Quarterly Review The Australian Residential Property Market and Economy

Transcription

1 Quarterly Review The Australian Residential Property Released January 2018

2 Contents Introduction 3 Housing Market 4 Mortgage Lending 11 Housing Supply 17 Demographic Overview 20 Household Finances 22 National Accounts 25 Inflation 26 Consumer Sentiment 27 Conclusion 28 About CoreLogic 30 Disclaimers 31

3 Introduction $7.5 trillion $2.5 trillion $1.8 trillion $0.948 trillion Value of Residential Property Value of Australian Superannuation Value of Listed Equities Value of Commercial Real Estate While dwelling values increased in 2017, there was a notable slowing of the market late in the year, culminating in national values falling by -0.3% over the final quarter of the year. This represented the largest (and first) quarterly fall in dwelling values since the three months to April Throughout 2017, national dwelling values increased by 4.2% which was down from 5.8% at the end of 2016 and the slowest rate of annual growth since October Importantly there was a noticeable slowing through the year once annual growth peaked at 10.4% in May investment costs. Over the period Australia has also seen a sharp rise in the level of foreign investment in housing stock. More recently investment has slowed due to a combination of credit rationing and higher mortgage rates for investors as well as those not paying down the principal on their mortgage. This has also occurred in line with a a slight pull-back in new housing construction however, approvals are now climbing again. Although both investment and construction activity has slowed both remain substantially higher than long-term average levels. Sydney, which accounts for almost one third of the total value of housing nationally, is leading the slowdown with values falling by -2.1% over the final quarter of Most other capital cities have also experienced a slowing of the rate of value change over recent quarters. In fact, only Perth and Darwin, where home values have been in decline since 2014, have recorded an improvement in housing performance over the final quarter of the year compared to the third quarter. Outside of Sydney, dwelling values have increased over the quarter in Melbourne (0.9%), Brisbane (0.3%), Adelaide (0.3%), Perth (0.1%), Hobart (3.1%) and Canberra (1.0%) and have fallen in Darwin (-2.9%). Over the 2017 calendar year, values have fallen in Perth (-2.3%) and Darwin (-6.5%) and have increased in Sydney (3.1%), Melbourne (8.9%), Brisbane (2.4%), Adelaide (3.0%), Hobart (12.3%) and Canberra (4.9%). The recent slowing of value growth nationally comes after a strong phase of growth which has been led by Sydney and Melbourne. The surge in dwelling values has occurred against a back-drop of low inflation, low mortgage rates and historically weak income growth. As a result, housing affordability has deteriorated substantially in Sydney and, to a lesser extent, in Melbourne. The past few years have also been characterised by high rates of population growth nationally and a heightened level of new housing construction activity, particularly for units. The construction boom has facilitated an increase in dwelling accommodation however, it has also occurred at the same time as historic high levels of investment activity in the housing market, with investment largely focused within Sydney and Melbourne. Residential developers have ramped up the construction of new dwellings, supported by strong demand for their stock, with much of this demand coming from investors that have been attracted by the strong capital gains on offer in Sydney and Melbourne as well as tax deductibility of CoreLogic previously had concerns that heightened levels of new housing construction and investor participation would cause rents to fall and a year ago rental growth was slowing across most regions of the country. Over the past year though, there has been an acceleration in rental growth with the rents increasing by 2.7% over the year. A similar trend has been evident across all capital cities however, the rate of growth now appears to be slowing. Exactly what has driven this acceleration is unclear however, it is probably due to a number of factors including: rapid population growth and the sheer lack of affordability of owning a home. Furthermore, the rising popularity of AirBnB is potentially resulting in some level of stock removal from the long-term rental market and increasing supply in the short-term market. Additionally, as mortgage rates edge higher, particularly for investment mortgages, it is likely that landlords will be doing their best to recoup their higher cost of debt by pushing rents higher if possible. Capital city dwelling values have now been rising for more than five and a half years and the rate of growth in Sydney and Melbourne has been significantly greater than that outside of these two cities. While lower mortgage rates have improved mortgage serviceability, for those that don t own a home it is increasingly difficult for them to firstly save a large enough deposit and secondly to compete with the equity that current home owners have built over recent years. More recently the housing market has slowed due to a range of factors including tighter credit policies, stretched affordability, supply additions and higher mortgage rates for investors. As a result the market is expected to continue to transition in 2018 with falls potentially set to continue in Sydney while conditions across Melbourne s housing market are also expected to slow further.

