housing outlook Australian Housing Outlook Prepared by BIS Shrapnel October 2012

Transcription

1 housing outlook Australian Housing Outlook Prepared by BIS Shrapnel October 2012

2 housing outlook DISCLAIMER: The information contained in this publication has been obtained from BIS Shrapnel Pty Limited and does not necessarily represent the views or opinions of QBE Lenders Mortgage Insurance Limited (QBE LMI). This publication is provided for informational purposes only and is not intended to constitute legal, financial or other professional advice and has not been provided with regard to the investment objectives or circumstances of any particular reader. While based on information believed to be reliable, no guarantee is given that it is accurate or complete and no warranties are made by QBE LMI as to the accuracy, completeness or usefulness of any of the information in this publication. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) (if any) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The information referred to may not be suitable for specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgment. Recipients should obtain their own appropriate professional advice. Neither QBE LMI nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This material may not be reproduced, redistributed, or copied in whole or in part for any purpose without QBE LMI s prior expressed consent. QBE Lenders Mortgage Insurance Limited ABN

3 contents 1. Executive summary 4 2. Economic outlook 10 State of play 10 Interest rates Housing finance 16 Buyer demand 16 Loans to first home buyers 16 Loans to upgraders 20 Loans for residential investment 20 Loan activity and the effect on prices Rental markets 24 Vacancy rates and rental growth 24 Rental growth Home affordability Capital city overviews and price forecasts 40 Sydney 40 Melbourne 42 Brisbane 44 Adelaide 46 Perth 48 Hobart 50 Canberra 52 Darwin Appendix Demand 30 Overseas migration 30 Interstate migration 32 Population 36 Demand and supply 38 1

4 housing outlook introduction I m delighted to introduce to the latest lmihousing OUTLOOK covering the expected trends for the Australian housing market over the next three years; exclusively researched and compiled by BIS Shrapnel. Ongoing volatility is proving a challenge for many forecasters and last year s lmihousing OUTLOOK was delivered amidst a tumultuous time in the global economy. Events in Europe and the US continue to weigh heavily on global markets, but the outlook for Australia continues to remain cautiously optimistic. Notwithstanding the relatively strong performance of the Australian economy, residential property prices nationally experienced their second year of decline in 2011/12. However, BIS Shrapnel are forecasting price growth for Perth (6% in 2012/13), Darwin (5%), Brisbane (4%) and, more modestly, in Sydney (3%). Meanwhile, minimal price growth is expected for Melbourne (1%) and Adelaide (1%) and prices are forecast to fall in Hobart (-1%) and Canberra (-1%) in 2012/13. The affordability of housing is currently at its best level across most capital cities since the first half of last decade, with the exception of a brief period in 2009 when affordability spiked due to aggressive cuts in interest rates. Notably, affordability is expected to further improve as standard variable interest rates are tipped to fall by another 25 basis points in 2012/13. Consequently, we should see increased housing turnover in the market as first home buyer numbers pick up and have a positive effect on upgrader activity, which in turn is predicted to further spur investors return to the market. QBE LMI has been supporting the mortgage industry for over 45 years and we continue to do so through the provision of flexible products that offer lenders the security and confidence they need to respond to the changing needs of borrowers. Our sponsorship of the lmihousing OUTLOOK has continued for over 10 years as part of our ongoing commitment to provide insights in relation to trends in the mortgage industry. This report provides comfort that Australia is well placed to deal with any uncertainty that our housing market faces in the next few years. I hope you find it informative. Jenny Boddington CEO 2

5 affordability is expected to further improve as standard variable interest rates are tipped to fall by another 25 basis points in 2012/13. 3

6 housing outlook 1. executive summary Median house price growth across most of the eight capital cities experienced their second year of decline in 2011/12, with the capital city weighted average median house price falling by 2.6%. While the economy strengthened, with Gross Domestic Product (GDP) growth increasing from 1.9% in 2010/11 to 3.4% in 2011/12, conditions outside the mining related sectors remained weak and this continued to weigh on consumer confidence reflected by the Westpac/Melbourne Institute Consumer Sentiment indicator being below 100 (where pessimists outnumber optimists) for all but two months of the year. Although rising by 14% in 2011/12, the number of first home buyers in the market remained low following a total 47% decline in the two years to 2010/11. Without first home buyer demand for entry level properties, upgrader volumes were also relatively weak, while the weak price performance also discouraged investors. The standard variable interest rate of 7.8% up to October 2011 also influenced price growth in the early part of 2011/12. As a result, median house prices fell across nearly all of the capital cities in 2011/12, with only Darwin (+10.7%) recording a rise. Marginal falls occurred in Sydney ( 0.7%), Brisbane ( 1.1%), Adelaide ( 1.3%), and Perth ( 1.0%). Larger median house price declines were experienced by Melbourne ( 5.3%), Canberra ( 5.0%) and Hobart ( 3.5%). 4

7 While the economy strengthened conditions outside the mining related sectors remained weak and this continued to weigh on consumer confidence. The price performance in 2011/12 was weaker than forecast in the 2011 lmihousing OUTLOOK Report. The subsequent release of the 2011 Census data has indicated that household formation up to 2011 was approximately 40,000 households lower than originally estimated, resulting in a more benign demand/supply balance at June The lower rate of household formation has also resulted in a lower forecast of future underlying demand. Combined with weaker than expected economic conditions outside the mining related sectors, there was little to promote price growth in 2011/12. Nevertheless, conditions for price growth are forecast to begin to improve over 2012/13. However differing economic conditions and demand and supply fundamentals across the states are expected to result in a patchwork performance across the capital cities. The improvement in economic growth over 2011/12 is forecast to continue, with the rising investment in the minerals sector increasingly resulting in flow on effects permeating through to the rest of the economy. While there are some external risks e.g. global financial stability and commodity prices most of the resource investment is already underway and should continue to rise through to completion over the next two to three years. On this basis, unemployment is forecast to fall and income growth should remain solid, which will underpin private consumption expenditure levels. First home buyer demand is now trending upwards following depressed activity since 2008/09. The fall in first home buyer numbers over 2009/10 and 2010/11 occurred after future demand had been pulled forward into 2008/09 by increased Federal Government incentives. Changes to State Government incentives will influence the timing of this recovery with some buyers also pushing back their purchase to accommodate announced incentives but loans to first home buyers should be close to reverting to their underlying level (based on the size of the first home buyer aged demographic) of around 120,000 to 130,000 per annum by the end of 2012/13. This should also provide impetus for an improvement in upgrader demand. Affordability has also improved. The Reserve Bank cut the official cash rate by 125 basis points in 2011/12, and a further cut of 25 basis points was made in October Whilst this only translated to a 115 basis point reduction in the standard variable interest rate, due to increased funding costs for banks, the reduction has improved affordability for purchasers. Outside of the brief low interest rate period in 2009, affordability in most capital cities is now at similar levels of the start to middle of the 2000s. On this basis, the current standard variable rate of 6.65% is expected to be low enough to encourage buyers into the market, with an additional rate cut before the end of 2012 anticipated to provide additional stimulus. As a result, after the declines over 2011/12, median house prices are forecast to steady in 2012/13, with some capital cities showing minor growth. Growth in the capital city weighted average median house price of 1.3% between the March and June quarters in 2012 suggests that prices have bottomed out, which should encourage investor activity to return to the market. This should result in increased momentum in dwelling turnover which will be carried into 2013/14. Dwelling turnover is forecast to accelerate through 2013/14 as strong economic growth continues and rising prices boost confidence. Rising migration nationally will outpace the addition of new dwelling stock, resulting in a growing housing deficiency placing upward pressure on prices. The Reserve Bank is then forecast to adopt a tightened interest rate policy in 2013/14, although the initial rises are expected to have little effect given the more buoyant residential market and strong economic conditions. 5

8 housing outlook 1. executive summary (cont.) Price growth is forecast to peak in 2014/15, coinciding with a peak in economic growth and low unemployment creating wage-price inflationary pressures. This is expected to lead to a further tightening of interest rates in 2014/15. The standard variable interest rate is forecast to peak at 8.1% in the first half of 2015, which is anticipated to slow median house price growth, and also have the desired effect of slowing the economy into 2015/16. The weak residential market in the resource states has set the scene for the strong upturn over the next three years. Weak recent rent and price growth has led to a low level of construction which, together with an increase in the rate of population growth, is seeing a rapidly rising dwelling deficiency in Queensland, Western Australia and Northern Territory taking vacancy rates in each of the state capitals to well below the balanced market rate of 3%. Consistent weak construction figures over an extended period means there is also a sizeable deficiency in New South Wales. Price growth will be assisted by the more buoyant economic outlook in these states. In contrast, the states that had the strongest rebound in construction after the Global Financial Crisis (GFC) Victoria, South Australia, Tasmania, and Australian Capital Territory have all had their dwelling deficiency eroded and moved into oversupply in 2011/12. Lower interest rates and some improvement in economic conditions should see the decline in median house prices stabilise over the next three years, however there is little to promote any major price growth. Price growth into 2012/13 is forecast to be strongest in Perth (+6%), Darwin (+5%) and Brisbane (+4%). Affordability in Perth and Brisbane has improved substantially in 2011/12 and a rapidly rising dwelling deficiency is developing. In Darwin, meanwhile, median house price growth of 10.7% was registered in 2011/12 driven by substantial levels of investment in mining and resource capacity leading to significant income and migration growth. Falls in vacancy rates are also expected to continue across all three cities, placing upward pressure on both rents and dwelling prices, attracting demand from investors in particular. Modest growth of 3% is forecast for Sydney in 2012/13. Whilst Sydney does not have the same economic drivers as the mining/ resource states, demand for housing will be driven by a substantial deficiency in underlying stock. Furthermore, affordability is currently at 2002 levels, elevating the potential for median house price growth. A mix of minimal price increases and declines are forecast for Melbourne (+1%), Adelaide (+1%), Hobart ( 1%) and Canberra ( 1%) in 2012/13. All four cities moved into an excess of housing stock in 2011/12 after a strong period of construction in recent years. While low interest rates should prevent any major declines in 2012/13, without major exposure to resource investment economic growth in these centres is expected to underperform national growth. As a result, even medium term median house price growth is forecast to be marginal. Median house price forecast comparison Chart 1 shows the forecast record of the lmihousing OUTLOOK since the inaugural 2002 report, comparing the forecast national median house price in each report over each of the three years of the forecast period with the actual movement in the national median house price. The national median is derived from a weighted median of each of our capital city forecasts (See Appendix for comparisons between forecast and actual median house prices for each individual capital city). BIS Shrapnel s median house price forecasts have typically been slightly more conservative than the actual median price rises over most three year periods. Through the middle of the decade, the sharp rises in prices over

