QBE LMI Australian Housing Outlook

8/3/2019 QBE LMI Australian Housing Outlook

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contents

1

1. Executive summary 4

2. Economic outlook 12State of play 12

Interest rates 14

3. Housing finance 16

Buyer demand 16

Loans to first home buyers 18

Loans to upgraders 18

Loans for residential investment 20

Loan activity and the effect on prices 22

4. Rental markets 24

Vacancy rates and rental growth 24

Rental growth 26

5. Home affordability 28

6. Demand 30

Overseas migration 30

Interstate migration 32

Population 36

Demand and supply 36

7. Capital city overviews and

price forecasts 40

Sydney 40

Melbourne 42

Brisbane 44

Adelaide 46

Perth 48

Hobart 50

Canberra 52

Darwin 54

8. Appendix 56


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5

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

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

The higher costs of borrowinghave also impacted on cash flows

for investors, while slowing pricegrowth or price falls across thecapitals have lowered capitalgrowth expectations and providedan additional disincentive forinvestors 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 of dwellingcompletions caused vacancy rates

to ease. The decline in demandby investors has been reflected bythe value of loans for residentialinvestment contracting by 30%over 2010/11.

As a result, median house pricegrowth has been flat 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 of 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 firstsix months to June 2011.

With the housing variable interestrate forecast to remain stableover 2011/12, and the economicoutlook becoming more positiveon the back of rising businessinvestment, confidence amongfirst 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 five year average of 131,000,

loans to first home buyers rose to191,000 in 2009 - indicating thataround 60,000 first home buyersbrought forward their purchase totake advantage of the FHOGBS.With loans falling to 96,000 in2010, around 35,000 of this hasbeen accounted for, with muchof the remainder to be workedthrough 2011 before increasingmore significantly through 2012.

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

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

5

...confidence among first 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 isforecast to pick up in 2012/13,underpinned by strongereconomic conditions that will be

primarily attributed to acceleratinginvestment in the mining andresource sector. Strong demandfor minerals from China and otherAsian countries, who have mostlyescaped the debt issues and weaksentiment plaguing America andEurope, has continued to supporthigh commodity prices and theexpansion of 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 benefits to each ofthe property markets in thesestates will be escalating underlyingdemand, as population growthstrengthens due to high net inflowsfrom migration. In addition, with

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

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

from the mining sector. This isexpected to maintain a tighteningbias towards monetary policy, withinterest rates forecast to rise by175 basis points during the twoyears to 2013/14 and forecastto peak at 9% in the first halfof 2014. The interest rates risecould sustain a high AustralianDollar and continue to impedethe foreign competitiveness ofthe non-resource sectors of theeconomy; namely, agriculture,manufacturing, tourism, services,and education. This will be stronglyfelt in the economies of New SouthWales and Victoria, where miningreceipts constitute a much smallerpart of the revenue base. Theincrease to interest rates is alsoexpected to have a greater impacton property markets in Sydneyand Melbourne where affordability

is most constrained, although thesignificant deficiency of residentialdwellings in Sydney should stillunderpin moderate price growth.

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

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

6

1. executive summary (cont.)

housing outlook


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Table 1: Median house prices by capital city

Source: Real Estate Institute of 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 forecasts


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

Perth, residential demand in bothcities will benefit from boomingactivity in the mining and resourcesectors. However, price growth isanticipated to be slightly behindthat for Sydney and Perth in bothcities based on the current weakerlocal economic conditions, andthe later commencement of theinvestment projects in the pipelineand their subsequent flow oneffects through to house prices.

More moderate house priceincreases totalling between 6%and 8% are forecast forAdelaide,Hobart and Canberra throughto June 2014. All three cities areestimated to experience an excessof housing stock through theforecast period, which will reducethe scope for more solid growth.

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

Price forecast comparison

The QBE lmiHOUSINGOUTLOOK has been compiled

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

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

each of our capital city forecasts.Charts for comparisons betweenforecast and actual median houseprices for each individual capitalcity can be found in the Appendix.

