Outlook for the Australian Property Market OCTOBER This overview is produced by PMI in conjunction with BIS Shrapnel.

Transcription

1 Outlook for the Australian Property Market OCTOBER 2007 This overview is produced by PMI in conjunction with BIS Shrapnel.

2 Darwin Brisbane Perth Adelaide Sydney Canberra Melbourne Hobart DISCLAIMER The information contained in this publication has been obtained from BIS Shrapnel and does not necessarily represent the views or opinions of PMI Mortgage Insurance Ltd ( PMI ). 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 PMI 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 the specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgement. Recipients should obtain their own appropriate professional advice. Neither PMI or its related parties 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 PMI s prior written consent.

3 Contents Welcome and Introduction 2 Executive Summary 4 Economic Outlook 8 Residential Demand 12 Home loan activity Owner occupier loan activity 13 Investor loan activity 14 Demand and Supply 15 Rentals 16 Trends in Migration Net overseas migration 17 Net interstate migration 19 Sydney State of play and Forecast 22 Melbourne State of play and Forecast 24 Brisbane State of play and Forecast 26 Adelaide State of play and Forecast 28 Perth State of play and Forecast 30 Hobart State of play and Forecast 32 Darwin State of play and Forecast 34 Canberra State of play and Forecast 36 Tables 1: Median house prices by capital city 5 2: Economic indicators 9 3: Number of home loans approved for owner occupation -% change on previous year 13 4: Number of loans to first home buyers 13 5: Total residential home loan activity 15 6: Deficiency of stock and building activity 16 7: Annual rental growth and vacancy rates 17 8: Net overseas migration 18 9: Australian population estimates 18 10: Net interstate migration 20 Charts 1: Proportion of residential loans attributable to investment property 15 2: Sydney dwellings: Prices and Activity 23 3: Melbourne dwellings: Prices and Activity 25 4: Brisbane dwellings: Prices and Activity 27 5: Adelaide dwellings: Prices and Activity 29 6: Perth dwellings: Prices and Activity 31 7: Hobart dwellings: Prices and Activity 33 8: Darwin dwellings: Prices and Activity 35 9: Canberra dwellings: Prices and Activity 37 New ways of thinking

4 Welcome and Introduction Welcome to the PMI residential Property Overview for As an organisation we ve used our industry knowledge and our relationship with leading property forecaster BIS Shrapnel over a number of years to provide you with the latest market information. I trust you find this information of value, that it will assist your understanding of the market and will enable you to further grow your business. If I or anyone on the PMI team can be of further assistance to you, please do not hesitate to contact us at info@pmigroup.com.au Ian Graham Chief Executive Officer 02

5 The PMI Residential Property Overview and Quarterly Updates produced in conjunction with key forecaster BIS Shrapnel are designed to provide you with an overview of current property market trends in Australia. These reports are just one of our range of Online Business Tools available on our website designed to help you grow your business. PMI Mortgage Insurance Ltd PMI is embracing new ways of thinking by providing you, our customer with the highest level of service and simple product solutions every time. Since we were established in 1965, PMI Mortgage Insurance Ltd (PMI) has always looked beyond, with the view of doing more to help our customers to build a successful business. For over four decades our proactive approach and innovative products and services have ensured PMI has maintained its enviable reputation as a leading mortgage insurer, credit enhancer and residential property market specialist. We help manage and reduce the risk for our customers with cutting edge solutions developed through our new ways of thinking, giving them the confidence to grow their businesses. PMI is a global organisation with our parent company, The PMI Group, Inc., headquartered in California. Together we are one of the largest private mortgage insurers in the United States, Australia, New Zealand, Europe and the largest mortgage guarantee reinsurer in Asia. Our size and strength means we think globally, but our dynamic can-do attitude drives us to act locally. We are constantly developing new and innovative products and services tailored to the local market and our customers, which range from banks, building societies and credit unions, to securitised funders and mortgage managers. For further information on PMI visit BIS Shrapnel BIS Shrapnel has an unrivalled reputation for its independent analysis and forecasting of property markets around Australia. Their strength lies in their forecasting and assessment methodologies, and in the depth of their analysis and understanding in the areas of both supply and demand in the property market. The property team produces a large number of highly regarded multi-client research and forecasting reports covering all the major property classes, including residential, commercial, industrial and retail. BIS Shrapnel also regularly complete customised research projects for private clients in all areas of the market, including investors, investment managers, developers, government and property users. Their aim is to help clients make the best decisions possible by utilising the available data and transforming it into a value added research solution. For further information regarding BIS Shrapnel visit New ways of thinking 03

6 Executive Summary The residential markets across most of Australia s capital cities in 2006/07 were characterised by a modest recovery in prices. After declines or modest growth in 2004/05 and 2005/06, price growth picked up in Melbourne, Brisbane, Adelaide, Hobart, and Canberra in 2006/07. Conditions continued to be weak in Sydney, with a further decline in the median house price, while the boom markets of Perth and Darwin showed signs of slowing. Affordability remains an issue. Interest rate increases totalling 0.75% in 2006 continue to place a strain on households at the margins. While growth in the median house price has been apparent in the eastern states (with the exception of Sydney), this does not reflect the weaker conditions in many of the outer suburban areas, where households are more highly geared and influenced by interest rate rises. Strong economic conditions in 2007/08 are expected to support continued price growth in most capital city residential markets. The favourable economic conditions have created strong wage growth and record levels of net overseas migration, which should drive stronger underlying demand at the national level, while keeping unemployment at long term low levels. Strong economic conditions in 2007/08 are expected to support continued price growth in most capital city residential markets However, a 0.25% rise in interest rates (due to the strong economy maintaining wages and inflationary pressure) in August 2007 has continued to deteriorate home affordability. Also, with the Reserve Bank of Australia (RBA) maintaining a tightening bias toward interest rates, aspiring home buyers are likely to delay their purchase or seek more affordable housing. Although we expect further house price growth in 2007/08, the rate of growth will consequently ease slightly from 2006/07 levels, while declining in Perth, and showing minimal rises in Sydney and Darwin. 04

7 Table 1: Median house prices by capital city Quarter ended Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin June $'000 % Var $'000 % Var $'000 % Var $'000 % Var $'000 % Var $'000 % Var $'000 % Var $'000 % Var Forecast Source: R.E.I.A, BIS Shrapnel Economic growth is likely to begin slowing toward the end of 2008/09, as the boom in resources investment begins to taper off (although it remains at a high level). Together with a forecast interest rate rise in the first quarter of 2008, this will have a further moderating effect on price growth during the year. However, solid underlying demand across the board, and a deficiency of dwelling stock in all markets, is expected to maintain upward pressure on prices. The economic slowdown is forecast to also prompt a loosening of monetary policy in 2009/10, which could support further price growth. It is expected that the residential markets in Perth and Darwin will be most affected by the decline in mineral investment during the forecast period. Affordability issues have already come to the fore in Perth as first home buyer demand has weakened considerably, and the median house price fell in June quarter Darwin also appears to be heading toward an affordability threshold. As a result, house values in Perth are projected to decline by 5% in the three years to 2009/10, while Darwin is anticipated to see a fall of 1.2% during the same period. However, in the other capital cities, a projected 0.25% fall in interest rates over 2009/10 is likely to improve affordability and promote activity. House price growth in 2009/10 is forecast to increase in Sydney, Melbourne and Canberra, while remaining solid in Brisbane, Adelaide and Hobart. After median house prices rose by a substantial 52% between June 2001 and June 2004, affordability in Sydney reached a challenging level. This has resulted in a correction in the Sydney market with the median house price declining by 4% over 2004/05, and falling slightly further in 2005/06 and 2006/07 to reach $525,500 by June With interest rates rising by 0.25% in August 2007, and the likelihood of another rise before the end of the 2007/08 financial year, growth in Sydney s median house price is likely to be limited. However, the decline in new dwelling construction means that a substantial deficiency of dwellings is emerging, reflected by strong rental growth and improvement in yields. These pressures are expected to ultimately feed through to house price growth from 2008/09. The median house price is projected to increase to $575,000 in June 2010, which represents growth of 8.5% in the two years to 2009/10. The affordability measure for Melbourne has remained relatively steady since 2000, suggesting that the recent New ways of thinking 05

