72990036 BIS Shrapnel Outlook

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housing outlook

Australian Housing Outlook 20112014

Prepared by BIS Shrapnel

October 2011


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DISCLAIMER: The information contained in this publication has been obtained from BIS Shrapnel Pty Limited and does not necessarily representthe views or opinions of QBE Lenders Mortgage Insurance Limited (QBE LMI). This publication is provided for informational purposes only andis not intended to constitute legal, nancial 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 completeand 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 aresubject to change at any time without prior notice. The information referred to may not be suitable for specic investment objectives, nancialsituation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgment. Recipients shouldobtain 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 prots arising in any way from the information contained in this material. This materialmay not be reproduced, redistributed, or copied in whole or in part for any purpose without QBE LMIs prior expressed consent. QBE LendersMortgage Insurance Limited ABN 70 000 511 071.

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contents

1

1. Executive summary 4

2. Economic outlook 12State o play 12

Interest rates 14

3. Housing fnance 16

Buyer demand 16

Loans to frst home buyers 18

Loans to upgraders 18

Loans or residential investment 20

Loan activity and the eect on prices 22

4. Rental markets 24

Vacancy rates and rental growth 24

Rental growth 26

5. Home aordability 28

6. Demand 30

Overseas migration 30

Interstate migration 32

Population 36

Demand and supply 36

7. Capital city overviews and

price orecasts 40

Sydney 40

Melbourne 42

Brisbane 44

Adelaide 46

Perth 48

Hobart 50

Canberra 52

Darwin 54

8. Appendix 56


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2

Welcome to the latest QBElmiHOUSING OUTLOOK reportor Australia, exclusively prepared,researched and written by BIS

Shrapnel.

As we release our report, volatilityin the global economy has neverbeen greater and orecasting nevermore challenging. Against thisbackground, QBE LMI is cautiouslyoptimistic about the outlook orthe Australian housing market, asreected in the report.

The resilience o the Australianeconomy since the Global

Financial Crisis (GFC) can primarilybe attributed to the strength othe resource and private sectorwhich should continue to grow,as demand rom Asia is expectedto continue or sometime. Whilethe housing market has certainlyslowed, BIS Shrapnels researchshows that the conditions or asignifcant correction over theorecast period to 2014 are justnot there.

In our 2011-2014 lmiHOUSINGOUTLOOK report, BIS Shrapnelhas orecast low price growth inMelbourne o 6%; moderate price

growth o between 6% and 8% inAdelaide, Hobart and Canberra;solid price growth o 16% inBrisbane and 17% in Darwin; andstrong price growth o around19%-20% in Perth and Sydney.

First home buyer demand, whichcollapsed in 2010/11, is noworecast to enter a recovery phasein 2012 as buyer confdence slowlyimproves. This is supported by lower

house price growth and interest ratesremaining at current levels, which willimprove home aordability.

QBE LMI has been supporting theAustralian mortgage market ormore than 45 years. During thattime we have experienced manycycles, the recession we had tohave (late 80s early 90s) and morerecently the GFC (2008/9). TheAustralian economy and housingmarket have demonstrated theirresilience to deal with such events.

Our lmiHOUSING OUTLOOKreport confrms that Australiais well placed to deal with anyuncertainty that our economy or

housing market aces in the nextew years. Mortgage lenders, withour support, are able to mitigateany concerns they have about thevolatility and uncertainties in theAustralian market today.

We trust you will fnd this reportinormative and insightul at atime when there is widespreadpessimism in the market. Wehave a lot to be grateul or being

in a great country with a soundeconomy which, notwithstandingthe global short-term challenges,provides us with much to lookorward to in the uture.

introduction

Ian GrahamCEO, QBE LMI

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3

...Australia is well placed to dealwith any uncertainty that oureconomy or housing market acesin the next ew years.


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44

House price growth across theeight capital cities was dampenedby weak purchaser sentimentthrough 2010/11. A setback

in economic conditions, withGross Domestic Product (GDP)growth easing rom 2.3% in2009/10 to 1.8% in 2010/11,and the associated weakness inemployment conditions, stymiedconfdence. Nevertheless,purchaser activity had alreadystarted to slow rom 2010 as theexpiry o the First Home OwnersGrant Boost Scheme (FHOGBS)at the end o 2009 substantiallyreduced the pool o potentialfrst home buyers in 2010 bypulling orward frst home buyersinto 2009. Non-frst home buyer(primarily upgrader) demandsubsequently ell away through2010 without strong demand orentry level dwellings.

In addition, the deterioration inhome aordability over 2009/10,ater strong house price growth

and a 160 basis point rise inthe standard housing variableinterest rate, was exacerbated byanother 40 basis point increasein November 2010. This took thehousing variable interest rate to7.8%, where it currently remains.Consequently, owner occupier

1. executive summary

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5

demand has continued to weakenin 2011, with total loans to frsthome buyers in July 2011 being53% below their peak at November

2009, and 32% below their fveyear average in the year to July2011. Loans to non-frst homebuyers have ollowed the trend andin July 2011 were 12% beneaththeir December 2009 high and inthe year to July 2011 were 13%below their average over the pastfve years.

The higher costs o borrowinghave also impacted on cash ows

or investors, while slowing pricegrowth or price alls across thecapitals have lowered capitalgrowth expectations and providedan additional disincentive orinvestors to enter the market.Moreover, rental growth, which hadalready slowed in Brisbane andPerth in 2009/10, did likewise inMelbourne, Adelaide and Darwin in2010/11 as high levels o dwellingcompletions caused vacancy rates

to ease. The decline in demandby investors has been reected bythe value o loans or residentialinvestment contracting by 30%over 2010/11.

As a result, median house pricegrowth has been at to decliningacross the capital cities over2010/11. However, marginal rises

in the median house price didoccur in Sydney (+2%), Hobart(+1%), and Canberra (+1%). Amarginal decline came throughin Adelaide (0.1%), while theresource centres o Brisbane(5.4%), Perth (6%), and Darwin(7.3%) experienced more severedeclines. Melbourne recorded a5.7% increase in its median houseprice over 2010/11, although thismasks a 1.8% decline over the frstsix months to June 2011.

With the housing variable interestrate orecast to remain stableover 2011/12, and the economicoutlook becoming more positiveon the back o rising businessinvestment, confdence amongfrst home buyers and upgradersis expected to gain some tractionand lead to residential price growthin the next 12 months.

First home buyer demand isexpected to enter a recoveryphase through 2012. Compared tothe fve year average o 131,000,

loans to frst home buyers rose to191,000 in 2009 - indicating thataround 60,000 frst home buyersbrought orward their purchase totake advantage o the FHOGBS.With loans alling to 96,000 in2010, around 35,000 o this hasbeen accounted or, with mucho the remainder to be workedthrough 2011 beore increasingmore signifcantly through 2012.

The weakening economicenvironment over 2010/11 islikely to have delayed some othe recovery in frst home buyers.Nevertheless, as the economicoutlook becomes more positive,frst home buyer confdenceis anticipated to strengthen,supporting rising upgrader activityas demand or their existingproperties subsequently improves.This is orecast to drive greater

residential property turnover, andto a lesser extent price growth, asdemand rom upgraders works itsway through to higher price points.Investor demand is also expectedto begin to increase on the back ourther rises to rents and evidencethat the current price sotness isbeginning to turn.

5

...confdence among frst home buyers and

upgraders is expected to gain some traction and leadto residential price growth in the next 12 months.


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The momentum in prices isorecast to pick up in 2012/13,underpinned by strongereconomic conditions that will be

primarily attributed to acceleratinginvestment in the mining andresource sector. Strong demandor minerals rom China and otherAsian countries, who have mostlyescaped the debt issues and weaksentiment plaguing America andEurope, has continued to supporthigh commodity prices and theexpansion o mining projects.

As more projects begin their

expansion, it should lead tostronger employment and incomegrowth, particularly in WesternAustralia, Queensland and theNorthern Territory, which have thegreatest exposure to the miningsector. The benefts to each othe property markets in thesestates will be escalating underlyingdemand, as population growthstrengthens due to high net inowsrom migration. In addition, with

construction orecast to be wellbelow underlying demand in thesestates over the orecast period, theexisting defciency in these statesis projected to become more acuteand place urther upward pressureon both prices and rents.

However, inationary pressuresare also likely to arise due to theprojected strong income growthand skills shortages emerging

rom the mining sector. This isexpected to maintain a tighteningbias towards monetary policy, withinterest rates orecast to rise by175 basis points during the twoyears to 2013/14 and orecastto peak at 9% in the frst halo 2014. The interest rates risecould sustain a high AustralianDollar and continue to impedethe oreign competitiveness othe non-resource sectors o theeconomy; namely, agriculture,manuacturing, tourism, services,and education. This will be stronglyelt in the economies o New SouthWales and Victoria, where miningreceipts constitute a much smallerpart o the revenue base. Theincrease to interest rates is alsoexpected to have a greater impacton property markets in Sydneyand Melbourne where aordability

is most constrained, although thesignifcant defciency o residentialdwellings in Sydney should stillunderpin moderate price growth.

Price growth is orecast to bestrongest over the next three yearsin Perth and Sydney, with bothcapitals experiencing orecast rises

o around 19%20% in medianhouse prices. The substantiallevel o investment in mining andresource capacity in WesternAustralia will drive solid income andpopulation growth, creating robustdemand or housing in Perth. InSydney, the signifcant defciencyo residential dwellings is likely tocontinue to apply upward pressureon both rents and dwelling prices,attracting demand in particularrom investors. Constrainedaordability has resulted in littleannual movement in prices inSydney since 2004, with theexception o the 14.3% increase inthe median house price in 2009/10,which highlights the level o pentup demand that can be releasedas aordability and the economicoutlook improves.

6

1. executive summary (cont.)