9 Table 1: Median house prices by capital city Source: Real Estate Institute of Australia, Forecasts: 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 * * * Total Forecast Growth (%) * * BIS Shrapnel forecasts 7

10 housing outlook 1. executive summary (cont.) and 2008 were not anticipated. The interest rate rises at the time were expected to have a greater dampening effect on price growth. Forecasts made over 2007 to 2009 were generally on track in terms of total growth over three year forecast period, despite the challenging economic conditions and negative expectations at the time that made forecasting difficult. However, forecasts of the national median house price in the 2010 and 2011 editions of the lmihousing OUTLOOK have been more optimistic than eventual growth. The 2010 estimate of the national median house price was 12% above the June 2012 median of $521,000, while in the 2011 estimate was 7% above. The over estimate of price growth in the 2011 report was partly due to an overestimation of the dwelling deficiency in a number of states in An analysis of the 2011 Census data suggests that household formation rates, and therefore underlying demand, have been lower than originally envisaged since the 2006 Census. This means that there was less pressure on prices than originally expected in 2011/12. In addition, the weaker than expected economic environment has had a larger drag on confidence and demand. Nevertheless, a number of market assumptions outlined in previous reports (such as a rising deficiency, reductions in vacancy rates in a number of cities, and a strengthening in economic conditions) are slowly coming through. Where this is happening, there should be a push through greater activity and price growth, albeit slightly delayed compared to recent forecasts. Impact of reductions in interest rates on median house prices Chart 2 shows the response in median house prices after previous periods of interest rate reductions. The chart indicates the progression of price growth in the quarters immediately before and after the standard variable rate had fallen by a total of 100 basis points. Price growth is measured in real (inflation adjusted) terms and indexed to the quarter when the standard variable rate had fallen by 100 basis points from its previous high. In all three previous periods when interest rates had recorded a decrease of more than 100 basis points, real median house price growth had picked up within six months of the decrease. Interestingly, over the first six quarters (18 months), the total price growth had been similar in all three circumstances. However, eight quarters, or two years after the interest rate reductions in 2001 and 2008, prices began to decline in real terms, while the upturn continued longer after the 1996 cuts. The response to interest rate reductions previously suggests that price growth should return after the 95 basis point reduction in the standard variable rate in 2011/12. However, real median house price growth will not necessarily be as rapid given that median house prices are starting from a slightly more constrained level of affordability compared to when interest rates had been reduced at previous points in time. 8

11 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 Median house prices ($000) Quarter ending June Actual Forecast Chart 2: Real median house price growth after 100 basis point cut to housing interest rates, Australia Source: Reserve Bank of Australia, Australian Bureau of Statistics, Real Estate Institute of Australia Price index Quarters since rate cut Dec 96 Dec 01 Dec 08 Jun 12 Forecast 9

12 housing outlook economic outlook State of play BIS Shrapnel forecasts the national economy to grow by more than 3% per annum through to 2014/15 (Table 2). Despite this solid aggregate growth, conditions for many businesses remain difficult, with most of the growth occurring in the mining and mining-related sectors. Outside of mining, the overriding business logic is to secure growth by reducing costs. These businesses are still cutting back on investment, making growth uneven. The market s current focus is on minerals projects that have been placed on hold or cancelled. However, the impact of these decisions will not be felt until the latter half of the decade. Currently, there are estimated to be two to three years worth of projects already under way in Western Australia and up to five years worth of investment activity in Queensland. With these projects too far advanced to be cancelled, the impact of any changes in policy or shift in commodity prices that cause a pause in new investment will not be felt until these projects are completed. The severity of the impact on the rest of the economy will depend on the level of the next round of projects coming through. As mining investment reaches its forecast peak in 2014, non-mining investment (i.e. housing and other business investment) is anticipated to stabilise and will start to pick up, taking over as the economy s principal engine of growth and smoothing the transition. In the same way that increases in interest rates and the value of Australian dollar have held back other sectors and freed up resources to make room for the mining boom, they will adjust as commodity prices ease and resource investment falls, creating conditions for other industries to come in and fill the gap. Despite recent falls in commodity prices, mining-related investment is expected to continue to grow over the next two years, underpinning solid growth in the rest of the economy. BIS Shrapnel forecasts mining related investment to rise by a total 22% in this period. Minerals export volumes are also forecast to grow strongly as the mining-related investment projects start production. Also supporting growth will be household spending, which is projected to grow at around 3.5% per annum as it has for the past year or so supported by wage and employment growth and below average interest rates. Dwelling building is expected to start growing from the end of 2012, due to below average interest rates and dwelling shortages in New South Wales and increasingly in Queensland and Western Australia. These two factors should ensure that the forecast unemployment rate holds at its current level of just over 5% in 2012/13. Offsetting these drivers of growth are trade-exposed industries which are expected to remain under pressure from the high Australian dollar, and fiscal tightening will weigh on a number of industries. Nevertheless, by the second half of 2013, a gradual broadening of growth is anticipated to start eroding the excess capacity currently prevalent in many parts of the economy. Emerging capacity constraints will encourage many non-mining businesses to start investing again after an extended period of underinvestment. This increase in business investment, particularly non-dwelling building, will in turn further reinforce the broadening of growth and support employment growth, pushing the unemployment rate below 5% towards the end of Economic growth should continue to stay solid through to 2014/15 as investment activity works its way through. The resultant solid employment and income growth will facilitate confidence and growth in consumption expenditure. However, the Reserve Bank of Australia (RBA) is expected to begin to adopt a tightening of monetary policy towards the end of 2013 as the unemployment rate continues to fall and the risk of wage-price inflationary pressures increases. Initial interest rate rises forecast for 2013/14 will have limited impact given the relatively buoyant economic conditions, with further more aggressive rises anticipated over 2014/15 eventually slowing the economy.

13 Table 2: Key economic indicators Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel Year Ended June Expenditure on GDP (at average 2008/09 prices) Consumption Private Consumption Government Consumption Private Investment New Public Investment Gross National Expenditure (GNE) GDP (Average) Inflation & wages (Jun on Jun) CPI Baseline Average Weekly Earnings ( Yr. Ave.) Employment (%) Employment Growth (August on August) Unemployment Rate (August) Interest Rates (% at 30 June) Cash rate Housing (variable)

14 housing outlook 2. economic outlook (cont.) Risks to the economic outlook Commodity prices have recently received a great deal of market attention, in particular, where they will go from here and what impact they will have on the Australian economy. BIS Shrapnel s view is that most commodity prices are around their trough, and are likely to strengthen a little towards the end of 2012 as short-term supply and demand imbalances work themselves out. Prices of some commodities have fallen below profitable levels for higher cost mines and production is being wound back. The Chinese Government is expected to undertake another round of stimulus spending, which is expected to absorb the current stockpile, allowing commodity prices to then show a mild recovery. The risk is that industrial production in China and other key regional markets does not recover to the extent that is anticipated, resulting in continued lower commodity prices. Irrespective of what happens to commodity prices over the next few months, it is not anticipated to have a large impact on forecast growth in mining-related investment over the next two years. Rather, it would be the medium to longer term outlook for the economy that would be most at risk. Events in Europe are the other concern at the moment. Bad news is expected to continue to filter out of Europe over the next few years and this is reflected in the forecasts. There is the potential for the European situation to strongly deteriorate, causing financial markets to freeze up (as they did in 2008), confidence to fall sharply, and commodity prices to decline. However, as occurred in 2008, the most severe effects tend to be short lived, with the Australian dollar likely to fall along with interest rates. In that situation, the Reserve Bank has a large toolkit to keep financial markets operating, including further loosening of monetary policy. Less severe, there is the risk that the forecast recovery in dwelling building does not take hold towards the end of If the leading indicators over the next few months do not support this recovery, then the Reserve Bank is expected to be more aggressive in lowering interest rates, given that inflationary pressures currently appear benign. This should eventually underpin the recovery in dwelling building, albeit a few months later than forecast. Interest rates The Reserve Bank cut the overnight cash rate by a total of 125 basis points between November 2011 and June 2012, with a further 25 basis point cut in October However, the rising cost of funds meant that banks only passed on 115 basis points of this reduction in their standard variable rate. While not all the cuts to the overnight cash rate were passed on, this was anticipated by the Reserve Bank. It is the standard variable rate that influences spending in the economy, so the cash rate is set with a desired standard variable rate in mind. The current standard variable rate of 6.65% quoted by the RBA (and based on an average of large lenders) compares with a peak of 7.8% in October 2011 and has been referred to by the RBA as mildly stimulatory. Interest rates were increased in line with the rebound in the Australian economy after the GFC, while the subsequent higher costs of bank funds has resulted in the margin between the cash rate and the standard variable interest rate widening from 180 basis points in late 2007 to 340 basis points in October

15 Chart 3: Interest rates and inflation Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel % As at June Standard variable rate Cash rate CPI Forecast 13