8 rises in interest rates have been offset by wages growth. House price rises have eased since 2001/02, culminating in a decline of just over 1% in 2004/05. After increasing by 3% in 2005/06, Melbourne s median house price rose by 13% in 2006/07 to $420,000 at June 2007, on the back of solid price growth for the more expensive Inner and Middle Melbourne suburban homes, which are less likely to be highly geared and therefore less influenced by rising interest rates. Although this growth, plus the four interest rate rises since May 2006, has reduced affordability, stronger underlying demand and a rising stock deficiency are placing upward pressure on prices. As a result, Melbourne is projected to witness solid annual rises in house prices, with total growth over the next three years of 19%, which should see the median house value reach $500,000 by June Although a significant stock deficiency continues to exist across Queensland, house prices in Brisbane appear to have reached their affordability limits after growth of 92% in the median house price between June 2001 and June Growth in the median house price slowed to 2.5% during 2004/05, before rising slightly to 4% in 2005/06. However, Brisbane s booming economy continues to support strong wages growth, underpinning higher demand. After two years of moderate price rises, more sizeable house price growth returned, with the median house price increasing by 12% in 2006/07 to $366,300 in June The strong economic and residential environment is projected to continue in the forecast period. Combined with substantial underlying demand and a significant stock deficiency, Brisbane is forecast to experience the strongest growth in median house prices of the capital cities. House price growth is forecast to be 9% in 2007/08 and 8% in 2008/09, before easing to 6% in 2009/10 a total of 26% over the three years. After increasing by 85% from 2001 to 2005, growth in Adelaide s median house price slowed, although not to the extent seen in the eastern capital cities. House prices rose by a moderate 4% in 2005/06, before increasing by a solid 8% in 2006/07 to $310,000 at June Nevertheless, Adelaide s median house price remains the most affordable of the mainland capitals. Higher overseas migration, creating increased demand and a larger stock deficiency, is forecast to underpin continued growth, with prices expected to rise by 10% in 2007/08. Price growth is then forecast to ease in the following two years to 2009/10, although still remain solid at 6% in both years. This represents a total rise of 23% over the three years to June Perth s median house price continued to increase up to 2006/07. Attractive affordability up until 2004/05 and a booming economy created strong wages growth and higher net migration inflows, which in turn strengthened demand for residential property. Perth s median house price showed compound growth averaging 18% per annum (or 169% total growth) between June 2001 and June 2007, rising from $165,700 to $446,500. However, the substantial increase in prices, combined with the rises in interest rates during that time, have caused 06

9 affordability to weaken to long term low levels. This has been evident in the decline in new lending activity in 2006/07, particularly to first home buyers. Affordability issues are expected to continue affecting price growth going forward, with house prices forecast to decline by 5% in the forecast period. Indeed, although the annual increase in the Perth median house price was 12% in 2006/07, Perth experienced a decline in its median house price in June quarter 2007, which reflects the challenging affordability at current prices. Median house price growth of 94% in Hobart over the two years to June 2004, was driven by increased demand from a high net interstate migration inflow. With interstate migration reverting back to almost zero in 2004/05, price growth slowed to 3% in the year. However, house prices in Hobart have accelerated over the last two years, growing by 6.5% in 2005/06 and 12% in 2006/07 to reach $310,000 at June Growth is forecast to remain moderate at between 4% and 5% in each of the three years to 2009/10. Canberra s median house price declined by 5% in 2004/05 to $352,500 at June 2005, as strong price growth in previous years deteriorated affordability, which in turn adversely affected prices. However, price growth rebounded in 2005/06, increasing by 8% to $380,100 at June 2006, and by 13% in 2006/07. Growth in Canberra s house price is forecast to mirror that of Melbourne s in the three years to 2009/10, with prices rising by a total of 17% to a value of $500,000 at June The market is expected to be supported by strong employment growth in the initial period, particularly in the government sector. Darwin s median house price has increased on average by a compound 18% annually from $206,000 at June 2003 to $395,000 at June Like Western Australia, the Northern Territory has benefited from a boom in mining and resources investment, resulting in an improvement in the net interstate migration outflow and net overseas migration inflow. However, with the current boom in resources investment forecast to begin to taper off from 2008/09 and declining affordability levels due to previous strong price growth and interest rate rises, Darwin s residential market is forecast to witness limited growth. House prices are projected to increase by 1% in 2007/08 and remain stable in 2008/09, before declining by 2.5% in 2009/10. New ways of thinking 07

10 Economic Outlook The economy ended on a high in 2006/07. GDP growth rose by 0.9% in the June quarter and 3.3% through the year. This was a strong result considering the economy encountered significant headwinds at the start of the financial year, including a spike in fuel and fruit prices that reduced consumer spending. Consumer spending rebounded strongly as headline inflation moderated, while investment also finished strongly with machinery and equipment expenditures surging in the June quarter. Wages growth continued to toe the line, despite 285,000 more people in employment at June 2007, compared to June Back-to-back weak wage setting decisions for workers on federal awards was partly responsible, but wages growth for workers on salaried individual contracts also remained remarkably contained considering the presence of skilled labour shortages. The seasonally adjusted unemployment rate finished the year at 4.1%. A surge in the Australian dollar (A$) helped keep inflation at bay. After tracking upwards through 2005/06, tradeables (i.e. importing competing items) inflation started to fall once again over 2006/07, offsetting relatively stable, but strong, domestic cost pressures and keeping the all-important underlying inflation rate just within the RBA s target band. Strong economic growth is expected in 2007/08. The economy looks set to exceed its speed limit, and a pick up in inflation and a further interest rate rise(s) seems inevitable Non-tradeables inflation (largely services) remained broadly steady in the June quarter, at around 3.5% (year-on-year). The RBA s preferred underlying indicators for inflation barely budged in annual terms (quarter-on-quarter growth stepped up in June) and continued to track just below their 3% upper target band. The shift in sentiment seemed to reflect a realisation that the pick up in domestic demand, given the lack of slack in the economy, means there is little opportunity for a near-term easing in domestic pressures. On the contrary, in 08

11 the absence of a sustained upswing in productivity (which would raise the economy s speed limit), there is only upside potential to domestic cost pressures. On top of this, the result brought to the fore the fact that the economy can t count on tradeables inflation to act as a counterbalance. Previously, falling world prices for manufactured goods and, more recently, a surging A$ has seen falling import prices offset stronger domestically sourced pressures. Together with surprisingly contained wage pressures, which have helped subdue domestic inflation, this has enabled the economy to operate close to full capacity for a prolonged period, without the need for an aggressive series of interest rate rises. Investment is expected to remain the key growth driver over 2007/08. Concerns were raised about a possible peaking in investment following a weak performance at the start of the year. However, investment recovered in the March quarter and surged in the June quarter Table 2: Economic indicators Forecasts Year Ended June EXPENDITURE ON GDP (at average 2004/05 prices) Consumption Private Consumption Government Consumption Private Investment Dwellings Real Estate Transfer Exp New Non-Dwelling Construction New Equipment New Business Investment (+) New Public Investment Gross National Expenditure (GNE) GDP Inflation & wages (Jun on Jun) CPI Baseline Average Weekly Earnings (Yr Ave) Employment (%) Employment Growth (Aug on Aug) Unemployment Rate (August) Interest Rates (% at 30 June) Cash Rate Housing (variable) Source: ABS, BIS Shrapnel The upbeat outlook for investment and the high level of job vacancies bodes well for employment growth, which together with strong wages growth will continue to underpin solid household income growth and consumer demand. The long awaited pick up in minerals and metals exports should also lend support to GDP growth. Production has started to ramp up but it has yet to translate into higher export volumes. With drought impacting on Australia s agricultural sector over 2005 and 2006, early rains in 2007 suggested improved output in 2007/08. However, New ways of thinking 09

12 Strong growth is expected in 2007/08. The economy looks set to exceed its speed limit, and a pick up in inflation and a further interest rate rise(s) seems inevitable. Productivity growth is coming through, but it is unlikely to come through quickly enough to take the heat out of labour markets. The currency is now more of an inflation threat than an ally. An upward bias is expected to be maintained by the Reserve Bank on interest rates and, after the 0.25 percentage point increase in August 2007, a further 0.25% rise is expected in the first half of limited winter rains suggest that a strong rebound from the drought is looking unlikely in 2007/08, offsetting some of the increase in exports from the minerals sector. The A$ lost ground as a result of the turmoil in world financial markets surrounding problems in the US sub prime mortgage market, but has since stabilised and strengthened. Strong economic fundamentals are expected to continue to support the A$ over 2007/08, but the currency is unlikely to see a further sustained appreciation and consequently it is likely to lose its inflation busting powers. A slowdown in employment and wage growth, as well as an increase in the unemployment rate in 2008/09, is projected to ease consumer spending, with the rises in interest rates over the previous year having their desired effect. Also public consumption and investment (particularly in the resource sector) is forecast to weaken during the year, causing economic growth to fall back to 2.9% in 2008/09. GDP growth is projected to accelerate in 2009/10 to 3.8% as construction in the housing market begins to take over from business investment as the main driver of the economy. Growing business and dwelling investment is forecast to return employment growth to a moderate level, which is likely to have a positive impact on consumer spending. Consumer sentiment should also be enhanced by the forecast 0.25% cut in interest rates during 2009/10 after the slowdown in economic conditions in the previous year. Table 2 shows the percentage change and forecasts for a range of key economic indicators. 10

