A hous e or a home? F inding value in A us tralian res idential

propertyAnthony Street

R eal hous e pric e index

050

100150200250300

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Real house price growth in Australia

Is it a bubble?

• “If we think about property prices .... you wonder how they are going to be afforded because these prices are getting quite high” Glenn Stevens, RBA, (on Sunrise March 2010)

Is it a bubble?

• “The price of housing typically trades about 3.5 times family income and in bubble it goes to 6 or 7.5. [Australia is] 7.5 times. . . which suggests you are twice the size that you should be” Jeremy Grantham, GMO, June 2010

Source: The Australian

Is it a bubble?

• “Australian house prices are expensive on every value metric. They are expensive relative to history, and expensive relative to houses in comparable countries” Gerard Minack, Morgan Stanley, August 2010

Is it a bubble?

• “The relationship between house prices and incomes in Australia is uncomfortably high versus the rest of the world .... By any normal set of measures, house prices in Australia are high” David Murray, Future Fund Chairman, March 2011

Source: The Australian

Is it a bubble?

• “Taking into account geographic differences, the ratio of house prices to income in Australia is not that much different to most other comparable countries” CBA, September 2010

Is it a bubble?

• “Australian housing affordability is not as stretched as some measures suggest .... House prices and affordability issues reflect a structural imbalance between supply and demand” Westpac, October 2010

Is it a bubble?

• “...the major reason for [Australia’s higher house price to income ratio over the past 10 years] has been a structural (read permanent) reduction in interest rates” ANZ, May 2010

Is it a bubble?

• “... the [house price to income] ratio ... is higher than it used to be, but it’s actually not exceptional by a global standard” Glenn Stevens, RBA, March 2011

100110120130140150160

Dec

-200

7

Mar

-200

8

Jun -

2008

Sep-

2008

Dec

-200

8

Mar

-200

9

Jun-

2009

Sep-

2009

Dec

-200

9

Mar

-201

0

Jun-

2010

Sep-

2010

Dec

-201

0

ABS House Price Index

Interpreting the R B A

Mar10: 18% growth

100110120130140150160

Dec

-200

7

Mar

-200

8

Jun -

2008

Sep-

2008

Dec

-200

8

Mar

-200

9

Jun-

2009

Sep-

2009

Dec

-200

9

Mar

-201

0

Jun-

2010

Sep-

2010

Dec

-201

0

ABS House Price Index

Interpreting the R B A

Mar11: Flat growthMar10: 18% growth

What is the hous e pric e to inc ome ratio?• Median dwelling price to average income ratio

=> 4 to 4.5x

What is the hous e pric e to inc ome ratio?• Median capital cityhouse price to median income ratio

=> 6 to 7x

012345678

1995

1997

1999

2001

2003

2005

2007

2009

Median house price to median household income

Source: calculated using ABS data

What is the hous e pric e to inc ome ratio?

•CBA’s view(from Australian Residential Housing investor presentation, Sept 2010)

House price to income

Sydney 6.2

Melbourne 5.7

Brisbane 4.7

San Francisco 7.0

Los Angeles 5.7

New York 7.0

Vancouver 9.3

Bristol-Bath 6.1

Auckland 6.7

Wellington 5.8Source: Demographia, UBS

Demographia

9.1

8.0

6.7

7.0

5.7

7.0

9.3

6.1

6.7

5.8

What is the hous e pric e to inc ome ratio?

•CBA’s view House price to income

Australia 4.3

Canada 4.1

UK 5.6

US 3.3

Source: RP Data/CBA/ABS; UBS

Demographia

6.8

3.7

5.1

2.9

S upply: every pic ture paints a s tory

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

75,000

125,000

175,000

225,000

275,000

325,000

375,000

1985

1989

1993

1997

2001

2005

2009

Dwelling starts versus population growth

Annual Dwelling Starts (LHS)Annual Population Growth (RHS)

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

1985

1989

1993

1997

2001

2005

2009

Dwelling starts versus population growth

Annual Dwelling Starts (LHS)Annual Population Growth (RHS)

IMF takes the s ame approac h

8

10

12

14

16

18

050

100150200250300

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Real house prices and working age population