16 housing outlook 2. economic outlook (cont.) In the months prior to the initial November 2011 rate cut, there was an expectation that rising investment in the mining sector would flow through to other parts of the economy, creating a tightening bias as inflation hovered around the upper end of the RBA s preferred band of 2% 3%. However, economic conditions outside the mining and mining-related sectors weakened and inflationary pressures receded, with the overnight cash rate being progressively reduced. At this stage, inflation is not a concern, being comfortably within the RBA s target range (outside of an anticipated brief spike due to the carbon tax). Following the RBA s 25 basis point cut on 2 October 2012, it still has room to lower interest rates further if it needs to and is forecast to lower the cash rate once more before the end of However, it is expected that only 40 basis point of the total 50 basis point reduction will be passed on in the standard variable rate (taking it to 6.45%). Although funding costs for the banks do not appear to have increased since the first half of 2012, their total cost of funds is likely to have increased as older, less expensive funding is progressively rolled over. However, if the current round of cuts do not gain traction, and a persistently high Australian dollar, soft commodity prices, the European debt crisis, United States political ructions, domestic political uncertainty and low consumer and business confidence further cloud the economic outlook, it is possible that the Reserve Bank could still make one further rate cut around March/April It seems that the flow on effect from mining related investment is taking longer to come through than envisaged twelve months ago and this has left a hole in the non-mining sectors of the economy. Nevertheless, with further growth in mining related investment forecast for at least the next two years, the forecast broadening in economic growth and eventual decline in the unemployment rate is expected to still come through and see inflation pressures emerge, pushing inflation toward 3% during With this in mind, the Reserve Bank is expected to start raising interest rates again from late 2013 and into Initial rises in the cash rate are expected to be limited, with a 50 basis point rise forecast over 2013/14. Economic activity is subsequently forecast to peak in 2014/15 as improvement in other sectors of the economy supplement the peak in resource investment, with wages and inflationary pressures anticipated to become more acute. In this environment, the RBA is expected to adopt a more aggressive stance on tightening interest rates, pushing up the cash rate by a forecast 125 basis points over 2014/15. This is expected to take the standard variable rate to 8.1% by June 2015, with bank margins being cut back from the current 340 basis points to 335 basis points as the world financial environment becomes more stable over the medium term and funding costs for banks are reduced. The peak in the standard variable rate will have the desired effect of slowing economic conditions beyond the forecast period over 2015/16. 14

17 inflation is not a concern, being comfortably within the RBA s target range it still has room to lower interest rates once more before the end of

18 housing outlook 3. housing finance Buyer demand Chart 4 illustrates the monthly year on year percentage change in residential lending to first home buyers, non first home buyers (i.e. upgraders and downsizers, which encompass all purchases made for owner occupation and where the buyer has previously owned another dwelling) and investors. The number of loans to first home buyers has been trending upwards nationally in 2011/12. This reflects first home buyer numbers beginning to revert to their underlying level of 120,000 to 130,000 loans per annum (see 3.2) after the collapse of first home buyer numbers over 2010 and 2011, due to first home buyers who had brought forward their purchase to beat the expiry of the Federal Government First Home Owner s Grant Boost Scheme (FHOGBS) at the end of The recovery in first home buyers appears to be coming through more slowly than originally envisaged. Uncertainty in the economic outlook is likely to be delaying some purchases, while higher deposit requirements by lenders since the GFC means that some first home buyers will also take longer to save a deposit. While loans to first home buyers are higher nationally, there have been large monthly variations through 2011/12 as a result of changes in state based incentives that have influenced demand. Depending on the timing, these changes have either caused first home buyer demand to surge (to beat the expiry of incentives) or be delayed (as first home buyers wait for a proposed increase in incentives). Despite the improvement, the number of loans to first home buyers remains below its estimated underlying level of 120,000 to 130,000 per annum, at 101,100 loans in 2011/12. As the negative impact of changes to incentives over previous years flows through, first home buyer loans are anticipated to increase further in 2012/13 and return to their underlying level in 2013/14. While first home buyers are not a large component of the market, at around 20% of total purchasers on average, they are important in that they form the foundation market for upgraders and downsizers, who make up the majority of purchasers. This was evident in the rise and subsequent fall in loans to non-first home buyers following movement in first home buyer loans from late 2009 and into While annual growth in loans to non-first home buyers has moved into positive territory in 2012, progress is slow with only small rises in loan activity still being recorded. Nevertheless, overall activity should improve as first home buyer activity continues to rise and promote upgrader and downsizer movement. The value of loans to investors has also begun to show signs of growth in the first six months of 2012, although investor activity remains weak after having been in decline since the middle of Investor demand is driven by rental yields and price growth, and with median prices having declined in most capital cities in 2010/11 and 2011/12 investor demand has remained muted despite the consequent improvement in yields. Evidence that the decline in median house prices is stabilising in a number of capital cities, and the prospect of price growth in 2012/13, point to some further improvement in investor demand over the next twelve months, albeit small. Loans to first home buyers Becoming a first home buyer is typically associated with various life stages for example, moving out of the family home, moving out of rental, moving in with a partner, marriage, etc. Consequently, underlying first home buyer demand is relatively steady as segments of the population move through these life stages. However, year-to-year demand can vary as conditions can promote or delay first home buyer purchases. This has been evident in recent years as future demand was pulled forward into 2009 by low interest rates and various Federal and State Government incentives, and numbers then subsequently fell over 2010 and

19 The number of loans to first home buyers has been trending upwards nationally in 2011/12. Chart 4: Annual growth in home loans percentage change on same month the previous year Source: Australian Bureau of Statistics Note: investor activity based on value of lending while owner occupier data based on number of loans % Investors Non-FHBs FHBs 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 17

20 housing outlook 3. housing finance (cont.) First home buyer demand averaged 124,500 loans per annum over the four years to December 2008 a period where (apart from three months at the end of 2008) the market has been largely unaffected by first home buyer incentives. Loans to first home buyers subsequently rose to 188,000 in 2009, suggesting that future demand equivalent to 63,500 first home loans had taken advantage of Federal and State Government incentives that had been introduced in late Subsequently, after the Federal Government incentives expired at the end of 2009, loans to first home buyers fell to an average 92,000 per annum over 2010 and This was 65,000 loans in total below the four year average to 2008 and suggests that the pull forward of future demand has been largely worked through. However, loans to first home buyers so far in 2012 are still depressed, at 101,000 in the twelve months to July As the number of potential first home buyers is unlikely to have decreased, given growth in the typical first home buyer demographic of 25 to 34 year olds, it is likely that the next round of first home buyers are delaying their entry into the market until the economic outlook becomes more certain. However, it is unlikely that first home buyers will delay their purchase indefinitely, and they are more likely to eventually compromise with the purchase of a smaller dwelling, or in a more affordable suburb. This occurred in 2006/07 and 2007/08, when loans to first home buyers remained at around 127,000 per annum, despite rising interest rates through the two years. As a result, the growth in loans to first home buyers, which started showing year on year growth from third quarter 2011, and recorded 14% growth in 2011/12 (Table 3), should continue to increase. So far, the strongest growth in loans to first home buyers has been evident in Queensland, Western Australia and Northern Territory. These states are benefiting from outperforming economic growth that is encouraging first home buyers confidence and accelerating population growth particularly in the first home buyer age groups, who are the largest component of migration into these states. The abolition of the First Home Owner s Grant for established dwellings in Queensland (October 2012) and increasing of the Grant to $15,000 for purchasers of new dwellings is expected to have little impact on the improving first home buyer demand. This is because the timing of the Budget announcement in September does not allow for many future first home buyers of established dwellings to rush forward their purchase before the established home grant is removed. There has also been relatively solid growth of 14% in loans to first home buyers in New South Wales in 2011/12, although activity through the year has been influenced by variations in first home buyer incentives. The 63% surge in fourth quarter 2011 was the result of purchasers seeking to beat the expiry of stamp duty exemptions to first home buyers of established dwellings. The consequent easing of activity in the first half of 2012 has reflected this pulling forward of demand, as well as a pause in first home buyers of new dwellings, who have waited until October 2012 to take advantage of the introduction of an increased cash incentive for first home buyers of new dwellings. Similarly, first home buyer demand strengthened in Victoria and South Australia in the first half of 2012 due to cash incentives to first home buyers of new dwellings expiring or being reduced at the end of June While the Victorian incentive did expire as scheduled, the South Australian incentive was extended for another year on 31 May 2012, which meant that many first home buyers had already purchased in June quarter As a result of this rush, first home buyer demand in these states will drop off over the second half of the year. 18

21 Table 3: Number of loans approved to first home buyers for owner occupation Source: Australian Bureau of Statistics FHBs loans (% change from previous period) % Change on corresponding quarter the previous year State 2009/ / /12 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Jul 12 NSW VIC QLD SA WA TAS NT ACT Australia

