growth that would have otherwise occurred over 2011/12. Nevertheless, the recovery in owner occupier demand is forecast to come through during 2012, underpinned by the rising dwelling deficiency. Investor demand is also forecast to improve as economic conditions strengthen, leading to higher price growth and dwelling starts. Modest price growth of 5% is forecast in 2011/12, gathering momentum to 7% in 2012/13, before price growth slows as interest rates peak over 2013/14. Overall, median house prices in Sydney are forecast to lift by a cumulative total of 19%, or 6% per annum, to $770,000 over the three years to June 2014. This reflects a total rise of 8.1% in real terms.

40

Nevertheless, the recovery in owner occupier demand is forecast to come through during 2012, underpinned by the rising dwelling deficiency.

Chart 9: Sydney dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
700 500 300 200 150 100 70 50 30 20 92 94 96 98 00 02 04 06 08 10 12 14 Year ended June
+12 +11 +29 +5 +2 +7 +3 +6 +3

Real House Price Sydney ($000) House Price Sydney ($000) Commencements (000) NSW (Y/E Quarter) Forecast

41

housing outlook

7. capital city overviews and price forecasts (cont.)

Melbourne Melbournes residential property market was clearly the strongest performer of all the capital cities over the two years to 2010. First home buyers led the surge in demand, encouraged by affordability returning to the best level in a decade heading into 2009/10, and further first home buyer incentives offered by the Victorian State Government in addition to the FHOGBS, which made the total first home buyer incentive in Melbourne the most generous of the state capitals. Rampant first home buyer demand also provided upgraders with a buoyant market to sell their existing dwelling, while the strong rebound in economic conditions and increase in house prices gave further impetus to upgraders to enter the property market. Indeed, loans to non-first home buyers jumped by a solid 14% over 2009/10. The robust performance of the local economy and price growth also gave confidence to investors, who increasingly became more prominent in the market through 2010, evident by the 22% jump in the value of residential investment loans over the 2010 calendar year. By December quarter 2010, the median house price in Melbourne reached a historic high of $601,000, which represented a considerable 48% acceleration in median prices from its low point twenty-one months earlier in the March quarter 2009 of $405,500. Purchaser sentiment has noticeably diminished during 2011. As well as concerns about economic conditions, the substantial price growth and earlier rises in housing interest rates has led to heightened concerns regarding affordability, which has already surpassed its previous worst point at June 2008 when interest rates were 9.6%. Consequently, median house prices have dropped by 2% in the first half of 2011 to $590,000 at June 2011. Constrained affordability is forecast to continue to act as an impediment to price growth over the three years to 2013/14 and offset the Victorian State Governments first home buyer incentives, which currently include a $13,000 new dwelling grant over 2011/12 and a 20% reduction in stamp duty for dwellings purchased by first home buyers. Furthermore, pressures on house price growth are expected to ease considerably due to the current record residential construction activity, which is projected to result in total completions surpassing 40,000 dwellings in each of the three years to 2012/13. This level of new dwelling supply is anticipated to erode the existing residential stock deficiency in Melbourne by June 2013. Additionally, the strength of recent price growth has resulted in indicative yields for separate houses falling to long term low levels of around 3% from the June quarter 2010. Consequently, sizeable rental growth will be required to drive an improvement in yields and a pick up in investor demand. Given the volume of new housing stock expected to come on line, the ability of landlords to raise rents for new dwellings is likely to be diminished, providing a further disincentive to investors. While the continuation of solid economic growth is likely to maintain purchaser confidence, pressures on prices are minimal. Melbournes median house price is forecast to be just 5.6% higher in Melbourne over the three years to 2013/14or less than 2% per annum and the lowest amongst all capital cities. This will lift Melbournes median house value to a forecast $623,000 at June 2014, although in real terms, the median house price in Melbourne is forecast to decline by 4.2% over the three years to 2013/14.

42

Chart 10: Melbourne dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
700 600 500 400 300 200 150 100 80 60 50 40 30 20 92
-15 +3 +3 +0.5 -0.2 -2 -3

Real house price Melbourne ($000)

-6

House price Melbourne ($000)

-13

Commencements (000) VIC (Y/E Quarter) Forecast

94

96

98

00

02

04

06

08

10 12 14 Year ended June

43

housing outlook

7. capital city overviews and price forecasts (cont.)