The median house price forecastshave mostly moved in the samedirection as eventual pricegrowth, although the forecastshave 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 effecton price growth. More recently,forecasts made over 2007 to2009 have accounted for 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 of the QBE

lmiHOUSING OUTLOOK($555,000), largely due to theweaker economic environmentover the past twelve months, withshocks to international demandand financial 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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Chart 1: Comparison between actual and three year forecasts, national weighted median house price

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

650

600

550

500

450

400

350

300

250

200

%

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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Why Australian house prices

wont collapse

Purchaser sentiment has been

plagued by fears that furtherdownside exists to housing pricesacross Australia, particularly in lightof the substantial declines seenin many other Western countries.It is forecast that the underlyingdwelling deficiency will be key topreventing substantial declines asseen in the United States.

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

deficiency on price growth,contrasting price performance inthe United States residential marketwith the English residential market.The property market in Englandcontains a deficiency of 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 of dwellings hasmaintained steady prices.

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

fell steeply over the followingtwo years to June 2008 andresulted in the surplus ofresidential dwellings doublingin this period. This led to houseprices experiencing a significantcorrection of 19%, with pricesdeclining by a further 15%over 2008/09 as demandcontinued to contract. Priceshave stabilised since, with thesubstantial oversupply beingmaintained by ongoing weakdemand, and removing anyscope for prices to rise.

Prices in England experienced arise of similar magnitude to theUnited States through to a peakin 20072008. However, pricesonly corrected by 11% in 2009before recovering in 2010 to justbelow those of 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 of 9.1% in August

2011, while the unemployment ratein England for the three months toJuly was 7.9%. Obviously there arealso separate local economic factorsinfluencing supply and demand forhousing and driving prices, althoughthis comparison would suggest thatthe underlying deficiency 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 deficiency 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 of interest rate rises, as thedeficiency feeds 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 deficiency/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 deficiency/oversupply and price growth,

England, 2000 to 2011

Source: Office of National Statistics, LSL Property Services/Acadametrics, BIS Shrapnel estimates

Underlying demand

Dwelling completions

Case-Shiller house price index (RHS)

Cumulative deficiency/surplus

Underlying demand

Dwelling completions

House price index (RHS)

Cumulative deficiency/surplus


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2. economic outlook

12

State of 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 after theexpiry of the Federal GovernmentsFirst Home Owners Grant BoostScheme (FHOGBS) and a declinein publicly funded housing starts.This has created a gap in economicactivity, with the next round of

resource investment yet to ramp upand drive growth.

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

Household budgets are also underpressure from sharp rises in food,petrol, electricity and healthcarecosts, as well as the prospectof increases in rents and risingmortgage costs. Consequently,

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

The recent global volatility inthe share market has alsoaffected consumer and businessconfidence. However, Australia is

expected to be largely insulatedfrom the causes which initiatedthe overseas shock. Australiadoes not share the European andAmerican problems of sovereigndebt, ratings downgrade action orthreats, or weak economic growth,which continue to plague many ofthe 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 affected expenditure andheld back the strengthening of theAustralian economy. The ReserveBank of 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 forecast 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 confidence.

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

and 3.8% in each of 2012/13 and2013/14. In this environment, theunemployment rate is also expectedto improve, falling just below 4% atits lowest point in mid 2013, resultingin wage cost inflationary pressures.In the short term, however, theweakness in some sectors of theeconomy and uncertain internationaloutlook are expected to result ininterest rates remaining stable over2011/12. Rates are then anticipatedto begin to rise again from 2012/13.This will be a drag on the economy,but in the initial stages will be partlyoffset 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 full employment, economic

activity is expected to be peakingand inflationary pressures mostacute. With inflation outside theRBAs preferred range of 2%3%,the RBA is expected to adopta more aggressive stance oninterest rates. A forecast peak inthe variable rate of 9% per annumin the first half of 2014 will impacthousing affordability and consumerspending, with economic growthbeginning to slow as rates reach

their peak.

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Table 2: Key economic indicators

Source: Australian Bureau of Statistics, BIS Shrapnel

Year Ended June 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

Inflation & 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 forecasts


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Interest rates

Variable interest rates rose sharplyfrom their post GFC low of 5.8%

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

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

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

initiate the next phase of recoveryin our undersupplied housingmarkets. However, with baselineinflation likely to remain near thetop of the RBAs target band of2%3%, it is expected that theRBA will maintain a tightening biasto monetary policy, although thenext rate rise is not expected untilthe third quarter of 2012 when it isenvisaged consumers will increasetheir spending.