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77

Table 1: Median house prices by capital city

Source: Real Estate Institute o Australia, BIS Shrapnel

Quarter

ended

June

Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin

$000 % Var $000 % Var $000 % Var $000 % Var $000 % Var $000 % Var $000 % Var $000 % Var

1996 220.0 3.3 155.0 3.3 130.0 0.0 111.5 -1.1 127.0 -0.8 112.0 6.7 158.0 3.9 168.0 -6.7

1997 241.0 9.5 179.0 15.5 134.0 3.1 114.9 3.0 135.0 6.3 105.0 -6.3 155.0 -1.9 178.0 6.0

1998 272.0 12.9 208.0 16.2 139.0 3.7 120.3 4.7 143.3 6.1 107.0 1.9 160.0 3.2 180.0 1.1

1999 296.0 8.8 232.0 11.5 145.0 4.3 125.0 3.9 148.5 3.6 115.0 7.5 158.0 -1.3 176.0 -2.2

2000 337.0 13.9 264.0 13.8 155.0 6.9 135.0 8.0 157.8 6.3 130.0 13.0 184.0 16.5 190.4 8.2

2001 364.0 8.0 302.0 14.4 160.0 3.2 148.4 9.9 165.7 5.0 120.3 -7.5 203.0 10.3 187.0 -1.8

2002 452.0 24.2 330.5 9.4 185.0 15.6 170.0 14.6 185.7 12.1 130.0 8.1 227.6 12.1 200.0 7.0

2003 519.0 14.8 355.0 7.4 235.0 27.0 220.0 29.4 210.2 13.2 180.0 38.5 320.0 40.6 206.0 3.0

2004 552.0 6.4 365.0 2.8 307.3 30.7 250.0 13.6 255.0 21.3 252.0 40.0 372.4 16.4 255.0 23.8

2005 528.0 -4.3 360.0 -1.4 315.0 2.5 275.0 10.0 295.0 15.7 260.0 3.2 352.5 -5.3 279.8 9.7

2006 526.8 -0.2 371.1 3.1 326.0 3.5 287.0 4.4 400.0 35.6 277.0 6.5 380.1 7.8 350.0 25.1

2007 532.6 1.1 415.0 11.8 366.3 12.4 312.8 9.0 455.0 13.8 310.0 11.9 426.5 12.2 395.0 12.9

2008 546.0 2.5 450.0 8.4 420.0 14.7 370.0 18.3 445.0 -2.2 325.0 4.8 467.5 9.6 423.3 7.2

2009 551.2 1.0 442.0 -1.8 419.0 -0.2 360.0 -2.7 450.0 1.1 336.0 3.4 450.0 -3.7 469.9 11.0

2010 629.9 14.3 560.0 26.7 460.0 9.8 410.5 14.0 500.0 11.1 366.5 9.1 520.0 15.6 555.3 18.2

2011 644.7 2.3 590.0 5.4 435.0 -5.4 410.0 -0.1 470.0 -6.0 370.0 1.0 525.0 1.0 515.0 -7.3

2012* 675.0 4.7 605.0 2.5 455.0 4.6 415.0 1.2 490.0 4.3 377.0 1.9 535.0 1.9 540.0 4.9

2013* 725.0 7.4 620.0 2.5 485.0 6.6 430.0 3.6 530.0 8.2 385.0 2.1 550.0 2.8 570.0 5.6

2014* 770.0 6.2 623.0 0.5 505.0 4.1 440.0 2.3 565.0 6.6 395.0 2.6 565.0 2.7 600.0 5.3

Total Forecast Growth (%)

2011-2014* 19.4 5.6 16.1 7.3 20.2 6.8 7.6 16.5

* BIS Shrapnel orecasts


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Solid median house price growtho 16% and 17% is expected overthe next three years in Brisbaneand Darwin, respectively. Similar to

Perth, residential demand in bothcities will beneft rom boomingactivity in the mining and resourcesectors. However, price growth isanticipated to be slightly behindthat or Sydney and Perth in bothcities based on the current weakerlocal economic conditions, andthe later commencement o theinvestment projects in the pipelineand their subsequent ow oneects through to house prices.

More moderate house priceincreases totalling between 6%and 8% are orecast orAdelaide,Hobart and Canberra throughto June 2014. All three cities areestimated to experience an excesso housing stock through theorecast period, which will reducethe scope or more solid growth.

The weakest house price growthis expected in Melbourne, with itsmedian value orecast to rise by lessthan 6% over the orecast period.Melbourne is the only major capitalwhere aordability is currentlyworse than June 2008 levels whenhousing interest rates peaked at9.6%. Combined with record levelso new dwelling supply comingthrough and eroding the currentdwelling defciency, any upwardpressure on prices will be minimal.

Price orecast comparison

The QBE lmiHOUSINGOUTLOOK has been compiled

by BIS Shrapnel since 2002. Thereport analyses the drivers o theresidential market and draws thesetogether in providing a basis ororecasts o residential house prices.

Chart 1 compares the three yearmedian house price orecasts sincethe inaugural 2002 edition and theactual movement in the nationalmedian house price rom 2000to 2011. The national median isderived rom a weighted median o

each o our capital city orecasts.Charts or comparisons betweenorecast and actual median houseprices or each individual capitalcity can be ound in the Appendix.

The median house price orecastshave mostly moved in the samedirection as eventual pricegrowth, although the orecastshave typically been slightly moreconservative than the actual

median price rises over mostthree year periods. Through thepast decade, the sharp rises inprices over 2007 and 2008 werenot anticipated. The interest raterises at the time were expected tohave a greater dampening eecton price growth. More recently,orecasts made over 2007 to2009 have accounted or therises in prices that subsequentlyoccurred, despite the challenging

economic conditions and negativeexpectations at the time.

The national median houseprice at June 2011 ($553,000)is slightly below that anticipatedin the 2010 edition o the QBE

lmiHOUSING OUTLOOK($555,000), largely due to theweaker economic environmentover the past twelve months, withshocks to international demandand fnancial markets weighingdown on consumer sentiment.This has pushed out the expectedrecovery in house prices by twelvemonths in this QBE lmiHOUSINGOUTLOOK compared to thatenvisaged in last years.

8


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9

Chart 1: Comparison between actual and three year forecasts, national weighted median house price

Source: Australian Bureau o Statistics, Real Estate o Australia, BIS Shrapnel Forecasts

650

600

550

500

450

400

350

300

250

200

%

Year ended June

00 01 02 03 04 05 06 07 09 11 1308 10 12 14

Actual

02

03

04

05

06

07

08

09

10

11Forecast


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10

Why Australian house prices

wont collapse

Purchaser sentiment has been

plagued by ears that urtherdownside exists to housing pricesacross Australia, particularly in lighto the substantial declines seenin many other Western countries.It is orecast that the underlyingdwelling defciency will be key topreventing substantial declines asseen in the United States.

This is highlighted in Charts 2and 3, which respectively showthe impact o a dwelling stock

defciency on price growth,contrasting price perormance inthe United States residential marketwith the English residential market.The property market in Englandcontains a defciency o dwellings,resulting in prices stabilising ratherthan experiencing a decline, asoccurred in the United States.Price movements across Australiaover 2010/11 are similar to theEnglish property market, wherethe undersupply o dwellings hasmaintained steady prices.

The United States alreadycontained a sizeable dwellingoversupply at June 2006 whenprices peaked, beore demand

ell steeply over the ollowingtwo years to June 2008 andresulted in the surplus oresidential dwellings doublingin this period. This led to houseprices experiencing a signifcantcorrection o 19%, with pricesdeclining by a urther 15%over 2008/09 as demandcontinued to contract. Priceshave stabilised since, with thesubstantial oversupply beingmaintained by ongoing weakdemand, and removing anyscope or prices to rise.

Prices in England experienced arise o similar magnitude to theUnited States through to a peakin 20072008. However, pricesonly corrected by 11% in 2009beore recovering in 2010 to justbelow those o 20072008, andstabilising at this level in 2011.

Economically, both the United Statesand England are in a similar position,with the United States recording anunemployment rate o 9.1% in August

2011, while the unemployment ratein England or the three months toJuly was 7.9%. Obviously there arealso separate local economic actorsinuencing supply and demand orhousing and driving prices, althoughthis comparison would suggest thatthe underlying defciency has playeda part in supporting prices in England,compared to the United States,where the excess dwelling stockappears to be still having an impact.

Consequently, given the substantialunderlying dwelling defciency inmost markets in Australia overthe three years to 2013/14, weanticipate that positive pressures onprices will remain. This will ensurenot only that prices hold up asinterest rates rise, but also underpinsome growth at least in the initialstages o interest rate rises, as thedefciency eeds through to rental

growth and occupancy.


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3,000

2,500

2,000

1,500

1,000

500

0

-500

-1,000

-1,500

220

200

180

160

140

120

100

80

60

40

20

0

Number of dwellings (000)

Deficiency

Oversupply

Price ($000)

Year ended June

00 01 02 03 04 05 06 07 0908 10 11

325300

275

250

225

200

175

150

125

100

75

50

25

0

250

225

200

175

150

125

100

75

50

25

0

Number of dwellings (000)

Deficiency

Price ($000)

Year ended June

00 01 02 03 04 05 06 07 0908 10 11

Chart 2: Underlying demand and supply, dwelling deciency/oversupply and price growth,

United States of America, 2000 to 2011

Source: US Census Bureau, Standard & Poors, BIS Shrapnel estimates

Chart 3: Underlying demand and supply, dwelling deciency/oversupply and price growth,

England, 2000 to 2011

Source: Ofce o National Statistics, LSL Property Services/Acadametrics, BIS Shrapnel estimates

Underlying demand

Dwelling completions

Case-Shiller house price index (RHS)

Cumulative defciency/surplus

Underlying demand

Dwelling completions

House price index (RHS)

Cumulative defciency/surplus


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2. economic outlook

12

State o play

Since the post Global FinancialCrisis (GFC) acceleration in the

economy over 2009/10, there hasbeen a pause in economic growthover 2010/11. Federal Governmentstimulus programs are windingdown, while new dwelling startsalso eased over 2010/11 ater theexpiry o the Federal GovernmentsFirst Home Owners Grant BoostScheme (FHOGBS) and a declinein publicly unded housing starts.This has created a gap in economicactivity, with the next round o

resource investment yet to ramp upand drive growth.

