Barometer An annual study of the mortgage market and associated insurance in Australia Prepared by GfK Australia for QBE

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1 Barometer 2014 An annual study of the mortgage market and associated insurance in Australia Prepared by GfK Australia for QBE

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

3 Table of Contents Introduction 5 Executive Summary 6 Property market sentiment 7 Chart 1: Housing economic indicators 7 Chart 2: Impact of political uncertainty on buying residential property 8 Chart 3: Perceptions of property price and interest rate changes 9 Chart 4: Perceptions of property market value in Chart 5: Perceptions of property pricing and affordability 11 The current mortgage market: expansion 13 Chart 6: Current and intended LVR 13 Chart 7: Current and intended loan sizes and LVR 14 Chart 8: Reasons for choosing a Big 4 bank over other lenders 15 Chart 9: Reasons for applying for mortgages through a broker versus direct through the lender 16 Is protecting housing assets important? 17 Chart 10: Ability to service mortgage 17 Chart 11: Impact of an interest rate rise on you and your finances 18 Chart 12: Asset insurance 19 Chart 13: Perceived importance of an actual claim rates for home, contents and landlord insurance 19 Chart 14: Offering of insurance by mortgage provider when taking out mortgages 20 Chart 15: Reasons for having insurance with mortgage institution 21 What does the future property market look like? 22 Chart 16: Intended versus actual property type purchases 22 Chart 17: Interest in Sydney property market 23 Chart 18: Interest in Melbourne property market 23 Methodology 25 Sample profiles 26 Appendix 41

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5 5 Introduction Welcome to the fourth annual QBE Australia (QBE) report into mortgage and property market sentiment and behaviour. For the first time this year s report will also highlight consumer attitudes and perceptions towards bancassurance. This report has been prepared exclusively for QBE by GfK Australia, based on a survey of 1,061 Australians. The sample consists of: current mortgage holders (Mortgagors); and those intending to buy residential property, either as an investment or home in the next five years (Intenders). The survey was developed by GfK Australia in consultation with QBE and fieldwork was conducted via an online panel from June 19 to June For more information on the survey sample, please see the methodology section at the end of this report. Summary statistics for key subgroups are also available at the end of the report. This year the report focuses on some of the topical influences on market sentiment and, where relevant, yearon-year changes are reported. This year it also looks at insurance behaviour amongst those who own or intend to buy property, to help understand the attitude of this majority group of Australians towards protecting their assets. The information, views and opinions in this report are based on research carried out by GfK Australia and the results of the survey.

6 6 Barometer 2014 Executive Summary Property appetite among respondents remains strong despite lower consumer confidence A cash rate at half the 20 year average is supporting a strong property appetite, with house prices and loan growth increasing (RBA) and more Australian adults looking to buy property in the next five years (39% of the sample in 2014 compared to 35% in 2013). The next 12 months now less likely to be seen as the right time to buy Since our last report in 2013, there has been a significant drop in respondent perceptions that the next 12 months is the best time to buy (36% in 2014 vs. 42% in 2013). Views appear to be heavily influenced by uncertainty about current market conditions and perceptions of property prices and interest rates in the next few years. The May Federal Budget is delaying market entry More than half of respondents say they intend to hold off on buying until they see the impact of the Budget on the economy. There is a general expectation interest rates will rise and house prices might stall More than half (53%) of respondents believe property prices will continue to rise in 2014, however 43% believe prices will fall (vs. only 28% in 2013). This may reflect the 39% of respondents who believe interest rates will rise in the second half of 2014 and 7% thinking they will fall. Affordability remains a top of mind concern More than half (59%) of respondents think property is overvalued despite improvements in housing affordability over the past three years: 65% worry foreign investment will make property unaffordable. First Home Buyer participation is waning FHB activity is at near record lows as a proportion of all buyers (RBA) and 63% worry they will never be able to afford their own home. This unaffordabliity sentiment also appears to extend to all buyers, with the majority (81%) of survey respondents believing future generations will find it harder to purchase their first home. Financial stability is still a big selling point for the Big 4 banks Existing relationships are helping to retain customers with the majority of Mortgagors still applying for mortgages directly with their financial institution rather than through a broker. Protection against mortgage payments is a low priority for those who need it most Among respondents, only a quarter of Mortgagors claim to have mortgage repayment protection insurance, dropping to one in five for those who have struggled with repayments in the last 12 months. Australians are well ahead on repayments 46% of respondents claim to be ahead and the rate of arrears (1.2%) is at the lowest rate since 2009 (Fitch). Non-insurance remains a substantial issue when it comes to Australian property Only four in five Mortgagors surveyed had building insurance, however this does not appear to be a factor of income level. Rather it may be linked to consumers misconceptions about actual property risk, with respondents ranking theft and fire as the highest risk to their property, although the most common claims are for water damage due to floods or storms. Property insurance is undersold at time of purchase Less than half of Mortgagors recall being offered building insurance by their financial institution at the point of sale. Property type preferences are changing Last year s increased interest in new developments from Intenders appears to have reversed in 2014, with existing dwellings now the property type more strongly considered and that more likely to be purchased. The conversion from interest to purchase of new developments is less than 50%. There is also a continuation of the outer suburb creep, with 53% looking to buy in the outer suburbs (compared to 48% in 2013 and 42% in 2012).