Brisbane Brisbanes residential property market was the weakest in the two years to 2010/11. The sluggish recovery in Queenslands economy over 2009/10, resulted in the upturn in residential property demand in Brisbane being more subdued and house price growth of 9.8% being lower than all capitals except Hobart. The state economy has been impacted by a decline in engineering and nonresidential construction; as projects underway were completed without the next round of projects coming through to support employment. Tourism has also been impacted by the high Australian Dollar. Consequently, employment prospects have been weaker and demand from both upgraders and investors has not experienced the depth of rebound as in other states. Moreover, the two percentage point increase in the housing variable interest rate from October 2009 to November 2010 caused demand to further diminish. Queenslands net interstate migration inflow is estimated to have fallen to just 7,500 persons over 2010/11, equating to a massive 80% drop from the peak intake level of 38,000 in 2002/03. With underlying demand consequently weakening, vacancy rates have also been above the balanced market rate of 3% since 2009. It is likely that the weak purchaser sentiment over the second half of 2010 was further exacerbated by the January 2011 Brisbane floods, which adversely impacted general economic activity and delayed purchaser decisions. In the year to June 2011, the total number of loans approved to owner occupiers declined by 24%, and the value of residential investment finance fell by 22%. Subsequently, the median house price in Brisbane decreased by 5.4% over 2010/11 to $435,000 at June 2011. To encourage demand, the Queensland Government implemented a Building Boost Grant of $10,000 available to all purchasers of new and existing dwelling between 1st August 2011 and 31st January 2012. This is in addition to the first home buyer stamp duty concession on properties up to $500,000 in value, which could result in a potential saving of up to $15,525. While a number of new projects involving the expansion of existing facilities and the construction of new coal seam gas facilities have been announced, it will take time before they are fully underway. As a result, the contribution of this investment to economic and employment growth will not be immediate. With the Queensland market also estimated to be in balance, there is little upward pressure on prices. Subsequently, the median house price in Brisbane is anticipated to increase by only a moderate 3.4% over 2011/12 to $450,000. Nevertheless, Brisbanes affordability advantage over both Sydney and Melbourne has improved after recently being below the price growth in both capital cities. This should result in some turnaround in the net interstate migration inflow, particularly as economic conditions strengthen from 2012 on the back of investment in the resource sector creating growth in white collar support jobs in Brisbane. Consequently, underlying demand will increase and cause dwelling deficiency to start rising quickly. Vacancy rates should also start to tighten, with rental growth strengthening after being weak over the last two years. As a result, median house price growth in Brisbane is projected to improve to 7% in 2012/13 and then slow slightly to 5% in 2013/14 as a peak in interest rates again impacts on affordability and curtails the strength of the upturn. By June 2014, Brisbanes median house price is estimated to be $505,000, representing an overall increase of 16% between June 2011 and June 2014, or 5.1% per annum on average. This equates to a 5.3% increase in real terms over the three years to 2013/14.

44

Chart 11: Brisbane dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
600 500 400 300 250 200 150 100 80 70 60 50 40 30 25 20 92
+5 +2 +7 +4

+3 +1

Real house price Brisbane ($000)

+25 +3 +9

House price Brisbane ($000) Commencements (000) QLD (Y/E Quarter) Forecast

94

96

98

00

02

04

06

08

10 12 14 Year ended June

45

housing outlook

7. capital city overviews and price forecasts (cont.)