22 housing outlook 3. housing finance (cont.) It should be noted that the improvement in first home buyer demand in 2011/12 comes from a very low 2010/11 base. Most of the impact of changes to first home buyer incentives at the state level is expected to have been washed through by the end of 2012, with loan activity to maintain a steadier upward trend nationally through All states are consequently anticipated to show a rise in loans to first home buyers in 2012/13, although the resource-based states of Queensland, Western Australia and Northern Territory are likely to continue to show the strongest growth due to strong economic conditions and higher migration. Given the current low base in 2011/12 and low interest rate environment, there should still be scope for a rise in first home buyer demand in the other states, although at a more moderate rate. With the largest component of first home buyers aged 25 to 34 years old, the underlying level of first home buyer demand should also increase in the coming years in-line with growth in this population segment. In the fifteen years to 2007, the national 25 to 34 year old population was steady at around 2.9 million persons, before rising to 3.3 million by This corresponded with the number of loans to first home buyers rising from an average of 108,000 per annum in the fifteen years to 2007, to 123,000 per annum in the five years to With the 20 to 34 year old population projected to rise to 3.6 million by 2017, the underlying level of first home buyer demand is projected to rise to around 130,000 loans per annum, and be in the 120,000 to 130,000 range on average in the five year period to Loans to upgraders Upgraders and downsizers represent the largest component of residential demand, at around two to three times the size of the first home buyer market, and therefore have the most influence on the market. However, there is less impetus for potential upgraders to enter the market to move to their next dwelling unless required by life stage movement, or encouraged to by capitalising on a strong market for their current dwelling. Consequently, while there is always an underlying level of upgrader activity taking place, demand from upgraders is greatest when there is strong demand for their current dwelling. Ultimately this needs healthy demand from first home buyers at the entry level to provide demand for their existing dwelling and entice them to move on. The number of loans approved to non first home buyers declined by 2% nationally in 2011/12 (Table 4). This varied across the states from low growth in New South Wales (1%), Western Australia (3%) and Northern Territory (2%) to a contraction in loan volumes of up to 7% in both Victoria and Tasmania. Growth in non-first home buyer activity has begun to re-emerge nationally in After recording zero year-on-year growth in loans to non-first home buyers in each of the March and June quarters, there was a 2% national rise in July Growth, or a receding rate of decline, was recorded in almost all states in the month. The 95 basis point reduction in standard variable interest rates between November 2011 and June 2012, combined with flat to falling median house prices across most capitals, has improved affordability and in turn upgrader sentiment. The strongest growth in loans to non first home buyers in the first half of 2012 has occurred in Queensland, Western Australia and Northern Territory, where rising first home buyer demand, and an increasingly positive economic outlook, has also flowed through to improved upgrader activity. Loans for residential investment The Australian Bureau of Statistics provides data on residential investment in terms of the value of total loans rather than the number of loans. As a result, changes in the value of loans over time reflect both a change in values for property as well as purchaser volumes. The total value of residential investment loans has remained steady nationally over 2011/12, although after an annual decline in the six months to December 2011, there has been a year-on-year 20

23 Table 4: Change in number of loans approved to non-first home buyers Source: Australian Bureau of Statistics Non-FHBs loans (% change from previous period) % Change on corresponding quarter the previous year State 2009/ / /12 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Jul 12 NSW VIC QLD SA WA TAS NT ACT Australia Table 5: Change in value of investment loans for the purchase of property for rent/resale Source: Australian Bureau of Statistics Value of investment loans (% change from previous period) % Change on corresponding quarter State 2009/ / /12 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Jul 12 NSW VIC QLD SA WA TAS NT ACT Australia

24 housing outlook housing finance (cont.) rise in the first half of 2012 (Table 5). Highlighting this emerging upward trend, the value of loans for residential investment has increased by over 5% in the six months to June 2012 when compared to the corresponding period in 2011.Given that median house price growth has been weak so far in 2012, investors are likely to have been attracted by improved yields, and encouraged by the prospect of a return to capital growth with signs that economic conditions have been strengthening. Over the first six months to June 2012, the value of loans for residential investment has increased by 35% in the Northern Territory compared to the first half of 2011, followed by growth of 27% in Queensland and 14% in Western Australia. Substantial investment in the resource and mining sectors in 2011/12 has led to rising net inflows of migrants from interstate and overseas in these states due to greater job creation and income levels. However, new dwelling construction is yet to experience a commensurate rise and the lack of new rental supply has seen rental vacancy rates in these states tighten quickly during 2011/12. Stronger rental growth has also been emerging, which should continue through the next two to three years until a recovery in construction catches up to the stronger underlying demand. The rising rents and the prospect for resultant capital growth should further buoy investor demand in these states. Although not experiencing the same strength in population drivers, a persistent shortfall of additional dwelling stock in New South Wales has ensured that rental vacancies remain tight. This appears to have underpinned the 3% annual rise in the value of residential investment loans in the first half of 2012 in the state. Investor demand should strengthen as the forecast strengthening in economic conditions increases the scope for solid rental growth and improved sentiment. The value of loans to investors in 2011/12 fell in Victoria ( 7%), South Australia ( 8%) and Tasmania ( 3%). These three states all experienced solid price growth in the post-gfc years which resulted in a deterioration of yields, while strong construction has seen vacancy rates creep up and rental growth slow. This has removed the prospect of any short term capital gains and investors have been discouraged. Loan activity and the effect on prices A key assumption of this report is that the recovery of first home buyer demand back to long term levels will encourage greater turnover by upgraders, with the increased overall activity having a positive impact on median house prices. The impact on the level of turnover on price growth can be seen in Chart 5. Turnover has been indicated by the 12-month moving average of new owner occupier loans for established dwellings. Periods where turnover has increased have coincided with stronger median house price growth, while periods of slowing turnover have seen price weakness. The 12-month moving average of new loans for established dwellings dropped from a peak of 31,750 in November 2009 to just below 23,000 in January Nationally, turnover has remained at this weak level since. As a result, the Australian median house price experienced a downward trend in growth in-line with the decline in turnover, with annual growth in the weighted median house price becoming negative since June Loans for established dwellings have barely risen in 2011/12, with this being reflected in the negative median house price growth over the year. While nationally there has been little change in lending activity, there is some disparity across the states, with rises in some states offsetting declines in others. Nevertheless, the marginal rise in loans that did come through over 2011/12 is expected to gain more momentum through 2012/13 as first home buyer demand continues to recover and flow through to greater upgrader activity. Turnover and confidence should also be encouraged by the 95 basis point decline in standard variable interest rates over the year and the prospect for further falls in the second half of The anticipated upward trend in established dwelling loans in 2012/13 should see some price growth return through the year, rising into the following year as turnover continues to grow.

25 Chart 5: 12-month moving average of new loans for established dwellings versus annual price growth, Australia Source: Australian Bureau of Statistics, Real Estate Institute of Australia & BIS Shrapnel Number of established loans ( 000) Annual price growth % Established dwelling loans Australia weighted house price Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 23

26 housing outlook 4. rental markets Vacancy rates and rental growth The vacancy rate in each city reflects the level of rental oversupply or deficiency. A vacancy rate of 3% in a market is considered balanced, where rents on average will rise roughly in line with inflation. Table 6 highlights Sydney s rental market has been extremely tight in recent years, with vacancy rates remaining well below 2% since Construction activity in Sydney fell below underlying demand in 2006, which has resulted in additions to the rental stock falling below tenant demand. Consequently, the vacancy rate is likely to stay below the balanced market rate through the forecast period given the extent of the deficiency. Vacancy rates in Brisbane and Perth have tightened sharply. These cities suffered a temporary shock to rental demand as their economies suffered more immediately after the GFC, which led to a blow out in vacancy rates to 3.9% and 4.5% respectively at June The sharp turnaround in the economic environment for their states saw potential tenants hold back until the outlook was clearer. The resulting collapse of investor demand resulted in a significantly reduced level of construction and fewer additions to rental stock. A turnaround in migration saw the empty rental dwellings being quickly absorbed through 2011/12. Vacancy rates have subsequently tightened to just 2.1% in Brisbane in June quarter 2012 and to 1.9% in Perth in the same period. Stronger rental growth should follow, which is expected to drive greater investor demand and an upturn in construction of rental dwellings. However, this will take some time to eventuate and vacancies will remain below the balanced rate of 3% for much of the next three years. Conversely, rental vacancy rates in Melbourne have slowly edged up from their low of 1.0% in June 2008 and have stabilised to average 2% over the last two years. However, tenant demand is slowing due to slowing population growth (compared to the last four years) and supply is rising due to a large pipeline of new dwelling construction still working its way though, particularly in the high rise apartment sector. As a result, new rental dwellings are expected to outpace tenant demand, with vacancy rates likely to surpass the balanced market rate of 3% over the next year to two years. Strong recent construction (particularly in the apartment sector) pushed the Canberra vacancy rate up to 3.3% in December quarter Although this tightened to 2.8% in June quarter 2012, it is likely that this is only a short term reprieve. There are still a large number of apartment projects yet to be completed and, combined with the potential for weaker tenant demand resulting from Federal Government spending cuts, vacancy rates in Canberra should increase back above 3% again. Low population growth in Adelaide and Hobart has seen tenant demand drop below new rental supply and resulted in vacancies inflating to 3.9% and 4.8% respectively by June quarter Vacancies in these markets are likely to stay above 3% for most of the forecast period. Given the small size of the Darwin market, vacancy rates can be volatile based on the size and timing of new developments. The vacancy rate of 0.8% in June quarter 2012 reflects a tight market, although it has come in quickly from a peak of 4.6% in the previous March quarter in Given the prospect for solid migration on the back of a buoyant local economy, vacancy rates should stay low over the next two to three years. 24

27 Sydney s rental market has been extremely tight in recent years, with vacancy rates remaining well below 2% since

28 housing outlook 4. rental markets (cont.) Rental growth Table 6 also highlights rental growth in relation to vacancy rates. Rental growth is indicated by increases in the rental component of the Consumer Price Index (CPI), which reflects the rise in rents being paid by all tenants. The common trend across all capital cities was for an easing in rental growth over the latter part of 2009 and over The Federal Government s FHOGBS, together with the drop in median house prices and relatively low interest rates over 2008/09, encouraged potential renters towards owner occupation. The rapid fall in interest rates also reduced the mortgage outlay for landlords, reducing the incentive to push through rent rises. The general trend has been for rental growth to continue to slow over the past two years, although rises have generally still remained above the CPI. Sydney has experienced the strongest annual rental growth of just below 6% per annum in this period, supported by low vacancies, which are also expected to continue to underpin solid increases in rents going forward. Tightening vacancy rates has also seen the rate of increase in rents improve to 4.6% in Perth and 2.9% in Brisbane over 2011/12, although growth remains minimal in Darwin. Rental growth in these three capitals should escalate further from 2012/13 as tightening vacancy rates and strengthening economic conditions drives higher population growth and tenant demand. Most capital cities where vacancy rates rose saw the rate of rental growth slow through 2011/12, evident in Melbourne (3.5%), Adelaide (3.8%) and Hobart (2.6%). The only exception was Canberra as rental growth stabilised at just above 5% in 2011/12 despite the increase in vacancy rates. Some downside risk to rental growth exists in each of these four capital cities, with vacancy rates likely to rise further in the coming two years due to the emergence of an excess in rental stock. 26