New jobs growth is now slowingsharply ater peaking at 3.6%through the year to November2010 and has allen to 1.2%through the year to August 2011.The slowdown in employmentgrowth mirrors the weakening ina range o other indicators sincelate 2010. Full time employmentell by 12,600 in August 2011and, although this was slightlyoset by an increase in part timeemployment, the unemploymentrate rose 0.2% to 5.3% (seasonallyadjusted).

Household budgets are also underpressure rom sharp rises in ood,petrol, electricity and healthcarecosts, as well as the prospecto increases in rents and risingmortgage costs. Consequently,

consumers are adopting an airo caution and this is resulting insubdued retail spending.

The recent global volatility inthe share market has alsoaected consumer and businessconfdence. However, Australia is

expected to be largely insulatedrom the causes which initiatedthe overseas shock. Australiadoes not share the European andAmerican problems o sovereigndebt, ratings downgrade action orthreats, or weak economic growth,which continue to plague many othe developed world economies.Australias economic drivers arestrong, although the markets havebeen caught in the contagion.This has resulted in growth inprecautionary savings, which inturn has aected expenditure andheld back the strengthening o theAustralian economy. The ReserveBank o Australia (RBA) hasconsequently held interest ratesstable throughout 2011.

Despite current concerns aboutthe economic outlook, the risinginvestment in new capacity in

the resource sector will underpinthe economy. Private businessinvestment is orecast to rise closeto 10% per annum over the nextthree years. This is projected tocreate jobs in the sectors servicingthe investment, and eventually drivea gradual strengthening in widerbusiness and consumer confdence.

Real Gross Domestic Product (GDP)growth is orecast to strengthen overthe coming years, rising rom 1.8%in 2010/11, to 3.3% in 2011/12

and 3.8% in each o 2012/13 and2013/14. In this environment, theunemployment rate is also expectedto improve, alling just below 4% atits lowest point in mid 2013, resultingin wage cost inationary pressures.In the short term, however, theweakness in some sectors o theeconomy and uncertain internationaloutlook are expected to result ininterest rates remaining stable over2011/12. Rates are then anticipatedto begin to rise again rom 2012/13.This will be a drag on the economy,but in the initial stages will be partlyoset by strong rises in incomes andsentiment as employment conditionsimprove across the board.

It is anticipated that higher interestrates will become an issue through2013 and into 2014, as miningexpansion projects are likely tobe at ull employment, economic

activity is expected to be peakingand inationary pressures mostacute. With ination outside theRBAs preerred range o 2%3%,the RBA is expected to adopta more aggressive stance oninterest rates. A orecast peak inthe variable rate o 9% per annumin the frst hal o 2014 will impacthousing aordability and consumerspending, with economic growthbeginning to slow as rates reach

their peak.

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13

Table 2: Key economic indicators

Source: Australian Bureau o Statistics, BIS Shrapnel

Year Ended June 2006 2007 2008 2009 2010 2011 2012* 2013* 2014*

Expenditure on GDP (at average 2008/09 prices)

Consumption

Private Consumption 2.8 4.3 4.7 0.2 2.1 3.3 3.1 3.7 3.3

Government Consumption 2.5 3.7 3.2 2.8 1.7 4.2 3.5 2.3 2.5

Private Investment 8.5 5.6 10.1 -0.1 -2.4 3.8 7.3 11.4 7.8

New Public Investment 7.9 4.7 10.5 5.9 26.3 6.0 -3.9 -3.7 -2.9

Gross National Expenditure (GNE) 4.1 4.9 6.0 0.2 2.4 4.0 3.6 4.8 3.8

GDP (Average) 3.1 3.6 3.8 1.4 2.3 1.8 3.3 3.8 3.8

Ination & wages (Jun on Jun)

CPI 4.0 2.1 4.5 1.5 3.1 3.6 2.6 3.9 3.4

Baseline 2.5 2.7 3.6 3.6 2.8 2.5 3.0 3.2 3.3

Average Weekly Earnings ( Yr. Ave.) 3.2 5.0 4.0 6.1 5.2 4.4 4.6 5.2 5.1

Employment (%)

Employment Growth (August on August) 2.5 3.0 2.8 0.2 3.2 1.2 2.3 3.0 0.8

Unemployment Rate (August) 4.7 4.3 4.1 5.8 5.1 5.3 4.7 3.9 4.6

Interest Rates (% at 30 June)

Cash rate 5.75 6.25 7.25 3.00 4.50 4.75 4.75 5.25 6.50

Housing (variable) 7.55 8.05 9.45 5.80 7.40 7.80 7.90 8.30 9.10

* BIS Shrapnel orecasts


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Interest rates

Variable interest rates rose sharplyrom their post GFC low o 5.8%

in September 2009 to 7.4% perannum at May 2010, beore a 40basis point rise in November 2010to their current level o 7.8% perannum. These rises in the cash rateand higher costs o unds resultedin the variable rate rising at agreater amount than the cash rate.In total, the margin between thecash rate and the housing interestrate widened rom 1.8 percentagepoints in late 2007 to 3.05

percentage points in mid-2011.So ar, interest rates have beenstable in 2011. At present, riskaverse and budget conscioushouseholds are adopting a cautiousapproach to spending, withconfdence aected by negativeeconomic and political news. Morerecently, household and businessconfdence has been hit by thevolatility in stock markets, both hereand overseas. This is expected todelay the recovery in confdenceand consumer spending.

There is a possibility that the RBAcould cut interest rates in late 2011to kick-start a recovery in consumerconfdence and spending, and

initiate the next phase o recoveryin our undersupplied housingmarkets. However, with baselineination likely to remain near thetop o the RBAs target band o2%3%, it is expected that theRBA will maintain a tightening biasto monetary policy, although thenext rate rise is not expected untilthe third quarter o 2012 when it isenvisaged consumers will increasetheir spending.

Consumer confdence and spendingis orecast to recover through thefrst hal o 2012. By this stage, anumber o new resource projectsare expected to commence, whilethe stability in interest rates willbegin to encourage new homebuyers back into the market. Theresultant alling unemployment andincreased job security should seethe rising savings rates stabilise.

This is likely to encourage consumerdemand which, combined withrecord terms o trade stimulus asa result o strong growth in miningincomes, is expected to heightenthe RBAs concern about an

outbreak o ination. It is orecastthat the frst rise in interest rates willbe 25 basis points in Septemberquarter 2012, as a preemptive

measure to slow the recovery indemand and ensure that othersectors o the economy do not addto the inationary pressures createdby the mining investment boom.

The broader economic recovery isorecast to gain traction through2012/13, although it is notexpected to create substantialdemand led inationary pressuresuntil 2013/14, in particular as skills

shortages across the economybecome more acute. Consequently,the cash rate is projected to lit by50 basis points in 2012/13, and amore substantial 125 basis pointsover 2013/14 to peak at 6.5%by June 2014. As economic andfnancial conditions improve bankmargins are also likely to be cutback, with the housing variableinterest rate estimated to rise atotal 120 basis points to 9% by

early 2014.

2. economic outlook (cont.)

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15

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0

%

As at June

96 0097 9998 01 02 03 04 05 06 07 0908 10 13 14 141211

Cash rate

Standard variable rate

CPIForecast

Chart 4: Interest rates and ination

Source: Australian Bureau o Statistics, Forecasts: BIS Shrapnel


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3. housing fnance

16

Buyer demand

Chart 5 illustrates the monthlyyearonyear percentage change

in residential lending to frst homebuyers, nonfrst home buyers (i.e.upgraders and downsizers, whichencompass all purchases made orowner occupation alone and wherethe buyer has previously ownedanother dwelling) and investors.

The stimulus created by theintroduction o the FHOGBS inOctober 2008 saw monthly loansto frst home buyers experiencesubstantial annual growth starting

December 2008 through toNovember 2009, peaking atyear-on-year growth o 109% inJune 2009. This also providednonfrst home buyers (primarilyupgraders) with a buoyant marketto sell their existing dwelling. Anescalation in the number o loansto non-frst home buyers ollowed,with growth in demand peakingover the latter hal o 2009.

However, the expiry o theFHOGBS at the end o 2009resulted in a subsequent collapsein frst home buyer activity in

2010 as many who would haveotherwise been in the market hadpulled orward their purchaseinto 2009. At the same time, theconsiderable price growth and 115basis point rise in the standardhousing variable interest rate during2010 meant that uture frst homebuyers had to take more time toput together a deposit. As a result,loans to frst home buyers in 2010were 50% below the elevatedlevels in 2009 and 31% below themost recent fve year average.

The number o loans to frsthome buyers has been slowlystabilising in 2011, with a returnto year-on-year growth emergingin Queensland, Western Australia,Tasmania, and the AustralianCapital Territory over the Junequarter 2011. Nevertheless, withthe national number o loans to

frst home buyers at 90,000 over2010/11, it will take some time toreturn to their fve year average oaround 130,100 per annum.

The volume o frst home buyeractivity is important as it providesthe impetus or greater activity byupgraders and downsizers, who

orm the majority o the market.This was reected by the recoveryin loans to non-frst home buyersover 2009 and the subsequentall in 2010. However, the declinehas stabilised and the number oloans to nonfrst home buyers inthe June quarter 2011 is only 2%below activity reported in the Junequarter 2010. As growth in loansto frst home buyers returns, someimprovement in non-frst homebuyer activity should also emerge.