Adelaide After a post-GFC decline in the median house price of 3% in 2008/09, Adelaide experienced a rebound in prices over 2009/10. The combination of cuts to interest rates and the introduction of the FHOGBS encouraged first home buyers to take advantage of the favourable conditions, evident by loan approvals to first home buyers over the 2009 calendar year being up by 48% for the year. An upturn in investor activity followed, highlighted by the solid 15% growth in the value of loans for residential investment in 2009/10, which helped to push the median house price in Adelaide up by 14% over 2009/10 to a value of $410,500, as at June 2010. However, residential property demand has significantly weakened across Adelaide through 2010/11, with the number of loans to first home buyers witnessing the largest fall of 39%. Furthermore, South Australias proportion of annual net overseas migration is projected to fall slightly due to a slowing of inflows from overseas students further impacting housing demand in Adelaide. Conversely, new dwelling supply is high from the boost in construction activity in 2009/10 and 2010/11, which has resulted in a mild oversupply of dwellings emerging across South Australia as at June 2011. Although the vacancy rate in Adelaide of 1.8% in the June quarter 2011 points to a tight rental market, it is rising from a low of 1.1% at June 2010 and should ease further. More subdued demand overall has led to house prices remaining stable over 2010/11, at a median value of $410,000 by June 2011. Despite first home buyers in Adelaide being eligible to receive a South Australian State Government grant of $8,000 if building or purchasing a new dwelling of up to $450,000 in 2011/12, demand is likely to remain weak. Construction activity is now easing, but is still anticipated to remain slightly above underlying demand in Adelaide in the short term. This is expected to result in the surplus of residential dwellings increasing moderately over the two years to 2012/13, before being effectively absorbed by June 2014 as new dwelling completions decline. Consequently, pent up demand pressures should be minimal over 2011/12, and median house price growth is expected to be restricted to 1%. The acceleration in economic growth nationally will also be felt in improving economic conditions in South Australia, which should provide some support to Adelaide house prices in 2012/13. However, with variable interest rates forecast to re-commence their rise from the second half of 2012, the combination of excess dwelling stock and deteriorating affordability will keep any rises limited. As the housing variable rate reaches a forecast peak of 9% by June 2014, the constrained affordability will not only dent purchaser sentiment, but also slow economic growth nationally. Consequently, growth in the median house price in Adelaide from 2011 to 2014 is anticipated to be limited to a total of 7%, or a minimal 2.4% per annum on average, over the three years to 2013/14, lifting the median value to $440,000 at June 2014. In real terms, the median house price will actually decrease by 2.6% over the three years to 2013/14.

46

Chart 12: Adelaide dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
500 300 150 100 70 50 30
+1 +4 -2 -0.4 +2 -1

Real house price Adelaide ($000)

15 10 7 5 92 94 96 98 00 02 04 06 08 10 12 14 Year ended June
-4 -4 -6

House price Adelaide ($000) Commencements (000) SA (Y/E Quarter) Forecast

47

housing outlook

7. capital city overviews and price forecasts (cont.)

Perth Perths median house price peaked at $478,000 in the December quarter 2007 after an extended increase in prices from the June quarter 2001, with growth totalling a substantial 188% during these six and a half years. This acceleration was due to booming economic conditions stemming from the increased investment spending in the resources sector. Not only was this generating strong wage growth, it also underpinned robust population growth as greater employment opportunities drove higher migration inflows from both interstate and overseas, further strengthening demand. Price growth in Perth has since struggled, being hampered by weaker state economic conditions and the resultant strains on affordability that emerged. After falling by 12% to $420,000 in the year to the December quarter 2008, Perths median house prices stabilised during the first half of 2009, before improving over 2009/10. Despite the median house price increasing by 11% to $500,000 in the year to June 2010, it was just 4.6% above the previous peak of $478,000. Overseas migration into Western Australia eased to 28,200 persons in 2009/10, down from a record 44,400 persons in 2008/09. Additionally, with employment opportunities diminishing, net interstate inflows also subsided to 2,000 persons in 2009/10 from 4,800 persons in 2008/09. Without the incentive of lower interest rates and Federal Government incentives, the weakness in residential demand has emerged again over 2010/11, with Perths median house price falling by 6% in the year to $470,000. Although engineering construction is rising as new capacity is added to the resource sector, it has not yet had a substantial impact on confidence across the greater economy. This is evident in declines in construction activity, with dwelling starts estimated to have dropped by 18% in the year to June 2011, and the contracting number of owner occupier loans (-20%) and value of residential investor finance (-28%). Nevertheless, new mining projects continue to be announced, while projects already commenced are ramping up, with the flow on effects on the state economy likely to translate into improved purchaser sentiment through 2011/12. In addition, affordability is slowly becoming more attractive due to falls in the median house price, rising incomes, and the expectation of relatively stabile interest rates through the year. Furthermore, first home buyers can save up to $17,765 in stamp duty by being exempt from paying conveyance duty on purchases of homes up to $500,000 and vacant land up to $300,000. As a result, price growth is forecast to return, with the median value rising by 4.3% over 2011/12. From 2012/13 inflationary concerns are expected to arise. With unemployment already low, further employment growth will result in wage cost inflationary pressures. Accordingly, interest rates are projected to rise with two increases in the cash rate in 2012/13, followed by more aggressive rises over 2013/14 as economic growth peaks, taking the variable rate to 9% in the first half of 2014. The initial rises are anticipated to be offset by strong income growth and assisted by improved net inflows from interstate and overseas migration, leading to stronger underlying demand. With supply being outpaced by demand, vacancy rates should also become tight and rental growth is expected to pick up. Subsequently, the median house price is forecast to escalate by 8% in 2012/13 and ease to 7% in 2013/14 as interest rates peak. Overall house prices in Perth are estimated to rise by a cumulative total of 20% over the forecast periodthe highest amongst all capital citiesto $565,000 as at June 2014. This reflects price growth of around 6% per annum, which is similar to the expectation of household income growth over the three years to 2013/14, and equates to an 8.8% total rise in real terms.