7 7 Property market sentiment Property appetite remains strong despite lower consumer confidence Since the release of the Mid-Year Economic and Fiscal Outlook in late the state of the Australian economy has been a consistent theme in both political and media dialogue. This recurrent debate about the economy appears to have had a negative impact on consumer confidence; first quarter 2014 economic indicators show a 10% decrease in consumer sentiment versus a 10% rise seen at the same time last year (see Chart 1 below). Faltering economic confidence is also reflected in worries about the job market, with consumer unemployment expectations more than 20% above the 10-year average 2. Chart 1: Housing economic indicators Q Q Q YEAR ON YEAR CHANGE (2013 TO 2014)^ Official cash rate % 3.00% 2.50% -17% HIA housing affordability % Consumer Sentiment Index % Time to buy dwelling Index % Average house price Index % Average loan size 6 $289,600 $301,100 $319,300 +6% ^% difference 2013 to 2014 as a percentage of 2013 value Nevertheless a cash rate less than half the 20-year average 7 has had a positive impact on the economy, particularly the housing market. House prices and average loan sizes continue to increase and survey results support this with appetite for property continuing to grow, with: 14.8% of respondents intending to buy property in the next 12 months compared to 13.2% in 2013; and two in five (39%) survey respondents citing an intention to buy in the next five years compared to 35% last year. 1 Mid-year Economic and Fiscal Outlook, Australian Government (2013) 2 Unemployment expectations continue to trend lower, Macro Business (2014) 3 Interest Rate Decisions , Reserve Bank of Australia ( ) 4 Commonwealth Bank Affordability Report, Housing Industry Association (2014) 5 Melbourne Institute Survey of Consumer Sentiment, Westpac (2014) 6 House Price Indexes: Eight Capital Cities, Australian Bureau of Statistics, (2014) 7 Interest Rate Decisions - average = 5.14%, June rate 2.5%, Reserve Bank of Australia ( )

8 8 Barometer 2014 Speculation about interest rate rises and the impact of the Federal Budget have changed perceptions of the best time to buy In 2014 there was a drop in the Housing Industry Association (HIA) Time to Buy Index for the first time in three years, with confidence falling back to pre-2012 levels. Survey responses mirror this sentiment: with a significant drop in perceptions that the next 12 months is the best time to buy. Approximately one in three (36%) mortgagors and intenders in 2014 think the next 12 months is the best time to buy compared to 42% in Given the proportion of respondents looking to buy in the next five years has increased (39% compared to 35% in 2013), it appears people may be delaying purchase until they think the market has improved. One factor behind this respondents in time to buy is uncertainty about the impact of the Federal Budget changes. Three in five (59%) intending buyers said they would hold off on buying until they see the impact of the Federal Budget, increasing to almost three quarters among First Home Buyers (see Chart 2). When asked a similar question about the Federal Election last year, more intending buyers (45%) said the Election would have no impact on their decision to buy, than the number this year who said the Budget would have no impact on their purchase intention (35%). This suggests that uncertainty as a result of the 2014 Federal Budget has had a greater impact on property buying intentions of respondents than the 2013 Federal Election. Chart 2: Impact of political uncertainty on buying residential property 2013 FEDERAL ELECTION 2014 FEDERAL BUDGET 30% 18% 9% Would like to see what happens to the economy before buying 30/59 Long campaign will effect economy so wait until after to buy Wait to see if change of governmnet before buying 59% 1st 1 st home buyer 73 % 15% Election campaign will put interest rates on hold so wait until after to buy 45% NO IMPACT 35% NO IMPACT Base: Total purchase Intenders 2013 n=680, 2014 n=749, First home buyers 2014 n=167