Consumer confidence and spendingis forecast to recover through thefirst half of 2012. By this stage, anumber of new resource projectsare expected to commence, whilethe stability in interest rates willbegin to encourage new homebuyers back into the market. Theresultant falling unemployment andincreased job security should seethe rising savings rates stabilise.

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

outbreak of inflation. It is forecastthat the first rise in interest rates willbe 25 basis points in Septemberquarter 2012, as a preemptive

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

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

shortages across the economybecome more acute. Consequently,the cash rate is projected to lift by50 basis points in 2012/13, and amore substantial 125 basis pointsover 2013/14 to peak at 6.5%by June 2014. As economic andfinancial 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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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 inflation

Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel


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3. housing finance

16

Buyer demand

Chart 5 illustrates the monthlyyearonyear percentage change

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

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

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

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

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

The number of loans to firsthome 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 of loans to

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

The volume of first home buyeractivity is important as it providesthe impetus for greater activity byupgraders and downsizers, who

form the majority of the market.This was reflected by the recoveryin loans to non-first home buyersover 2009 and the subsequentfall in 2010. However, the declinehas stabilised and the number ofloans to nonfirst home buyers inthe June quarter 2011 is only 2%below activity reported in the Junequarter 2010. As growth in loansto first home buyers returns, someimprovement in non-first homebuyer activity should also emerge.

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

remainder of the market. The valueof loans to residential investorsstabilised during the second halfof 2010, before experiencing adecline of more than 10% duringthe first half 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 first homebuyer demand starts to recover

and support prices at the entrylevel end of the market.

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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 of StatisticsNote: investor activity based on value of lending while owner occupier data based on number of loans

Investors

Non-FHBs

FHBs

The upturn in investor demand lagged the pick up in

lending activity to first home buyers.


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3. housing finance (cont.)Loans to first home buyers

All states experienced a collapsein first home buyer demand in

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

Nationally, there has been anaverage of around 131,000 firsthome buyers per annum duringthe last five years. The FHOGBSresulted in first home buyernumbers increasing to 191,000during 2009. This would suggestthat the incentive pulled forwardaround 60,000 first home buyersinto 2009 to take advantage of theFHOGBS. With first home buyerloans falling to 96,000 in 2010,numbers were around 35,000 belowthe recent average. This is just overhalf of the pull forward of demandinto 2009 that occurred, and wouldindicate that after 2011, first homebuyer numbers should begin torevert to the long term levels.

Data for the first six months of2011 indicates that although firsthome buyer loans declined inyear-on-year terms, the rate of

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

Loans to upgraders

Upgraders and downsizersbetween them represent the largestcomponent of residential demand,at around two to three times the sizeof the first home buyer market, andtherefore have the most influence onthe market. However, there is lessimpetus for potential upgraders toenter the market to move to theirnext dwelling unless required by lifestage movement, or encouraged toby capitalising on a strong market for

their current dwelling.

Consequently, while there is alwaysan underlying level of upgraderactivity taking place, demand fromupgraders is greatest when there

is strong demand for their currentdwelling. Ultimately this needshealthy demand from first homebuyers at the entry level to providedemand for their existing dwellingand encourage them to move on.

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

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

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

and quarterly change in the number of loans

Source: Australian Bureau of Statistics

Calendar 2009 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-first 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 decreaseof 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 of upgradersin the property market. However,the scope of any recovery willstill be encouraged by the timingand strength of the rebound infirst home buyer demand andprice growth, which should startto emerge in 2011/12 and gainmomentum over 2012/13.

Loans for residential investment

The Australian Bureau of Statisticsprovides data on residentialinvestment in terms of the value oftotal loans rather than the number ofloans. The value of loans to investorsexperienced a postGFC rebound of15% in 2009/10 (Table 5).