48

Chart 13: Perth dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
550 500 300 150 100 70 50 30
+5 +20 +0.2 +4 +8 +7

+2 +4 +3

Real house price Perth ($000) House price Perth ($000) Commencements (000) WA (Y/E Quarter) Forecast

15 92 94 96 98 00 02 04 06 08 10 12 14 Year ended June

49

housing outlook

7. capital city overviews and price forecasts (cont.)

Hobart Median house prices in Hobart experienced a sizeable surge over the year to March 2010, increasing by 21% to a peak of $380,500. With the lowest median house price of the state capitals, Hobart had a strong pull forward effect from the FHOGBS, as the number of loans to first home buyers increased by an annual 48% during the 2009 calendar year. However, the upturn in first home buyer demand did not translate into improved activity from upgraders (as occurred in most other states), with the volume of non-first home buyer loans declining by 1% over 2009/10. This may be due to Tasmanian first home buyers preference for new dwelling over established dwellings and hence not enabling an upgrader to sell their existing dwelling. Indeed, construction activity still rose over 2009/10 by 8% to a long term high of more than 3,100 dwelling starts. Also contributing to the growth in commencements was the pick up in investor demand, with the value of residential investment loans escalating by 20% in the year to June 2010. While the median house price in Hobart of $370,000 in the June quarter 2011 is 1% higher than at the June quarter 2010, it is 3% below the December 2010 quarter median of $382,500. The expiry of the FHOGBS at the end of 2009 resulted in first home buyer loans contracting by 54% during 2010 in Tasmania, the second greatest fall amongst all states, which have remained weak in 2011. Over 2010/11, the number of loans to upgraders (-12%) and investor finance (14%) have also both declined. At 2.7% in the June quarter 2011, Hobarts residential vacancy rate has remained below the balanced market rate of 3% since 2000. It could be that the strength in first home buyer demand was accommodated by investors selling their rental dwellings in the buoyant market across 2009/10. First home buyers were able to save on stamp duty up to $4,000 when buying a dwelling and $2,000 on vacant land purchases, which is still in place in 2011/12. As a result, there was not a significant increase in vacant rental dwellings over 2009/10, although the vacancy rate is now trending upward. An important determinant of demand and price growth in the forecast period will be Hobarts relative affordability in comparison to the other capital cities around Australia. This was the key driver of the surge in house prices over 2002/03 and 2003/04 as interstate migration moved to a net inflow. Although Hobart is still one of the most affordable state capitals, recent accumulated house price growth has eroded some of Hobarts affordability advantage, with Tasmania expected to witness a zero net impact from interstate migration inflow over the forecast period. Furthermore, construction is now outpacing underlying demand, with the rental vacancy rate likely to ease more in the coming months due to the pipeline of residential dwellings to be completed, reducing pressures on both rents and prices. In addition, the impact of projected interest rate rises from the second half of 2012 is expected to result in diminished sentiment and a reduction in transaction activity generally. Consequently, minimal price growth totalling just 7%, or 2.2% per annum, over the three years to 2013/14 is forecast in Hobart, lifting the median house value to $395,000 at June 2014. In real terms, house prices are projected to show a decline of 3.4% over the 2013/14 period.

50

Chart 14: Hobart dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
500 350 250 150 100 70 50 35 25 15 10 92 94 96 98 00 02 04 06 08 10 12 14 Year ended June
-12 -8 +2 -1 +2 +3 -2 -1

Real house price Hobart ($000) House price Hobart ($000)

-12

Commencements (000) TAS (Y/E Quarter) Forecast

51

housing outlook

7. capital city overviews and price forecasts (cont.)