9 9 Verbatim comments indicate that views on the best time to buy are heavily influenced by perceptions about property prices and interest rates. A belief that property prices will rise is linked to a perception that now is the right time to buy. Conversely a belief in imminent interest rate rises, and the predicted easing in prices as a result, is commonly stated as a reason to wait. There has also been a significant shift in sentiment on property prices and interest rate changes in Belief that prices will fall has almost doubled from 25% to 43%. Opinions are also no longer split on interest rates with a third of respondents believing interest rates will rise in the second half of 2014 and almost none believing they will fall. This belief is amplified amongst First Home Buyers, three in five of whom believe rates will rise (Chart 3). Chart 3: Perceptions of property price and interest rate changes HIGHER Interest Rates in Q3/Q4 Total Property prices vs last year 28% 39% 46% 53% Interest Rates in Q3/Q4 1st 1 st home buyer Property prices vs last year 30% 60% 47% 56% LOWER % 7% 24% 24% 21% 7% 27% 26% Base: Total survey sample 2013 n=1,017, 2014 n=1,061; First home buyers 2013 n=115, 2014 n=167 Significant increase on 2013 Significant decrease on 2013 Property prices are perceived to be high and affordability is an increasing concern Although most Australians are physically well housed, it can no longer be said that we are, in general, affordably housed. 8 Saul Eslake, Chief Economist of Bank of America Merrill Lynch Australia. It would appear survey respondents agree with the above statement, with a significant increase in both the number of respondents who think property prices rose year on year (see Chart 3) and the number who believe property prices are overvalued (see Chart 4). In fact more than half of Mortgagors and Intenders believe property in Australia is overvalued, with one in three (31%) believing it is substantially overvalued by more than 10%. Even the RBA has a split opinion about the value of property; its recent research paper concludes that if the historical rate of appreciation since 1955 (approx. 2.5%) continues then houses are fairly valued, but if house price growth slows, then the average household is probably financially better off renting than buying 9. 8 Australian Housing Policy: 50 Years of Failure, Saul Eslake, (2013) 9 Is Housing Overvalued?, Reserve Bank of Australia (2014)

10 10 Barometer 2014 Chart 4: Perceptions of property market value in 2014 Overvalued (>10%) 20% 31% 43% 28% 36% 28% 20% 42% 20% Somewhat overvalued (up to 10%) 28% 28% 28% 26% 28% 29% 22% 29% 30% Somewhat undervalued (up to 10%) Undervalued (>10%) 18% 9% 10% 7% 7% 3% 12% 9% 9% 8% 6% 6% 21% 11% 7% 3% 9% 9% st home buyer Owneroccupier Base: Total sample: 2013 n=1,017, 2014 n=1,061; 2014: First Home Buyers n=167, Owner-Occupiers n=533, NSW/ACT n=355, VIC/TAS n=312, QLD n=178, WA n=127, SA/NT n=89 Significant increase on 2013 Significant decrease on 2013 The trend of different property value perceptions across states continued in 2014: Respondents residing in NSW/ACT and WA were most likely to rate the market as overvalued (65% and 71% respectively), with both representing significant increases from 2013 (54% and 53% respectively). These views are likely related to increased activity in the respective capital cities, with property prices in Sydney and Perth increasing by 20.5% and 9.4% respectively 10. Conversely a third (32%, down from 44% in 2013) of Queenslanders rate property as undervalued, indicating that the Gold Coast property slump continues to impact perceptions despite Brisbane recording 4.8% year on year growth. As property prices continue to increase (prices have risen by 10.6% across state and territory capitals over the year to March ), affordability remains a significant concern. The majority (61%) rate property as unaffordable, with more than one in four stating prices are so high they can t afford what they want (29%, up from 25% in 2013). Survey respondents are not confident that affordability will improve: half (47%) believe property will become increasingly unaffordable, increasing from 41% in The majority of survey respondents (81%) agree future generations will find it harder to purchase their first home and a third of property Intenders (35%) fear they ll never be able to afford their own home. Indeed the great Australian dream of owning one s own home appears to be slightly on the decline, with one in seven (15%) now stating they re better off renting than owning (increasing from 11% in 2013). 10 RP Data-Rismark March Hedonic Home Value Index Results, RP Data (2014)