Real house price index (lhs)Working age population (millions, rhs)

051015202530

050

100150200250300

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Real house prices and working age population

Real house price index (lhs)Working age population (millions, rhs)

R ental growth

0%

2%

4%

6%

8%

10%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Annual growth in residential rentsRental growth modest compared to price growth

Source: ABS

Mortgage affordability

0%

10%

20%

30%

40%

50%19

95

1997

1999

2001

2003

2005

2007

2009

Mortgage repayments as % of household income

Dwelling s ize

Increased dwelling size accounts for small component of house price increases

Source: ABS

Average floor area of new dwellings

Hous ehold debt

Households have used increasing levels of debt to fund house purchases

Source: RBA

0255075100125150

05

101520253035

1977

1981

1985

1989

1993

1997

2001

2005

2009

%%

Housing debt

Housing debt to housing assets (LHS)Housing debt to disposable income (RHS)

Unemployment and interes t rates

0.0

5.0

10.0

15.0

20.0

0

50

100

150

200

250

300

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

%

Australian house prices compared to unemployment and mortgage rates

Real House Price Index (LHS)Unemployment Rate (RHS)Mortgage Rate (RHS)

“When you have ... a strong, ideally nearly perfect economy and generous money – you are nearly certain to have a bubble form”Jeremy Grantham

R es idential property as an inves tment

• “Did you know that eight out of ten millionaires made their fortunes in real estate? ... actively investing in real estate projects is the best way to build wealth and help secure your financial future” Property developer

R es idential property as an inves tment

• “Why you should invest in property .... Greater leverage on your money - banks lend up to 95% on property and only 60% on shares” Investment property consultants and finance brokers

R es idential property as an inves tment

• “Housing Shortage Leaves High Demand for Rentals Invest Now!” Real Estate University

R es idential property as an inves tment

• “If ... the resources story unwinds ... the RBA is likely to reduce interest rates ... The housing market is therefore a powerful hedge against Australia’s resources boom running off the rails.” Rismark, Feb 2011

R es idential inves tment returns

•Current gross rental yields 4.1% (houses) to 4.9% (apartments)

•Net yield 2-3%• Investors (even ungeared) are betting on continued 5%pa+ house price growth

R ental growth furphy

• If price growth falls to 3%pa, rent growth of 13%pa needed for geared taxpayer to break even after 10 years

Ac tual inves tor experienc e

•83% of wage earners with an investment property reported an income loss (over 600,000 taxpayers)

•91% of these investors used gearing

Source: ATO 2007/08 tax statistics

R ental inc ome gains by oc c upation

1. Investment income recipients 74% (42%)2. Superannuation funds 67% (50%)3. Property operators 57% (59%)5. Financial asset investing 56% (60%)6. Sheep, cattle and grain farming 53% (55%)7. Dairy farming 53% (56%)14. Mushroom and vegetable growing 48% (67%)27. Gambling activities 37% (76%).....

192. Salary & wage earners 17% (91%)0% 25% 50% 75% 100%Source: ATO 2007/08 tax statistics

Taxpayers reporting a rental gain, by occupation

% reporting rental gains

% using gearing

Owner-oc c upiers : a hous e or a home?

•70% of dwellings owned by owner-occupiers

•Decision to buy not solely financial: “economics of happiness”

•Leads to an inefficient market from a purely investment perspective

T he US experienc e

050

100150200250300350400

1989

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Australian and US house prices since Dec '89

Australian house prices US house prices

S trong labour market s upporting Aus tralian hous e pric es

0

2

4

6

8

10

12

2001

2002

2003

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2006

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2011

Une

mpl

oym

ent R

ate

(%)

Australian and US unemployment rates

Australian Unemployment Rate US Unemployment Rate

S ummary

• Interest rates and unemployment are key to Australian residential market

•These cyclical factors will far outweigh any structural issues, such as undersupply

… one final quoteFrom Oct 2006 at peak of US housing market:“The U.S. housing market largely reflects a strong U.S. economy ... the U.S. housingmarket has never declined.” Ben Bernanke, Chairman US Federal Reserve