4 Housing Market Over the three months to December 2017, national dwelling values fell by 0.3%; the first rolling quarterly fall since April 2016 National dwelling values fell by -0.3% over the final quarter of 2017 which was the first quarterly decline since the three months to April Over the quarter, combined capital city dwelling values fell -0.5% while combined regional areas saw values increase 0.5%. The quarterly decline in capital city dwelling values was driven by a -2.1% fall in Sydney with Darwin (- 2.9%) the only other capital city in which values fell over the quarter. Over the past 12 months, national dwelling values increased by 4.2% with combined capital city values 4.3% higher and combined regional market values up 3.8%. Looking at the annual change in house and unit values; houses increased by 4.0% nationally, 4.0% across the combined capital cities and 3.9% across the combined regional markets compared to 4.9%, 5.1% and 3.6% respectively for units. 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Quarterly and annual change in national dwelling values Quarterly change Annual change Hobart was the only capital city to record double-digit value growth in 2017 National dwelling values recorded a slowdown in growth throughout 2017 with the 4.2% annual change the slowest over a calendar year since they rose 1.1% in the 2012 calendar year. Although nationally value growth in 2017 was lower than the 5.8% in 2016, amongst the capital cities only Sydney, Adelaide and Canberra recorded a weaker annual change in 2017 than in Throughout 2017, the annual change in dwelling values peaked in May 2017 at 10.4% and decelerated each month thereafter to be less than half that rate by the end of the year. Annual value growth was strongest over the year in Hobart (+12.3%) with Melbourne (+8.9%) the only other capital city to record an annual change in excess of 5%. Most capital cities other than Hobart and Melbourne recorded annual growth of less than 5% while Perth (-2.3%) and Darwin (-6.5%) have continued to see values fall on an annual basis. Sydney house values have increased by 2.1% over the past year compared to a 5.4% increase in unit values however, over the December quarter house values were -2.9% lower while unit values fell by - 0.4%. Over the past year, Melbourne house values have increased by 9.1% compared to a 8.4% increase in unit values and over the quarter house value growth (+0.6%) was lower than unit growth (+1.8%). Change in dwelling values, 12 months to December % 10% 8.9% 12.3% 5% 3.1% 2.4% 3.0% 4.9% 4.3% 3.8% 4.2% 0% -5% -2.3% -10% -6.5%

5 Housing Market House values in Brisbane increased by 3.1% over the 12 months to December 2017 while unit values fell by -1.2%, over the quarter the value of houses increased 0.5% while unit values fell by -0.6%. Over the 12 months to December 2017, Adelaide house values increased by 3.3% compared to a 0.5% increase in unit values while over the quarter house values rose 0.5% and unit values increased by 0.3%. Perth house values fell by -2.6% and unit values were -0.9% lower over the 12 months to December 2017 while over the quarter house values increased by 0.1% while unit values increased 0.4%. Values of houses in Hobart have increased by 12.9% and units by 9.1% over the past year while over the past quarter, house values were 3.0% higher and unit values rose by 3.4%. Throughout the 12 months to December 2017, Darwin house values fell by -5.3% compared to a - 8.4% fall in unit values while over the past quarter, house values were -2.4% lower and unit values were -4.0% lower. Over the past 12 months, Canberra house values have increased by 5.8% while unit values have increased by 2.1% and over the past quarter, houses increased by 1.5% and units fell by -0.6%. The housing asset class generated total returns of 8.1% over the past year Over the 12 months to December 2017, total property returns which factor in both capital growth and rental returns have been recorded at 8.1% split between 7.8% across the combined capital cities and 9.2% across the combined regional markets. Nationally, total returns over 2017 were lower than the 10.1% a year ago and well down from the peak throughout 2017 of 14.7% in May. Investors enjoyed double-digit returns from residential property over the past year in Melbourne and Hobart. All other capital cities except for Darwin recorded positive total returns over the year however, they were relatively moderate. Over the past five years, total returns nationally have been recorded at 11.2% p.a. while Sydney (14.7% p.a.) and Melbourne (13.1% p.a.) have generated much higher returns, returns in Perth (3.5% p.a.) and Darwin (1.5% p.a.) have been much lower. 20% 15% 10% 5% 0% -5% 6.3% Total returns over the 12 months to December % 12.1% 6.5% 7.4% 9.6% 9.2% 7.8% 8.1% 1.6% -1.3%

6 Housing Market Growth in Sydney and Melbourne over recent years has eclipsed all other capital cities Following a decline of -6.5% between June 2010 and February 2012, national dwelling values have increased by 40.7% since that time to December The chart below shows the increase in home values across the current phase in each capital city with Sydney and Melbourne recording a substantially higher level of growth than all other capital cities. Considering that Hobart has recorded the third highest rate of growth at just 30.8%, with most of that growth over the past two years, it is clear that this growth phase has been very much focused on Sydney and Melbourne. Outside of the two major capital cities and Hobart, values have increased by 20.7% in Brisbane, 16.6% in Adelaide and 15.8% in Canberra. Over the period, Perth has recorded a value increase of just 0.9% while Darwin values are % lower. Interest rates are usually named as the catalyst for such strong growth, but all cities have the same interest rates, yet Sydney and Melbourne have substantially outperformed all other capital cities. As we further dissect the housing market it is clear that demographics, investment concentrations and labour markets are a big driver of Sydney and Melbourne s strength. 80% 60% 40% 20% 0% -20% 70.8% Change in dwelling values over the current growth phase to December % 20.7% 16.6% 0.9% 30.8% -10.2% 15.8% 47.9% 17.9% 40.7% Since value falls in 2008 housing market growth conditions have been significantly skewed towards Sydney and Melbourne In 2008, during the financial crisis, capital city dwelling values fell by -7.9% between March 2008 and January 2009 but with lower interest rates and first home buyer stimulus dwelling values began to rise thereafter. As has been the case with the most recent growth phase, since the global financial shock it has been the two largest capital cities that have seen substantial value growth while other capital cities have recorded relatively moderate increases in values. The relative strength of the Sydney and Melbourne economies, strong migration into those cities and a relatively low supply of stock available for sale has supported this growth in dwelling values while these conditions have generally not been apparent in other capital cities. Since December 2008, Sydney and Melbourne dwelling values have almost doubled. All other capital cities except for Adelaide (21.4%), Hobart (35.0%) and Canberra (31.4%) have recorded cumulative value growth of less than 20% since the end of 2008 with Darwin values lower now than they were then. Change in dwelling values, January 2009 to December % 80% 60% 40% 20% 0% -20% 94.5% 90.2% 19.4% 21.4% 4.8% 35.0% -1.5% 31.4% 64.5% 21.7% 54.1%