11 11 Influence of foreign investment on property prices is a growing concern In 2014 there has been significant media interest in the impact of foreign investment on property prices in Australia. Foreign investment in residential property is certainly perceived as an increasing threat, with two thirds (65%) of Intenders now concerned foreign investment will make property unaffordable vs. 56% in 2013 (Chart 5). While foreign investment in Australian property has been increasing (with the latest statistics indicating this investment reached $17 billion in 2012/2013), it should be noted that foreign investment into residential property is subject to approval by the Foreign Investment Review Board (FIRB) and is restricted to the purchase of new dwellings. Analysis of FIRB data by the RBA suggests that foreign investment is largely concentrated in high-density new dwellings within the inner-city areas of Sydney and Melbourne. Furthermore, the average price point for approved foreign residential property purchases is approximately $650, Due to a combination of these factors, it is unlikely that foreign investment is responsible for much crowding out of First Home Buyers whose average price points are significantly lower. It should also be noted that foreign investment may also be contributing to a stimulation of the construction market, which will assist in lessening housing-supply issues which continue to persist across most state capitals 12. Chart 5: Perceptions of property pricing and affordability Disagree Agree Future generations will find it harder to purchase their first home I'm worried about the debt people are getting into to buy property I'm worried foreign investment will make property unaffordable I think property prices will increase strongly in the next three years It s more important to get into the market now than to save a bigger deposit I'm worried I ll never be able to afford my own home I'd consider an interest only loan to purchase a more expensive property I am better off owning a home than renting 7% 81% 12% 70% 5% 14% 65% 9% 20% 49% 4% 20% 48% 8% 48% 31% 7% 44% 27% 4% 15% 64% 8% Base: Total sample, n=1,061 Significant increase on 2013 Significant decrease on Foreign Investment in Residential Real Estate, RBA (2014) 12 Australian Housing Outlook , BIS Shrapnel (2013)

12 12 Barometer 2014 Affordability remains a particular issue for First Home Buyers and their participation in the market is waning According to the latest Australian Bureau of Statistics (ABS) data, First Home Buyer activity is at near record lows, accounting for only 12.6% of total borrowers in May 2014 a fall of 2% on the previous year 13. Recent changes to First Home Buyer grants restricting applicability to new dwellings in NSW, QLD (2012) and VIC (2013), have seemingly impacted First Home Buyers ability to enter the property market. It is expected a similar trend will apply in TAS and SA, with the restrictions extending to these states in July Survey results indicate affordability is a perceived barrier for First Home Buyers, with 78% believing property prices are close to reaching or are above what they can afford, and 63% worrying they ll never be able to afford their own home (compared to 31% of all respondents). 13 Number of dwelling commitments, Australian Bureau of Statistics (2014)

13 An annual study of the mortgage market in Australia 13 The current mortgage market: expansion Loan-to-Value Ratio (LVR) continues to rise As noted by the RBA in July, loan approvals have risen by around 20% in value in the past year, and this is certainly significant 14. In fact the rise in the value of loan approvals is currently close to double the rate of property price increases (year on year property growth at March 2014 was 10.6% across state and territory capitals 15 ). Survey results support that LVRs are increasing and likely to remain high close to the 80% point at which lenders mortgage insurance (LMI) is usually required (see Chart 6). Note that these are higher compared to actual figures provided by the Australian Finance Group which reports mortgage LVR figures of approximately 69% 16 across all states and territories. Chart 6: Current and intended LVR 73% 70% 74% 80% 76% 80% 77% 5+ years ago n= years ago n= years ago n=170 last 12 months n=74 next 12 months n= years from now n= years from now n=237 MORTGAGORS LVR at time of purchase INTENDERS Intended maximum LVR Information provided by respondents on their most recent mortgage or intended next mortgage clearly demonstrates intended loan sizes are on the increase, particularly for First Home Buyers (Chart 7). The upper range of what Intenders are willing to borrow is close to $400,000, well above the current average loan size of $319, Loan sizes for those who bought in the last 12 months are on average $337,000, compared to an average of $215,000 across all existing loans, which also highlights that loan sizes and LVRs are increasing. It is important to note that lending is still lower than the pace reached before the Global Financial Crisis (GFC) and the RBA has indicated that borrowing does not appear to be imprudent. Chart 7: Current and intended loan sizes and LVR $ MORTGAGORS All Mortgagors 1 st home owners Investors Owneroccupiers Amount borrowed $275,000 $358,000 $303,000 $255,000 Current loan $215,000 $264,000 $266,000 $201,000 Current LVR* 51% 68% 57% 47% INTENDERS Desired loan $271,000 - $383,000 7% $258,000 - $396,000 9% $283,000 - $400,000 6% Desired LVR 54% - 79% 13% 57% - 81% 20% 55% - 82% 14% All Intenders 1 st home buyers Potential Investors Base: Mortgagors, n=712; First Home Owners, n=123; Current Investors, n=150; Owner Occupiers, n=533 Intenders, n=749; First Home Buyers, n=167; Potential Investors, n=316 Significant increase on 2013 * Calculated by last 12 month suburb median value for house or apartments as at September 2013, source: RP Data 14 Economic Update, Reserve Bank of Australia (2014) 15 RP Data-Rismark March Hedonic Home Value Index Results, RP Data (2014) 16 AFG Mortgage Index, Australian Finance Group (2014) 17 House Price Indexes: Eight Capital Cities, Australian Bureau of Statistics (2014)