13 Interest Rates After two rate rises in December quarter 2003, the RBA waited to assess the impact and left the cash rate unchanged at 5.25% during It became evident that the rate hikes had substantially dampened the growth in credit, particularly lending for the purchase of residential property, and residential property price growth slowed rapidly with small declines evident in some markets. There were also declines in dwelling approvals in the second half of 2004, which followed the weaker rate of turnover in residential property. Furthermore, retail sales growth slowed rapidly in the second half of 2004, indicating that the weakening residential property market was also dampening household spending. However, interest rates in 2004 remained comparatively low by historical standards and growth in domestic demand was strong, as the unemployment rate was low and wages growth solid. Despite weaker dwelling approvals and retail sales, employment growth was very strong in the second half of Concerned at the potential for a tightening labour market to ignite an acceleration of wages growth, the RBA implemented a further 0.25% increase in the cash rate to 5.5% in March This move brought the standard variable housing rate to 7.30%. The impetus for this decision was concern over pressure on Australia s productive sector, particularly in labour markets, increasing the potential for a future rise in inflation. As at December 2004, headline CPI stood at 2.6%. Over the next 14 months, rate increases were put on hold as the RBA assessed the impact of its March 2005 rise, the extent of which was an apparent slowdown in consumer spending and a tentative easing in inflationary pressure. During that time, rising world oil prices forced the CPI to the 3% threshold in September 2005 quarter. While baseline CPI eased back to 2.8% in the final quarter of calendar 2005, by March 2006 it had risen again to 3.0%. In May 2006, the RBA deduced that the March 2005 rate increase was insufficient to keep price growth at an acceptable level and opted to tighten the cash rate by a further 0.25%. This decision was due to a range of factors including international commodity price growth, which led to a strong rise in export earnings. Underlying measures of inflation continued to show upward movement over the course of 2006 due to higher oil prices and capacity constraints. While retail sales and dwelling construction were subdued, business investment showed strong growth. Most importantly, employment growth remained robust, raising concerns about accelerating labour costs that might eventually force the rate of inflation higher. In response, the RBA implemented further rate rises of 0.25% in August and November A steady pick up in employment and wages growth have pushed up inflationary pressures in the first half of Combined with higher consumer spending during that time, interest rates rose again in August 2007, with another rise expected in the first half of These measures are expected to draw the cash rate to 6.75% and the housing variable rate up to 8.55% by June 2008, the highest level for both rates since the second half of Solid economic conditions are expected to maintain pressure on both wages growth and inflation over 2008/09. While some upward bias may still exist on interest rates, we expect they will remain steady over the course of the year. However, as the current round of business investment begins to moderate over 2009/10 and the extra capacity comes on stream, economic conditions are forecast to begin easing. This is likely to remove some of the pressure in the labour market and improve the inflation outlook. Consequently, we expect the Reserve bank to begin reducing interest rates, with a reduction of 0.25% over 2009/10. This should also be a signal for acceleration in residential construction in some markets, as the outlook for affordability improves. New ways of thinking 11

14 Residential Demand Favourable economic conditions have led to a pick up in residential prices across Australian capital cities in 2006/07, except in Sydney. High net overseas migration is driving strong underlying demand at the national level, whilst increasing the stock deficiency in most states. Also applying upward pressure on house prices was strong employment and wage growth in 2006/07, combined with 30- year low unemployment rates. The number of first home buyers entering the national residential market continued to increase over 2006/07, enticed by expanding first home buyer benefits. Investors have also returned to the market in greater numbers in 2006/07 as tight vacancy rates accelerated rental growth. Nevertheless, investor activity overall remains below previous peaks and performance. Melbourne, Brisbane, Adelaide, Hobart and Canberra experienced a pick up in house price growth in 2006/07. Although Perth and Darwin also witnessed significant increases in house prices up to 2005/06, growth eased considerably in 2006/07. Sydney was the only capital city that had negative growth during the year, with the median house price declining marginally. Further deterioration of home affordability across all capital cities is expected to have the most influential effect on residential market conditions in 2007/08. Although there were two interest rate rises in 2006/07, in addition to the previous 0.25% rise in May 2006, all capitals apart from Sydney saw solid house price growth. This underlines the strength of the economic conditions and employment opportunities during the year. Further deterioration of home affordability across all capital cities is expected to have the most influential effect on residential market conditions in 2007/08. The interest rate rise that occurred in August 2007, with another forecast in the first quarter of 2008, are likely to compound this effect. 12

15 In the medium term, we expect the boom in business investment, particularly in the resource sector, to begin to decline over 2009 to 2010 and result in a slowing of economic growth. This is expected to affect purchaser sentiment, and have a dampening effect on purchaser demand. However, with the underlying fundamentals expected to remain solid, underpinned by strong population growth and a continuing dwelling deficiency, we nevertheless expect further upward momentum to construction and prices. The effect of slowing business investment is likely to be most felt in Perth and Darwin. These two cities, which have experienced surging house prices due to booming economic conditions and strong demand, are forecast to experience a weakening in prices. Nevertheless, in the short term, we expect strong underlying demand and relatively positive sentiment to continue to buoy house prices over 2007/08. Home loan activity Owner occupier loan activity Table 3: Number of home loans approved for owner occupation - % change on previous year New Dwellings Established Dwellings State 2003/ / / / / / / /07 New South Wales Victoria Queensland South Australia Western Australia Tasmania Northern Territory A.C.T Australia Source: ABS Data Table 4: Number of loans to first home buyers Annual Average State 1997/98 to 2002/ / / / /07 New South Wales 33,199 24,785 27,337 36,040 38,618 Victoria 29,520 21,303 28,178 32,905 32,964 Queensland 23,363 20,193 19,894 26,700 31,200 South Australia 7,445 6,150 6,419 7,701 8,432 Western Australia 15,561 12,393 16,060 17,485 13,783 Tasmania 2,121 1,611 1,635 2,159 2,072 Northern Territory ,481 1,904 1,119 A.C.T. 1,905 1,001 1,140 1,485 1,759 Australia 114,106 88, , , ,947 Source: ABS Data Following the recovery in the number of loans for new dwellings in 2003/04, loans for new and established dwellings nationally edged down in 2004/05. In 2005/06, finance for owner occupation showed strength, particularly in the market for established dwellings, which increased by 12%, while loans for new dwellings rose by 9%. At the national level, growth in the number of loans for new and established dwellings eased in 2006/07, although it still remained solid. During the year, loans for new dwellings increased by 5%, while 8% growth was recorded for loans for established dwellings. A major factor in higher growth for established dwellings is the deterioration of affordability for land, with recent strong house price increases making the established dwelling option more attractive from an affordability perspective. In 2005/06, the largest increase in loans for the purchase of new dwellings occurred in the Northern Territory (15%) and Western Australia (14%). All other states also achieved solid growth in loans for new dwellings in 2005/06, except for Tasmania, where loans declined by 5%. Conversely, all states witnessed growth in the loans for established dwellings, with the pattern of growth similar to the increases in loans for new dwellings in most states. Again, the Northern Territory and Western Australia showed the most impressive growth in loan approvals for established dwellings. However, New South Wales, Queensland and the Australian Capital New ways of thinking 13

16 Territory sustained a rise of more than 10% in the number of approvals for established dwellings, driving the national strength in home loan activity above 2005/06 levels. In 2006/07, finance activity for owner occupation was in stark contrast to the year before. The Northern Territory and Western Australia each experienced declines of greater than 10% in the number of loans for both new and established dwellings. The downturn in activity suggests that the affordability limitations in these states had been reached during the year, particularly as interest rates have increased. In other states, Queensland experienced the largest growth in loans for new dwellings, rising by 25%, while South Australia and the Australian Capital Territory had solid increases of 13% each. Loan activity for established dwellings was solid in all states except the Northern Territory and Western Australian, with growth highest in the Australian Capital Territory (31%) and Queensland (15%). The remaining states had growth of around 10%. Nationally, loans to first home buyers increased significantly in 2004/05 (16%) and 2005/06 (24%) after the low number in 2003/04, which was influenced by the removal of the additional First Home Owner s Grant for new housing and the subsequent drop off in demand (Table 4). Although easing, growth has continued in 2006/07, with 129,900 loans approved to first home buyers, representing an increase of 3% for the year. At the state level, the strongest growth in loans to first home buyers over the two years to 2006/07 has occurred in Queensland (57%), followed by the A.C.T. (54%), and then New South Wales (41%). South Australia, Tasmania and Victoria have also experienced significant growth in loans to first home buyers of 31%, 27% and 17% respectively. In 2005/06, the number of loans to first home buyers in Western Australia and Northern Territory increased by 9% and 29%, respectively. However, first home buyer activity significantly declined in 2006/07, falling by a greater amount in Northern Territory (41%), compared to 21% in Western Australia. Investor loan activity The value of investor loans has recovered since declining by 15% in 2004/05, increasing by a total of 15% over the two years to 2006/07, totalling $69.1 billion. However, the level of investor finance has fallen to 35% of total residential purchaser activity in 2006/07, after peaking at 43% three years earlier. While overall investment lending for residential property increased in the last two years to 2006/07, the balance of lending shifted from the eastern states to the nation s economic boom states, particularly Western Australia and the Northern Territory. This switch in overall composition of investment has contributed to residential price growth in Perth and Darwin. The value of commercial loan approvals for residential dwellings increased significantly over the past two years in Western Australia and the Northern Territory due to the tight rental market and strong capital growth attracting investor purchasers. In the two-year period to 2006/07, the value of commercial loans grew by 76% in Western Australia and 71% in the Northern Territory. After a decline in 2004/05, Queensland also witnessed a considerable rise in the value of investment loans over the two years to 2006/07, increasing by 38%. However, in other states, over the twoyear period, growth in the value of investor loans has been more moderate at 8% in Victoria, 11% in South Australia, 4% in Tasmania, and 13% in the Australian Capital Territory. New South Wales is the only state to experience a decline in the value of commercial loans in the two years to 2006/07. The value of investment loans fell by 6% in that time, after dropping by a more substantial 23% in 2004/05. Significant growth in property prices between 2000 and 2004 has translated into lower yields for investors. In an environment of limited capital growth, this caused investors to turn away from the New South Wales property market to markets in other states, or alternative forms of investment, such as equities or superannuation. 14