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

the year. Weaker sentiment hasemerged due to higher borrowingcosts more than negating higherrents, as well as creating wideraffordability constraints andcausing dwelling prices to fall. 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 performingstates during 2010/11. However,all are likely to experience a greaterrebound in the value of residentialinvestment loans. The return ofmore 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 benefit, as thesestates attract higher net inflowsof migrants from 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 risingdeficiency of dwellings over thenext three years to June 2014,therefore resulting in tightervacancy rates and increasingrental growth. This is alsoprojected to occur in the NorthernTerritory as demand continuesto outpace completions. Thesecities consequently offer the bestpotential for capital growth withstrengthening economic growthand rising dwelling deficiencieslikely to support price rises.Western Australia is forecast tolead the upturn in investor demand,with Queensland lagging due to therelatively weaker state of its localeconomy before it emerges duringthe second half of 2012.

3. housing finance (cont.)

20

housing outlook


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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 of the GFC andreal house prices are still below itsprevious peak level at March 2004,providing scope for future pricegrowth as economic conditionsstrengthen. This downturn in theproperty market also led to acollapse in dwelling constructionand the subsequent emergence ofa critical undersupply of housingstock in the city. The continuationof extremely tight vacancy ratesshould underpin solid rental growthand improve residential investmentyields, despite the prospect ofrising interest rates from 2012/13.

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

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

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

Loan activity and the effect

on prices

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

slowing turnover have seen priceweakness.

The last 24 months have followedthis relationship. The monthlyaverage number of loans forestablished dwellings peaked at36,000 in the year to November2009, before continually falling to26,250 in the year to June 2011.This predicated a downward trendfor growth in the Australian medianhouse price, with the yearly rateof increase slowing from a peak of19% at March 2010 to below 1%at June 2011.

However, as highlighted in theprevious sections, it appears that

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

particularly with housing interestrates expected to remain steady.

3. housing finance (cont.)

housing outlook


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23

40

37

34

31

28

25

22

20

15

10

5

0

-5

-10

Number of established loans (000) Annual price growth %

Jun

05

Dec05

Jun

06

Dec06

Jun

07

Dec07

Jun

08

Dec08

Jun

09

Dec09

Jun

10

Dec10

Jun

11

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

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

Established loans

Australia weighted house price


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24

4. rental marketsVacancy rates and

rental growth

The vacancy rate in each city

reflects the level of rental oversupplyor deficiency. A vacancy rate of 3%in a market is considered balanced,where rents will rise roughly in linewith inflation. Table 6 highlights thetightening in residential vacancyrates from 2005 to 2008, with rentalvacancies being below the balancedmarket level across all capital cities.Record inflows during this time fromoverseas migration underpinnedstrong underlying demand, and led

to demand for 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 of 3.9%and 4.3%, respectively. Brisbaneand Perth experienced a biggershock to rental demand due to theireconomies suffering more fromthe GFC, as mining investment fellin response to falls in commodityprices. The subsequent lowermigration impacted on the rateof 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 after thefloods in January 2011. Vacancyrates tightened across all regions of

Brisbane from 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 reflect short termaccommodation of the displacedpopulation immediately after thefloods who have since returned totheir place of residence. However,vacancy rates continued to remaintight in inner and middle Brisbane.

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

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

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

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

housing outlook


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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 of theConsumer Price Index (CPI).

All capital cities achieved solidrental growth, which was greaterthan CPI, from 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 of this was as a resultof the boosted Federal and StateGovernment first home buyerincentives, which dampened tenantdemand from young people, asthey looked to become owneroccupiers. Lower interest ratesin 2009 also reduced the cash

outflow for investors, removingmuch of the impetus for landlordsto push through more substantialrate rises.

Capital cities where vacancy ratesrose have seen rental growth slow,evident in Brisbane and Perth from2010 and Melbourne and Darwin

from 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 affordability,leading to further solid increasesin rents. Some downside risk to

rental growth exists in Melbourne,Adelaide, Hobart and Canberra,where vacancy rates are likely toease further in the coming twoyears due to either the erosion oftheir dwelling deficiencies or anemergence of excess stock.

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27

Table 6: Annual rental growth and vacancy rates

Source: Australian Bureau of Statistics & Real Estate Institute of 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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28

5. home affordabilityChart 7 shows the ratio betweenthe monthly repayments requiredto service a 25year loan of 75% ofthe 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 affordability ratioreflects the ability of a purchaser tobuy a median priced home.

Interest rates of 49 year lowsover 2008/09 created attractiveaffordability 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 homeaffordability by June 2010.

