Reiq Business Luncheon Slide Presentation

REIQ Business luncheon March 2011 Bill Evans.

0 10 20 30

availabilty of stock

staffing

market volatility*

consumer confidence

interest rates

finance/funding

%

Dec-10

Source: NAB,

Westpac Economics

* including volatility in

financial, economic and

market conditions

Industry opinions: critical challenges

2

Current Forecasts-March 2011

Latest Sept-11 Dec-11 June-12

RBA Cash 4.75 5.00 5.00 5.25

3yr swap 5.27 5.40 5.60 5.80

10yr 5.44 5.60 5.50 5.80

US 10 yr 3.34 3.20 3.20 3.80

AUD/USD 1.03 1.05 0.99 0.93

USD/JPY 81 83 79 85

USD/EUR 1.42 1.43 1.45 1.35

3

To date, HH debt reduction has been limited

0

3

6

9

12

15

0

3

6

9

12

15

1990 1994 1998 2002 2006 2010

$trn

Other*

Households

Nonfarm nonfinancial firms

Government

Rest of World

Sources: Federal Reserve, Westpac Economics

March „08

$trn

*nonfinancial noncorporate and farm

4

House prices have declined for 5 months

100

120

140

160

180

200

220

240

100

120

140

160

180

200

220

240

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10

Index Index

20-city index

10-city index

Source: Factset

S&P Case-Shiller index

Prices have fallen 4.3% in five months

to Dec ‟10 and are 31% from peak.

5

Contributions to real GDP growth

3.2 3.7 4.1 3.0 3.0 2.8 2.8 2.9 3.2 3.4

1.1 1.4

1.5

1.2 1.1 1.1 0.9 1.0 1.1 1.2

4.4

5.6 6.1

4.6

8.7

5.6 4.6

3.3 4.0

5.0

2.6

2.0

2.5

0.8

-3.7

0.8

0.8

1.0

0.8

-5

0

5

10

15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ppt cont.

Net exports Gross investment Public consumption Private consumption

Sources: CEIC, Westpac.

Contribution to full year growth.

6

A pending overhang of property

50

100

150

200

250

50

100

150

200

250

Aug-06 Aug-07 Aug-08 Aug-09 Aug-10

index index

Completions

Sales

Starts

Sources: CEIC, Westpac. Aug-2006 = 100.

Underlying data in sqm.

7

0

5

10

15

20

0

5

10

15

20

25

30

35

40

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

%pa %yr

Loan growth (lhs)

RRR (rhs)

Sources: Westpac Economics, CEIC

“Sound”,

Easing bias

“Sound”,

tightening bias

“Sound”,

tightening bias

“Appropriately

Loose”

“Prudent” “Appropriately

Tight”

“Tight”

“Tight”

China’s monetary & credit policy stance

8

Australian commodity forecasts

40

140

240

340

440

540

640

40

140

240

340

440

540

640

Dec-83 Nov-87 Nov-91 Nov-95 Nov-99 Nov-03 Nov-07 Nov-11

index index

metals, rurals & oil bulks

Sources: Westpac Economics, Bloomberg, ABS

9

AUD susceptible to event risk

0.80

0.85

0.90

0.95

1.00

1.05

0.80

0.85

0.90

0.95

1.00

1.05

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

USD USD

Source: Bloomberg

Ireland

crisis

Greece

crisis

10

CPI: selected discretionary items*

-3

-2

-1

0

1

2

3

4

-3

-2

-1

0

1

2

3

4

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

%yr 6m % ann'sd

6mth% annualised

%yr

Sources: ABS, Westpac Economics

* Ice cream/other dairy; cakes/biscuits; snacks/confectionery; meals out/take away;

clothing & footwear; house purchase; house repairs/maintenance; furniture/furnishings;

h/hld appliances, utensils, tools; hairdressing/personal care services; motor vehicles;

MV parts/accessories; AV & computing; sports & rec. equipt; toys/games/hobbies;

other rec. activities; domestic holidays

11

CPI inflation: underlying still moderating

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-1

0

1

2

3

4

5

6

7

8

9

Sep-94 Sep-98 Sep-02 Sep-06 Sep-10

%qtr %yr

avg RBA core CPI* %qtr (rhs)

headline CPI %yr (lhs)

avg RBA core CPI* %yr (lhs)