17 Demand and Supply The average annual unzderlying demand for new dwellings in Australia was estimated to be 157,200 for the period 2001/02 to 2005/06, up 13% on the average for the five years to 2001/02. BIS Shrapnel expect average annual underlying demand to increase by a solid 16% to 182,300 over the 2006/07 to 2011/12 period, mainly due to the larger inflows from net overseas migration. Net overseas migration is expected to rise sharply from a low of 100,000 in 2003/04 to 185,000 by 2007/08, as the economy approaches a cyclical peak. In 2008/09, economic growth is expected to slow for the short term, and consequently net overseas migration is projected to ease to 165,000 persons. It is forecast that net overseas migration will average around 161,700 people per annum between 2006/07 and 2011/12, compared to an average of 117,100 over the five years to 2005/06. Total dwelling commencements surged through 2001/02, increasing by 43.5% from the previous year to 164,400. Private house commencements increased by 51% during the year, as the introduction of the additional First Home Buyer Grant from the Federal Government encouraged more people to build houses. Also in 2001/02, private other dwelling commencements rose by 34% as investors, wary of an uncertain equities market, elected to put their money in the better performing residential market. Growth in dwelling commencements continued over the following two years rising by a total of 5%, with Table 5: Total residential home loan activity Loans for Year owner Loans for Total home Loans for Loans for ended occupation investment loan activity owner investment June $ million % change $ million % change $ million % change occupation % % ,343 4,230 30, % 13.8% , , , % 16.5% , , , % 20.5% , , , % 23.9% , , , % 25.4% , , , % 29.7% , , , % 32.4% , , , % 29.9% , , , % 31.4% , , , % 31.8% , , , % 35.6% , , , % 41.2% , , , % 43.4% , , , % 38.1% , , , % 35.5% , , , % 35.3% Source: Australian Bureau of Statistics Chart 1: Proportion of residential loans attributable to investment property(%) Share of total housing finance (%) (excludes refinancing) Up-grader Investors First Home Buyers New ways of thinking 15

18 Table 6: Deficiency of stock and building activity Demand for Housing Building Activity / Dwelling Commencements Deficiency of Stock (est.) Average Annual 2006/ /08 Number of June 07 % of Underlying Demand (estimate) (forecast) Dwellings ( 000)* Average Annual for Dwellings Underlying (2006/07 As at As at Demand to 2011/12) Annual % Annual % State June 06 June 07 Number change Number change NSW ,157 30, , VIC ,254 38, , QLD ,865 40, , SA ,081 10, , WA ,809 24, , TAS ,429 2, , NT ,925 1, , ACT ,786 2, , Australia , , , * A negative means stock surplus. Dwelling commencements include conversions. Source: BIS Shrapnel commencements peaking at 172,400 in 2003/04. Since peaking, however, total dwelling commencements have been on a downward trend, declining by an estimated 13% in the three years to 2006/07 to reach 150,400. The growth in house and unit/apartment prices and the four 0.25% interest rate rises during the three year period have been influential in the drop in total commencements, with estimated declines of 12% in private house starts and 17% in private other dwelling starts. Australia s stock deficiency is estaimed to have increased from 22,800 dwellings at June 2006 to 60,200 dwellings at June 2007, as underlying demand continued to accelerate during the year, while total dwelling completions showed a modest decline. The majority of Australia s stock deficiency at June 2007 is located in New South Wales, Victoria and Queensland, with the three states accounting for 94% of the national total. At June 2007, the stock deficiency in New South Wales and Queensland was equivalent to just under half of the states annual underlying demand, while in Victoria it was just below a third. Nationally, the stock deficiency is forecast to continue to increase to 2009/10, as strong underlying demand continues to outpace rising dwelling construction. Rentals Rental growth in Melbourne and Sydney has fallen below the rate of inflation since 2000, as vacancy rates crept up past the 3% mark (the balanced market level), due to strong investor purchaser activity and the First Home Owners Grant encouraging tenants to become homeowners. Since 2003, vacancy rates in Sydney and Melbourne have tightened, driving higher rental growth. In the year to June quarter 2007, both Sydney and Melbourne achieved rental growth of just over 4%, while the vacancy rate was 1.4% in both cities. The strongest rental growth over the last four years has been in Brisbane and Hobart with each of these capitals experiencing very low vacancy rates. In June quarter 2007, rental growth was 6.6% in Brisbane and 5.5% in Hobart. Rental growth in Adelaide has remained strong over the past few years, rising above inflation to 3.7% in the year to June Adelaide has maintained solid rental growth due its low vacancy rates, which have been below 2% for the past four years. In June quarter 2007, rental growth was 4% in Adelaide. Between 2001 and 2003, rental growth in Perth fell, reaching a low of 1.3% in 2002/03, due to vacancy rates above 4%. Since then, however, vacancy rates in Perth declined to 2.1% in June quarter 2007, bringing increased rental growth, which rose to 9.6% for the year. 16

19 Darwin and Canberra have also experienced low vacancies, with rates of 1.2% and 2.4%, respectively, at June quarter Rental growth has been particularly strong in Canberra at 8% in 2006/07, while Darwin showed growth of 5.4% for the year. Trends in Migration Net overseas migration Net overseas migration is a major component of growth in Australia s population and consequently in new household formation, which in turn, is the key driver of underlying demand for new dwellings. Australia s net overseas migration peaked in 2000/01 as a result of significant growth in the number of long-term arrivals and a modest rise in the number of permanent settlers. Over the next three years to 2003/04, the number of overseas migrants entering Australia fell to a low of 100,000 persons in 2003/04. This downward trend was reversed as the Federal Government announced on April 1, 2004 a boost in the planned intake of migrants for 2004/05, with an extra 5,000 places created in the skilled category. This change was in addition to the announcement of an extra 1,000 places being made available in the humanitarian intake for refugees, for a total of 13,000 in 2004/05. Further to this, on April 14, 2005, the Federal Government announced plans to again boost Australia s intake of skilled overseas migrants in 2005/06 by 20,000. An unchanged policy was announced for 2006/07. Table 7: Annual rental growth and vacancy rates Sydney Melbourne Brisbane Adelaide CPI As at June Rental Vac. Rental Vac. Rental Vac. Rental Vac. Growth growth (%) rate (%) growth (%) rate (%) growth (%) rate (%) growth (%) rate (%) (%) * * Perth Hobart Canberra Darwin CPI As at June Rental Vac. Rental Vac. Rental Vac. Rental Vac. Growth growth (%) rate (%) growth (%) rate (%) growth (%) rate (%) growth (%) rate (%) (%) at June Qtr Source: ABS and REIA These changes were aimed at achieving government s non-humanitarian target for overseas migration of between 130,000 to 140,000 for 2005/06. This, so far, has proven to be successful, as the preliminary figure for net overseas migration into Australia in 2005/06 is 146,800 persons. However, BIS Shrapnel believe that the methodology adopted by the ABS for calculating net overseas migration, from 2001/02 to 2005/06, understates the actual net inflow. The methodology eliminates long-term arrivals or departures if they temporarily break their stay (or absence). The ABS has adopted a new methodology from September quarter 2006 in line with the release of the 2006 Census estimates that allows for brief departures during an extended stay (such as home visits by overseas students) or brief returns from long-term departures. Under the proposed new method, overseas travellers (whether Australian residents or overseas visitors) who are in Australia for a total of 12 months or more during a New ways of thinking 17