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

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

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

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

close to its worst level inAdelaide outside of 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 forecast toremain steady through 2011/12,and, with economic and incomegrowth strengthening, affordabilityis projected to roughly remainsteady or improve slightly throughthe year. As indicated above,affordability levels in most capitalcities correspond to periods thathave previously been conducive toprice growth. This should enablebuyer confidence to begin toimprove. Nevertheless, tighteninginterest rates are forecast toreturn in 2012/13 and 2013/14.Consequently, home affordabilityis not anticipated to improvesignificantly, but to become morestrained over 2013/14, which willhave a dampening effect on houseprice growth, despite the prospectsfor strong economic conditions.

housing outlook


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29

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 of Statistics, Forecasts: BIS Shrapnel* Mortgage repayment based on 75% of 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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31

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 forecastse BIS Shrapnel estimate

...the improvement in long term arrivals now appears

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


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After falling to an estimated165,000 persons in 2010/11, thenet inflow (arrivals and departures)from all forms of overseas

migrationpermanent migration,movement of long term residents,and long term overseas visitorsis expected to remain steady in2011/12 at 170,000 persons.The upside will come from thepermanent migration component,with the Federal Governmentlifting their skill stream intake inthe 2011/12 migration programto almost 126,000 persons (from114,000 persons in 2010/11).The total intake, including refugeeand family reunion, is forecast toincrease from 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 forecast to becomemore solid from 2012/13, labourcapacity constraints are expected

to become more pressing, asunemployment falls to below 4%through 2013. This is anticipated todrive stronger growth in overseasarrivals on temporary workingvisas. Together with further risesin the Federal Government intake,net overseas migration is forecastto subsequently rise to an inflow of200,000 persons in 2012/13 beforeescalating further to 240,000persons in 2013/14.

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

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

Interstate migration

Interstate migration is largelyinfluenced by relative housingaffordability 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 reducedflows compared to recent years.

New South Wales is forecast toaverage a net outflow of 16,700persons per annum over thethree years to 2013/14. This is a

sizeable improvement from theaverage net outflow of 26,200persons per annum over theeight years to 2008/09, reflectingsome improvement in the stateeconomic outlook relative tothe other states, as well asimproved affordability after anextended period of weak prices.However, this is higher than thenet outflow of 10,000 personsfrom interstate migration in eachof the two years to 2010/11,reflecting the improvement ofeconomic conditions in the maindestination states of Queenslandand Western Australia.

Victoria recorded a net inflowfrom interstate migration of2,600 persons in 2009/10 andis expected to do so againin 2010/11, at around 2,000persons. This highlights the

relatively better performance ofits economy compared to otherstates in recent years. However,affordability in Melbourne hasdeteriorated, and with otherstates economies expected tobe stronger than Victorias overthe forecast period, interstatemigration is anticipated to fallback to a net zero impact in2011/12, before averaging a netoutflow of 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 inflow from interstate

migration in Queensland hascontracted significantly, froman annual average of 30,100

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

years to 2013/14. South Australia is expected to

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

Western Australia revertedto a net inflow from interstatemigration in 2003/04, whichhas remained steady, averaging

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

Tasmania is forecast to

experience a balanceof interstate arrivals anddepartures in each of thethree years to 2013/14. Thiscompares to average netinterstate migration inflow of400 persons per annum overallin the ten years to 2010/11.

The Northern Territory isanticipated to average a netinflow of 800 persons perannum in the forecast period,underpinned by rising resourceinvestment, a reverse from theannual average net outflow of800 persons during the twoyears to 2010/11.

TheAustralian Capital Territoryis also expected to witness a zeronet effect from interstate migrationover the three year forecast

period to 2013/14, a marginalimprovement on the averagenet outflow of 300 persons perannum from 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 forecastse BIS Shrapnel estimate


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6. demand (cont.)

36

Population

Australias population is projectedto grow at an average rate of

1.6% per annum to 23.8 millionat June 2014 (Table 9). This ratewill be lower than that recordedover the five years to 2010/11(1.8% per annum), when a highernet overseas migration inflow wassustained. The more moderateeconomic environment will see acontinued trend in low overseasarrivals until unemployment fallsfurther and labour shortagesbecome more acute. All the

regions, except for the NorthernTerritory, are projected to recordslower growth over the forecastperiod than over the last five years.

