The Economic Outlook for the Australian

Housing Market

Dr Harley Dale

HIA Chief EconomistDefence Housing Australia Summit

Canberra, 11th September 2014

The most comprehensive housing report

card produced in Australia

Winter 2014 edition:-

• In 2013, the world economy enjoyed its most stable year since the outbreak of the GFC.

• Budget 2014/15 is weighing down on consumer confidence.

• In the 12 months to March 2014 the level of commencements reached nearly 177,000. We have come a very long way!

• Dwelling price growth has decelerated in recent months, but …

For more information regarding HIA Economics please contact us at:

(02) 6245 1393 or economics@hia.com.au

What is driving housing activity?

Strong population

growth

Record low interest rates

Strong foreign

investment

Dwelling price growth

Resilient confidence

Property Market Trends – a good story

‘made bad’?

The national dwelling price story

• The price story is all about transactions.

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

600,000

Aug

-04

Feb

-05

Aug

-05

Feb

-06

Aug

-06

Feb

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11

Feb

-12

Aug

-12

Feb

-13

Aug

-13

Feb

-14

Aug

-14

House and Unit Prices - Regional Australia vs Capital Cities Source: RP Data and Rismark Simple median price

Capital City Houses Capital City Units Regional Houses Regional Units

Ironically, it’s all about Sydney being …

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Aug

-00

Feb

-01

Aug

-01

Feb

-02

Aug

-02

Feb

-03

Aug

-03

Feb

-04

Aug

-04

Feb

-05

Aug

-05

Feb

-06

Aug

-06

Feb

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11

Feb

-12

Aug

-12

Feb

-13

Aug

-13

Feb

-14

Aug

-14

Dwelling Prices Source: RP Data and Rismark Simple median price

National Dwellings Melbourne Dwellings Sydney Dwellings

… the late player to hit form

• Sydney and Melbourne dominate our population landscape, but …

• … everybody else is asking what have prices done for me lately?

13.3

6.9 3.8 3.90.3 2.0 1.0

-0.1

7.2

26.2

14.6

-2.1 -1.0

6.2

-3.3

12.6

5.3

13.113.2

45.7

14.3

25.7

58.3

13.2

82.9

14.1

26.6

-10

0

10

20

30

40

50

60

70

80

90

Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra 8 Capitals

% c

han

ge

Change in Real House Prices to June 2014

1 Year 5 Year 10 YearSource: ABS

An investor driven recovery? Yes and no

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Val

ue $

m (

mov

ing

annu

al t

otal

)

Val

ue $

m (

mov

ing

annu

al to

tal)

Lending for Rental Properties - AustraliaSource: ABS Housing Finance

Existing (lhs) Construction (rhs)

What about owner occupiers? Yes and no

100000

110000

120000

130000

140000

150000

160000

170000

180000

10000

15000

20000

25000

30000

35000

40000

45000

50000

55000

Jul-2

004

Jan-

2005

Jul-2

005

Jan-

2006

Jul-2

006

Jan-

2007

Jul-2

007

Jan-

2008

Jul-2

008

Jan-

2009

Jul-2

009

Jan-

2010

Jul-2

010

Jan-

2011

Jul-2

011

Jan-

2012

Jul-2

012

Jan-

2013

Jul-2

013

Jan-

2014

Owner occupier lending - Australia, moving annual value, $ million Source: ABS 5609.0

First Home Buyers (LHS) Non-First Home Buyers (RHS)

The rental market – back into the fold?

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0.0

0.5

1.0

1.5

2.0

2.5

Ju

n-9

4

Ju

n-9

5

Ju

n-9

6

Ju

n-9

7

Ju

n-9

8

Ju

n-9

9

Ju

n-0

0

Ju

n-0

1

Ju

n-0

2

Ju

n-0

3

Ju

n-0

4

Ju

n-0

5

Ju

n-0

6

Ju

n-0

7

Ju

n-0

8

Ju

n-0

9

Ju

n-1

0

Ju

n-1

1

Ju

n-1

2

Ju

n-1

3

Ju

n-1

4

% c

hange in in

dex

CPI Rental Growth – AustraliaSource: ABS 6401

Qtrly Annual

The rental market – rising vacancy rates?

1.9%

2.7%

2.4%

1.6%

2.5%

2.3%

1.6%

1.8%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Sydney

Melbourne

Brisbane

Adelaide

Perth

Canberra

Darwin

Hobart

Per cent

Capital City Vacancy Rates, June 2014Source: SQM Research

The rental market yield – not much there?

• Yields aren’t great, but is that the ‘play’?