20 Table 8: Net overseas migration (000 s) Year Ended June NSW VIC QLD SA WA TAS NT ACT Aust * * * * * Forecast *original net overseas estimates based on previous ABS methodology Source: ABS, BIS Shrapnel Table 9: Australian population estimates Population Estimate Year Ended June 2006 Old 2006 Census Difference NSW 6,827,694 6,817,182-10,512 VIC 5,091,666 5,128,310 36,644 QLD 4,053,444 4,091,546 38,102 SA 1,554,656 1,568,204 13,548 WA 2,050,884 2,059,045 8,161 TAS 488, , NT 206, ,674 3,986 ACT 328, ,225 5,408 Australia 20,605,488 20,701,488 96,000 continuous 16-month period following an overseas movement will be added to net overseas migration estimates. We expect that net overseas migration from 2001/02 (when the current methodology was adopted) will be revised upwards when the final Censusrelated estimates are released. Indeed, the first population estimates based on the 2006 Census support our expectations. A comparison between the population estimates at June 2006 based on the old methodology and the revised population estimates as per the 2006 Census shows that Australia s total population had been understated by 96,000 persons over the 2001 to 2006 period. This equates to almost 20,000 persons per annum. We believe the majority of this understatement arose from overseas migrants who were excluded under the old methodology. However, under the new methodology, migrants who periodically return to their country of origin during a longer stay (or those that return back to Australia) are now included in the overseas migration calculation. The upward revision in population has been greatest in Queensland, Victoria and, in relative terms, South Australia (Table 9). In addition to the Federal Government s boost in the official migrant intake, strong economic conditions and increased employment opportunities are also expected to encourage long-term visitors to Australia in increased numbers. Net overseas migration into Australia is estimated to have increased to 175,

21 persons in 2006/07, and is forecast to rise again in 2007/08 to 185,000 persons. However, net overseas migration is forecast to drop back to 165,000 persons in 2008/09 and 140,000 persons in 2009/10, as an expected economic slowdown (due primarily to an easing in the resources sector) is likely to result in lower inward migration and a higher outflow of long-term visitors, due to employment opportunities diminishing. New South Wales is expected to continue to be the initial location for 32% of overseas migrants over the next four years. While this is high relative to other states, it is well below the 45% to 46% share of the mid 1990s. Other states share of Australia s overseas migration intake in the forecast period is 27% for Victoria, 19% for Queensland, 14% for Western Australia, and 7% for South Australia. Tasmania, the Northern Territory and the Australian Capital Territory proportion of the total overseas migration inflow is projected to be less than 1% in the four years to 2009/10. The state capitals absorb the majority of each state s overseas migrants. For example, Sydney receives over 90% of New South Wales overseas migrants, while over 90% of Victoria s overseas migrants end up in Melbourne. The exception is in Queensland, where around 60% of overseas migrants go into Brisbane and 85% into total South East Queensland. Net Interstate migration The dominant interstate flow since 1997/98 is the resettlement of people from New South Wales to Queensland. In 2002/03, the population outflow from New South Wales of 31,800 persons was the highest outflow in thirteen years. This was driven by the strong growth in Sydney house prices, which encouraged empty nesters and retirees to cash in on significant capital gains in their property and pocket the difference when they moved to more affordable parts of the country. Likewise, affordability posed a barrier to home ownership for some first home buyers and families who were priced out of the Sydney market. Consequently, these buyers looked to other states for more affordable alternatives. However, Brisbane s house price growth (and most centres in Queensland in general) considerably outperformed Sydney in 2003/04 and 2004/05, with the affordability advantage held by Brisbane narrowing significantly. This has lead to a lower net outflow from New South Wales to 30,400 in 2003/04, 25,700 in 2004/05, and 24,000 in 2005/06. This dynamic is likely to continue to reduce the net outflow from New South Wales. The net outflow is estimated at 27,000 persons in 2006/07 before improving again to a forecast 25,000 persons in 2007/08. Improving conditions in New South Wales and Sydney are expected to see a further reduction in the state s net outflow to 20,000 persons in 2008/09 and 16,000 persons in 2009/10. Victoria s net interstate migration inflow slowed to zero in 2002/03 after averaging 4,300 persons per annum between 1997/98 and 2001/02. In 2003/04, Victoria s net interstate migration returned to an outflow of 2,300 persons. This rose marginally to 2,400 persons in 2004/05 before falling slightly to 1,900 persons in 2005/06. The net interstate migration outflow from Victoria is forecast to average 3,000 persons per annum over the four years to 2009/10, as residents continue to move interstate for employment opportunities in the booming resource states, or opt for more affordable housing in other parts of the country. The price advantage of residential property and the more attractive climate and lifestyle offerings in South East Queensland provided the catalyst for a rise in the net inflow into Queensland to 39,200 in 2002/03. The inflow eased slightly in 2003/04 to 36,700 as its affordability advantage over other eastern states began to diminish. The decline became more pronounced in 2004/05 and 2005/06 when the net inflow eased back to 31,500 persons and then 25,800 persons. Growth in Queensland house prices is expected to exceed Sydney and Melbourne in 2007/08, which is projected to further diminish the state s affordability advantage. However, a robust Queensland economy is likely to continue to support inflows to the state for people migrating for employment opportunities. It is expected that the net interstate migration inflow will rise slightly to 26,500 in 2006/07, before declining marginally in each of the following three years to reach 24,500 persons by 2009/10. New ways of thinking 19

22 Table 10: Net interstate migration ( 000s) Year Ended June NSW VIC QLD SA WA TAS NT ACT Forecasts Source: BIS Shrapnel, Australian Bureau of Statistics South Australia s net interstate migration outflow reached its best level of 1,500 in 2002/03, before increasing to 3,200 persons in 2003/04 and 3,500 in 2004/05. The net outflow appears to have steadied, improving slightly to 2,900 in 2005/06. The net interstate migration outflow from South Australia is forecast to remain roughly at this level in 2006/07 and through to 2009/10, at 3,000 persons per annum. Western Australia sustained four consecutive years of net interstate migration outflows up to, and including, 2002/03. The outflow has since reverted to a net interstate migration inflow, with the state recording a gain of 1,300 persons in 2003/04 and 1,500 in 2004/05. This reversal was the result of the comparative affordability of housing in Perth relative to other capital cities and the strong job prospects resulting from the state s surge in mining activity. The inflow continued to gather momentum in 2005/06, rising to 3,100 persons. These factors are expected to continue to attract people from other states, with the inflow of interstate migrants accelerating to 4,500 persons in 2006/07 and forecast to rise to 5,000 persons in 2007/08. As the boom in mining investment begins to ease and economic conditions weaken, the net interstate migration inflow is forecast to moderate in 2008/09 to 2,000 persons and fall to zero in 2009/10. The Australian Capital Territory recorded a significant turnaround in its net interstate migration in 2004/05. After posting net interstate outflows in the four years to 2004/05, the Australian Capital Territory recorded an inflow of 300 persons in 2005/06. Strong growth in Federal Government employment influenced the reversing trend in net interstate migration and it is estimated that the Australian Capital Territory s inflow of interstate migrants has increased to 1,000 persons in 2006/07. In line with weaker economic conditions, this figure is projected to ease to 500 persons in 2007/08, and to slow further in 2008/09 and 2009/10, where it is forecast to have zero effect in both years. After a long-term departure of residents to other states, Tasmania recorded a moderate net migration inflow in 2002/03 of 1,900 persons, a turnaround of 3,400 from the previous year. It seems likely that the pressures of housing affordability in Victoria and New South Wales were the driving force behind this shift, as the change has been characterised by an increased inflow of persons into Tasmania as opposed to reduced numbers of people leaving the state. Net interstate migration into Tasmania peaked at an inflow of 2,500 persons in 2003/04 before dropping back to an inflow of 200 persons in 2004/05 and 100 persons in 2005/06. Net interstate migration is estimated to have reversed to an outflow of 500 persons in 2006/07 and 2007/08, before increasing to a net outflow of 1,000 persons in 2008/09 and 2009/10. The Northern Territory had zero effect from interstate migration in 2004/05, after recording outflows in the seven years prior to 2003/04. Although a net interstate migration outflow of 400 persons occurred in 2005/06, an inflow of interstate migrants of 500 persons is estimated for 2006/07. Net interstate migration is forecast to weaken to zero in 2007/08 before reverting to an outflow of 500 persons in 2008/09 and 2009/10, as investment in the resources sectors, which has been driving the local economy, begins to slow. 20