29 Table 6: Annual rental growth and vacancy rates Source: Australian Bureau of Statistics & Real Estate Institute of Australia Sydney Melbourne Brisbane Adelaide CPI As at June Vacancy rate (%) Rental growth (%) Vacancy rate (%) Rental growth (%) Vacancy rate (%) Rental growth (%) Vacancy rate (%) Rental growth (%) Growth (%) Perth Hobart Canberra Darwin CPI As at June Vacancy rate (%) Rental growth (%) Vacancy rate (%) Rental growth (%) Vacancy rate (%) Rental growth (%) Vacancy rate (%) Rental growth (%) Growth (%)

30 housing outlook 5. housing affordability Chart 6 shows the ratio between the monthly repayments required to service a 25 year loan of 75% of the national median priced house (at the standard variable housing loan interest rate at June 30 each year) in each city, and average disposable household income across their respective states. The affordability ratio reflects the ability of a purchaser to buy a median priced home, with a higher ratio meaning worse affordability. The combination of a fall in median house prices, coupled with the 95 basis point reduction in the standard variable interest rate over 2011/12, has seen housing affordability improve across all cities. At June 2012, the affordability ratio was: most constrained in Sydney at 31.7%, followed by in Melbourne at 28.7%. between 20% and 23% in Brisbane, Adelaide, Perth, Hobart and Darwin; and least constrained in Canberra at 16.4%. However, outside of 2009 when variable interest rates were at 40 year lows, housing affordability in Sydney is at its best level since 2001, despite being the least affordable capital city. Similarly, affordability in Brisbane is at its best level since 2003, and Adelaide and Perth are at their most affordable since These were periods that were commensurate with price growth in all of the capitals. The standard variable rate is forecast to fall by a total 40 basis points in 2012/13 to 6.45%, whilst median house prices are expected to show mixed results across Australia, with falls in some cities, and others seeing positive (albeit limited) growth return in 2012/13. This should see housing affordability across Australia further improve through 2012/13, before starting to deteriorate over the second half of the forecast period as median house price growth returns and interest rates begin to increase again. 28

31 Chart 6: 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 % As at June Sydney Melbourne Brisbane Perth Forecast % As at June Adelaide Hobart Darwin Canberra Forecast 29

32 housing outlook 6. demand Overseas migration Overseas migration is trending upwards again in 2011/12 after bottoming out at 170,300 persons in 2010/11. Net overseas migration fell from its record of 299,900 persons in 2008/09, which was underpinned not only by Australian Government policy in its allocation for permanent migrants, but also net growth in long term overseas visitors. These are migrants who come for more than 12 months, although do not necessarily stay permanently. The largest component of this group comprises migrants on student visas, followed by those on temporary 457 working visas. Over 2010/11 (the latest available data), there were 250,000 student visas granted, and 90,000 skilled temporary (subclass 457) visas. There were also 193,000 working holiday visas granted, although this visa only lasts for 12 months so many of these visa holders were likely to remain in the country for less than a year. The same long term visitors who were a driver of the record migration were a key component of the decline in migration through to 2010/11. Long term arrivals weakened as the Australian economy slowed and employment prospects deteriorated, while departures increased as students and temporary work visa holders (which typically last up to four years) expired. As indicated in Chart 7, a combination of an increased permanent intake but more so a rise in the net inflow of long term visitors is contributing to a rapid rebound in net overseas migration in 2011/12. Long term arrivals are now increasing as skills shortages emerge in a number of industries, while departures have steadied, reflecting the lower level of long term arrivals in recent years. While only beginning to become evident in the official net overseas migration data up to December quarter 2011, an analysis of the monthly movements (which takes into account stated movement rather than the eventual movement indicated by the official data) highlights the sharpness of the upturn in net overseas migration in the first six months of

33 Long term arrivals are now increasing as skills shortages emerge in a number of industries. Chart 7: Permanent and long term net overseas movement, moving annual totals, Australia Source: Australian Bureau of Statistics Persons ( 000) Long Term Resident and Visitor Movements Permanent Movements Net Overseas Migration Forecast Forecast Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 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 Dec 14 Dec 15 Year ending 31

34 housing outlook 6. demand (cont.) With the monthly net movement rising from 210,000 in 2010/11 to 283,000 in 2011/12, net overseas migration is on track to increase from 170,300 in 2010/11 to 230,000 persons in 2011/12. Furthermore, although more moderate, growth in the net overseas migration inflow is expected in 2012/13, and rising over the following two years. With economic growth forecast to continue to strengthen, labour capacity constraints are expected to become more acute, driving stronger growth in overseas arrivals on temporary working visas. Together with further rises in the Federal Government permanent intake, net overseas migration is forecast to subsequently rise to an inflow of 260,000 persons by 2014/15. Western Australia has become an increasingly prevalent destination for overseas migrants. After accounting for just under 15% of Australia s annual net overseas migration up to 2010, the state is on track to accommodate 22% of the national net inflow in 2011/12, reflecting the strong employment growth in the state. Similarly, Queensland is likely to attract an increased percentage of the net inflow in the next three years as mining investment in the state ramps up. Over the three years to 2014/15, New South Wales is expected to still attract the highest share of migrants (27%), followed by Victoria (23%), although the share of migration into Queensland (22%) and Western Australia (22%) will be almost on par with Victoria. The share of migration into the other states is forecast to be similar to their long term averages; with South Australia accounting for 5% of the national net inflow, while Tasmania, the Northern Territory and the Australian Capital Territory are projected to be attracting less than 1% each. Interstate migration The main drivers of migration between the states are relative housing affordability and economic conditions. Reduced interstate movement also generally occurs when economic conditions overall deteriorate; i.e. limited job prospects elsewhere encourage people to stay where they are. After fairly moderate movements in the years immediately after the GFC in 2009/10 and 2010/11, movement between the states appears to be increasing in 2011/12, reflecting the relative disparity in economic conditions between the states (Table 8). The net outflow from interstate migration in New South Wales is estimated to have increased to 19,000 persons in 2011/12 (it s highest in four years), with outflows to the mining states beginning to improve as employment opportunities there draw migrants. We expect this trend to continue over the forecast period as housing affordability deteriorates due to price growth and rising interest rates. Net outflows are forecast to return closer to historical levels, averaging 22,300 persons per annum over the three years to June Victoria recorded a net interstate migration inflow of 2,600 persons in 2009/10, followed by a further increase to 3,800 persons in 2010/11, reflecting the stronger recovery in the state s economy after the GFC. However, strong median house price growth in recent years has seen housing affordability deteriorate significantly and, with the state economy now underperforming most of the other states, this will hurt net interstate migration. The net interstate migration inflow is expected to slow to 1,000 persons in 2011/12, before averaging a net outflow of 7,300 persons per annum in the forecast period. 32

35 Table 7: Net overseas migration ( 000) Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel Year Ended June NSW VIC QLD SA WA TAS NT ACT Australia e * * * * BIS Shrapnel forecasts e BIS Shrapnel estimate 33

36 housing outlook 6. demand (cont.) The net interstate migration inflow into Queensland fell below 10,000 persons in 2010 and 2011; the first time since Poor affordability after prices peaked in 2008 and a weak state economy contributed as uncertainty surrounding employment prospects deterred people from making a move. The net inflow is on track to improve, although remain relatively low at 12,000 persons in 2011/12, as the local economy slowly recovers from its current weakness. Residential price declines that have improved affordability relative to the eastern state capitals, and a further strengthening in the state economy, are expected to combine to underpin further growth in net interstate migration inflows to an average of 24,800 persons per annum in the three years to June Net interstate migration outflows from South Australia have remained relatively stable for some time now, hovering between 2,500 persons and 4,700 persons per annum since Despite being one of the most affordable housing states in mainland Australia, interstate migration is forecast to maintain a net outflow averaging 3,000 persons per annum over the three years to June 2015, reflecting its lack of employment drivers in growth industries. Some upside may exist depending on the impact of future resource investment on employment and income growth. The significant investment occurring in the resources sector in Western Australia has created a sizeable demand for labour, and with more attractive incomes available; this is drawing migrants from interstate. Consequently, the net inflow from interstate migration is on track to reach a long term high of 11,500 persons over 2011/12. This is significantly higher than the peak of 5,200 persons in 2006/07 when the previous mining boom peaked. Migration is forecast to remain high as the local economy continues its momentum and resource investment projects reach their peak employment stage into 2013 and Over the three years to 2014/15, the state is forecast to experience an average net interstate inflow of 8,800 persons per annum across the three years to Tasmania is estimated to show a return to a net outflow of 2,000 persons over 2011/12. Without any major employment drivers in the state, it is expected that the net outflow from interstate migration will average 1,200 persons per annum between 2013 and In the Northern Territory, net interstate migration outflows of 1,600 persons on average per annum have been recorded over the last three years to 2012, as new mining and infrastructure investment weakened upon the completion of a number of projects. Expanding investment in the oil and gas sector is likely to see a recovery to an average annual net interstate inflow of 700 persons in the three years to Interstate migration in the Australian Capital Territory traditionally relies on growth in public sector employment. After minor net inflows in 2011 and 2012, it is projected that interstate migration reverts to an annual average outflow of 500 persons in the three years to 2015 as the Federal Government looks to cut spending. 34

37 Table 8: Net interstate migration ( 000) Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel Year ended June NSW VIC QLD SA WA TAS NT ACT e * * * * BIS Shrapnel forecasts e BIS Shrapnel estimate 35