Western Australia is forecastto achieve the highest annualpopulation growth over the threeyears to 2013/14, averaging2.5%. Conversely, Tasmania isanticipated to record the smallestamount of growth, at 0.7% perannum. Population growth in theNorthern Territory (2.3% perannum) and Queensland (2% perannum) are also expected to beabove the national average. Eachof the three fastest growing regionshave the highest exposure to themining and resource industry,which is expected to be thekey driver of economic growth,and therefore will likely create agreater number of employment

opportunities.

Demand and supply

The underlying demand for newdwellings is driven largely by the

formation of additional households,which in turn is largely underpinnedby population growth. The balancebetween underlying demand andsupply has an impact on vacancyrates, rents, prices, and construction.

Underlying demand is forecast toaverage 180,300 new dwellingsper annum over the three yearsto 2013/14, which is above theestimated average for underlyingdemand of 171,100 dwellings in

the 2006/07 to 2010/11 period.Although net overseas migration(and therefore overall populationgrowth) is expected to be lowerduring the next three years to2013/14, compared to the previousfive years to 2010/11, a projectedincrease in household formationrates is anticipated to driveunderlying demand.

The period from 2006 to 2011was characterised by deterioratingaffordability. Traditionally, mostindividuals have formed new

households while aged in their20s. However, with entry into thehousing market (either as renters orowner occupiers) becoming moredifficult, household formation foran increasing number has beendelayed into their 30s. Althoughsolid population growth occurredin the 20 to 29 year old age groupover 2006 to 2011, not all ofthis was reflected in householdformation, as many stayed in thefamily home longer, or rented ingroup households. As the stronggrowth in 20 to 29 year olds overthe last five years translates tostronger growth in 30+ year oldhouseholds, there will be a higherpropensity for this to drive growthin households, assisting growth inoverall household formation.

housing outlook


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37

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 forecasts


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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 deficiency estimate of124,200 dwellings at June 2011is expected to escalate furtherduring the forecast period to aprojection of 189,200 dwellingsat June 2014around one yearslevel of underlying demand.However, the rise in the deficiencywill be concentrated in New SouthWales, Queensland and WesternAustralia, where the lowest levels ofconstruction relative to underlyingdemand are occurring.

New South Wales has experienceda sustained severe weakness innew dwelling construction since2006 that has resulted in thestates underlying deficiency ofresidential 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 of the forecast 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 first home buyerstamp duty exemption to only

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

Both Queensland and WesternAustralia are experiencing a

moderate deficiency of 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 forecast 29,900 dwellings inQueensland and 20,800 dwellingsin Western Australia by June2014. The flooding in parts ofQueensland 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 refurbishment.Consequently this has not had a

substantial impact on the currentdemand/supply balance.

Conversely, Victoria has achievedrecord levels of dwellingcommencements over the past twoyears to 2010/11, which is alreadystarting to reduce the deficiencybuilt up between 2006/07 and2009/10. The shortage of housingstock has fallen 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 deficiency in the NorthernTerritory is forecast to rise at amore modest rate, although,significantly, it is anticipated to betwice as much as the three yearforecast of underlying demandby June 2014. Alternatively,some underlying oversupply ofresidential housing is projectedto persist through the three yearforecast 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 deficiency, by state


Ave Ann Underlying

Demand (000s)

Dwelling

commencements

Deficiency 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 affordability, withmortgage repayments on 75% ofa median priced house accountingfor 41.6% of average disposablehousehold income at June 2004the worst level since 1989 whenvariable interest rates peakedat 17% and 49% of 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 increasedfrom late 2003 to the middleof 2008, and the GFC-inducedeconomic downturn over 2008/09further impacted affordabilityand purchaser sentiment. Thiswas highlighted by dwellingcommencements falling to 50 yearlows in 2008/09, whilst the medianhouse price at June 2009 wasidentical to that of five years earlier.