7 Housing Market Overview Houses continue to show a premium over units across the country At the end of December 2017, the national median value of a house was recorded at $562,294 and the median unit value was $516,551, a gap of 8.9% When you split the results individually to the combined capital cities and combined regional markets the gap between house and unit values is wider in the capital cities (19.5%) and narrower in the regional markets (7.2%). Across the individual capital cities, the premium for houses over units is recorded at: 37% in Sydney, 45% in Melbourne, 38% in Brisbane, 38% in Adelaide, 19% in Perth, 27% in Hobart, 31% in Darwin and 55% in Canberra. In dollar terms the gaps between house and unit prices are recorded at: $284,182 in Sydney, $258,683 in Melbourne, $147,496 in Brisbane, $127,481 in Adelaide, $76,075 in Perth, $88,962 in Hobart, $112,091 in Darwin and $238,593 in Canberra. National Combined regions Combined capitals Canberra Darwin Hobart Perth Adelaide Brisbane Melbourne Sydney Median house and unit values as at December 2017 Settled sales transactions have continued to trend lower $516,551 $562,294 Units $337,049 $361,236 $580,485 $693,736 $431,048 $669,642 $356,992 $469,083 $335,289 $424,251 $408,488 $484,562 $331,325 $458,806 $383,752 $531,248 $574,052 $832,735 $774,124 Houses $1,058,306 $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 It is estimated that over the 12 months to December 2017 there were 471,917 settled dwelling sales nationwide. Compared to sales over the 12 months to December 2016, the number of transactions was - 4.8% lower. Annual sales are tracking 13.2% lower than the recent peak recorded over the twelve months ending August The combined capital cities recorded an estimated 296,916 settled sales over the year which accounted for 63% of total sales nationally. Capital city transactions were -6.4% lower over the past year than the previous year while regional market transactions were down -2.0%. Across the individual capital cities, the annual change in transactions was recorded at: -5.6% in Sydney, -11.2% in Melbourne, -8.2% in Brisbane, - 0.1% in Adelaide, +1.5% in Perth, +3.2% in Hobart, +2.5% in Darwin and -6.3% in Canberra. Note that these figures only count settled sales; offthe-plan sales will typically settle upon completion of the project, at that time these sales will be counted at their contract date. Given this, it is expected that recent years of sales activity will be revised higher once these settlements occur. 70,000 60,000 Monthly number of settled dwelling sales Monthly sales 6 month average 50,000 40,000 30,000 20,000 10,000 0

8 Housing Market Overview Discounting levels have been trending lower over recent years Vendor discounting measures the difference between the initial list price and the ultimate selling price of properties which sell by private treaty for less than their original list price. Vendors that sold their homes below the initial list price are currently discounting them by 5.6%. The current level of discounting across the individual capital cities is recorded at: 5.2% in Sydney, 4.3% in Melbourne, 5.64% in Brisbane, 5.7% in Adelaide, 7.9% in Perth, 5.6% in Hobart, 11.4% in Darwin and 3.3% in Canberra. Sydney and Darwin are the only capital cities in which discounting levels are higher over the year, up 0.1% and 2.9% respectively. 0% -1% -2% -3% -4% -5% -6% -7% -8% With advertised stock levels rising in Sydney, its likely discounting rates will see some upwards pressure though Combined capital cities vendor discounting levels -9% The length of time it takes to sell a home is slightly higher over the past year The days on market figure measures the average time from the first listing date to the contract date for properties sold by private treaty. Combined capital city homes are currently taking an average of 39 days to sell compared to 36 days at the same time a year ago. At an individual capital city level, the average days on market is recorded at 36 days in Sydney, 31 days in Melbourne, 55 days in Brisbane, 47 days in Adelaide, 58 days in Perth, 29 days in Hobart, 90 days in Darwin and 35 days in Canberra. The typical days on market has reduced over the past year in Adelaide (-3 days), Perth (-1 day), Hobart (-3 days), Darwin (-9 days) and Canberra (- 1 day). In Sydney, Melbourne and Brisbane homes are taking longer to sell than they were a year ago, up 6 days, 2 days and 10 days respectively. Combined capital cities days on market