The upturn in investor demandlagged the pick up in lendingactivity to frst home buyers.Investor demand is driven by rentalyields and price growth, althoughit is greatest during periods ostrong price growth. This occurredthrough the frst hal o 2010, asthe rise in frst home buyer demandled price growth through the

remainder o the market. The valueo loans to residential investorsstabilised during the second halo 2010, beore experiencing adecline o more than 10% duringthe frst hal in 2011. With capitalgrowth showing a decline in mostcapital cities, investor demand islikely to remain weak until pricesstabilise, which is expected tooccur over 2011/12 as frst homebuyer demand starts to recover

and support prices at the entrylevel end o the market.

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17

120

100

80

60

40

20

0

-20

-40

-60

%

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Chart 5: Annual growth in home loans percentage change on same month the previous year

Source: Australian Bureau o StatisticsNote: investor activity based on value o lending while owner occupier data based on number o loans

Investors

Non-FHBs

FHBs

The upturn in investor demand lagged the pick up in

lending activity to frst home buyers.


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18

3. housing fnance (cont.)Loans to frst home buyers

All states experienced a collapsein frst home buyer demand in

2010, with a reduction o between40% and 60% in the numbero loans approved, equating toa national decline o 50%. Thissteep contraction reected theeect o the Federal GovernmentsFHOGBS, with the incentive pullingorward demand into 2009 thatwould have normally occurred in2010, thus resulting in a diminishedpool o young purchasers in themarket (Table 3).

Nationally, there has been anaverage o around 131,000 frsthome buyers per annum duringthe last fve years. The FHOGBSresulted in frst home buyernumbers increasing to 191,000during 2009. This would suggestthat the incentive pulled orwardaround 60,000 frst home buyersinto 2009 to take advantage o theFHOGBS. With frst home buyerloans alling to 96,000 in 2010,numbers were around 35,000 belowthe recent average. This is just overhal o the pull orward o demandinto 2009 that occurred, and wouldindicate that ater 2011, frst homebuyer numbers should begin torevert to the long term levels.

Data or the frst six months o2011 indicates that although frsthome buyer loans declined inyear-on-year terms, the rate o

decline has slowed (Table 3). Withloans to frst home buyers in themost recent June quarter 2011only 2% below the same quarterthe year beore, this suggeststhat frst home buyer demand haseectively bottomed out nationallyand year-on-year rises (rom a lowbase) should now emerge.

Loans to upgraders

Upgraders and downsizersbetween them represent the largestcomponent o residential demand,at around two to three times the sizeo the frst home buyer market, andthereore have the most inuence onthe market. However, there is lessimpetus or potential upgraders toenter the market to move to theirnext dwelling unless required by liestage movement, or encouraged toby capitalising on a strong market or

their current dwelling.

Consequently, while there is alwaysan underlying level o upgraderactivity taking place, demand romupgraders is greatest when there

is strong demand or their currentdwelling. Ultimately this needshealthy demand rom frst homebuyers at the entry level to providedemand or their existing dwellingand encourage them to move on.

Upgrader activity contracted by8% nationally over 2010/11 (Table4), with declines in non-frst homebuyer loans, ranging rom 5%in New South Wales to 26% in

Northern Territory. This reectsthe reduced demand or theirexisting dwellings during 2010/11due to the weak frst home buyermarket and minimal to no pricegrowth or their existing dwelling.Two regions that bucked the trendwere Victoria, where the numbero loans to upgraders remainedstable; and the Australian CapitalTerritory, which saw a 5% increasein upgrader activity.

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19

Table 3: Number of loans approved to rst home buyers for owner occupation,

and quarterly change in the number of loans

Source: Australian Bureau o Statistics

Calendar 2009 Calendar 2010 2010/11

State Avg. Ann. No. 2006/072010/11 Number A % Chg Number A % Chg Number A % Chg

NSW 40,013 60,603 59 28,430 -53 27,203 -35

VIC 34,297 47,449 50 28,894 -39 25,790 -34

QLD 26,333 37,074 58 16,328 -56 15,746 -36

SA 8,606 12,906 48 6,165 -52 5,597 -39

WA 16,510 25,313 58 12,323 -51 12,205 -37

TAS 2,233 3,388 48 1,572 -54 1,497 -34

NT 946 1,208 25 608 -50 609 -29

ACT 1,860 2,911 100 1,630 -44 1,563 -28

Australia 130,797 190,852 55 95,950 -50 90,210 -35

Table 4: Change in number of loans approved to non-rst home buyers (FHBs)


Non-FHBs loans

(% change from previous period) Percentage change on corresponding quarter

State 2008/09 2009/10 2010/11 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

NSW -16 7 -5 -13 -16 -3 -1 2

VIC -14 14 0 3 -4 4 2 0

QLD -22 6 -20 -20 -26 -17 -23 -13

SA -13 -3 -12 -20 -20 -12 -6 -5

WA -23 14 -11 -6 -14 -16 -13 -1

TAS -18 -1 -12 -25 -25 -20 4 0

NT -10 0 -26 -27 -26 -33 -26 -13

ACT -2 7 5 -1 4 10 -1 8

Australia -17 8 -8 -11 -16 -7 -7 -2


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The marginal annual decreaseo 2% in loans to upgraders inthe June quarter 2011 suggeststhat activity is close to reaching

its trough. Improving economicconditions in 2011/12 and stabilityin interest rates should encouragea greater presence o upgradersin the property market. However,the scope o any recovery willstill be encouraged by the timingand strength o the rebound infrst home buyer demand andprice growth, which should startto emerge in 2011/12 and gainmomentum over 2012/13.

Loans or residential investment

The Australian Bureau o Statisticsprovides data on residentialinvestment in terms o the value ototal loans rather than the number oloans. The value o loans to investorsexperienced a postGFC rebound o15% in 2009/10 (Table 5).

Through 2010/11, the total valueo residential investment loanscontracted by 8%, recordingincreased year-on-year alls through

the year. Weaker sentiment hasemerged due to higher borrowingcosts more than negating higherrents, as well as creating wideraordability constraints andcausing dwelling prices to all. Withinterest rates expected to be morestable in 2011/12, and turnoverexpected to slowly increase, thedecline in prices is expected tostabilise in 2011/12, and growthin investor activity is expected toreturn across most states, althoughis still expected to be moderate.

Northern Territory (-30%), WesternAustralia (-28%) and Queensland(-22%) were the worst perormingstates during 2010/11. However,all are likely to experience a greaterrebound in the value o residentialinvestment loans. The return omore substantial investment in theresource and mining sectors is

expected to lead to acceleratingeconomic growth, which is projectedto drive greater employment andincome growth. Underlying demandis expected to beneft, as thesestates attract higher net inowso migrants rom interstate andoverseas due to greater job creationand income levels.

Whilst demand is anticipated toescalate, new dwelling supply islikely to be weak. Constructionactivity has contracted since

2007/08 in both Queenslandand Western Australia, which isexpected to translate into a risingdefciency o dwellings over thenext three years to June 2014,thereore resulting in tightervacancy rates and increasingrental growth. This is alsoprojected to occur in the NorthernTerritory as demand continuesto outpace completions. Thesecities consequently oer the bestpotential or capital growth withstrengthening economic growthand rising dwelling defciencieslikely to support price rises.Western Australia is orecast tolead the upturn in investor demand,with Queensland lagging due to therelatively weaker state o its localeconomy beore it emerges duringthe second hal o 2012.

3. housing fnance (cont.)

20

housing outlook


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21

Table 5: Change in value of investment loans for the purchase of property for rent/resale


Value of Investment Loans

(% Change from Previous Period) Percentage Change on Corresponding Quarter

State 2008/09 2009/10 2010/11 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

NSW -7 11 -1 3 -1 5 0 -7

VIC -9 21 3 34 19 11 -2 -13

QLD -29 11 -22 -4 -20 -15 -32 -19

SA -17 15 -10 12 5 -8 -18 -18

WA -21 15 -28 3 -23 -29 -30 -28

TAS -11 20 -14 19 -21 -3 -14 -18

NT 11 42 -30 4 -24 -38 -46 -10

ACT -3 36 -1 6 10 -8 -13 7

Australia -15 15 -8 9 -2 -3 -13 -14


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22

Although investor demandin New South Wales has notexperienced the same declinesas the other states over 2010/11,with year-on-year growth comingthrough in some quarters, investoractivity should strengthen in2011/12. Sydney entered adownturn ahead o the GFC andreal house prices are still below itsprevious peak level at March 2004,providing scope or uture pricegrowth as economic conditionsstrengthen. This downturn in theproperty market also led to acollapse in dwelling constructionand the subsequent emergence oa critical undersupply o housingstock in the city. The continuationo extremely tight vacancy ratesshould underpin solid rental growthand improve residential investmentyields, despite the prospect orising interest rates rom 2012/13.

Conversely, Victoria is likely towitness the value o investor loansbegin to all away in 2011/12,

ater being the only state toshow growth in 2010/11 o 3%.Constrained aordability and theorecast o rising interest ratesover the two years to 2013/14 areexpected to lead to minimal pricegrowth in Melbourne. Without theprospect o capital gain, and withthe possibility o capital loss, areduction in investor demand islikely to eventuate.

The current high level o residentialconstruction activity in Melbournewill result in a signifcant addition onew rental stock, relieving vacancyrates and placing downwardpressure on rents. An oversupplyo dwellings in Adelaide, Hobartand Canberra is orecast to persistover three years to June 2014 andis also expected to suppress bothprice and rental growth through thisperiod. With the cost o borrowingexpected to rise, investor activityis likely to be dampened in thesemarkets.

Loan activity and the eect

on prices

Chart 6 highlights the relationshipbetween turnover and pricegrowth. The level o turnover hasbeen indicated by the numbero owner occupier loans orestablished dwellings. Periodswhere turnover has increasedhave coincided with strongerprice growth, while periods o

slowing turnover have seen priceweakness.