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

first home buyer demand through2009. This was followed 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 further 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 of residential housinghas caused tight vacancy rates ofless than 2% since 2007. This hasalready underpinned solid rentalgrowth totalling 27% betweenJune 2007 and June 2011, withfurther growth expected. Tenantdemand is likely to also receive

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

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

to first home buyers would berestricted to offtheplan or newlyconstructed dwellings. This is

expected to cause a short spurtin demand for dwellings under the$600,000 threshold from first homebuyers for established dwellings

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

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

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

7. capital city overviews and price forecasts

40

housing outlook


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41

Chart 9: Sydney dwellings, prices and activity

Source: Australian Bureau of Statistics, RealEstate Institute of 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 forecast to come through during 2012,underpinned by the rising dwelling deficiency.


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Melbourne

Melbournes residential propertymarket was clearly the strongest

performer of all the capital citiesover the two years to 2010.First home buyers led the surgein demand, encouraged byaffordability returning to the bestlevel in a decade heading into2009/10, and further first homebuyer incentives offered by theVictorian State Government inaddition to the FHOGBS, whichmade the total first home buyerincentive in Melbourne the most

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

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

of $601,000, which represented aconsiderable 48% acceleration inmedian prices from its low pointtwenty-one months earlier in theMarch quarter 2009 of $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 affordability,which has already surpassed itsprevious worst point at June 2008when interest rates were 9.6%.Consequently, median house priceshave dropped by 2% in the first halfof 2011 to $590,000 at June 2011.

Constrained affordability isforecast to continue to act as

an impediment to price growthover the three years to 2013/14and offset the Victorian StateGovernments first home buyerincentives, which currently includea $13,000 new dwelling grant over2011/12 and a 20% reduction instamp duty for dwellings purchasedby first 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 of the threeyears to 2012/13. This level of newdwelling supply is anticipated toerode the existing residential stockdeficiency in Melbourne by June2013.

Additionally, the strength ofrecent price growth has resultedin indicative yields for separatehouses falling to long term low

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

While the continuation of solideconomic growth is likely tomaintain purchaser confidence,pressures on prices are minimal.Melbournes median house priceis forecast 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 liftMelbournes median house valueto a forecast $623,000 at June

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

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

42

housing outlook


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43

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 of9.8% 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 of projects coming throughto support employment. Tourismhas also been impacted by the highAustralian Dollar. Consequently,employment prospects have beenweaker and demand from bothupgraders and investors has notexperienced the depth of reboundas in other states.

Moreover, the two percentage pointincrease in the housing variableinterest rate from October 2009 toNovember 2010 caused demandto further diminish. Queenslandsnet interstate migration inflow isestimated to have fallen to just7,500 persons over 2010/11,equating to a massive 80% dropfrom the peak intake level of38,000 in 2002/03. With underlyingdemand consequently weakening,vacancy rates have also beenabove the balanced market rate of

3% since 2009.It is likely that the weak purchasersentiment over the second half of2010 was further exacerbated by

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

to June 2011, the total number ofloans approved to owner occupiersdeclined by 24%, and the value ofresidential investment finance fellby 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 of $10,000available to all purchasers of newand existing dwelling between1st August 2011 and 31st January2012. This is in addition to thefirst home buyer stamp dutyconcession on properties up to$500,000 in value, which couldresult in a potential saving of up to$15,525.

While a number of new projectsinvolving the expansion of existingfacilities and the construction of

new coal seam gas facilities havebeen announced, it will take timebefore they are fully underway.As a result, the contribution ofthis 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, Brisbanesaffordability advantage overboth Sydney and Melbournehas improved after recently

being below the price growth inboth capital cities. This shouldresult in some turnaround in thenet interstate migration inflow,particularly as economic conditionsstrengthen from 2012 on the backof investment in the resourcesector creating growth in whitecollar support jobs in Brisbane.Consequently, underlying demandwill increase and cause dwellingdeficiency to start rising quickly.Vacancy rates should also startto tighten, with rental growthstrengthening after 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 affordability and curtails thestrength of the upturn.

By June 2014, Brisbanes medianhouse price is estimated to be$505,000, representing an overallincrease of 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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45

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

After a post-GFC decline in themedian house price of 3% in

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

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

However, residential propertydemand has significantly weakenedacross Adelaide through 2010/11,with the number of loans to firsthome buyers witnessing the largestfall of 39%. Furthermore, SouthAustralias proportion of annual netoverseas migration is projectedto fall slightly due to a slowing ofinflows from overseas studentsfurther impacting housing demandin Adelaide.