38 housing outlook 6. demand (cont.) Population Australia s population is projected to grow at an average rate of 1.73% per annum to 23.9 million at June 2015 (Table 9). This rate will be higher than that recorded over the six years to 2011/12 (1.55% per annum), despite forecast overseas migration not reaching the high net inflows achieved in 2008 and Nevertheless, the forecast strengthening economic environment leading to labour shortages is anticipated to still underpin a substantial net intake from overseas migration during the three year period to Western Australia is forecast to achieve the highest rate of population growth over the three years to 2014/15 averaging 3.35% per annum, whilst population growth in the Northern Territory (2.62% per annum) and Queensland (2.41% per annum) are also expected to be above the national average. Each of these states is expected to experience both a strong net interstate migration inflow, as well as benefit from rising net overseas migration nationally. Average annual population growth from 2012/13 to 2014/15 in New South Wales (1.18%), Victoria (1.51%) and South Australia (0.99%) is forecast to be similar to the previous six years to June 2012, and show a noticeable reduction in Tasmania (0.4%) and the Australian Capital Territory (1.16%). It should be noted the population from 2007 to 2011 has been rebased in light of the results from the most recent 2011 Census. This resulted in the original 2011 population estimate being revised downwards by almost 300,000 persons. However, an improved methodology in undertaking a post enumeration survey to estimate the population undercount suggests that the 2006 Census population (using the outdated post enumeration survey methodology) could have been overstated by around 250,000 persons. Consequently, the total population growth is likely to be understated given the potentially higher 2006 population base. 36

39 Table 9: Population projections ( 000s), 2006 to 2015 Source: Australian Bureau of Statistics, BIS Shrapnel Year ended June NSW VIC QLD SA WA TAS NT ACT Australia , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , p 7, , , , , , f 7, , , , , ,893.4 average annual growth % f f p projection f BIS Shrapnel forecast 37

40 housing outlook 6. demand (cont.) Demand and supply The underlying demand for new dwellings is driven largely by the formation of additional households, which in turn is largely underpinned by population growth. The balance between underlying demand and supply has an impact on vacancy rates, rents, prices, and construction. Since the lmihousing OUTLOOK , historical underlying demand up to 2011 has been revised down in line with the Census. Forecasts of underlying demand have also been updated using assumptions derived from the Census. On this basis, underlying demand is forecast to average 174,700 new dwellings per annum over the three years to 2014/15 (Table 10). This is above the estimated average for underlying demand of 155,000 dwellings per annum in the 2006/07 to 2011/12 period and reflects the stronger level of population growth and, to a lesser extent, a stabilisation in household formation rates after household formation was impacted by increasing household sizes in between the 2001 and 2006 Censuses. The weaker estimate of underlying demand between the 2006 and 2011 Censuses means that the estimated deficiency at June 2011 of 37,200 dwellings was lower than indicated in the lmihousing OUTLOOK Nevertheless, the national deficiency at June 2011 was still concentrated in New South Wales, with the other states closer to balance. A deficiency of this level in each of these states was not sufficient to drive any strong construction or price growth in 2011/12 given the prevailing economic environment. The underlying deficiency is estimated to have increased to 57,500 by June 2012, reflecting the low level of dwelling commencements in the year, although the change in the deficiency has been uneven across the states. With dwelling activity still high relative to underlying demand, the Victorian, South Australian, Tasmanian, and Australian Capital Territory markets are all expected to have moved into an underlying surplus. Conversely, low construction volumes in New South Wales, Queensland, Western Australia, and Northern Territory have resulted in a rising underlying deficiency in these states at June This trend is expected to continue into the forecast period, with the resource states experiencing a rising rate of population growth and solid underlying demand which will take some time for construction to catch up. Similarly, construction in New South Wales will also take some time to match underlying demand, given its current low base. The rising deficiency will be a key driver in new dwelling construction improving in these states from 2012/13, with the underlying deficiency reaching around a year s underlying demand in each of the states during the forecast period. Conversely, the emerging surplus in Victoria, Tasmania and the Australian Capital Territory is forecast to expand through to at least 2013/14. This will place upward pressure on vacancy rates and downward pressure on price growth. The resultant subdued purchaser demand will cause new dwelling supply to ease, with the excess stock beginning to be absorbed by the end of the forecast period. The South Australian market is expected to move back into a mild deficiency by 2014/15, although will not be sufficient to have any major positive effect on prices and construction. 38

41 Table 10: Underlying demand, commencements and stock deficiency, by state Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel Ave Ann Underlying Demand ( 000s) Dwelling commencements Deficiency of Stock (est.) ( 000) State 2012/13 to 2014/ /12 ('000s) Ann. % Chg. As at June 2011 As at June 2012 As at June 2013 As at June 2014 As at June 2015 NSW VIC QLD SA WA TAS NT ACT Australia

42 housing outlook 7. capital city overviews and price forecasts Sydney Outside of 2009/10 when the median house price rose by 14% in response to increased first home buyer incentives and low interest rates, Sydney s median house price has fallen in real terms every year since peaking in 2003/04. Up until then, Sydney had enjoyed median house price growth totalling 151% between June 1996 and June 2004, which had placed a considerable strain on housing affordability. As a result of the growth, mortgage repayments on 75% of a median priced house of $552,000 at June 2004 accounted for as high as 41.6% of average disposable household income the worst level since 1989 when variable interest rates peaked at 17% and 49% of household income was required to meet mortgage repayments on a median priced home. With construction also relatively high through this upturn, there was little undersupply to speak of and median house prices began to decline. Affordability continued to remain a constraint despite a collapse in new dwelling construction creating a substantial deficiency of dwellings since Price growth has continued to remain weak and Sydney s median house price of $642,400 at June 2012 remains 10% below its peak just before the middle of the decade in real terms. Since the brief rally in prices in 2009/10, Sydney s median house price has increased by a total of 2% in the last two years. Nevertheless, there are signs that median house price growth is set to rally. Rental growth continues to remain solid, outpacing recent price growth, and driving an improvement in yields. First home buyer demand albeit inconsistent due to changes in state government first home buyer incentives appears to be improving, while the extended period of weak prices together with interest rate reductions over 2011/12 mean that affordability is now at its best level since Given this, the main factor holding back the Sydney market now appears to be confidence. With economic growth forecast to become more broad based outside the resource sector in 2012/13, this should help sentiment. It should also encourage greater turnover as existing home owners take the opportunity to sell their dwelling to the increasing number of first home buyers and trade up or trade down. A persistent dwelling deficiency and rising rents through the next three years will promote renters moving into owner occupation as well as investor purchasers. Modest growth in the median house price of 3% is forecast in 2012/13, accelerating to 6% in 2013/14 after a period of stable low interest rates and improving economic conditions. After such weak price performance for much of the previous decade, the return of price growth, and relatively low interest rates and improving economic conditions leading into the year, are expected to see the momentum in prices continue into 2014/15 as investor demand and speculative activity picks up. This is forecast to result in a last surge in the median house price growth of 7% in the year. However, prices are expected to be slowing by the end of this period. The rise in prices is expected to help drive an upturn in dwelling construction, which by this stage is anticipated to erode some of the dwelling deficiency. Sharper rises to interest rates over 2014/15 due to inflationary pressures from the corresponding peak in the economy are also expected to dampen price growth, which should slow considerably the following year. Overall, median house prices in Sydney are forecast to lift by a cumulative total of 17%, or 6% per annum, to $790,000 over the three years to June This reflects a total rise of 6.3% in real terms. 40

43 Chart 8: Sydney dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) 1, Real House Price Sydney ($ 000 in 2010) Nominal House Price Sydney ($ 000) Commencements ( 000) NSW (Quarterly, MAT) Forecast Year ended June 41

44 housing outlook 7. capital city overviews and price forecasts (cont.) Melbourne The Melbourne residential property market has slowed over the last two years. Melbourne s median house price at June 2012 of $535,000 was 4.5% below its median house price at June Growth in new dwelling construction continued into 2010/11, with commencements peaking at record 47,300 dwellings for the year, although this has fallen by an estimated 22% in 2011/12 to 36,800 dwellings. Melbourne s median house price surged in 2009/10 after the GFC, rising by a substantial 27% in the year. This was driven by attractive financial incentives for first home buyers and variable interest rates that were at 40 year lows at the start of the year. However, with interest rates creeping back up through 2009/10, the rise in prices was unsustainable as affordability surpassed its previous worst point at June 2008 when variable interest rates peaked at 9.6%. The rise in prices also drove a boom in new dwelling construction. First home buyers and upgraders underpinned strong demand for new houses, while strong investor demand drove off-the-plan apartment sales. In the record year of 2010/11, other dwelling (i.e. multi unit) commencements comprised just under half of new dwelling commencements in Melbourne well up from the ten year average of 35%. The high level of new dwelling construction has coincided with slowing population growth and the market is estimated to have moved from close to balance at June 2011, to a rising underlying surplus of dwellings at June Rental vacancy rates have also begun to increase and should continue to rise as most of the investor purchased apartments work their way through to completion. Affordability continues to remain strained. While the current low interest rates mean that affordability in most of the other capital cities is back to the levels seen in the early part of the decade, affordability is at 2006 levels in Melbourne. However, a rising dwelling deficiency was emerging in Melbourne to drive price growth back then, whereas now the market is in underlying oversupply. First home buyer demand in Victoria has also weakened further than the other states. While more attractive state government incentives compared to the other states boosted demand considerably, they also attracted future first home buyers, with the number of first home buyers in the market consequently much lower now that the incentives have expired. The incentives have been replaced to some extent by stamp duty concessions. However, these will not have the same impact as the previous cash grants. As a result, there is little in the Melbourne market at the moment to drive demand or price growth. Nevertheless, major price declines are also not expected. Population growth will remain solid, albeit slowing slightly, as rising net overseas migration offsets an increase in the net interstate migration outflow, although will not necessarily be sufficient to absorb excess stock in the next one to two years. Economic conditions in Victoria are expected to stabilise and eventually pick up though 2012/13, while low interest rates will continue to support affordability. This should help sentiment, although further pressure on median house prices is expected by forecast tightening interest rate policy over 2013/14 and 2014/15. Subsequently, the median house price in Melbourne is forecast to average a minimal 1% per annum over the three years to 2014/15 to reach $557,000. In real terms, median house prices are forecast to fall by a total of 5%. 42