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24 Sydney State of play Strong growth in demand underpinned growth in construction activity, with a 44% increase in dwelling approvals in 2001/02 and a 24% increase in Sydney s median house price from $364,000 in June 2001 to $452,000 by June The subsequent decrease in stock deficiency, combined with rising vacancy rates, reduced investor interest in residential property, and growth in Sydney s median house price slowed to 15% over 2002/03. Construction activity continued to slow over 2003/04 but remained above underlying demand, resulting in the emergence of a stock surplus. This had the effect of further slowing the growth in Sydney s median house price, which rose by only 6% to $552,000 at June By June 2004 Sydney s home loan affordability had also reached its worst levels since the late 1980s when interest rates were above 15%. The decline in housing affordability over the first half of this decade has been caused by rapid price growth in a low interest rate environment. The lack of affordability in Sydney has kept potential buyers out of the market, either staying at home longer, renting or buying in a more affordable part of the country. In response, the New South Wales Government abolished the stamp duty in April 2004 for first home buyers purchasing a dwelling for less than $500,000 (saving up to $18,000 in stamp duty costs) on a sliding scale up to $600,000. The number of first home buyers, which declined substantially over /03 and 2003/04, has risen significantly over the past two years to 36,000 loans in 2005/06, above the longterm average. This trend continued in 2006/07, although at a slower rate, where first home buyer numbers increased by 7% over the year. The New South Wales Government also introduced a 2.25% stamp duty on the sale of an investment property. This stamp duty was widely unpopular and arguably caused property investors to withdraw from the market. However, with the change in the leader of the State Government in August 2005, the tax was subsequently abolished. Given the continued weakness in investor interest in the market, the effect of any pick up in the investor demand on house prices was negligible. Over 2004/05, these incentives did little to reverse the combined impacts of low affordability, limited pent-up demand, and continued low investor sentiment. As a result, there was little price pressure in the market, and Sydney s median house price declined by 4.3% to $528,000. Sydney s median house price remained steady in 2005/06, declining marginally to $526,800 at June Although affordability deteriorated slightly during the year due to a May 2006 interest rate rise, the rapidly emerging stock deficiency resulting from the decline in dwelling construction has been insufficient to place upward pressure on the declining market. Conditions have remained the same through 2006/07, with two rises in the interest rates continuing to have a dampening effect on prices. Sydney s median house price of $525,500 at June 2007 represented a 0.2% decline for the year. However, some market sectors have shown stronger growth while others continue to weaken particularly the outer western suburbs. Dwelling construction, particularly for new houses, has fallen to levels not seen since the 1950s, and with demand well exceeding supply, the stock deficiency is rapidly increasing. This situation is largely a consequence of the limited land supply that has resulted in owner occupiers being priced out of the market for new detached dwellings. The challenging affordability of land has led to knockdowns accounting for around half of all new detached house approvals. Medium and high density dwellings, which are more affordable, have become more attractive to the increasing number of smaller households (lone persons, empty nesters and retirees) and delayed the effects of rising land costs on total dwelling supply in Sydney. As Sydney enters an extended period where dwelling supply is significantly below underlying demand, vacancy rates will continue to remain tight. There is expected to be a substantial and extended adjustment to residential rents in the form of strong rental growth. The poor affordability in the Sydney residential market, combined with 0.25% rises in housing interest rates in May, August, and November 2006, has compounded the current slowdown in new dwelling activity. As a result, New South Wales stock deficiency is expected to have increased to 21,900 dwellings at June The deficiency has placed some upward pressure on prices in some inner and middle ring suburbs of Sydney,

25 The poor affordability in the Sydney residential market, combined with rises in housing interest rates in May, August, and November 2006, has compounded the current slowdown in new dwelling activity which have shown a modest rise in median house price. However, affordability continues to be an issue in the most highly geared households in the outer western suburbs where prices continue to be weak. Chart 2: Sydney dwellings - Prices and activity Forecast Despite pent-up demand, the current climate of negative sentiment and affordability constraints will continue to dampen the overall Sydney market. A 0.25% interest rate rise in August 2007, combined with another rise expected in the first half of 2008, will limit a solid upturn in prices during the year. The median house price in Sydney is forecast to increase by less than 1% to $530,000 in the year to June Economic conditions are forecast to begin slowing from 2008/09 as a result of higher interest rates curbing consumer spending and the weakening of business investment, as many current projects approach completion. However, with affordability slightly improving as a result of consistent wages growth, the magnitude of pent-up demand should start to release, leading to an increase in dwelling commencements and prices. Affordability issues will remain a constraint during this period, and the upturn in dwelling activity is projected to remain well below underlying demand, evident by the stock deficiency growing to 69,200 dwellings by June Consequently, prices are expected to grow modestly in 2008/09 and to accelerate in 2009/10 and beyond. Sydney s median house price is forecast to grow a total of 7.5% over the two years to 2009/10 and continue growing into 2010/11 and 2011/12. New ways of thinking 23

26 Melbourne State of Play Melbourne sustained strong price growth throughout the latter half of the 1990s through to Over the seven years to June 2003, the median house price rose at a compound average rate of 13% per annum, or 10% per annum in real terms. Prices were driven by an extended period of stock deficiency underpinned by continued high underlying demand resulting from the high net interstate migration inflow into Victoria, and in particular Melbourne. This was a more prolonged and significantly stronger period of growth than the boom of the late 1980s, primarily driven by improved net interstate migration, and in particular, the four years of a net interstate migration inflow into Melbourne during 1998/99 to 2001/02 the first time such an inflow had occurred in nearly thirty years. Although continuing to remain healthy, price growth began to moderate in the year to June The median house value rose by only 3% (the lowest annual growth since 1995/96) to $365,000. Weaker demand for residential property and the deterioration of housing affordability resulted in a further moderation in Melbourne s house prices in 2004/05, with the median house price declining by 1.4% to $360,000. House price growth continued to remain low in 2005/06, rising by 3% to $371,500 at June However, an underlying increasing trend was beginning to emerge. Loans to first home buyers increased by 17% in 2005/06, with the increase in activity from this segment of the market likely to have had some positive effect on house prices, by providing a market for upgraders to sell into. There was also strong growth in loans by owner occupiers for newly erected dwellings. In 2006/07, some of the property market indicators reflected continued momentum in house price growth. Underlying demand increased by an estimated 5,000 dwellings in 2006/07, with the stock deficiency rising to an estimated 13,600 dwellings at June Also, investor activity began to increase during 2006/07 as tight vacancy rates caused a pick up in rental growth. In 2006/07, the value of loans for residential investment in Victoria increased by 10%, with loans by owner occupiers also rising. Interest rate rises in May, August and November 2006 appear to have created a diversion in price growth within Melbourne. Outer Ring suburbs appear to have been far more affected by the deterioration of affordability after the interest rate rises through Households in this sector are more likely to be employed in sectors of the economy that are under pressure (i.e. manufacturing), and are also more likely to be highly geared. In comparison, households in the more expensive Inner and Middle Ring suburbs are less likely to be highly geared, with residents also more likely to be employed in the white collar segments of the economy that are still enjoying considerable growth. This growth has been supported by strong sentiment and wages growth in the white collar sector, meaning affordability has been less of an issue. The solid price rises that have occurred in the more expensive Inner and Middle ring suburban houses have resulted in accelerated growth for Melbourne s median house price as the increases flow through to the remainder of the market. Melbourne s median house price increased 13% in 2006/07 to $420,000, which represents the greatest house price growth for the year when compared to all other capitals. However, the two tiered market outlined earlier has been reflected in the quartile values, with Melbourne s upper quartile house price increasing by 17% in 2006/07, compared to 6% growth in the lower quartile. Forecast Solid price growth in 2006/07, coupled with an interest rate rise in August 2007 and another expected in the first half of 2008, is expected to have a mild dampening effect on price growth. It is forecast that 50% of average weekly income will go to mortgage repayments on a median priced house by June 2008 a level not seen since the late 1980s. As a result, house price growth will ease in 2007/08, although still remain solid at 7%. The main stimulus for this growth will come from overseas migration into Victoria, which is forecast to peak at 50,000 persons in 2007/08. This is forecast to maintain strong underlying demand whilst also increasing the stock deficiency to 24,500 dwellings by June This is expected to ensure continued pressure in the rental market and further solid rental growth. 24

27 Although population growth is expected to slow due to an easing in overseas migration, tight vacancy rates are expected to place further pressure on property prices via strong rental growth Property price growth is forecast to slow in 2008/09, with the median house price expected to increase by 4% to $480,000 by June The projected 0.25% fall in interest rates in 2009/10, combined with continued strong underlying demand, should lead to improved purchaser sentiment in the following year. Chart 3: Melbourne dwellings Prices and activity Although population growth is expected to slow due to an easing in overseas migration, tight vacancy rates are expected to place further pressure on property prices via strong rental growth. The three bedroom median weekly rental rate in Melbourne is forecast to rise by 23% over the three years to 2009/10, a direct result of the tight vacancy rates and low levels of dwelling completions. This is likely to lead to a strengthening in dwelling investment and a pick up in investor activity, beginning in 2009/10. Consequently, the median house price is forecast to increase by over 6% in 2009/10 to $500,000. New ways of thinking 25