The last 24 months have ollowedthis relationship. The monthlyaverage number o loans orestablished dwellings peaked at36,000 in the year to November2009, beore continually alling to26,250 in the year to June 2011.This predicated a downward trendor growth in the Australian medianhouse price, with the yearly rateo increase slowing rom a peak o19% at March 2010 to below 1%at June 2011.

However, as highlighted in theprevious sections, it appears that

a turning point in frst home buyerdemand across all states has beenreached, while the downturn inloans or established dwellings alsoappears to be bottoming out. Withloans or established dwellingsconsequently projected to begina recovery phase during 2011/12(although primarily throughout 2012),the increase in turnover shouldsee prices frstly stabilise, and thenbegin to pick up through the year,

particularly with housing interestrates expected to remain steady.

3. housing fnance (cont.)

housing outlook


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23

120

100

80

60

40

20

0

-20

-40

-60

%

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Chart 6: Moving annual monthly loans for established dwellings versus annual price growth, Australia

Source: Australian Bureau o Statistics, Real Estate Institute o Australia & BIS Shrapnel

Investors

Non-FHBs

FHBs


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24

4. rental marketsVacancy rates and

rental growth

The vacancy rate in each city

reects the level o rental oversupplyor defciency. A vacancy rate o 3%in a market is considered balanced,where rents will rise roughly in linewith ination. Table 6 highlights thetightening in residential vacancyrates rom 2005 to 2008, with rentalvacancies being below the balancedmarket level across all capital cities.Record inows during this time romoverseas migration underpinnedstrong underlying demand, and led

to demand or rentals outpacingnew rental supply.

Vacancy rates remained tight atbelow 2% in most capital citiesover the two years to June 2010,except in Brisbane and Perthwhere they reached a high o 3.9%and 4.3%, respectively. Brisbaneand Perth experienced a biggershock to rental demand due to theireconomies suering more romthe GFC, as mining investment ellin response to alls in commodityprices. The subsequent lowermigration impacted on the rateo population growth, whileemployment uncertainty is likely tohave delayed new tenants movinginto the newly vacated stock.

There was a short term impact onvacancy rates in Brisbane ater theoods in January 2011. Vacancyrates tightened across all regions o

Brisbane rom December quarter2010 to March quarter 2011,although they have increasedagain in outer Brisbane (whichincludes areas such as Ipswich andMoreton Bay) in the June quarter2011. This would reect short termaccommodation o the displacedpopulation immediately ater theoods who have since returned totheir place o residence. However,vacancy rates continued to remaintight in inner and middle Brisbane.

Over 2010/11, vacancy rates havebeen trending upwards in Adelaide(rom 1.1% at June 2010 to 1.8%at June 2011) and Melbourne(rom 1.5% to 2.2%), reectingincreasing new dwelling supply.This still represents a tight marketso ar, although vacancy ratesare likely to continue to rise, withnew dwelling supply anticipated to

outstrip demand over 2011/12 inthese centres. Given the small sizeo the Darwin market, vacancy ratescan be volatile based on the sizeand timing o new developments.Vacancy rates have been as high as7.1% in 2003 and as low as 0.8%in 2009. The vacancy rate o 2.0%in the June quarter 2011 reects atight market, although it has allenrom 4.6% in the March quarter.

Vacancies are now tightening inBrisbane and Perth, and are acutein Sydney and Canberra at 1.5%.The sharp alls in construction

activity in Brisbane and Perthin 2010/11 and low level oconstruction activity in Sydneyover the last fve years has resultedin additions to the rental stockalling below tenant demand. TheCanberra market has been indefciency up to 2010/11 althoughvacancy rates are expected torise through 2010/11 as dwellingcompletions continue to rise.

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vacancy rates are likely tocontinue to rise with new dwelling

supply anticipated to outstripdemand over 2011/12


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26

4. rental markets (cont.)Rental growth

Table 6 also highlights rental growthin relation to vacancy rates. Rental

growth is indicated by increasesin the rental component o theConsumer Price Index (CPI).

All capital cities achieved solidrental growth, which was greaterthan CPI, rom 2007 to 2009.This was underpinned by strongrental demand, buoyed byrobust economic conditions, thatoutpaced new rental supply andresulted in tight vacancy rates.

During the last two years to 2011,though, rental growth in all capitalcities has become more moderate,as vacancy rates in most haveeased. Part o this was as a resulto the boosted Federal and StateGovernment frst home buyerincentives, which dampened tenantdemand rom young people, asthey looked to become owneroccupiers. Lower interest ratesin 2009 also reduced the cash

outow or investors, removingmuch o the impetus or landlordsto push through more substantialrate rises.

Capital cities where vacancy ratesrose have seen rental growth slow,evident in Brisbane and Perth rom2010 and Melbourne and Darwin

rom 2011. On the other hand, theincrease in rents has been strongerthan the other capitals in Sydneyand Canberra, where vacanciesremain acute.

Rental demand in 2011/12 isexpected to improve due toeconomic growth and minimalimprovement in aordability,leading to urther solid increasesin rents. Some downside risk to

rental growth exists in Melbourne,Adelaide, Hobart and Canberra,where vacancy rates are likely toease urther in the coming twoyears due to either the erosion otheir dwelling defciencies or anemergence o excess stock.

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27

Table 6: Annual rental growth and vacancy rates

Source: Australian Bureau o Statistics & Real Estate Institute o Australia

As at June

Sydney Melbourne Brisbane Adelaide CPI

Vacancyrate (%)

Rentalgrowth (%)

Vacancyrate (%)

Rentalgrowth (%)

Vacancyrate (%)

Rentalgrowth (%)

Vacancyrate (%)

Rentalgrowth (%)

Growth (%)

2002 4.6 2.5 3.8 2.6 4.1 2.4 3.6 3.0 2.8

2003 4.4 0.4 3.9 1.7 2.3 3.5 2.8 3.7 2.7

2004 3.6 2.2 3.6 1.6 2.3 4.6 1.9 3.0 2.5

2005 2.5 1.4 2.6 1.5 2.3 4.4 1.8 2.8 2.5

2006 2.1 2.0 1.7 1.5 2.2 6.2 1.6 3.6 4.0

2007 1.4 4.2 1.4 4.1 1.5 6.6 1.3 4.0 2.1

2008 1.1 7.1 1.0 6.2 2.2 9.3 1.5 4.9 4.5

2009 1.3 7.1 1.4 6.1 3.0 8.1 1.4 5.5 1.5

2010 1.3 4.8 1.5 4.1 3.9 3.7 1.1 4.2 3.1

2011 1.5 5.9 2.2 3.9 2.5 2.6 1.8 4.3 3.6

As at June

Perth Hobart Canberra Darwin CPI

Vacancyrate (%)

Rentalgrowth (%)

Vacancyrate (%)

Rentalgrowth (%)

Vacancyrate (%)

Rentalgrowth (%)

Vacancyrate (%)

Rentalgrowth (%)

Growth (%)

2002 4.5 2.0 2.3 2.4 3.6 5.7 5.0 0.2 2.8

2003 4.5 1.3 2.8 3.1 3.5 4.9 7.1 1.1 2.7

2004 3.3 2.6 2.2 5.0 4.3 7.4 5.5 1.9 2.5

2005 2.5 2.3 2.5 3.3 2.2 3.0 1.9 3.2 2.5

2006 1.9 4.7 2.2 5.1 2.3 2.9 2.4 4.4 4.0

2007 2.1 9.6 2.3 5.5 2.4 5.4 1.2 8.0 2.1

2008 2.8 12.5 2.3 4.3 0.5 7.4 2.0 8.7 4.5

2009 3.5 9.3 2.1 5.3 2.5 6.7 0.8 13.1 1.5

2010 4.3 3.5 2.2 3.6 1.1 4.1 1.3 8.3 3.1

2011 3.5 3.4 2.7 4.1 1.6 5.1 2.0 2.8 3.6


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5. home aordabilityChart 7 shows the ratio betweenthe monthly repayments requiredto service a 25 year loan o 75% othe national median priced house(at the standard variable interesthousing loan interest rate at June30 each year) in each city, andaverage disposable householdincome across their respectivestates. The aordability ratioreects the ability o a purchaser tobuy a median priced home.

Interest rates o 49 year lowsover 2008/09 created attractiveaordability heading into 2009/10,

causing purchaser sentiment toquickly escalate through the yearas the economic climate rapidlyrecovered. This strong demandresulted in more sizeable houseprice growth and, coupled with a160 basis point interest rate rise,led to a steep deterioration in homeaordability by June 2010.

The combination o house pricesstabilising in 2010/11 and a 40basis point rise in housing variableinterest rate in November 2010 to7.8% per annum was oset by risesin income through the year. As aresult home aordability remainedlargely unchanged during the yearto June 2011. To place aordabilityat June 2011 in context, the ratio is:

at its best level since 2003 inboth Canberra and Hobart,apart rom the brie low interestrate period in 2009;

at its best level since 2006 inBrisbane and since 2005 inPerth and Darwin apart romthe brie low interest rate periodin 2009,

in line with levels at June 2007and June 2010 in Sydney;

close to its worst level inAdelaide outside o June 2008when variable interest ratespeaked at 9.6%; and

worse in Melbourne than whenvariable interest rated peaked at9.6% in June 2008.

Interest rates are orecast toremain steady through 2011/12,and, with economic and incomegrowth strengthening, aordabilityis projected to roughly remainsteady or improve slightly throughthe year. As indicated above,aordability levels in most capitalcities correspond to periods thathave previously been conducive toprice growth. This should enablebuyer confdence to begin toimprove. Nevertheless, tighteninginterest rates are orecast toreturn in 2012/13 and 2013/14.Consequently, home aordabilityis not anticipated to improvesignifcantly, but to become morestrained over 2013/14, which willhave a dampening eect on houseprice growth, despite the prospectsor strong economic conditions.