9 Housing Market Overview Rental growth has accelerated over the past year despite high levels of housing stock additions Rental rates increased by 2.7% nationally over the 12 months to December 2017 with combined capital city rents 2.6% higher and combined regional market rents up 3.0%. Nationally, unit rents (+2.9%) have increased at a faster pace than house rents (2.6%) and this is reflected across the combined capital cities (2.9% vs. 2.4%) however, in the combined regional markets house rents (3.1%) have outperformed unit rents (2.5%). Although annual rental growth is higher now than it was a year ago, over recent months the rate of rental increase has slowed. It will be interesting to see whether supply additions over the coming months and years result in a further softening of rental growth. At an individual capital city level, the annual change in dwelling rents have been recorded at: +3.0% in Sydney, +4.3% in Melbourne, +0.2% in Brisbane, +3.1% in Adelaide, -2.5% in Perth, +9.4% in Hobart. -1.5% in Darwin and +4.9% in Canberra. 12% Annual change in national dwelling rents 10% 8% 6% 4% 2% 0% Gross rental yields have begun to firm due to rents increasing faster than dwelling values At the end of December 2017, the gross rental yield nationally was recorded at 3.6%, 3.3% across the combined capital cities and 4.9% across the combined regional markets. Houses (3.5%) have lower gross yields than units (4.1%) nationally as well as across the combined capital cities (3.1% vs. 3.9%) and combined capital cities (4.9% vs. 5.2%). Across Australia, gross rental yields have softened, with this easing trend evident across both the combined capital city and combined regional markets over the past year for houses and units. Throughout the individual capital cities, gross rental yields are currently recorded at: 3.1% in Sydney, 2.9% in Melbourne, 4.3% in Brisbane, 4.2% in Adelaide, 3.9% in Perth, 5.0% in Hobart, 5.9% in Darwin and 4.4% in Canberra. Gross rental yields are currently lower than they were a year ago across most capital cities, the exceptions are Sydney and Darwin. With rental growth remaining firm in most areas and value growth slowing we expect to see some further increases in yields over the coming year. 4.9% 4.7% 4.5% 4.3% 4.1% 3.9% 3.7% 3.5% Gross rental yields, National

10 Copyright 2018 RP Pty Ltd trading 2017 as CoreLogic Asia Pacific (CoreLogic) and its licensors are the sole and exclusive owners of all rights, title and interest (including intellectual property Quarterly Review Data September

11 Mortgage Lending New finance commitments to investors are well down on their recent highs, but remain at historically elevated levels There was $33.5 billion in housing finance commitments in November 2017 to Australian lenders. The total value of housing finance commitments increased by 2.3% in November 2017 and was 0.8% higher year-on-year. The $33.5 billion in commitments was split between $21.3 billion to owner occupiers and $12.2 billion to investors. The value of owner occupier housing finance commitments increased by 2.7% over the month and was 6.9% higher year-on-year. Finance commitments to investors increased by 1.5% in September however, they were -8.3% lower year-on-year. The ongoing changes to lending policies for investors has led to waning demand in this segment however, stamp duty concessions in NSW and Vic for first home buyers and low interest rates has supported demand from the owner occupier segment. $25 $20 Monthly value of housing finance commitments, National Owner occupier Investor Billions $15 $10 $5 $0 The value of lending to owner occupiers has increased for four consecutive months In November 2017, the $21.3 billion in owner occupier housing finance commitments was split between: $2.0 billion for construction of dwellings, $1.2 billion for purchase of new dwellings, $6.2 billion for refinancing of established dwellings and $11.9 billion for purchase of established dwellings. Owner occupier lending has been rising on the back of increases in lending for all sectors over the past year except for refinances. Year-on-year, finance commitments were higher for construction of dwellings (+9.3%), purchase of new dwellings (+15.3%) and purchase of established dwellings (+11.4%) while they were lower for refinancing of established dwellings (-2.8%). $14 $12 $10 Monthly value of owner occupier housing finance commitments by type Construction of dwellings Purchase of new dwellings Refinance of established dwellings Purchase of established dwellings Billions $8 $6 $4 $2 $0

12 Mortgage Market Lending to investors is well below its peak but significantly higher than long-term levels In November 2017 there was $12.2 billion in housing finance commitments to investors, consisting of $1.4 billion for construction of dwellings and $10.7 billion for established housing. Both lending for construction of dwellings and established housing rose over the month (+13.4% and +0.1%) however, commitments for construction were higher over the year (+18.9%) while established housing was lower (-11.0%) The value of investor housing finance commitments had been easing on the back of higher mortgage rates to investors and other policy constraints restricting lending to this segment. As at November 2017, the value of investor housing finance commitments was -16.7% below its historic peak. Although the value of lending to investors has fallen, investors accounted for 44.6% of the total value of new finance commitments (excluding refinances) in November which was well above the long-run average share of 34.2%. New South Wales and Victoria have seen heightened levels of investor borrowing over recent years with New South Wales much higher than Victoria s level, and the recent increases in mortgage rates to investors, as well as tighter lender credit policies, are most likely to impact on demand within those markets where investors have been most active. Billions $16 $14 $12 $10 $8 $6 $4 $2 $0 Monthly value of investor housing finance commitments by type Construction of dwellings Purchase of established dwellings Owner occupier first home buyer finance commitments hit their highest volume since December 2009 Data on owner occupier housing finance commitments to first home buyers shows that there were 11,091 commitments in November Not only was the number of first home buyer housing finance commitments the greatest since December 2009, they accounted for 18.0% of all owner occupier commitments, the highest proportion since October A big driver of the rebounding first home buyer numbers has been the removal of stamp duty for first home buyers under certain price thresholds in NSW and Vic from July 1, Comparing the number of first home buyer commitments between June and November 2017 shows November 2017 volumes were 77% higher in New South Wales and 49% higher in Victoria. 20,000 Monthly number of owner occupier first home buyer finance commitments 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