45 Chart 9: Melbourne dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) Real House Price Melbourne ($ 000 in 2010) Nominal House Price Melbourne ($ 000) Commencements ( 000) VIC (Quarterly, MAT) Forecast Year ended June 43

46 housing outlook capital city overviews and price forecasts (cont.) Brisbane The Brisbane residential market has underperformed the other capital city markets since peaking in 2008, with the estimated June 2012 median of $433,000 being only 3% above the June 2008 median. The market was impacted by a substantial deterioration of affordability and emergence of an excess supply in the run up to the 2008 peak. Even the presence of substantial increases to first home buyer incentives and low interest rates in 2009 only had a brief stimulatory effect on demand. The underperforming state economy in the years following the GFC has also had an impact. The state economy experienced a sharp decline in engineering and non residential construction; as projects underway were completed without the next round of projects coming through to support employment. Tourism has also been impacted by the high Australian Dollar, while state wide floods and the impact of Cyclone Yasi at the start of 2011 also had a negative effect on the economy. Despite substantial declines in dwelling construction through this downturn, there was not any substantial absorption of the oversupply as population growth, and therefore underlying demand, also slowed considerably. Brisbane s affordability advantage over the eastern state capitals has narrowed substantially compared to the start of the decade. Together with the slower economic growth, interstate migration into Queensland collapsed to 7,200 persons in 2010/11; well down from the 24,600 per annum average over the previous decade. Net overseas migration into the state also fell in line with national net overseas migration. Weak purchaser sentiment is still having an impact on the Brisbane residential market, although things are starting to turn from a fundamental perspective. Economic growth started to accelerate in 2011/12 from the low flood affected conditions of 2010/11. Work on a number of multi-billion dollar coal seam gas projects has commenced. While the projects are largely located in central Queensland, services and support employment is typically in Brisbane. Four years of stagnant prices in Brisbane also means that affordability has improved since the 2008 peak, as well as relative to the other capital cities. As a result, the net interstate migration inflow is on track to rise to 12,000 in 2011/12, while net overseas migration is also improving. With new dwelling completions still remaining low a rising deficiency is emerging, reflected in vacancy rates in Brisbane moving from an excess (3.9%) at June 2010, to a deficiency (2.1%) at June 2012, and causing rental growth to return. First home buyer demand has also begun to recover in 2012 after falling in 2010 and This will provide increasing demand for entry level dwellings that will allow upgraders to move on to their next dwelling. Confidence is expected to continue to improve through 2012/13 as economic growth in Queensland strengthens, being facilitated by low interest rates. Upgrader activity should increase as first home buyer demand continues to recover, while investors are expected to return to the market in larger numbers to capitalise on rental growth and the prospect for future capital gain. The removal of the First Home Owner s Grant for established dwellings after October is unlikely to have had a major impact on first home buyer demand given the little time (one month) between the Budget announcement and expiry of the Grant, although some buyers of established dwellings may delay their purchase to make up the deposit gap. Other potential purchasers may opt for a new dwelling where the Grant has been lifted to $15,000. The median house price is set to initially increase by a forecast 5% over the year to June 2013 to $450,000. Rises in private sector employment flowing from strong rises in mining investment will offset public sector losses. With accelerating economic growth continuing and a growing stock deficiency, confidence should pick up further with a lift in forecast median house price gains to 8% over 2013/14 before slowing to 6% over 2014/15 as forecast rising interest rates begin to dampen price growth. Brisbane s forecast median house price of $515,000 by June 2015 represents a total 19% rise over the three year period, or 6% per annum. In real terms the median house price will have increased by a total 8.3%.

47 Chart 10: Brisbane dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) Real House Price Brisbane ($ 000 in 2010) Nominal House Price Brisbane ($ 000) Commencements ( 000) QLD (Quarterly, MAT) Forecast Year ended June 45

48 housing outlook 7. capital city overviews and price forecasts (cont.) Adelaide Adelaide has experienced two years of decline in its median house price since peaking at $410,500 at June 2010, when increased first home buyer incentives and sharp reductions in interest rates drove the market. However, prices stalled as interest rates rose and affordability deteriorated. The expiry of the Federal Government first home buyer incentives also saw first home buyer numbers reduce by 37% in the two years to 2011/12, which in turn impacted on upgrader activity. At the same time, the rise in new dwelling construction that corresponded with the peak in prices coincided with a reduction in underlying demand as net overseas migration fell and a market that was in deficiency began to move into oversupply. This was reflected in the June quarter 2012 vacancy rate of 3.9% being above the balanced market level of 3%. Economic conditions in South Australia have remained weak through 2011/12, keeping demand subdued, as reflected by the number of loans to owner occupiers falling by 3% in the year and the value of residential investment loans declining by 8%; both of these results being comparatively worse than at the national level. As a result, the median house price fell to $395,000 in the two years to June 2012; a total fall of 4%. Further declines in the median house price are not expected. The decline in the median house price and the 95 basis point reduction in interest rates in 2011/12 have taken mortgage repayments for a median priced house from 26.8% of disposable household income at June 2010, to 22.4% at June Outside of 2009 when interest rates were at 40 year lows, this is its best level since First home buyer numbers are also expected to continue to trend back towards long run averages through 2012/13, which should assist turnover. Nevertheless, there is also little to place upward pressure on median house prices. Without significant exposure to key growth industry sectors, South Australia s economy is expected to underperform the national economy, with the recent postponement of the planned Olympic Dam expansion removing a significant potential driver of economic activity and employment growth in the short to medium term. As a result, there is little upside to the migration forecasts with South Australia containing fewer lifestyle and employment drivers to attract migrants in general compared to the eastern states and Western Australia. Price growth of a minimal 1% is consequently forecast in 2012/13, with the subdued outlook for the state s economy being offset by some further improvement in affordability as housing interest rates fall by a further 25 basis points towards the end of New dwelling commencements are also expected to continue to decline in this environment, falling to their lowest level in a decade at 7,700 dwellings. The reduction in new dwelling starts will take supply below underlying demand, and the excess dwelling supply will be slowly absorbed. This should help prices, although continued moderate underlying demand and forecast rises in interest rates are expected to dampen price growth. The median house price is forecast to rise by a total of 5% over 2013/14 and 2014/15, taking the median house price to $420,000 by June Median house price growth over the next three years is forecast to total 6%, which in real terms equates to a decline of 3% for the period. 46

49 Chart 11: Adelaide dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) Real House Price Adelaide ($ 000 in 2010) Nominal House Price Adelaide ($ 000) Commencements ( 000) SA (Quarterly, MAT) Forecast Year ended June 47

50 housing outlook 7. capital city overviews and price forecasts (cont.) Perth The residential market in Perth has stagnated after prices peaked in December 2007, with the median house price reaching $478,000. House affordability in the years leading to the peak deteriorated significantly with the monthly mortgage repayment on a median priced house rising from 15% of average disposable household income at June 2001 to 34% at June Affordability in Perth went from being behind Sydney, Melbourne and Brisbane, to being the second least affordable (moderately behind Sydney). As a result, the Perth market has since been in a sustained downturn. Outside of a brief rebound in 2009/10 driven by first home buyer incentives and low interest rates, annual price growth has largely been negative and Perth s median house price of $475,000 at June 2012 remains 1% below the December 2007 peak. In real terms the median house price is 12% below the December 2007 peak. The weak conditions have largely been the result of the deterioration of affordability after prices peaked, the erosion of the dwelling deficiency and the emergence of dwelling oversupply, and concerns about the impact of the global economic outlook on the Western Australian economy. Conditions in Perth are now beginning to turn around and point to a recovery. The combination of rising underlying demand and falling completions has seen a substantial deficiency emerge. This is being reflected in vacancy rates falling to 1.9% in June 2012, which is well below the balanced market rate of 3%, and underpinning stronger rental growth. Employment growth has also been strong with the unemployment rate well below 5 per cent. Affordability has also improved significantly. With the median house price down by 12% in real terms since 2007, affordability has improved to the best level since 2004, with strong income growth (disposable household income has risen by 48% between 2007 and 2012) also contributing positively to the affordability equation and encouraging first home buyer demand. Outside of the Northern Territory, loans to first home buyers in Western Australia experienced the strongest annual growth (29%) of the states in 2011/12. Moreover, loans to first home buyers in July 2012 were up by 56% on (an admittedly low) July Further growth in investment in the resources and mining sector will continue to underpin strong employment and wages growth, which will in turn encourage further demand. As a result, price growth is forecast to return through 2012/13, with the median house price forecast to increase by 6% over the year to $505,000. The rising investment in new mining and resource projects will lead to further improvement in sentiment, although emerging inflationary concerns are likely to encourage the Reserve Bank to raise rates by 50 basis points through the year. However, this should be more than offset by continued positive employment prospects and a rising stock deficiency, resulting in the median house price in Perth rising by an estimated 8% over the following year to $545,000 by June Strengthening inflationary concerns will emerge over 2014/15, as the economic upturn becomes more broadly based beyond the mining sector. This will result in the Reserve Bank becoming more aggressive with its monetary policy stance, increasing the cash rate by 125 basis points during the year. The forecast cash rate of 5.0% will translate to a standard variable rate of 8.25% at June This will subsequently take some of the heat out of the economy at a time when economic growth is peaking, and will result in affordability issues re-emerging with a slower gain of 6% in the median house price in Perth to $580,000 anticipated by June Median house price growth over the three year period is forecast to total 22%, or 7% per annum. In real terms the median house price is forecast to have increased by 11%. 48