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45

40

35

30

25

20

15

10

%

Year ended June

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0908 10 11 1412 13

Chart 7: Mortgage repayments on a median priced home*

as a proportion of monthly disposable household income

Source: Australian Bureau o Statistics, Forecasts: BIS Shrapnel* Mortgage repayment based on 75% o the median house price

Sydney

Melbourne

Brisbane

Perth

Forecast

45

40

35

30

25

20

15

10

%

Year ended June

91 9 2 93 9 4 95 9 6 97 9 8 99 00 0 1 02 0 3 04 0 5 06 07 0908 10 11 1412 13

Adelaide

Hobart

Canberra

Darwin

Forecast


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30

housing outlook

6. demandOverseas migration

Overseas migration peaked ata record net inow o 299,900persons over 2008/09, which wastriple the net intake just fve yearsearlier in 2003/04 (Table 7). Thissurge in overseas migration wasunderpinned by ongoing robusteconomic growth and a persistentlow unemployment rate, whichcreated a shortage o skilledworkers or particular industries thatthe domestic labour market couldnot cover. Indeed, the main growthdriver in overseas migration in thisperiod was derived rom long termoverseas visitors, that is, migrantswho come or more than twelvemonths, although do not necessarilystay permanently. The largestcomponent o this group comprisesmigrants on student visas, ortemporary 457 working visas.

Net migration rom long termoverseas visitors also peaked inthe year to July 2009 at 232,500persons (Chart 8). The slower

economic conditions since2008/09 resulted in long termarrivals declining rom a peak o395,600 in July 2009, to a lowo 337,200 in October 2010,while departures have steadilyincreased rom 165,500 in July2009 to 214,000 in July 2011.Long term arrivals have begun torecover since their lows in October2010, with the increase roughlyon par with the rises taking place

in departures. As a result, the netlong term movement ell to around130,000 at the end o 2010, andhas remained at this level since.

This recent rise in overseasdepartures is attributed to theexodus o people who enteredAustralia during the rapid upturn

in overseas arrivals over 2005 to2009 on student and 457 workingvisas, which typically last up toour years (or the length o thedegree or students). However, theimprovement in long term arrivalsnow appears to be osetting therise in departures, with the netmovement having stabilised.


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Table 7: Net overseas migration (000)


Year Ended June NSW VIC QLD SA WA TAS NT ACT Australia

2002 44.4 20.3 26.5 2.8 15.0 0.3 0.7 0.7 110.6

2003 40.9 26.8 27.1 3.9 15.6 1.0 0.3 0.9 116.5

2004 29.8 25.0 25.4 4.3 13.6 0.7 0.6 0.5 100.0

2005 35.2 32.3 29.6 7.0 17.2 1.0 1.0 0.5 123.8

2006 38.5 39.6 33.0 9.8 22.4 1.2 1.9 0.5 146.8

2007 73.5 62.5 46.3 14.6 31.5 1.4 1.1 2.0 232.8

2008 87.2 73.5 54.1 15.3 41.2 1.9 1.6 2.5 277.3

2009 86.7 83.5 59.4 18.0 44.4 2.2 2.1 3.6 299.9

2010 66.0 60.4 39.7 15.4 28.2 1.8 1.3 2.7 215.6

2011e 49.5 47.9 29.7 9.9 24.6 1.2 1.0 1.3 165.0

2012* 50.0 47.6 31.5 10.2 27.2 1.2 1.0 1.4 170.0

2013* 55.8 55.0 39.0 12.0 34.0 1.4 1.4 1.4 200.0

2014* 65.8 64.8 48.0 15.6 40.8 1.7 1.7 1.7 240.0

* BIS Shrapnel orecastse BIS Shrapnel estimate

...the improvement in long term arrivals now appears

to be osetting the rise in departures, with the netmovement having stabilised.


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Ater alling to an estimated165,000 persons in 2010/11, thenet inow (arrivals and departures)rom all orms o overseas

migrationpermanent migration,movement o long term residents,and long term overseas visitorsis expected to remain steady in2011/12 at 170,000 persons.The upside will come rom thepermanent migration component,with the Federal Governmentliting their skill stream intake inthe 2011/12 migration programto almost 126,000 persons (rom114,000 persons in 2010/11).The total intake, including reugeeand amily reunion, is orecast toincrease rom 168,700 in 2010/11to 185,000 in 2011/12.

Long term overseas visitors areexpected to contribute little togrowth in net overseas migrationuntil 2012/13. With economicgrowth orecast to becomemore solid rom 2012/13, labourcapacity constraints are expected

to become more pressing, asunemployment alls to below 4%through 2013. This is anticipated todrive stronger growth in overseasarrivals on temporary workingvisas. Together with urther risesin the Federal Government intake,net overseas migration is orecastto subsequently rise to an inow o200,000 persons in 2012/13 beoreescalating urther to 240,000persons in 2013/14.

New South Wales is expected tobe the initial location or 28% ooverseas migrants during the nextthree years (Table 7). Other states

expected share o Australias netoverseas migration inow in theorecast period is 27% in Victoria,19% in Queensland, 17% inWestern Australia, and 6% in SouthAustralia. The proportion o thetotal net overseas migration inowin Tasmania, the Northern Territoryand the Australian Capital Territoryis projected to be less than 1%during the same period.

Interstate migration

Interstate migration is largelyinuenced by relative housingaordability and economic conditionsbetween states. In addition, reducedinterstate migration overall generallyoccurs when economic conditionsdeteriorate i.e. limited job prospectselsewhere encourage people tostay where they are. More moderateeconomic conditions currently have

subdued interstate movements, withstates generally recording reducedows compared to recent years.

New South Wales is orecast toaverage a net outow o 16,700persons per annum over thethree years to 2013/14. This is a

sizeable improvement rom theaverage net outow o 26,200persons per annum over theeight years to 2008/09, reectingsome improvement in the stateeconomic outlook relative tothe other states, as well asimproved aordability ater anextended period o weak prices.However, this is higher than thenet outow o 10,000 personsrom interstate migration in eacho the two years to 2010/11,reecting the improvement oeconomic conditions in the maindestination states o Queenslandand Western Australia.

Victoria recorded a net inowrom interstate migration o2,600 persons in 2009/10 andis expected to do so againin 2010/11, at around 2,000persons. This highlights the

relatively better perormance oits economy compared to otherstates in recent years. However,aordability in Melbourne hasdeteriorated, and with otherstates economies expected tobe stronger than Victorias overthe orecast period, interstatemigration is anticipated to allback to a net zero impact in2011/12, beore averaging a netoutow o 3,500 persons over

the two years to 2013/14.

32

6. demand (cont.)

housing outlook


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33

Chart 8: Long term overseas movement, moving annual totals, Australia


400

350

300

250

200

150

100

50

0

Persons (000)

Jun00

Dec00

Jun01

Dec01

Jun02

Dec02

Jun03

Dec03

Jun04

Dec04

Jun05

Dec05

Jun06

Dec06

Jun07

Dec07

Jun08

Dec08

Jun09

Dec09

Jun10

Dec10

Jun11

Arrivals

Departures

Net movement


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34

6. demand (cont.) Net inow rom interstate

migration in Queensland hascontracted signifcantly, roman annual average o 30,100

persons over the seven yearsto 2007/08, to 18,500 personsin 2008/09, and an estimatedaverage o just 8,500 personsper annum in the last two yearsto 2010/11. This has been dueto poor relative aordability,ater strong price growththrough 2007/08 and, morerecently, a severe weakeningin state economic conditions.The ooding in regions oQueensland may have had anegative impact on migrationat the start o 2011, althoughthis would be temporary.The expected recovery inQueenslands economy, and itsclimate and liestyle attractions,should see net interstatemigration inows recover againto a orecast average o 16,800persons per annum in the three

years to 2013/14. South Australia is expected to

average a net outow o 4,000persons per annum during2011-2014. This is in line withlong term trends and slightly uprom the 3,600 persons averageannual net outow in the sevenyears to 2010/11.

Western Australia revertedto a net inow rom interstatemigration in 2003/04, whichhas remained steady, averaging

3,600 persons per annum overthe eight years to 2010/11.In the three year orecastperiod to 2013/14, averageannual net interstate migrationinow is projected to improveto 5,300 persons, as majorresource expansions reach ullemployment stage and labourmarkets become very tight.

Tasmania is orecast to

experience a balanceo interstate arrivals anddepartures in each o thethree years to 2013/14. Thiscompares to average netinterstate migration inow o400 persons per annum overallin the ten years to 2010/11.

The Northern Territory isanticipated to average a netinow o 800 persons perannum in the orecast period,underpinned by rising resourceinvestment, a reverse rom theannual average net outow o800 persons during the twoyears to 2010/11.