4.2%

3.7%

4.8%4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Mar-08 (previous peak rate of growth in rents) Aug-14

Capital city rental yields Source: RP Data & Rismark

Houses Units

Household income, mortgage costs, and

dwelling prices – a rational perspective

We have super low borrowing costs …

• Rates have fallen 225 basis points since late 2011.

• First rate rise in mid 2015?

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

% I

nter

est R

ate

Interest Rates, Australia Source: HIA Economics, RBA

Mortgage Rate Margin to Cash Rate (RHS) Discounted Variable Mortgage Rate RBA Cash Rate Small Business Variable Term Loan

Interest rates at historic lows for a long time

14

14

15

17

17

19

0 2 4 6 8 10 12 14 16 18 20

Aug '13 to date

Mar '05 to Apr '06

Dec '03 to Feb '05

Jun '02 to Oct '03

Jul '97 to Nov '98

Dec '94 to Jun '96

Number of Months

Duration of Prolonged Steady Interest Rate Periods, 1994 to 2014Source: RBA

The household savings story

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jun-

1982

Jun-

1984

Jun-

1986

Jun-

1988

Jun-

1990

Jun-

1992

Jun-

1994

Jun-

1996

Jun-

1998

Jun-

2000

Jun-

2002

Jun-

2004

Jun-

2006

Jun-

2008

Jun-

2010

Jun-

2012

Jun-

2014

Per

cent

age

of d

ispo

sabl

e in

com

e

Household Savings Rate Source: HIA Economics, ABS 5206

Dwelling prices and real income growth

• This profile is unsustainable, and whatever happens …

• … security will be key.

90

95

100

105

110

115

120

125

130

Mar

-04

Jun-

04

Sep

-04

Dec

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Inde

x nu

mbe

r

Index of real house prices and real incomes - based to 100 in March 2004 Source: ABS 6302, 6401, 6416

Real Earnings Real Prices

Dwelling Price to Income ratio is much higher

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Dwelling Price to Income Ratio - 1995 to 2014Source: ABS, RP Data, HIA

Price to Income Ratio Trend with structural break

Implications of a housing boom for the

Australian construction industry

New housing took the price signal, and …

• Over the 12 months to March 2014 starts increased by 13% to nearly 177,000.

25,000

30,000

35,000

40,000

45,000

50,000

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Num

ber

Total Dwelling Starts – AustraliaSource: ABS 8752

Seasonally Adjusted Trend

… NSW won the Origin battle

• In the 12mths to March 2014, NSW started over 46k new dwellings, an increase of 20%.

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

Mar-

94

Mar-

95

Mar-

96

Mar-

97

Mar-

98

Mar-

99

Mar-

00

Mar-

01

Mar-

02

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Num

be

r

Total Dwelling Starts – New South WalesSource: ABS 8752

Seasonally Adjusted Trend

The short term outlook is strong, but …

160.15152.67 152.73

159.88

132.92

173.78

162.98

145.24

161.91

182.42176.81 174.05

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

2004/05 (a) 2005/06 (a) 2006/07 (a) 2007/08 (a) 2008/09 (a) 2009/10 (a) 2010/11 (a) 2011/12 (a) 2012/13 (a) 2013/14 2014/15 2015/16

Tho

usan

d dw

ellin

gs c

omm

ence

d

Australia Housing Starts ForecastsSource: HIA Economics Group

Forecast

Taxation is one challenge

44%

38%36%

41%

38% 38%

36%

37%

0

50,000

100,000

150,000

200,000

250,000

300,000

Sydney Melbourne Brisbane Perth Adelaide Albury Wodonga Townsville

Tax

on

a N

ew H

ouse

(V

alue

and

% o

f fin

al h

ome

pric

e)

Taxes on HousesSource: Taxation of the Housing Sector (The CIE, 2011), Taxation generated from the housing sector: an extension (The CIE, 20 13)

Taxes on housing – New Houses (Value and % of final home price)

Skilled labour is another challenge

124.0

126.0

128.0

130.0

132.0

134.0

136.0

138.0

140.0

142.0

144.0

146.0

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

Price IndexAvailability Index

Home Building Trade Prices and Availability - AustraliaSource: HIA Trades Report

Trade Availability (LHS) Trade Prices (RHS

Tra

des

in S

hort

Sup

ply

Housing is about opportunity, not just

challenge; and you’re well placed for that

opportunity

THANK YOU FOR YOUR TIME

Harley Dale, HIA Chief EconomistSeptember 2014

economics.hia.com.au

aciresearch.com.au