13 Mortgage Market Owner occupier average loan sizes have only slightly increased over the year The average new mortgage size to owner occupiers was recorded at $388,900 in November Average mortgage sizes have increased over each of the past three months and they are 3.3% higher yearon-year. First home buyer average loans sizes are $327,100 and have increased by 1.0% over the year Non-first home buyer average loan sizes sit at $402,500 and have increased by 4.5% year-on-year. $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Average owner occupier loan size, monthly The majority of owner occupiers take out a variable rate mortgage, but fixed rates have risen in popularity Housing finance data reveals that in November 2017, 15.8% of owner occupier mortgage commitments were for fixed-rate loans. At its absolute peak, in March 2008, approximately one quarter of mortgages were on a fixed rate. Variable rate mortgages are clearly preferred by Australian owner occupiers, again this data is not published for investors. The rising proportion of new mortgages on a fixed rate is likely reflective of the uncertainty which has been created by ongoing mortgage repricing over recent months and likely a growing acceptance that the interest rate cycle has bottomed out. The majority of mortgages being on a variable rate means that when the RBA change the cash rate setting or lenders adjust mortgage rates, it has an almost immediate impact on household finances. 30% 25% 20% 15% 10% 5% 0% Monthly proportion of new mortgages on a fixed rate home loan Interest-only lending is comprising a much smaller proportion of new mortgages The Australian Prudential Regulation Authority (APRA) reported that over the September 2017 quarter there was $ billion in new interest-only mortgage lending. The $ billion in new interest only lending was the lowest quarterly value of new originations since the March 2009 quarter. The $ billion of new lending for interest-only purposes represented an historic low of 16.9% of total new lending and is much lower than its peak of 45.6% of lending in June APRA has regulated that lenders can t lend more than 30% of total new lending to interest-only purposes. Given this the December data will be interesting to see whether the proportion of interest-only lending rebounds closer to this threshold or remains at the current much lower level. Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Quarterly value of new interest-only mortgages Source: CoreLogic, APRA

14 Mortgage Market Average outstanding mortgage balances rose by 4.3% over the year to September 2017 At the end of the September 2017 the average outstanding mortgage balance sat at $264,300 which was 4.3% higher over the year. Interest-only mortgages had the highest average outstanding amount at $347,000, up 3.1% over the year but slightly lower over the quarter. Mortgages with an offset facility also had an above average outstanding amount ($314,100) having risen by 1.6% over the past year but also slightly lower over the quarter. The average outstanding balance on a reverse mortgage has increased by 5.3% over the past year to $103,000. Low-documentation mortgages had an average outstanding balance of $195,200 which has increased by 2.3% over the past year. Other non-standard mortgages have seen their average outstanding balances fall by -1.3% over the year to $186,800 at the end of September While outstanding mortgages amounts are edging slightly higher they remain substantially lower than current prices indicating that, on average, mortgagees have significant equity in their properties. $270,000 $260,000 $250,000 $240,000 $230,000 $220,000 $210,000 $200,000 $190,000 $180,000 $170,000 Average outstanding mortgage balance Source: CoreLogic, APRA The value of lending with a loan to value ratio (LVR) above 90% is the lowest since March 2011 According to APRA there was $ billion in new mortgage lending over the September 2017 quarter. $27,595 billion worth of new mortgage lending over the quarter was for loans with an LVR of 60% or less which accounted for 28.1% of all new mortgage lending for the quarter, its highest share since December Loans with an LVR of between 60% and 80% accounted for 51.3% of all new lending over the quarter at $ billion. An historic high 79.4% of new mortgages over the quarter had an LVR of less than 80%. 13.8% of lending over the quarter was for loans with an LVR of between 80% and 90%, at a total of $ billion. Just $6.676 billion was lent for mortgages with an LVR of more than 90% over the September 2017 quarter which was its lowest value since March 2011, and these mortgages accounted for an historic low 6.8% of new lending over the quarter. With fewer new mortgages being written with high LVRs it reflects the more conservative approach to mortgage lending being taken by lenders. Mortgages with LVRs above 80% also typically incur lenders mortgage insurance (LMI) and a reduction in higher LVR lending likely indicates reduced demand for this product. 60% 50% Proportion of total new mortgage lending by loan to valuation ratio band Less than 60% 60% to 80% 80% to 90% Greater than 90% 40% 30% 20% 10% 0% Source: CoreLogic, APRA

15 Mortgage Market Housing credit growth has slowed largely due to a slowing of investor credit The total value of outstanding mortgage credit, according to the RBA, was $1.715 trillion in November 2017 with the value outstanding having almost doubled over the past decade. Housing credit advanced by 0.4% in November 2017 with investor credit (0.4%) advancing at a slower pace than credit to owner occupiers (0.5%). Monthly housing credit data shows that credit growth has been slowing recently for investors and has been relatively steady for owner occupiers. Over the 12 months to November 2017, housing credit has advanced by 6.4% with owner occupier credit increasing by 6.3% and investor credit up by 6.5%. The slowdown in credit growth is commensurate with higher mortgage rates for investors and an overall slowing of the rate of growth in dwelling values over recent months. 35% 30% Owner occupier Annual change in total housing credit, National Investor 25% 20% 15% 10% 5% 0% Source: CoreLogic, RBA Residential Real Estate Underpins Australia s Wealth Number of dwellings 9.9 million Outstanding mortgage debt $1.72 trillion Household wealth held in housing 52.2%, RBA, ASX Total sales p.a. 471,917 Gross value of sales p.a. $298.3 billion