TheAustralian Capital Territoryis also expected to witness a zeronet eect rom interstate migrationover the three year orecast

period to 2013/14, a marginalimprovement on the averagenet outow o 300 persons perannum rom 2007/08 to 2010/11.Despite anticipated cuts to publicsector spending, local economicgrowth is still expected to beroughly on par with the othernon-resource states.

housing outlook


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35

Table 8: Net interstate migration (000)


Year ended June NSW VIC QLD SA WA TAS NT ACT

2002 -25.1 3.6 30.0 -1.3 -3.6 -1.4 -2.0 -0.2

2003 -32.5 -0.7 38.0 -1.2 -2.0 2.0 -2.8 -0.8

2004 -31.1 -3.1 35.5 -2.9 2.1 2.6 -1.5 -1.6

2005 -26.3 -3.1 30.4 -3.2 2.2 0.3 0.6 -0.8

2006 -25.6 -1.8 26.6 -2.7 3.9 -0.1 -0.6 0.3

2007 -27.4 -2.4 27.0 -3.7 5.2 -0.9 0.3 1.9

2008 -21.9 -2.7 23.1 -4.5 4.8 0.3 1.2 -0.3

2009 -19.8 0.7 18.4 -4.7 4.8 0.7 0.7 -0.8

2010 -10.5 2.6 9.6 -3.0 2.0 0.3 -0.8 -0.1

2011e -9.5 2.0 7.5 -3.5 4.0 0.3 -0.7 -0.1

2012* -13.0 0.0 12.0 -4.0 4.5 0.0 0.5 0.0

2013* -17.0 -2.5 17.0 -4.0 5.5 0.0 1.0 0.0

2014* -20.0 -4.5 21.5 -4.0 6.0 0.0 1.0 0.0

* BIS Shrapnel orecastse BIS Shrapnel estimate


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Table 9: Population projections (000s), 2006 to 2012


Year ended June NSW VIC QLD SA WA TAS NT ACT Australia

2006 6,816.1 5,126.5 4,090.9 1,567.9 2,059.4 490.0 210.6 334.1 20,695.5

2007 6,904.9 5,221.3 4,196.0 1,585.8 2,113.0 493.2 214.8 341.1 21,070.1

2008 7,014.9 5,327.0 4,308.6 1,604.0 2,177.0 497.9 220.5 346.3 21,496.1

2009 7,127.2 5,446.6 4,424.8 1,624.5 2,244.4 503.3 226.2 352.3 21,949.3

2010 7,232.6 5,545.9 4,513.9 1,644.6 2,293.5 507.6 229.7 358.6 22,326.4

2011^ 7,322.4 5,633.4 4,589.9 1,658.3 2,341.6 511.5 233.3 363.0 22,653.4

2014* 7,593.2 5,907.6 4,875.4 1,706.0 2,519.8 522.6 250.1 377.1 23,752.0

average annual growth

2006-2011 1.4 1.9 2.3 1.1 2.6 0.9 2.1 1.7 1.8

2011-2014* 1.2 1.6 2.0 0.9 2.5 0.7 2.3 1.3 1.6

^ projection* BIS Shrapnel orecasts


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In comparison, total dwellingsupply still remains well belowunderlying demand, with anestimated 154,900 dwelling

starts in 2010/11. Consequently,the stock defciency estimate o124,200 dwellings at June 2011is expected to escalate urtherduring the orecast period to aprojection o 189,200 dwellingsat June 2014around one yearslevel o underlying demand.However, the rise in the defciencywill be concentrated in New SouthWales, Queensland and WesternAustralia, where the lowest levels oconstruction relative to underlyingdemand are occurring.

New South Wales has experienceda sustained severe weakness innew dwelling construction since2006 that has resulted in thestates underlying defciency oresidential housing ballooning toan estimated 87,900 dwellings asat June 2011. Although supply isexpected to experience growth

in the three years to 2013/14,dwelling starts are not anticipatedto match underlying demand untilthe end o the orecast period,leading to conditions in New SouthWales becoming tighter. Giventhe lags in the planning process,subdivisions in new release areasare not expected to become

available to the market in thisperiod. The change in the StateGovernments frst home buyerstamp duty exemption to only

apply to new dwellings is likelyto shit some frst home buyerdemand rom established to newdwellings, although is not expectedto create a substantial increase innew construction in the short term,particularly given the current lowerpool o frst home buyers currentlyin the market.

Both Queensland and WesternAustralia are experiencing a

moderate defciency o residentialhousing, estimated at 5,700dwellings and 8,300 dwellingsat June 2011 respectivelynotenough to create any pressureon construction or prices at themoment. However, as economicconditions improve in thesestates, the resultant pick up inpopulation and underlying demandis expected to initially outpace newdwelling construction, resulting

in the shortage rising rapidly toa orecast 29,900 dwellings inQueensland and 20,800 dwellingsin Western Australia by June2014. The ooding in parts oQueensland appears to have hada more limited impact on dwellingsupply than initially speculated,with less than 2,000 dwellings

in total destroyed and requiringreplacementalthough many willrequire substantial reurbishment.Consequently this has not had a

substantial impact on the currentdemand/supply balance.

Conversely, Victoria has achievedrecord levels o dwellingcommencements over the past twoyears to 2010/11, which is alreadystarting to reduce the defciencybuilt up between 2006/07 and2009/10. The shortage o housingstock has allen to an estimated20,200 dwellings at June 2011,

and is likely to continue to bereduced, lowering to a projected12,800 dwellings at June 2013.

The defciency in the NorthernTerritory is orecast to rise at amore modest rate, although,signifcantly, it is anticipated to betwice as much as the three yearorecast o underlying demandby June 2014. Alternatively,some underlying oversupply oresidential housing is projectedto persist through the three yearorecast period in South Australia,Tasmania, and the AustralianCapital Territory.

38

6. demand (cont.)

housing outlook


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39

Table 10: Underlying demand, commencements and stock deciency, by state


Ave Ann Underlying

Demand (000s)

Dwelling

commencements

Deciency of Stock (est.) (000)

State 2011/12 to 2013/142010/11

('000s)Ann. %

Chg.As at

June 2010As at

June 2011As at

June 2012*As at

June 2013*As at

June 2014*

NSW 47.5 30.1 -5.8 75.7 87.9 103.9 113.3 116.5

VIC 48.7 57.5 5.5 30.8 20.2 13.5 12.8 18.7

QLD 39.0 26.9 -19.1 5.6 5.7 14.3 22.9 29.9

SA 10.4 10.7 -11.3 0.2 -1.7 -2.3 -2.2 -0.4

WA 27.6 20.6 -18.2 8.7 8.3 13.0 17.0 20.8

TAS 2.5 2.9 -7.1 -0.9 -1.7 -2.1 -2.2 -2.0

NT 2.1 1.3 4.3 1.7 2.0 2.7 3.5 4.4

ACT 2.6 5.1 15.0 1.6 -0.4 -2.3 -2.6 -2.4

Australia 180.3 154.9 -6.4 123.4 124.5 145.0 166.8 189.5

* BIS Shrapnel estimate based on construction approvals to June 2010


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Sydney

Strong house price growth,averaging 12% per annum over

the eight years through to 2003/04,pushed the median house valuein Sydney to $552,000 at June2004. This caused a severedeterioration in aordability, withmortgage repayments on 75% oa median priced house accountingor 41.6% o average disposablehousehold income at June 2004the worst level since 1989 whenvariable interest rates peakedat 17% and 49% o household

income was required to meetmortgage repayments on a medianpriced home.

Consequently, Sydneys residentialproperty market entered a slumpin construction activity and prices,with weakened demand persistingas housing interest rates increasedrom late 2003 to the middleo 2008, and the GFC-inducedeconomic downturn over 2008/09urther impacted aordabilityand purchaser sentiment. Thiswas highlighted by dwellingcommencements alling to 50 yearlows in 2008/09, whilst the medianhouse price at June 2009 wasidentical to that o fve years earlier.

House price growth has returnedin the two years to 2010/11, withthe combination o a reduction ininterest rates during 2008/09 andthe FHOGBS creating a surge in

frst home buyer demand through2009. This was ollowed by an

upturn in upgrader and investordemand as both economicconditions and capital growthimproved. The median house

value rose by 14.5% over 2009/10and a urther 2.3% in 2010/11 to$644,700. However, despite theserises, real houses prices remainbelow their peak. In todays dollarterms the peak in the medianhouse price in the March quarter2004 would be equivalent to$707,000, or nearly 10% above theJune 2011 median.

Despite an improvement coming

through, residential constructionactivity in Sydney still remainsat its lowest level since the early1990s recession, and the resultantundersupply o residential housinghas caused tight vacancy rates oless than 2% since 2007. This hasalready underpinned solid rentalgrowth totalling 27% betweenJune 2007 and June 2011, withurther growth expected. Tenantdemand is likely to also receive

a boost as more young personsare priced out o the residentialmarket, in particular with interestrates orecast to rise to 9% by June2014, placing additional upwardpressure on rents.

In its 2011/12 budget released inSeptember, the newly elected NSWCoalition Government announcedthat rom 1 January 2012 theexisting ull stamp duty exemption

to frst home buyers would berestricted to otheplan or newlyconstructed dwellings. This is

expected to cause a short spurtin demand or dwellings under the$600,000 threshold rom frst homebuyers or established dwellings

up to the end o 2011 while theexemption is still in place. However,with the pool o frst home buyersalready reduced ater the FHOGBS,it is not expected to have asignifcant impact on demandor prices. It is also likely to delaythe recovery in frst home buyerdemand in early 2012 as uturefrst home buyers o establisheddwellings will have to save moremoney to cover the stamp duty.This will dampen some o the pricegrowth that would have otherwiseoccurred over 2011/12.

Nevertheless, the recovery inowner occupier demand is orecastto come through during 2012,underpinned by the rising dwellingdefciency. Investor demand is alsoorecast to improve as economicconditions strengthen, leading tohigher price growth and dwelling

starts. Modest price growth o 5%is orecast in 2011/12, gatheringmomentum to 7% in 2012/13,beore price growth slows asinterest rates peak over 2013/14.Overall, median house prices inSydney are orecast to lit by acumulative total o 19%, or 6% perannum, to $770,000 over the threeyears to June 2014. This reects atotal rise o 8.1% in real terms.

7. capital city overviews and price orecasts

40

housing outlook


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Chart 9: Sydney dwellings, prices and activity

Source: Australian Bureau o Statistics, RealEstate Institute o Australia, Forecasts: BIS Shrapnel

92 94 96 98 00 02 04 06 08 10 12 14

700

500

300

200

150

100

70

50

30

20

Year ended June

+5+7

+6

+2 +3+3

+11+29

+12

Real House Price Sydney ($000)

House Price Sydney ($000)

Commencements (000) NSW(Y/E Quarter)

Forecast

Nevertheless, the recovery in owner occupier

demand is orecast to come through during 2012,underpinned by the rising dwelling defciency.