Canberra The combination of the correction in prices during 2008, as well as the fall in interest rates in late 2008/early 2009 resulted in a considerable improvement in affordability in Canberra heading into 2009/10. Furthermore, the introduction of the FHOGBS in late 2008 set the scene for an upturn in first home buyer demand. The Australian Capital Territory (ACT) experienced the largest surge in demand from first home buyers as loan approvals surged by 100% on the previous year in the 2009 calendar year. The ACT attracts many residents from other states into Federal Government employment and it is likely that many from this group took the opportunity to purchase rather than remain in long term rental. At the same time, concerns about employment prospects in Canberra due to the GFC were likely to have dissipated as Federal Government stimulus spending ramped up and created more jobs to support it. Investor demand also picked up in 2009/10, highlighted by the 36% rise in the value of residential investment loans on the back of vacancy rates quickly tightening from around the balanced market level in the first half of 2009, to 1% in the September quarter 2009, where it remained for the rest of the financial year. Subsequently, house prices escalated by 16% in 2009/10 to a median value of $520,000 at June 2010. However, the significant pull forward of first home buyer demand into 2009 has seen loan approval volumes fall since then. In 2010/11, there were 1,560 first home buyer loans, which is almost half the total in the 2009 calendar year. This has underpinned a slowing in price growth, although with demand from both upgraders and investors remaining resilient, the median house value edged up by 1% to $525,000 as at June 2011. From 1st July 2011 to 31st December 2011 the ACT government is offering a reduction in stamp duty to just $20 for all home buyers purchasing property with a value of up to $362,600, or vacant land of up $202,000 in value. Canberras new dwelling completions have steadily been increasing, whilst also outpacing underlying demand from 2009/10, resulting in an estimated minimal stock surplus of about 400 dwellings as at June 2011. This oversupply of residential housing is on track to jump to 2,300 dwellings as at June 2012, as the high level of new apartment projects in the pipeline are completed, limiting the scope for solid price growth going forward. Additionally, during the three years to 2013/14, employment growth in Canberra is expected to be dampened by limitations on Federal Government spending in order to get the Federal budget deficit back into surplus. Subsequently, the net movement from interstate migration is projected to be zero in each of the three years to 2013/14. Without any major pressures on prices, the annual rate of price growth is forecast to remain minimal within the 2.5% to 3% range over the three years to 2013/14, with the median house price increasing by 8% overall, although declining by 2.6% in real terms. By June 2014, the median house value is projected to reach $565,000.

52

Chart 15: Canberra dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel
550 400 250 150 100 75 40 25 15 10 92 94 96 98 00 02 04 06 08 10 12 14 Year ended June
-40 -18 -8 +2 +3 +3 -1 -1 -1

Real house price Canberra ($000) House price Canberra ($000) Commencements (000) ACT (Y/E Quarter) Forecast

53

housing outlook

7. capital city overviews and price forecasts (cont.)

Darwin Darwin was the only capital city to achieve double digit price growth over 2008/09, with prices increasing by 11% over the financial year to $469,900. This was due to the local economy continuing its robust performance through the GFC, evident by the 4.5% increase in Gross State Product. Investment in key industries in Darwin such as the oil and gas sectors held up, while employment in the defence and public administration sectors was also little affected. Another driver of solid price growth was investor demand, with the value of residential investment loans also rising by 11% in 2008/09, the only state to witness an increase. This was supported by tight vacancy rates of under 1% which led to a 13% jump in rentals. Many of the projects driving employment growth were coming to an end in 2009/10. However, momentum in Darwins residential property market continued as the stimulus measures in response to the GFC (boosted first home owner incentives and low housing interest rates) further buoyed demand. Loans to first home buyers escalated to 28% above the five year average over the 2009 calendar year, whilst the value of residential investment loans surged by a further 42% during 2009/10 the highest growth compared to all states and driven by tight vacancy rates and solid rental growth. Subsequently, the median house price rose by a sizeable 18% for the year to $555,300 as at June 2010. However, purchaser sentiment became more subdued in 2010/11. The strong run up in house prices resulted in significantly poorer affordability heading into the second half of 2010. Indeed, on this reports affordability measure, affordability in Darwin reached its worst point on record, with mortgage repayments accounting for 24.3% of household income as at June 2010. Vacancy rates have also become more volatile, rising from 1.3% as at June 2010, to 2.0% as at June 2011, although recording a rate of 4.6% in the March quarter 2011. In this environment, rental growth has slowed sharply, as has investor demand, with the value of residential finance for investment falling by 30% over 2010/11. As a result, the median house price has fallen by 7.3%the largest amongst all capitalsthrough the year to $515,000 as at June 2011. Affordability has improved after the decline in the median house price in 2010/11, and should improve further as interest rates remain steady over 2011/12. The Northern Territory government introduced a Build Bonus initiative, which offers all purchasers of a new dwelling up to $530,000 in value a $10,000 grant between 3rd May 2011 and 31st December 2011. In addition first home buyers are exempt from paying transfer and mortgage duty on all dwelling purchases of up to $540,000. This should see price growth return through the year. Early rises in interest rates should be absorbed by strengthening income growth, with the Northern Territory expected to benefit from substantial rises in LNG gas investment emerging over the next three years. Increasing migration should also underpin stronger underlying demand. However, with interest rates forecast to peak in the first half of 2014, this should prevent a blowout in prices at a time when local investment and work done will be peaking. As a result, total rises in prices will be moderate, with annual house price growth (+4%) forecast to reappear in 2011/12 and then strengthen further to 6% in 2012/13 and ease to 5% in 2013/14 as interest rates peak. Darwins median house price is forecast to reach $600,000 by June 2014, representing total growth of 17% (or 5.4% in real terms) over the three years to 2013/14. This equates to average growth of 5.2% per annum.