Sources: ABS, RBA, Westpac Economics

* average of s.a. trimmed mean

& weighted median CPI ex GST

effect in 2000/01

12

Mortgage rate expectations by state

70

75

80

85

90

95

100

70

75

80

85

90

95

100

Aus NSW VIC QLD SA WA

net% net%

Feb-10

Jun-10

Aug-10

Feb-11

% reporting expected

rise minus % reporting

expected fall

13

Pace of employment growth to slow in 2011H1

-50

0

50

100

150

200

250

300

-1

0

1

2

3

4

Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

`000 %yr

6mth change (rhs)

% yr (lhs)


14

-9

-6

-3

0

3

-9

-6

-3

0

3

Sep-85 Sep-90 Sep-95 Sep-00 Sep-05 Sep-10

% GDP % GDP

Trade balance Income position

Current account


f/c to

end-2012

Rolling annual

Current account balance

15

Net public debt: G7 chalk, Australian cheese

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

US UK Germany France Canada Australia

1990 2000

2009 2015

%GDP

Sources: Westpac, IMF, Australian Treasury.

%GDP

16

The Australian dollar: actual versus fitted

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

USD USD

Fair value band

AUD/USD actual

AUD/USD forecast

Sources: RBA, Westpac Economics

17

-1.4

4.3

2.1

3.2 2.8 2.7

-1.3

1.5

2.2 2.7

2.9 2.9 3.1 3.4

-2

-1

0

1

2

3

4

5

Qld NSW Aus SA Vic WA Tas

% ann

Dec-09 yr Dec-10 yr


Domestic demand growth, by state

Qld: lagging – for now

18

Output effects from the Floods and Cyclones

Activity loss

March quarter: Coal: $2.2bn

Farm: $2.5bn

Tourism: $300m

Other: $500m

June/September: $1.5bn (coal/tourism)

Rebuilding

Government: Commonwealth: $5.6bn

States: $1bn

Private: Housing: $2.5bn

19

Dwelling completions – Qld’s capacity to rebuild

0

10

20

30

40

50

60

0

10

20

30

40

50

60

1987 1991 1995 1999 2003 2007 2011

„000 '000

Sources: ABS, Westpac

decade avg

f/c

+5.5k

flood

rebuild

20

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

1991/92 1995/96 1999/00 2003/04 2007/08 2011/12

% ann % ann

GSP GSP, ex floods State demand

Sources: ABS, Qld Gov't, Westpac Economics

Qld Gov‟t

fcasts

2010/11: 1.25% (3.0%); 2011/12: 5.0% (4.25%)

Qld: 5% growth in 2011/12

21

CAPEX plans by industry

-20

0

20

40

60

80

-20

0

20

40

60

80

2007 2008 2009 2010 2011f 2012f

% chg, yr avg % chg, yr avg

mining

manufacturing

services

total

History in real terms,

Expectations in nominal


financial years 5th est. 1st est.

22

Mining investment boom ... Coming to Qld Business investment : share of GSP

0

5

10

15

20

25

30

35

Dec-89 Dec-97 Dec-05

NSW Vic Tas

% of GSP


0

5

10

15

20

25

30

35

Dec-89 Dec-97 Dec-05

SA Qld WA

% of GSP

23

Firms: hiring ... under investing

-20

-15

-10

-5

0

5

10

15

20

25

30

-4

-2

0

2

4

6

Dec-80 Dec-85 Dec-90 Dec-95 Dec-00 Dec-05 Dec-10

% ann % ann

Jobs (lhs)

Equipment * (rhs)

Sources: ABS; Westpac Economics * smoothed

Consumer recession

in NSW & Vic Asian crisis

AUD “collapse” Deleveraging

24

Household savings ratio-cyclical high

-5

0

5

10

15

20

25

-5

0

5

10

15

20

25

Sep-59 Sep-69 Sep-79 Sep-89 Sep-99 Sep-09

% income % income

Sources: ABS, Factset, Westpac Economics

post 2006 avg doubled

equates to ~$122bn

25

Funding costs / deposit rates bid up

-250

-200

-150

-100

-50

0

50

100

150

200

250

-250

-200

-150

-100

-50

0

50

100

150

200

250

Oct-90 Oct-95 Oct-00 Oct-05 Oct-10

bps bps

spread: 1yr term deposit vs 90 day bank bills

Sources: RBA, Westpac Economics

26

Essential: rising costs an added drag

-15

-10

-5

0

5

10

15

20

25

Mar-97 Mar-07 Mar-02 Mar-97 Mar-07

-15

-10

-5

0

5

10

15

20

25 % %

nominal spend

real

prices

*ann avg %ch

figures in brackets

show %total spend

water (1%)


electricity (2%) fuel (5%)