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Melbourne

Melbournes residential propertymarket was clearly the strongest

perormer o all the capital citiesover the two years to 2010.First home buyers led the surgein demand, encouraged byaordability returning to the bestlevel in a decade heading into2009/10, and urther frst homebuyer incentives oered by theVictorian State Government inaddition to the FHOGBS, whichmade the total frst home buyerincentive in Melbourne the most

generous o the state capitals.Rampant frst home buyer demandalso provided upgraders witha buoyant market to sell theirexisting dwelling, while the strongrebound in economic conditionsand increase in house prices gaveurther impetus to upgraders toenter the property market. Indeed,loans to non-frst home buyersjumped by a solid 14% over2009/10.

The robust perormance o thelocal economy and price growthalso gave confdence to investors,who increasingly became moreprominent in the market through2010, evident by the 22% jump inthe value o residential investmentloans over the 2010 calendaryear. By December quarter2010, the median house price inMelbourne reached a historic high

o $601,000, which represented aconsiderable 48% acceleration inmedian prices rom its low pointtwenty-one months earlier in theMarch quarter 2009 o $405,500.

Purchaser sentiment has noticeablydiminished during 2011. As wellas concerns about economicconditions, the substantial price

growth and earlier rises in housinginterest rates has led to heightenedconcerns regarding aordability,which has already surpassed itsprevious worst point at June 2008when interest rates were 9.6%.Consequently, median house priceshave dropped by 2% in the frst halo 2011 to $590,000 at June 2011.

Constrained aordability isorecast to continue to act as

an impediment to price growthover the three years to 2013/14and oset the Victorian StateGovernments frst home buyerincentives, which currently includea $13,000 new dwelling grant over2011/12 and a 20% reduction instamp duty or dwellings purchasedby frst home buyers. Furthermore,pressures on house price growthare expected to ease considerablydue to the current record

residential construction activity,which is projected to result in totalcompletions surpassing 40,000dwellings in each o the threeyears to 2012/13. This level o newdwelling supply is anticipated toerode the existing residential stockdefciency in Melbourne by June2013.

Additionally, the strength orecent price growth has resultedin indicative yields or separatehouses alling to long term low

levels o around 3% rom theJune quarter 2010. Consequently,sizeable rental growth will berequired to drive an improvementin yields and a pick up in investordemand. Given the volume o newhousing stock expected to comeon line, the ability o landlords toraise rents or new dwellings islikely to be diminished, providing aurther disincentive to investors.

While the continuation o solideconomic growth is likely tomaintain purchaser confdence,pressures on prices are minimal.Melbournes median house priceis orecast to be just 5.6% higherin Melbourne over the three yearsto 2013/14or less than 2% perannum and the lowest amongstall capital cities. This will litMelbournes median house valueto a orecast $623,000 at June

2014, although in real terms, themedian house price in Melbourneis orecast to decline by 4.2% overthe three years to 2013/14.

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

42

housing outlook


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Chart 10: Melbourne dwellings, prices and activity


92 94 96 98 00 02 04 06 08 10 12 14

500

400

300

200

150

100

80

60

50

40

30

20

Year ended June

600

700+3 +3 +0.5

-0.2 -2

-15-6

-13

-3

Real house price Melbourne($000)

House price Melbourne ($000)

Commencements (000) VIC(Y/E Quarter)

Forecast


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44

Brisbane

Brisbanes residential propertymarket was the weakest in the two

years to 2010/11. The sluggishrecovery in Queenslands economyover 2009/10, resulted in theupturn in residential propertydemand in Brisbane being moresubdued and house price growth o9.8% being lower than all capitalsexcept Hobart. The state economyhas been impacted by a declinein engineering and nonresidentialconstruction; as projects underwaywere completed without the next

round o projects coming throughto support employment. Tourismhas also been impacted by the highAustralian Dollar. Consequently,employment prospects have beenweaker and demand rom bothupgraders and investors has notexperienced the depth o reboundas in other states.

Moreover, the two percentage pointincrease in the housing variableinterest rate rom October 2009 toNovember 2010 caused demandto urther diminish. Queenslandsnet interstate migration inow isestimated to have allen to just7,500 persons over 2010/11,equating to a massive 80% droprom the peak intake level o38,000 in 2002/03. With underlyingdemand consequently weakening,vacancy rates have also beenabove the balanced market rate o

3% since 2009.It is likely that the weak purchasersentiment over the second hal o2010 was urther exacerbated by

the January 2011 Brisbane oods,which adversely impacted generaleconomic activity and delayedpurchaser decisions. In the year

to June 2011, the total number oloans approved to owner occupiersdeclined by 24%, and the value oresidential investment fnance ellby 22%. Subsequently, the medianhouse price in Brisbane decreasedby 5.4% over 2010/11 to $435,000at June 2011. To encouragedemand, the QueenslandGovernment implemented aBuilding Boost Grant o $10,000available to all purchasers o newand existing dwelling between1st August 2011 and 31st January2012. This is in addition to thefrst home buyer stamp dutyconcession on properties up to$500,000 in value, which couldresult in a potential saving o up to$15,525.

While a number o new projectsinvolving the expansion o existingacilities and the construction o

new coal seam gas acilities havebeen announced, it will take timebeore they are ully underway.As a result, the contribution othis investment to economic andemployment growth will not beimmediate. With the Queenslandmarket also estimated to be inbalance, there is little upwardpressure on prices. Subsequently,the median house price in Brisbaneis anticipated to increase by only

a moderate 3.4% over 2011/12 to$450,000.

Nevertheless, Brisbanesaordability advantage overboth Sydney and Melbournehas improved ater recently

being below the price growth inboth capital cities. This shouldresult in some turnaround in thenet interstate migration inow,particularly as economic conditionsstrengthen rom 2012 on the backo investment in the resourcesector creating growth in whitecollar support jobs in Brisbane.Consequently, underlying demandwill increase and cause dwellingdefciency to start rising quickly.Vacancy rates should also startto tighten, with rental growthstrengthening ater being weakover the last two years. As a result,median house price growth inBrisbane is projected to improveto 7% in 2012/13 and then slowslightly to 5% in 2013/14 as a peakin interest rates again impactson aordability and curtails thestrength o the upturn.

By June 2014, Brisbanes medianhouse price is estimated to be$505,000, representing an overallincrease o 16% between June2011 and June 2014, or 5.1% perannum on average. This equates toa 5.3% increase in real terms overthe three years to 2013/14.


housing outlook


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92 94 96 98 00 02 04 06 08 10 12 14

500

600

400

300

200

250

150

100

80

6070

50

40

30

20

25

Year ended June

+5

+7 +4

+2 +3

+3

+25+9

+1

Chart 11: Brisbane dwellings, prices and activity


Real house price Brisbane ($000)

House price Brisbane ($000)

Commencements (000) QLD(Y/E Quarter)

Forecast


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Adelaide

Ater a post-GFC decline in themedian house price o 3% in

2008/09, Adelaide experienced arebound in prices over 2009/10.The combination o cuts to interestrates and the introduction o theFHOGBS encouraged frst homebuyers to take advantage o theavourable conditions, evidentby loan approvals to frst homebuyers over the 2009 calendar yearbeing up by 48% or the year. Anupturn in investor activity ollowed,highlighted by the solid 15%

growth in the value o loans orresidential investment in 2009/10,which helped to push the medianhouse price in Adelaide up by14% over 2009/10 to a value o$410,500, as at June 2010.

However, residential propertydemand has signifcantly weakenedacross Adelaide through 2010/11,with the number o loans to frsthome buyers witnessing the largestall o 39%. Furthermore, SouthAustralias proportion o annual netoverseas migration is projectedto all slightly due to a slowing oinows rom overseas studentsurther impacting housing demandin Adelaide.

Conversely, new dwellingsupply is high rom the boost inconstruction activity in 2009/10and 2010/11, which has resulted

in a mild oversupply o dwellingsemerging across South Australiaas at June 2011. Although thevacancy rate in Adelaide o 1.8%in the June quarter 2011 pointsto a tight rental market, it is risingrom a low o 1.1% at June 2010and should ease urther. Moresubdued demand overall has ledto house prices remaining stableover 2010/11, at a median value o$410,000 by June 2011.

Despite frst home buyers inAdelaide being eligible to receive aSouth Australian State Governmentgrant o $8,000 i building orpurchasing a new dwelling o up to$450,000 in 2011/12, demand islikely to remain weak. Constructionactivity is now easing, but is stillanticipated to remain slightly aboveunderlying demand in Adelaide inthe short term. This is expected to

result in the surplus o residentialdwellings increasing moderatelyover the two years to 2012/13,beore being eectively absorbedby June 2014 as new dwellingcompletions decline. Consequently,pent up demand pressures shouldbe minimal over 2011/12, andmedian house price growth isexpected to be restricted to 1%.

The acceleration in economicgrowth nationally will also be eltin improving economic conditionsin South Australia, which should

provide some support to Adelaidehouse prices in 2012/13. However,with variable interest rates orecastto re-commence their rise rom thesecond hal o 2012, the combinationo excess dwelling stock anddeteriorating aordability will keepany rises limited. As the housingvariable rate reaches a orecast peako 9% by June 2014, the constrainedaordability will not only dentpurchaser sentiment, but also sloweconomic growth nationally.

Consequently, growth in themedian house price in Adelaiderom 2011 to 2014 is anticipatedto be limited to a total o 7%, ora minimal 2.4% per annum onaverage, over the three years to2013/14, liting the median valueto $440,000 at June 2014. In realterms, the median house price willactually decrease by 2.6% over the

three years to 2013/14.


46

housing outlook


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92 94 96 98 00 02 04 06 08 10 12 14

500

300

150

100

70

50

30

10

7

5

15

Year ended June

+1 +4 +2

-2 -0.4

-4 -4 -6

-1

Chart 12: Adelaide dwellings, prices and activity

Source: Australian Bureau o Statistics, RealEstate Institute o Australia, Forecasts: BI

72990036 BIS Shrapnel Outlook

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