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Chart 16: Darwin dwellings, prices and activity Source: Australian Bureau of Statistics, Real Estate Institute of Australia and Forecasts: BIS Shrapnel
+6 +2 +5 +2

600 300 200 150 100 60 30 20 15 10 6 92 94 96 98 00 02 04 06 08

+5 +2

Real house price Darwin ($000) House price Darwin ($000)

+17 -3 -7

Commencements (000) NT (Y/E Quarter) Forecast

10 12 14 Year ended June

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housing outlook

8. appendix
Chart 17: Comparison between actual and three year forecasts, Sydney median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 800 750 700

Actual
650 600 550 500 07 08 09 10 11 12 13 14 Quarter ended June

07 08 09 10 11 Forecast

Chart 18: Comparison between actual and three year forecasts, Melbourne median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 650

600

550

Actual 07

500

08 09

450

10 11

400 07 08 09 10 11 12 13 14 Quarter ended June

Forecast

56

Chart 19: Comparison between actual and three year forecasts, Brisbane median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 550

500

450

Actual 07

400

08 09

350

10 11

300 07 08 09 10 11 12 13 14 Quarter ended June

Forecast

Chart 20: Comparison between actual and three year forecasts, Adelaide median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 500 480 460 4400 420 400 380 360 340 320 300 07 08 09 10 11 12 13 14 Quarter ended June

Actual 07 08 09 10 11 Forecast

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housing outlook

8. appendix (cont.)
Chart 21: Comparison between actual and three year forecasts, Perth median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 600 580 560 4500 520 500 480 460 440 420 400 07 08 09 10 11 12 13 14 Quarter ended June

Actual 07 08 09 10 11 Forecast

Chart 22: Comparison between actual and three year forecasts, Hobart median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 450 430 410 390 370 350 330 310 290 270 250 07 08 09 10 11 12 13 14 Quarter ended June

Actual 07 08 09 10 11 Forecast

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Chart 23: Comparison between actual and three year forecasts, Canberra median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 600 580 560 540 520 500 480 460 440 420 400 07 08 09 10 11 12 13 14 Quarter ended June

Actual 07 08 09 10 11 Forecast

Chart 24: Comparison between actual and three year forecasts, Darwin median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts
Median house price ($000) 650 600 550

Actual
500 450 400 350 07

07 08 09 10 11
08 09 10 11 12 13 14 Quarter ended June

Forecast

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about

QBE LMI Operating for over 45 years, QBE LMI has combined its risk management expertise, depth and breadth of market knowledge and financial strength to serve the evolving needs of our clients through all stages of the economic cycle. Our products and services support the mortgage industry by reducing the inherent credit risk in mortgage lending. We are committed to protecting mortgage lenders, giving them the security and confidence to be responsive to changing needs of borrowers and offer higher Loan to Value ratio loans both now and in the future. Our strong reputation for service and innovation and ability to identify, develop and roll-out flexible products and services, means we can adapt and evolve with our clients developing needs and help them securely grow their business. We provide lenders mortgage insurance to the lending industry in Australia, New Zealand and Hong Kong and operate as a wholly owned subsidiary of the QBE Insurance Group. QBE some key facts Our parent, QBE, is one of Australasias leading companies. These core facts about QBE give you an idea how their involvement supports the confidence in QBE LMIs offering: QBE Group is a top 25 company in the global insurance and reinsurance market The QBE Group has been listed on the Australian Stock Exchange for over 30 years QBE operates in all key insurance markets QBE has offices in 49 countries in Asia Pacific, the Americas and Europe QBE employs over 14,000 staff worldwide

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