27

Australia’s emissions profile

0

50

100

150

200

250

300

0

50

100

150

200

250

300

Stationary energy

Transport Fugitive emissions

Waste & industrial

processess

Agriculture

Source: Department of Climate Change

National Greenhouse Gas Inventory 2006; Mt CO2-e

28

Consumer sentiment and job security

80

100

120

140

160

180

200 70

80

90

100

110

120

130

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

index index

consumer sentiment index (lhs)

unemployment expectations (rhs) Sources: Westpac-Melbourne Institute

29

Consumer sentiment: family finances

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

index index

consumer sentiment index

consumer sentiment - family finances Sources: Westpac-Melbourne Institute

30

Household financial ratios

0

20

40

60

80

100

120

140

160

180

Mar-77 Mar-87 Mar-97 Mar-07 Mar-77 Mar-87 Mar-97 Mar-07

0

5

10

15

20

25

30

35 % %

total housing own-occ housing

*all figures are to 2010Q3

debt to assets (rhs) debt to income (lhs)

Sources: RBA, Westpac

31

House price growth: all dwellings

-20

-10

0

10

20

30

40

50

60

70

-20

-10

0

10

20

30

40

50

60

70

Oct-03 Oct-05 Oct-07 Oct-09 Oct-03 Oct-05 Oct-07 Oct-09

% %

Bris Melb Adel Syd Perth

Sources: RP Data-Rismark,

Residex, Westpac

*six-monthly growth

rates, annualised

32

House price growth stalls

-15

-5

5

15

25

35

45

-15

-5

5

15

25

35

45


% ann % ann

Brisbane

capital cities avg.

Sources: ABS; Westpac Economics

*six-monthly growth rates, annualised

33

Price-income ratios: various measures

0

1

2

3

4

5

6

7

8

9

10

0

1

2

3

4

5

6

7

8

9

10

Sydney Melbourne Brisbane Adelaide Perth

times times

house price to state median income house price to capital city median income all dwelling price to capital city median income unit price to capital city median income

Source: APM, RP Data-Residex, ABS, Westpac

June 2008

units

%total

stock:

38% 28% 21% 24%

22%

34

Housing affordability vs long run trend

20

25

30

35

40

45

50

55

60

65

70

20

25

30

35

40

45

50

55

60

65

70

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

% %

Sydney

Melbourne

Brisbane

Perth

Sources: REIA, ABS, RBA, Westpac

deteriorate

improve

35

40

60

80

100

120

140

160

180

40

60

80

100

120

140

160

180

Mar-08 Mar-09 Mar-10 Mar-11 Mar-08 Mar-09 Mar-10 Mar-11

index index

NSW Vic Qld WA

Source: Melbourne Institute, Westpac Economics

*smoothed

‘Time to buy a dwelling’ by state

36

Population vs dwelling stock

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

450

500

1950s 1960s 1970s 1980s 1990s 2000s last 3 years

thousands thousands

population

dwelling completions

dwelling stock*

Source: ABS, Westpac

annual average change

* net of demolitions – implied by Census

data to 2006; Westpac estimates thereafter

37

Population vs dwelling stock: Qld

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

1950s 1960s 1970s 1980s 1990s 2000s last 3 years

thousands thousands

population

dwelling completions

dwelling stock*

Source: ABS, Westpac

annual average change

* net of demolitions – implied by Census data

to 2006; Westpac estimates thereafter

38

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jun-82 Jun-90 Jun-98 Jun-06

% ann % ann

Qld (lhs) Aust (rhs)


Population growth: sharp slowdown

39

Population growth in perspective

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1926 1936 1946 1956 1966 1976 1986 1996 2006

ann% ann%

population

contribution from net migration

contribution from natural increase


40

Migrant inflows vs student visas

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010

thousands thousands

student visas granted migrant arrivals

Source: ABS, Dept of Immigration and

Citizenship, Westpac Economics

*financial years

50k

drop

67k

drop

41

Australian bank funding sources

10

20

30

40

50

10

20

30

40

50

Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

% %

Domestic deposits

Short term debt

Long term debt

Sources: RBA, APRA, ABS, Westpac.