28 Brisbane State of Play Brisbane s median house price increased to $307,300 by June 2004, representing 92% growth over the previous three years. This strong price growth coincided with rises in overseas and interstate migration, which both peaked in 2002/03 at 27,100 persons and 39,200 persons, respectively. The consequent pick up in demand also underpinned a rising stock deficiency in the Queensland market. The affordability advantage that enticed more people to migrate to Queensland from New South Wales and Victoria, however, was eroded with the price growth between 2001 and As a result, both the overseas and interstate migration inflow eased in 2004/05. This reduction was reflected in solid declines in home loans for owner occupation (-7%) and the value of loans to investors (-16%) in Queensland, as well as the continued decline in the number of first home buyers (down 18% over 2003/04 and 2004/05). Furthermore, the 0.5% increase in interest rates at the end of 2003 triggered a deterioration of affordability, which also had a slowing effect on price growth. Over 2004/05 the growth in Brisbane s median house price slowed to 2.5%, with the median house price reaching $315,000 at June This decline in demand failed to absorb much of the stock deficiency, as this also coincided with a downturn in new dwelling construction. As a result, pent up demand was still high at 13,900 dwellings in June High stock deficiency continued to place upward price pressure in Brisbane, which was offset by continued affordability issues. This was highlighted by the median house price rising to $326,000 in 2005/06, representing growth of 3.5% over the previous year. With dwelling commencements totalling an estimated 40,000 in 2006/07, new dwelling supply remains below underlying demand. As a result, the stock deficiency rose to 21,100 dwellings at June The effects of this rising stock deficiency have been reflected in the upturn in lending to both owner occupiers (17%) and investors (32%), with the trend likely to continue. This drove up house prices by 12% in 2006/07 to $366,300. The significant level of stock deficiency has also been reflected by Brisbane s residential vacancy rate. This remained below the balanced market level of 3% since June 2003 and edged lower to 1.5% at June This has been reflected in strong rental growth, which has increased since June 2003 and reached a solid 6.6% in 2006/07. As rental growth outpaced the more modest price growth in 2004/05 and 2005/06, the improvement in yields is also enticing investors back to the Brisbane market. Forecast Underlying demand in Queensland is expected to remain high throughout the forecast period, at a projected average of 44,400 dwellings per annum. Traditionally, the major driver of underlying demand in Queensland has been its net interstate migration inflow. However, in the forecast period, underlying demand is expected to be increasingly driven by overseas migration and, to a lesser extent, interstate migration. This is evident in the forecast annual average inflow of both overseas and interstate migration between 2006/07 and 2009/10. At an average of 30,800 persons per annum, overseas migration is expected to be greater than average interstate migration of 25,600 persons per annum, a reversal from the situation over the period. Rising deficiency and strong economic growth is expected to fuel housing demand, and price growth of 9% is forecast for 2007/08. The easing in the growth rate over the previous year is expected as the effects of interest rate rises dampen home prices. Price growth is forecast to slow slightly, although remain solid in 2008/09 and 2009/10 at around 6% in both years. Strong growth in construction activity should absorb some of Brisbane s housing stock deficiency and ease some of the upward pressure on prices. The stock deficiency, however, is still forecast to remain substantial and with interest rates stabilising in 2008/09 and declining in 2008/10, house prices should increase despite slowing economic growth. Brisbane s forecast median house price of $460,000 by June 2010 represents a total rise of 26% over the 2007 to 2010 period. Price growth in Brisbane is forecast to be strongest of the state capital cities covered by this report. 26

29 The easing in the growth rate over the previous year is expected as the effects of interest rate rises dampen home prices Chart 4: Brisbane dwellings Prices and activity New ways of thinking 27

30 Adelaide State of Play Over the 2001 to 2004 period, population growth picked up as South Australia experienced a rise in its share of the country s net overseas migration inflow, as well as an improvement in net interstate migration, which fell from a net outflow of 3,500 in 1999/2000 to a net outflow of 1,500 in 2002/03. Higher underlying demand contributed to the upturn in new dwelling activity and house prices. Adelaide s median house price increased from $148,400 to $250,000 over the three years to June 2004, representing growth of 68%. A high overseas migration inflow of 7,000 persons in 2004/05 and 9,500 persons in 2005/06 has increased underlying demand in South Australia from 7,300 dwellings at June 2004 to 8,700 dwellings at June After declining to a low in 2003/04, first home buyers have returned to the market in greater numbers over the two years to 2005/06 and the number of mortgages has increased by 25%. This has maintained upward pressure on prices, and although affordability has deteriorated as a result of the increases in house prices between 2001 and 2004, price growth has remained solid in the two years to 2005/06. In 2004/05, Adelaide s median house price increased by 10% to $275,000 before growth eased to 4.4% the following year. In June quarter 2006, the median house price was $287,000. Growth in Adelaide s median house price again strengthened in 2006/07, increasing by 8% to $310,000. It appears that the two 0.25% interest rate rises during the year did not have a major effect on purchaser sentiment. The boost to overseas migration in South Australia has maintained the strength in dwelling demand. Loan activity across all market segments increased in South Australia, with loans to first home buyers rising by 9%, loans to owner occupiers growing by 10%, and loans to investors increasing by a substantial 32%. Adelaide s affordability advantage relative to other capital cities has also attracted more investors to its residential market, which in turn led to increased investor demand. The Adelaide rental market is particularly tight, highlighting the strength of demand. This evidence suggests that investors went through a sell-down period after a period of flat prices in the 1990s. As a result, Adelaide s residential rental vacancy rate since early 2003 improved dramatically to remain well below the balanced market level of 3%. Adelaide s residential rental vacancy rate fell to 1.3% in June quarter Rental growth has also been stronger during this period, remaining above or at the level of inflation. Forecast Strong overseas migration throughout the forecast period is expected to ensure underlying demand remains at a projected average of 11,100 dwellings per annum in the five years to 2011/12. This is anticipated to maintain solid price growth and, although there was an interest rate rise in August 2007 with another expected in first half 2008, Adelaide s median house price is forecast to grow by 10% in 2007/08 to $340,000. A weakening economic environment and continued housing affordability challenges through 2008/09 are likely to bring about a slight easing in price growth. The median house price in Adelaide is forecast to increase at just under 6% in both years, which would see the median value rise to $380,000 by June

31 Adelaide s affordability advantage relative to other capital cities has also attracted more investors to its residential market, which in turn led to increased investor demand Chart 5: Adelaide dwellings Prices and activity New ways of thinking 29

32 Perth State of Play Over the last five years to 2005/06, Western Australia s residential property market was stimulated by growth in population, employment and wages, and increased dwelling construction and activity, driven by the mining and resource sectors booming economy. Perth s median house price increased to $210,200 after growth of 27% in prices over the two years to 2002/03. High overseas migration strengthened underlying demand and increased the stock deficiency, which placed upward pressure on prices. This was also reflected in increased loan activity to both owner occupiers and investors. In 2001/02, loans to owner occupiers for the construction of new dwellings increased by 31% alone, while the value of residential investment loans rose by 115% over the previous two years. This led to dwelling commencements growth of 48% between June 2001 and June A return to a net interstate migration inflow in 2003/04 of 1,300 persons, which increased to 1,500 persons in 2004/05, occurred due to residents from other states seeking the improved employment opportunities and higher wages that the Western Australian economy provided. Although Perth had just experienced two years of solid price growth, its house prices were still more affordable in relation to all other capital cities in 2003/04 and 2004/05, which attracted residents from interstate. As a result, growth in house prices continued to surge, rising by 21% in 2003/04 and 16% in 2004/05. In 2005/06, house price growth accelerated to a substantial 36%, raising the median house value to $400,000. Again, population growth played a significant part in this increase. During the year, the inflow of overseas migrants peaked at 22,400 persons, while interstate migration was high at an inflow of 3,100 persons. This underpinned stronger underlying demand and construction activity, with dwelling commencements increasing by 13% whilst completions rose by 12%. Perth s tight vacancy rate has reflected the well-performing residential market and fuelled recent price growth. The vacancy rate was more than 4% between 2001 and 2003, but moved into balance in 2004 at an average of 3% before tightening further to 1.9% by June Rental growth increased to 4.7% in 2005/06, resulting in further growth to investor demand. This is evident in the considerable growth in the value of investor loans, which rose by 55% in 2005/06. Residential market conditions in Perth appear to have peaked in the first half of Loans for owner occupation declined in 2006/07, as did finance for residential investment, despite conditions that were expected to continue enticing strong migration from overseas and interstate to Perth. Estimated overseas and interstate migration in 2006/07 of 23,600 persons and 4,500 persons, respectively, has boosted underlying demand and further increased the stock deficiency. Price growth of 12% occurred in 2006/07, which increased the median house value to $446,500 at June However, the annual growth in the median price over 2006/07 has masked a decline in the median price in the first half of 2007, with the median price peaking at $450,000 at March 2007 before falling in June. Forecast The massive growth in Perth s median house price from 2001 to 2007 (totalling 169% in the six-year period) has had a profound effect on affordability, with Perth now the second least affordable city in Australia. Poor affordability is likely to continue to be a major concern in 2007/08, resulting in a modest decline in the median house price of 2% for the year. Compounding the lack of affordability in 2008/09 will be the expected slowing of economic conditions in line with a decline in investment spending in the resource sector. Consequently, employment and wage growth in Western Australia is projected to moderate beginning in 2009 and continuing in This is anticipated to affect overseas and interstate migration, which are both estimated to ease in 2008/09. As a result, house prices in Perth are forecast to decline by another 2%. However, a more significant shake out in prices due to the downturn in the resources sector is not expected. With the slowdown in construction activity over 2007 to 2010, the stock deficiency is expected to climb to an estimated 8,700 dwellings by June Also, relatively high migration is projected to keep underlying demand solid in the three years to 2009/10. This should prevent any more significant downturn in house prices with a total decline in prices forecast of 5% over the three years to 2009/

33 The massive growth in Perth s median house price from 2001 to 2007 (totalling 169% in the six-year period) has had a profound effect on affordability, with Perth now the second least affordable city in Australia Chart 6: Perth dwellings Prices and activity New ways of thinking 31