16 Quarterly Review September 2017

17 Housing Supply Approvals for units have come roaring back with November 2017 one of the largest months on record for unit approvals There were 21,055 dwellings approved for construction nationally in November The number of approvals increased by 11.7% over the month to be 17.1% higher year-on-year however, they were -5.4% lower than in August 2016 which was the peak in approval numbers. The 21,055 approvals in November were split between 9,849 houses and 11,206 units. higher than they were a year ago. The chart below highlights that unit approvals tend to be much more volatile than houses. Looking at annual data, approvals are much lower over the year in Sydney (-9.3%), Brisbane (- 19.9%), Perth (-11.7%), Darwin (-51.9%) and Canberra (-21.8%) and are higher in Melbourne (5.7%), Adelaide (1.8%) and Hobart (37.0%). House approvals were -2.8% lower over the month but 1.2% higher year-on-year while unit approvals increased by 28.7% over the month and are 35.8% It remains to be seen how many of these approved new properties will be built given slowing housing market conditions. 14,000 12,000 10,000 Houses Monthly dwelling approvals, National Units 8,000 6,000 4,000 2,000 0 Dwelling commencements have eased from their peak but rose over the September 2017 quarter 54,927 dwellings commenced construction over the September 2017 quarter which was 0.7% greater than over the previous quarter but -3.3% lower compared to the September 2016 quarter. In terms of commencements for new construction, there were 28,101 new houses and 26,528 new units which commenced construction. New house commencements were -3.4% higher over the quarter and -5.3% lower year on year while new unit commencements increased by 5.9% over the quarter but were -1.0% lower year-on-year. Throughout the states and territories commencements were lower relative to the same quarter last year in NSW, Qld and WA and were higher elsewhere Despite a quarterly increase in commencements given that dwelling approvals remain below recent peak levels it seems unlikely that commencements will rebound to their previous highs. 40,000 35,000 Houses Quarterly dwelling commencements, National Units 30,000 25,000 20,000 15,000 10,000 5,000 0

18 Housing Supply Dwelling completions continue to trend slightly lower Over the September 2017 quarter there were 52,901 dwelling completions which was -0.9% lower than the previous quarter but 3.9% higher than the September 2016 quarter. The data consisted of 28,417 new house completions which were 0.9% higher over the quarter and 1.9% higher year-on-year. There were 24,011 new units completed over the September 2017 quarter which was -3.5% lower than the previous quarter and 7.0% higher than the previous year. Across the states and territories completions were higher over the year in NSW, Vic and ACT but lower elsewhere with WA and NT recording the most substantial falls. There remains a substantial number of dwellings under construction which should ensure that completions continue to remain elevated for some time. 35,000 Quarterly dwelling completions, National 30,000 25,000 20,000 15,000 10,000 5,000 0 Houses Units The volume of stock under construction returns to near record-high levels There were 219,741 dwellings under construction at the end of September 2017 consisting of: 65,542 new houses, 151,950 new units and 2,294 existing dwellings. The number of new houses under construction rose by 2.9% over the quarter and are 35.4% higher than their long-term average. The number of new units under construction was 0.4% higher over the quarter and 285.0% higher than its long-term average. Dwelling approvals have increased over recent months while commencements remain fairly steady which should result in heightened volumes of dwellings under construction over the coming quarters Across the individual states the data shows that while the number of dwellings under construction has started to fall, noticeably so in Vic and Qld, in NSW the number of units under construction has continued to climb. The heightened level of unit construction in particular will take a number of years to work its way through to completion. Quarterly number of dwellings under construction, National 180,000 Houses Units 160, , , ,000 80,000 60,000 40,000 20,000 0 Sep-87 Sep-92 Sep-97 Sep-02 Sep-07 Sep-12 Sep-17

19 Housing Supply A high number of dwellings approved for construction are not progressing to commencement There was 37,792 dwellings approved for construction which had not yet commenced nationally at the end of the September 2017 quarter which was -2.6% lower than the number over the previous quarter. This figure consisted of 10,801 new houses awaiting commencement and 26,324 new units not commenced. The number of houses not yet commenced has trended higher over the past four quarters and is now at its highest level since September 2012 while the number of yet to be commenced units has fallen over the past two quarters and is at its lowest level since March Despite a recent fall, the number of new units which have not yet commenced remains elevated compared to historic averages and with approvals surging between September and November it will be interesting to see next quarter just how many of the units which have been approved actually progress through to the commencement phase. NSW currently has its fewest dwellings awaiting commencement since September 2015 and dwellings awaiting commencement in Vic are the lowest since June In Qld, where concerns around a unit oversupply are most prominent, dwellings awaiting commencement are at their highest volume since June ,000 35,000 Quarterly number of dwellings approved for construction but not commenced, National Houses Units 30,000 25,000 20,000 15,000 10,000 5,000 0