42

Major Banks’ Bond Issuance

-40

-20

0

20

40

60

-40

-20

0

20

40

60


$bn $bn

Onshore* Offshore* Maturities Net issuance

Source: RBA

AUD equivalent

* Latest quarter issuance to date

43

Westpac business lending by sector

31.4

7.6

6.2

7.2

9 6.1 4.6

27.9

Property

Agriculture

Accom, Restaurant

Manufacturing

Retail

Wholesale trade

Transport

Other

Sources: Westpac.

44

Total dwelling approvals – Victoria rules!

40

60

80

100

120

140

160

180

200

40

60

80

100

120

140

160

180

200

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

index index

Vic (36%) WA (13%)

Qld (17%) NSW (19%)


smoothed, Sep 2005 = 100

figures in brackets show %total

45

Unit approvals- Victoria overheated?

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

450

500


index index

Vic (36%) WA (5%)

Qld (13%) NSW (20%)


smoothed, Jan 2006 = 100

figures in brackets show %total

46

QLD mortgage arrears well above national

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

% %

Average REDS

SPIN

Source: Westpac Economics

47

Foreign bank claims on Australia

0

100

200

300

400

500

0

25

50

75

100

125


$USbn

Japanese (lhs)

European (rhs)

Sources: BIS, Westpac.

$USbn

48

Mortgage assets: structural shifts

50

100

150

200

250

300

350

400

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10

Banks

Securitisation vehicles

index

Sources: APRA, ABS, Westpac.

49

Lending finance- steady recovery

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20


$bn $bn

construction only (lhs)

investor housing - individuals (rhs)


*smoothed, annualised

50

Non res showing no recovery

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Apr-87 Apr-91 Apr-95 Apr-99 Apr-03 Apr-07 Apr-11

AUDbn/mth AUDbn/mth

units (surpassed prev peak, now 11% lower)

non res (still 41% below pre-crisis peak)*


Private dwelling approvals,

trend, nominal

* excluding education

51

Brisbane office market – also a constraint ... as supply continues

-50

0

50

100

150

200

250

1990 1994 1998 2002 2006 2010

-4

0

4

8

12

16

20 %

Net absorption Net supply

Vacancy rate

Sources: PCA, Westpac Property

‟000 sqr meters Westpac Property

forecasts to 2012

Vacancy rate

11.3% 2009

13.0% 2011

52

Disclaimer Key points

• The two key challenges for the industry are interest rates and credit availability – both are of equal concern to industry participants.

• The interest rate outlook will be affected by the global growth outlook; the sustainability of the mining boom and prospects for the cautious consumer.

• US growth prospects are less than robust; China is tightening policy and Europe‟s problems are structural.

• Australian consumers are cautious and look to stay that way with house prices under pressure and housing affordability stretched.

• Any easing in consumer caution is likely to lead to higher rates since the mining boom will continue unabated.

• The mining boom is set to strengthen further maintaining pressure on rates through 2012 – QLD will benefit from this.

• The Australian dollar will be resilient to increasing global risk although it should weaken somewhat in 2012.

53


• The key to Australia‟s world class house prices has been the increasing imbalance between new supply and population growth although there is clear oversupply in places like the Gold Coast.

• Population growth has slowed sharply particularly in QLD taking some pressure off underlying demand.

• New funding pressures have eased for the major banks as they take advantage of the rising savings rate to fund books through retail deposits – although maturities remain a challenge.

• Foreign banks and securitisers have lost considerable ground to the majors who now dominate new lending QLD‟s reliance on regional banks has been a weakness for the state.

• There is clear evidence that approvals and lending for developments is slowly improving although Victoria is dominating activity.

54


• There is a clear diversity in terms of approvals across the states with Victoria showing signs of being overheated while QLD is lagging. • Property dominates banks‟ loan books although approvals for non residential have not recovered since the GFC while apartments are showing upward momentum.

• While there is some improvement in residential prospects for non residential particularly in Brisbane/Gold Coast are not sound.

• The stability and improvement in the housing industry is likely to need to await rate cuts which should begin in 2013 following another “round” of rate hikes in 2012.

55

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