34 Hobart State of Play Strong growth of 39% in Hobart s house price over 2002/03 was driven by increased underlying demand for dwellings. Tasmania recorded a net interstate migration inflow of 1,900 persons in 2002/03, which was the first net inflow in over a decade. In 2003/04 this inflow increased to 2,500 people, substantially strengthening underlying demand. The marked turnaround in net interstate migration into Tasmania was most likely due to housing affordability pressures in Melbourne and Sydney. Interstate migration inflow has a higher concentration in the 50+ age group. This group is likely to be trading down from an existing dwelling and less likely to be seeking full-time employment. Consequently, this age group is less affected by the more limited employment drivers in the state. This strengthening net interstate migration inflow resulted in an emerging deficiency of residential stock of 1,300 dwellings at June 2004, further underpinning the substantial price growth experienced in Hobart over 2002/03. At June 2004, the median house price stood at $252,000, representing a 40% increase over 2003/04. However, the growth in net interstate migration into Tasmania was short lived as the relative housing affordability that Tasmania once provided declined to levels not seen since the late 1980s. Growth in Hobart s median house price, which grew by 94% over the two years to June 2004, placed increasing pressure on interstate migration, and in 2004/05, net interstate migration into Tasmania declined to an inflow of just 200 persons. Consequently, growth in the median house price in Hobart slowed dramatically, rising to $260,000 at June 2005, representing a marginal 3% increase over a year earlier. The rapid rise in house prices between June 2002 and June 2004 pushed affordability in Hobart to its limit. This deterioration of affordability can also explain the 0.3% decrease in dwelling commencements from the previous year, in addition to underlying demand for dwellings, which fell due to the slowdown in the net interstate migration inflow. The drop off in interstate migration continued in 2005/06 and resulted in some marginal softening in underlying demand. Consequently, stock deficiency eroded and an excess of 800 dwellings was recorded at June At the same time, growth in Hobart s median house price in 2005/06 rebounded slightly to 6.5%, with the median house price being $277,000 at June The relative affordability of Hobart s residential property market compared to other capital cities around Australia was the key driver of interstate migration and the upturn in prices. Although Hobart is currently more affordable than most other state capitals, the large median house price growth from June 2002 to June 2004 eroded much of its affordability advantage. This is the main reason for net interstate migration reverting to an outflow of 500 persons in 2006/07. However, a solid gain for overseas migration in Tasmania is expected to slightly increase the underlying demand for dwellings. As a result, a stock deficiency of over 700 dwellings is estimated at June This appears to have helped support house prices, with the median house price in Hobart rising by a solid 12% in 2006/07 to $310,000 at June Forecast The interest rate rise in August 2007, combined with the forecast increase in the first half of 2008 and the previous three rises in calendar 2006, is expected to further deteriorate affordability and slow price growth in 2007/08. Very similar overseas and interstate migration during the year, compared to the previous year of 2006/07, is forecast to bring on a marginal decline in underlying demand. As a result, median house price growth is projected to ease to 5% for the year. With underlying demand remaining stable in 2008/09, Hobart s median house value is anticipated to grow by another 5% in 2008/09. Although dwelling completions in Tasmania are forecast to decline by 2% in 2009/10, this decline is expected to keep dwelling stock relatively stable in relation to underlying demand. However, weakened underlying demand due to an anticipated rise in the net interstate migration to an outflow of 1,000 persons will see growth in Hobart s median house price slow slightly. Forecast growth of 4% in 2009/10 will see the median house price reach $355,000 by June

35 Although Hobart is currently more affordable than most other state capitals, the large median house price growth from June 2002 to June 2004 eroded much of its affordability advantage Chart 7: Hobart dwellings Prices and activity New ways of thinking 33

36 Darwin State of Play The median house price in Darwin has been increasing since 2001/02. After growing by 10% in the two years to 2002/03, house prices rose by 24% in 2003/04 to $255,000. Although growth eased in 2004/05 to 10%, it then accelerated the following year to 25%. At June 2006, Darwin s median house price reached $350,000. The substantial growth in house prices, totalling 87% between 2001 and 2006, originates from strong economic conditions in the Northern Territory, led by the mining and investment resource boom. This has been the stimulus for growth in both employment and wages, and has improved overseas and interstate migration. With more people migrating from overseas and fewer residents leaving for interstate locations, underlying demand for dwellings picked up and began running above completions starting from 2000/01. Subsequently, the Northern Territory s stock excess has gradually decreased since 2000/01, from 2,600 dwellings to 400 dwellings. This improvement has underpinned price growth. Darwin typically has a higher vacancy rate than the other capitals due to its smaller population, where even small moves in net interstate migration can have a significant effect. Vacancy rates have continually declined from a high of 14% in 1999 to just 1.2% in June This trend toward relatively lower vacancy rates was a result of improved net overseas migration from an inflow of 300 in 2002/03 to 1,900 in 2005/06, as mining and infrastructure investment boomed. Similarly, the net interstate migration outflow has also improved. Continued booming economic conditions in 2006/07 are supporting employment, wage, and population growth, with the net increase in migrants entering from overseas and interstate forecast at 1,200 and 500, respectively. These conditions have strengthened underlying demand, resulting in a stock deficiency of 500 dwellings at June Responding to the increased activity, median house prices increased by 13% in 2006/07 to $395,000. Forecast The key issue is when affordability will reaches a critical point, slowing median price growth. Affordability in Darwin weakened in 2005/06 and 2006/07 and is expected to emerge as a constraint on price growth in 2007/08. Affordability in Darwin can support some price growth in the current economic environment over 2007/08, although price growth is expected to slow to just 1% during the year. The current phase of investment in the mining and infrastructure sectors is expected to peak in 2008/09, followed by a decline in investment spending. Once investment turns down, employment in the Northern Territory is expected to decline in 2009 and In previous periods of a weak labour market, median house prices decreased (1995/96 and 2000/01) because the Darwin residential market is not as deep or liquid as markets in other cities. Similarly, Darwin s median house price is forecast to remain steady over 2008/09, before declining by 2.5% in 2009/

37 The key issue is when affordability reaches a critical point, slowing median price growth Chart 8: Darwin dwellings Prices and activity New ways of thinking 35

38 Canberra State of Play The Australian Capital Territory s median house price experienced significant annual growth in the five years to 2003/04. In this period, median house values increased by 136%, or 18% per annum, from $158,000 to $372,400. Consequently, affordability deteriorated, whereby the average monthly mortgage payment on a median priced house as a share of average monthly income rose from a low of 21% in 1999/2000 to 42% in 2003/04. As a result, the net interstate migration outflow began increasing in 2001/02 and was high through 2004/05, peaking a year earlier at 2,400 persons in 2003/04. However, this outflow of residents to other parts of Australia, which was greater than the upturn in the inflow of overseas migrants, did not have much effect on the supply/demand balance in the Australian Capital Territory s residential market, as it remained balanced. Poor affordability, from the considerable price growth between 1999 and 2004, led to a decline in median prices in 2004/05, with house prices falling by 5% during the year to a median of $352,500 at June This coincided with weak employment growth in the Australian Capital Territory for the year. A return to an inflow in interstate migration in the Australian Capital Territory increased the underlying demand for dwellings, which underpinned a rebound in house prices. Solid price growth of 8% was achieved in 2005/06, which increased the median house value to $380,000 at June Residential rents in Canberra recovered in 1999/2000, growing by 5.7% in June quarter 2000, and staying strong the following June quarter at 4.2%. Vacancy rates slowly increased in the early 2000s and peaked at 4.3% at June However, a falling vacancy rate since has led to a return of stronger growth in residential rents. At June quarter 2007, rents increased by 8%, whilst the vacancy rate was 2.4%. Solid house price rises continued in 2006/07 with growth of 13%, bringing the median price to $428,000 at June This growth stems from the strong inflows of overseas (1,100 persons) and interstate (1,000 persons) migration in 2006/07 having a significant effect on demand. Underlying demand is estimated to have increased by 1,000 dwellings to 3,100 dwellings during the year, while the stock levels are projected to have moved away from the balanced market position to a deficiency of 1,200 dwellings at June Forecast Overseas and interstate migration are forecast to stay solid in 2007/08, with an inflow of 1,100 persons and 500 persons, respectively. This trend is expected to maintain strong underlying demand, which is likely to drive up stock deficiency further to 2,000 dwellings at June As a result, the median house value is projected to increase to $450,000 by June 2008, representing 5% growth for the year. The rise in migration inflow for the Australian Capital Territory can be attributed to the Federal Budget s identified plans to raise Commonwealth Sector employment, which would partly offset an expected reduction in Australian Capital Territory government employment. Over the two years to 2009/10, net overseas migration is forecast to slow while net interstate migration is expected to have zero impact. This is anticipated to see underlying demand and the stock deficiency stabilise, causing growth to ease. Subsequently, house prices are forecast to rise by just over 4% in 2008/09 and 6% in 2009/10, increasing the median house price to $500,000 by June