20 Demographic Overview The annual rate of national population growth has steadied recently It was estimated that at the end of the June 2017 quarter, the national population was 24,598,933 persons. Australia s population increased by 1.6% or 388,124 persons over the 12 months to June While net overseas migration has accelerated, natural increase has slowed 2.5% 2.0% 1.5% 1.0% 0.5% Annual change in national population 0.0% Net overseas migration is the main driver of the strong rate of population growth Population growth nationally is comprised of net overseas migration as well as the natural increase in the population (births minus deaths). Statebased migration also includes net interstate migration which cancels out at a national level. Net overseas migration was recorded at 245,408 persons over the 12 months to June 2017 which was 27.1% higher than at the same time in 2016 and at its highest level since December Natural increase fell by -7.5% over the year and was recorded at 142,716 persons. The national rate of annual population growth peaked at 2.2% in December 2008 when the population increased by 459,504 persons over the quarter, of which net overseas migration was recorded at 315,687 persons. Although the rate of population and overseas migration has slowed relative to the 2008 peak, it remains elevated and is much higher than in most other developed countries throughout the world. 350, ,000 Components of annual population change, National Natural increase Net overseas migration 250, , , ,000 50,000 0 Victoria remains the population growth powerhouse of the nation The population of New South Wales increased by 1.6% or 121,794 persons over the 12 months to June The annual population increase was 8.9% higher over the year and slightly lower than its record high. Victoria s population increased by a nation-leading 2.3% over the 12 months to June 2017 with the population increasing by 144,357 residents over the year. The total change in population over the year was -1.3% lower than over the previous year. With an increase of 79,580 persons over the year to June 2017, Queensland s population increased by 1.6% over the year. The 79,580 person increase in population was the greatest annual population increase for the state since September 2013 and 23.4% higher than the population increase a year earlier. South Australia s population increased by 10,494 persons over the 12 months to June 2017 resulting in a population growth rate of 0.6%. The 10,494 person increase in population was slightly higher than the previous quarter but -6.4% lower than over the previous year. The population of Western Australia increased by 21,403 persons or 0.8% over the past year. Although Western Australia is seeing an historically slow rate of population growth, the state s annual change in population lifted (from a low base) by 45.8% over the past year.

21 Demographic Overview The Tasmanian population increased by 3,289 persons or 0.6% over the 12 months to June The 3,289 increase was the greatest annual population increase since December Northern Territory s population increased by 0.1% or 365 persons over the 12 months to June 2017, a -53.0% decline on the increase a year earlier. In the Australian Capital Territory, the rate of population growth was recorded at 1.7% over the past year resulting in an increase in population of 6,833 persons. 160, , , ,000 More than three quarters of net overseas migration has been into NSW or Vic 80,000 60,000 40,000 20,000 0 Change in population over the 12 months to June 2017 NSW VIC QLD SA WA TAS NT ACT Most of those people immigrating to Australia continue to choose to settle in either NSW or Vic with net overseas migration over the past year recorded at record highs of 98,570 persons in NSW and 86,901 persons in Vic. NSW accounted for 40.2% of net overseas migration nationally and Vic accounted for 35.4%, if you add in the 12.7% in Qld, the three most populous states accounted for 88.3% of national net overseas migration. With net overseas migration of 98,570 persons over the past year, New South Wales recorded its greatest volume of net overseas migrants on record and the number was 31.4% higher compared to the previous year. The net overseas migration of 86,901 persons into Victoria over the past year was the greatest number on record and 23.1% higher than the previous year. Queensland s net overseas migration was recorded at 31,148 persons over the past year which was 44.3% higher than the number of overseas migrants at the same time a year earlier and the highest number since March Over the past year there were 10,497 net overseas migrants to South Australia which was 4.6% higher than the number a year earlier. Net overseas migration to Western Australia is well below historic peaks however, the 13,101 net migrants to the state over the past year was 7.9% higher than over the previous year. Net overseas migration for Tasmania was recorded at 1,461 persons which was 30.0% higher than a year earlier and its highest annual number since June The 923 net overseas migrants to the Northern Territory over the past year was 58.0% higher than the number over the previous year but still well down on recent levels. The Australian Capital Territory had net overseas migration of 2,801 persons over the past year which was 42.9% higher than the number over the previous year. 120, ,000 Annual number of net overseas migrants by states and territories NSW Vic Qld SA WA Tas NT ACT 80,000 60,000 40,000 20, ,000

22 Demographic Overview Queensland now leads the pack in terms on net interstate migration over the past year The net outflow of New South Wales residents to other states and territories was recorded at 14,859 persons over the past year, its greatest decline since March Victoria recorded a net gain from interstate migration of 17,182 persons which is slightly down on its historic high level of gain the previous quarter however, it is 2.9% greater than over the previous year. Net interstate migration to Queensland was recorded at 17,426 persons over the past year, its greatest increase since December 2008, 50.5% higher than over the previous year and now the nation s leading state for net interstate migration. South Australia recorded a loss of 5,941 persons over the past year due to net interstate migration which was lower than over the previous quarter as well as being lower than the net loss of 6,398 residents a year earlier. After annual net interstate migration peaked at 11,425 persons in September 2012, Western Australia has recorded a loss of 11,722 residents over the past year, which is a slightly lower net loss than the record-high annual loss over the previous quarter. Net interstate migration to Tasmania saw a net gain of 741 residents over the past year, which was its strongest net inflow since September The net loss of 3,490 residents from the Northern Territory over the past year was its greatest outflow on record. The Australian Capital Territory has recorded a net inflow of residents from other parts of the country of 663 persons, which is slightly lower over the quarter. 60,000 Annual number of net interstate migrants by states and territories NSW Vic Qld SA WA Tas NT ACT 40,000 20, ,000-40,000-60,000