51 Chart 12: Perth dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) Real House Price Perth ($ 000 in 2010) Nominal House Price Perth ($ 000) Commencements ( 000) WA (Quarterly, MAT) Forecast Year ended June 49

52 housing outlook 7. capital city overviews and price forecasts (cont.) Hobart Hobart s median house price was flat over 2011/12, after growth slowed to only 1% in 2010/11. This reflects owner-occupier demand for housing loans slumping to its lowest level in more than 20 years, with the first home buyer segment in particular continuing to fall back from its stimulus supported highs. The first home buyer segment was particularly vulnerable to the pull-forward effect of the stimulus measures as the grants accounted for such a significant proportion of the house prices in Hobart compared to other capital cities. With demand contracting significantly, upwards pressure on prices all but evaporated, leading to the price declines that eventuated in 2011/12. Dwelling completions in Tasmania peaked at approximately 3,100 over 2010/11, well outpacing underlying demand and expanding the existing oversupply to approximately 1,900 dwellings at June Although completions have weakened to 2,600 dwellings in 2011/12, this figure remains above underlying demand and the excess has continued to increase to an estimated 3,100 dwellings at June As a result the rental vacancy rate has risen sharply to 4.8%; well above the balanced market rate of 3% and its highest level since the 1990s. This indicates that the prospect for house price growth over the forecast period remains weak. Being one of the smallest states, the economic and residential outlooks for Tasmania are often the most volatile. An important determinant of demand and price growth in Hobart is its relative affordability compared to the mainland capital cities, with interstate migration and housing affordability showing a strong correlation. Over the forecast period, the Tasmanian economy is expected to show some improvement although lag the performance of the greater Australian economy, with employment growth expected to remain relatively mild over the forecast period. Falling residential building will also be a drag on the economy as the oversupply of dwellings limits the need for new dwelling construction. Net interstate migration into Tasmania has been positive in recent years. Most interstate migration comprises tree change movers from the mainland. Therefore, they will often have a greater level of assets and having retired, or being close to retirement, will have a lower need for employment. However, the outflow of younger Tasmanians seeking employment is increasing and this is evident in data so far in 2011/12 indicating that Tasmania s net interstate migration has reverted to an outflow. With a relatively weak economic outlook and a significant dwelling oversupply across Tasmania, upwards pressure on prices will be limited. The impact of lower interest rates and an improved national economic outlook should provide some support to prices, although median house price growth is expected to be minimal. Hobart s forecast median house price of $375,000 at June 2015 represents a 1% increase on the estimated June quarter 2012 median of $370,000 for the three years. In real terms the Hobart median house price is forecast to show a decline of 7.7% in this period. 50

53 Chart 13: Hobart dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) Real House Price Hobart ($ 000 in 2010) Nominal House Price Hobart ($ 000) Commencements ( 000) TAS (Quarterly, MAT) Forecast Year ended June 51

54 housing outlook 7. capital city overviews and price forecasts (cont.) Canberra The Canberra market experienced a strong response to the increased first home buyer incentives and low interest rates in 2009, with the median house price rising by 16% in 2009/10. Canberra has a relatively large young adult population with reasonably well paying and stable employment attached to the public sector. The population is also more transient and is therefore typically more likely to be renting. However, the introduction of the FHOGBS in October 2008 acted as the catalyst for many renters in Canberra to take up the option of buying, particularly after the sharp reductions in interest rates over 2008/09 more so than in most of the major states. In addition, after a period of restricted land supply, new development fronts opened up, predominantly in northern Canberra and to the west of Canberra. Dwelling construction consequently increased substantially. Initial support was provided by first home buyers, with upgraders playing an increasing role through 2009/10. Despite the shift from renters into owner occupation, continued strong population growth since 2009 also kept rental vacancy rates tight, at below 2% in 2009/10 and 2010/11. This resulted in a substantial increase in investor demand for apartment stock close to the Canberra CBD and on the foreshore. As a result, new dwelling activity in Canberra rose to a record 5,100 starts in 2010/11; the highest level on record. As the construction pipeline works its way through to completion, the Australian Capital Territory market has moved into an oversupply estimated at 1,200 dwellings at June Canberra s vacancy rate is now trending upwards, and was 2.8% in June quarter 2012 after being below 2% in the previous two years. Purchaser activity has weakened considerably. First home buyer levels remain below the long term average after dropping off with the expiry of the FHOGBS, and this has seen loans to upgrader/downsizers further softening in 2011/12. As a result, the Canberra median house price has fallen by 5% from its June 2011 level of $520,000 to $494,100 at June Over the forecast period underlying demand is forecast to slow as migration weakens due to cuts to public sector employment as the Federal Government looks for cost savings to bring the budget back into surplus. The Australian Capital Territory s net interstate inflow of recent years is consequently forecast to revert to a net outflow in the forecast period. While dwelling completions will inevitably fall back from their unsustainably high level and track below underlying demand; it will take some time for the existing oversupply to be eroded. Canberra s median house price is forecast to fall by 1% in 2012/13 as confidence continues to be hit by public sector redundancies, before stabilising in 2013/14 and 2014/15 as national economic conditions continue to improve, resulting in increased tax revenue and less fiscal imperative to cut costs. Rising interest rates in 2013/14 and 2014/15 will also dampen price growth. The median house price in Canberra is forecast to barely move over the next three years, with the forecast median house price of $498,000 at June 2015 representing a minimal 1% rise over the June 2012 median. In real terms prices will have declined by 8% in the three years and will be down by 17% from their June 2011 peak. 52

55 Chart 14: Canberra dwellings, prices and activity Source: Australian Bureau of Statistics, RealEstate Institute of Australia, Forecasts: BIS Shrapnel ($ 000) Real House Price Canberra ($ 000 in 2010) Nominal House Price Canberra ($ 000) Commencements ( 000) ACT (Quarterly, MAT) Forecast Year ended June 53

56 housing outlook 7. capital city overviews and price forecasts (cont.) Darwin House prices in Darwin performed well through the GFC, being supported by a number of mining projects currently under construction and rises in Federal Government administration expenditure. After rising by a total 31% in 2008/09 and 2009/10, the median house price declined by 7% over 2010/11, as expenditure in these areas fell and impacted on the local economy. The decline was exacerbated by the deterioration of Darwin s housing affordability after posting considerable price growth over the previous decade. In fact Darwin s affordability was close to its worst on record at June 2010, despite interest rates being lower than other previous periods of poor affordability. However, the fundamentals appear to have reversed quickly over 2011/12, with the median house price rebounding by 10.7% to $570,000 at June New dwelling starts also fell in 2010/11 in line with the fall in the median house price, and below the level of underlying demand. The flow on effect to completions means that the modest deficiency in the Northern Territory market has continued to increase. Accordingly, the rental vacancy rate remains was 0.8% in June quarter 2012, highlighting the tightness in the local market. Loans to owner-occupiers in the Northern Territory are also showing a strong recovery. First home buyer loans were up by 38% in 2011/12. Loans to non-first home buyers increased by a modest 2%, although moved from year-on-year declines at the start of the year to solid year-on-year rises by June quarter In July 2012, loans to non-first home buyers were up by 43% on June 2011 The key driver of this rebound in the residential market appears to be the commencement of infrastructure, oil and gas projects over 2012, particularly the Inpex LNG project, which includes development of the gas field, an onshore LNG plant, a pipeline and a port component. Given Darwin s small population and local economy, this investment appears to be having a greater impact than it would have had it been centred on one of the larger capital cities. Population growth in Darwin has begun to improve in 2011/12 after slumping in recent years as interstate migration moved into a net outflow and overseas migration fell in line with the national trend. This should continue through the forecast period driving stronger underlying demand as the strong economy offers employment opportunities, particularly in the mining and mining related sectors. Dwelling completions are not expected to rise quickly enough to match underlying demand, causing the existing stock deficiency to continue to expand and placing increasing upwards pressure on the median house price. The big question mark is how much more price growth the Darwin market can sustain given that affordability has not improved as much as some of the other capital cities in 2011/12 notwithstanding lower interest rates. Offsetting this will be the rising dwelling deficiency placing pressure on prices and employment and income growth also rising strongly. On this basis, Darwin s median house price growth is forecast to be at a more moderate level of 5% per annum over 2012/13 and 2013/14, before beginning to slow over 2014/15 in response to higher interest rates and a winding down of mining investment. In total, the median house prices is forecast to rise by 14% over the three years to June 2015, taking the median to $650,000, although there is potential upside to prices, particularly if speculative investment activity takes place. 54

57 Chart 15: Darwin dwellings, prices and activity Source: Australian Bureau of Statistics, Real Estate Institute of Australia and Forecasts: BIS Shrapnel ($ 000) 1, Real House Price Darwin ($ 000 in 2010) Nominal House Price Darwin ($ 000) Commencements ( 000) NT (Quarterly, MAT) Forecast Year ended June 55

58 housing outlook 8. appendix Chart 16: Comparison between actual and three year forecasts, Sydney median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast Chart 17: Comparison between actual and three year forecasts, Melbourne median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast 56

59 Chart 18: Comparison between actual and three year forecasts, Brisbane median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast Chart 19: Comparison between actual and three year forecasts, Adelaide median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast 57

60 housing outlook 8. appendix (cont.) Chart 20: Comparison between actual and three year forecasts, Perth median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast Chart 21: Comparison between actual and three year forecasts, Hobart median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast 58

61 Chart 22: Comparison between actual and three year forecasts, Canberra median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast Chart 23: Comparison between actual and three year forecasts, Darwin median house price Source: Real Estate Institute of Australia, BIS Shrapnel Forecasts Median house price ($ 000) Quarter ending June Actual Forecast 59

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