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

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

Despite first home buyers inAdelaide being eligible to receive aSouth Australian State Governmentgrant of $8,000 if building orpurchasing a new dwelling of 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 of residentialdwellings increasing moderatelyover the two years to 2012/13,before being effectively 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 feltin improving economic conditionsin South Australia, which should

provide some support to Adelaidehouse prices in 2012/13. However,with variable interest rates forecastto re-commence their rise from thesecond half of 2012, the combinationof excess dwelling stock anddeteriorating affordability will keepany rises limited. As the housingvariable rate reaches a forecast peakof 9% by June 2014, the constrainedaffordability will not only dentpurchaser sentiment, but also sloweconomic growth nationally.

Consequently, growth in themedian house price in Adelaidefrom 2011 to 2014 is anticipatedto be limited to a total of 7%, ora minimal 2.4% per annum onaverage, over the three years to2013/14, lifting 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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47

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


Real house price Adelaide ($000)

House price Adelaide ($000)

Commencements (000) SA(Y/E Quarter)

Forecast


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48

Perth

Perths median house price peakedat $478,000 in the December

quarter 2007 after an extendedincrease in prices from the Junequarter 2001, with growth totallinga substantial 188% during these sixand a half years. This accelerationwas due to booming economicconditions stemming from theincreased investment spendingin the resources sector. Not onlywas this generating strong wagegrowth, it also underpinned robustpopulation growth as greater

employment opportunities drovehigher migration inflows from bothinterstate and overseas, furtherstrengthening demand.

Price growth in Perth has sincestruggled, being hampered byweaker state economic conditionsand the resultant strains onaffordability that emerged. Afterfalling by 12% to $420,000 in theyear to the December quarter2008, Perths median houseprices stabilised during the firsthalf of 2009, before improvingover 2009/10. Despite the medianhouse price increasing by 11%to $500,000 in the year to June2010, it was just 4.6% abovethe previous peak of $478,000.Overseas migration into WesternAustralia eased to 28,200 personsin 2009/10, down from a record44,400 persons in 2008/09.

Additionally, with employmentopportunities diminishing, netinterstate inflows also subsided to2,000 persons in 2009/10 from4,800 persons in 2008/09.

Without the incentive of lowerinterest rates and FederalGovernment incentives, theweakness in residential demand has

emerged again over 2010/11, withPerths median house price fallingby 6% in the year to $470,000.Although engineering constructionis rising as new capacity is addedto the resource sector, it has notyet had a substantial impact onconfidence across the greatereconomy. This is evident indeclines in construction activity,with dwelling starts estimated tohave dropped by 18% in the yearto June 2011, and the contractingnumber of owner occupier loans(-20%) and value of residentialinvestor finance (-28%).

Nevertheless, new mining projectscontinue to be announced, whileprojects already commencedare ramping up, with the flowon effects on the state economylikely to translate into improvedpurchaser sentiment through

2011/12. In addition, affordabilityis slowly becoming more attractivedue to falls in the median houseprice, rising incomes, and theexpectation of relatively stabileinterest rates through the year.Furthermore, first home buyerscan save up to $17,765 in stampduty by being exempt from payingconveyance duty on purchases ofhomes up to $500,000 and vacantland up to $300,000. As a result,

price growth is forecast to return,with the median value rising by4.3% over 2011/12.

From 2012/13 inflationaryconcerns are expected to arise.With unemployment already low,further employment growth will

result in wage cost inflationarypressures. Accordingly, interestrates are projected to rise withtwo increases in the cash ratein 2012/13, followed by moreaggressive rises over 2013/14 aseconomic growth peaks, takingthe variable rate to 9% in the firsthalf of 2014. The initial rises areanticipated to be offset by strongincome growth and assisted byimproved net inflows from interstateand overseas migration, leading tostronger underlying demand. Withsupply being outpaced by demand,vacancy rates should also becometight and rental growth is expectedto pick up.

Subsequently, the median houseprice is forecast to escalate by 8% in2012/13 and ease to 7% in 2013/14as interest rates peak. Overall houseprices in Perth are estimated to rise

by a cumulative total of 20% overthe fo

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