23 Household Finances Mortgage rates have been lifted despite the cash rate holding at record lows At their December 2017 meeting, the RBA kept the official cash rate on hold at 1.5%. For an owner occupier, average mortgage rates are currently recorded at: 5.20% for a standard variable mortgage, 4.5% for a discounted variable mortgage and 4.10% for a three year fixed rate. For investors, current average mortgage rates are: 5.80% for a standard variable mortgage, 5.10% for a discounted variable mortgage and 4.45% for a three year fixed mortgage. Mortgage premiums for investors have only been in place for slightly more than two years and were introduced in response to the heightened level of purchasing by this market segment. Investors on variable mortgage rates are now typically paying 60 basis points more than owner occupiers (and premiums are even greater for interest-only mortgages) which is a significant contributor to the slowing mortgage demand. 15% Mortgage rates for owner occupiers over time Standard variable Discounted variable 3 year fixed 13% 11% 9% 7% 5% 3% Source: CoreLogic, RBA Gross household and housing debt continues to rise to new record highs The national ratio of household debt to disposable income was recorded at 199.7% in September 2017, up from 199.3% the previous quarter and 191.3% a year earlier. The 199.7% ratio of household debt to disposable income is largely made up of housing debt which has a record-high ratio of 137.5% up from 136.8% the previous quarter and 131.7% a year earlier. Of the 137.5% ratio of household debt to disposable income, 104.7% of the 136.4% is owner occupier debt (also a record-high) leaving 33.8% to investors. Although household and housing debt is at historic high levels, the ratio of total interest payments to disposable income sits at 8.8% for total debt and 7.2% for housing debt, both of which have edged slightly higher of late yet also indicating that lower interest rates have improved serviceability which is at levels last seen in early The high level of housing and household debt makes households much more sensitive to any changes in mortgage rates. Also remember that this is a national view; home owners that have had their mortgage for many years are likely to be in a stronger position while recent buyers may be in much higher levels of debt. 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Ratio of household and housing debt to disposable income, National Household Housing Source: CoreLogic, RBA

24 Household Finances While housing and household debt are at record highs, the ratio of household and housing assets to disposable incomes is also at near record highs As at the end of the September 2017 quarter, the ratio of household assets to disposable income was recorded at 952.1% and the ratio of housing assets to disposable income was recorded at 521.8% A year earlier these ratios were recorded at 900.6% for household assets and 486.0% for housing assets, indicating that asset values have risen at a faster pace than debt. It is undeniable that households are heavily indebted, largely due to housing however, the macro view is that these assets have a significantly higher value than the debt held against them. Of course the macro view does not show what is occurring in individual properties or locations, households that have recently taken out large debt (such as a mortgage) and those who own homes where values have fallen over recent years are likely to be in a much weaker position than these figures indicate. Furthermore, were asset values to start falling it is unlikely that the debt would decline at an equivalent rate. 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% Ratio of household and housing assets to disposable income Household Housing Source: CoreLogic, RBA Annual wage growth has increased slightly but wage rises remain sluggish The ABS wage price index showed that over the 12 months to September 2017, wages increased by 2.0%, slightly higher than their historic low of 1.9%. Separating the data into private and public sector wages shows that private sector wages increased by 1.9% over the year and public sector wages were 2.4% higher. The ABS has been producing this dataset since late 1997 and the growth in wages for both the private and public sector is only slightly above historically low levels. Lower wages growth impacts on a household s ability and willingness to spend more, particularly on items such as rent and other non-essential spending. The low rate of growth in wages appears to have not had any impact on the growth in dwelling values, but is likely a key driver of weak retail spending and a softening in household saving and increasing indebtedness. 6% 5% Annual change in wage price index, public and private sector, National Private sector Public sector 4% 3% 2% 1% 0%

25 National Accounts The Australian economy grew by 0.8% over the second quarter of the year The national economy expanded by 0.6% over the September 2017 quarter to be up 2.8% over the year. The 2.8% annual increase is up from 1.9% the previous quarter but remains below long-term average levels. Per capita GDP rose by 0.2% over the quarter to be just 1.3% higher over the year highlighting that headline GDP is expanding more rapidly than it is for individuals. Nominal (or inflation adjusted) GDP rose by 0.6% over the September 2017 quarter to be 4.5% higher over the year. The total output of the national economy over the 12 months to June 2017 was $1.706 trillion. Australia has now seen the longest period without a recession on record (defined as consecutive quarters of GDP decline) for a developed country. 10% 8% 6% 4% 2% 0% -2% -4% Quarterly and annual change in GDP Quarterly Annual Private capital formation and exports drive the GDP expansion over the September 2017 quarter Over the September 2017 quarter, the percentage point contributions to GDP growth were: +0.0% from government expenditure. +0.1% from household expenditure, +0.9% from private capital formation, -0.4% from public capital formation, +0.2% from inventories, +0.4% from exports and -0.4% from imports. Looking at the annual change in the value of these components: government expenditure rose 2.4%, household expenditure rose 2.2%, private capital formation rose 4.6%, public capital formation rose 12.2%, exports increased by 6.4% while imports increased by 7.7%. 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% Contributions to quarterly change in GDP, September 2017 quarter 0.0% Public consumption 0.1% Private consumption 0.9% -0.4% Private capital Public capital formation formation 0.2% 0.4% -0.4% Inventories Exports Imports Private capital formation and exports drive the GDP expansion over the September 2017 quarter According to data in the National Accounts, the household saving ratio was recorded at 3.2% over the September 2017 quarter. The household saving ratio has now been below 10% for 21 consecutive quarters. Given that interest rates, are so low, as are riskfree returns, it is little surprise to see that households are saving less and are increasing borrowings however, sluggish wage growth is probably also contributing to households saving less. 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Household saving ratio, National -4% Sep-82 Sep-87 Sep-92 Sep-97 Sep-02 Sep-07 Sep-12 Sep-17