14 14 Barometer 2014 Big 4 lenders continue to benefit as perceived financial security remains more important than price and lending appetite Just under three quarters (72%) of all current Mortgagors and Intenders chose, or plan to choose, one of the Big 4 banks (The Commonwealth Bank, NAB, Westpac and ANZ) as their mortgage provider, which is in line with lending market share (79%) and up from 58% pre-gfc 18. Consumer appetite for the Big 4 lenders is increasing, with 80% of Intenders with a lender in mind indicating they would go with a Big 4 bank compared to 72% in The primary motivation for taking out a mortgage with a Big 4 bank is an existing relationship. One in two (49%) Mortgagers and Intenders say they chose, or would choose, a Big 4 bank due to an existing relationship, versus one in three (32%) for other lenders (see Chart 8). Perceived financial security is also a key differentiator between the Big 4 banks and other lenders; two in three (64%) rate the Big 4 banks as financially secure which is a large over-index compared to other banks, credit unions, building societies and non-bank lenders (see Chart 8). Chart 8: Reasons for choosing a Big 4 bank over other lenders Big 4 banks Other lenders Existing relationship 49% Mortgages best suit needs 47% Better financial security 29% Better rates 46% Better reputation 27% Care more about customers 64% 34% 27% Base: Have/intend to have mortgage with Big 4 bank, n=591; Have/intend to have mortgage with another lender, n=292 Offer better financial security Happy to lend large amounts for a mortgage Happy to lend you more than 80% LVR Big 4 banks Other banks Credit unions / Building Societies Other lenders Base: Total sample, n=1,061 Interestingly, financial security is particularly important for intending First Home Buyers (46%) and survey respondents who said they had just bought their first home were most likely of all Mortgagors to have a mortgage with a Big 4 bank (79% vs. 67% for all Mortgagors). This could be seen as surprising given the higher LVRs amongst Mortgagors who bought their first home (80% versus 74% for all Mortgagors) and belief amongst all survey respondents that non-big 4 lenders are more likely to lend more than an 80% LVR (See Chart 8). Survey respondents favouring non-big 4 lenders believe they offer better rates and more suitable products than the Big 4 banks (46% vs. 24% and 47% vs. 25%, respectively). 18 Mortgage industry calls on government to encourage securitisation to counter lack of widespread competition in home lending, Mortgage and Finance Association of Australia (2014)

15 15 Going direct to lenders is still the norm, driven by convenience Only about a third (37%) of mortgage seekers took up their loan through a mortgage broker and this has not changed since Investors are slightly more likely to utilise a broker (42%) but age is actually the strongest predictor of mortgage broker usage, with 42% of those under 45 years of age using a broker versus 28% for over 45s. The primary motivation for using a mortgage broker remains convenience (see Chart 9), rather than a borrower s belief they will get a better deal, suggesting younger people are perhaps happier to outsource the search process. The primary motivation for getting a mortgage directly through a bank is also convenience, with one in three (39%) respondents stating they went with their bank because it was easier. Perceived easiness is particularly important to first home owners (49% of whom indicated they took on a mortgage with their bank directly because it was easier), suggesting there is greater confidence in the ease of process with main financial institutions amongst those unfamiliar with the mortgage acquisition process. Chart 9: Reasons for applying for mortgages through a broker versus direct through the lender 63% 37% Under 45 years old: 42% 45 years plus: 28% Direct with lender More convenient 40% Going with my bank was easier 39% Better deal 26% Through a mortgage broker More convenient 46% Do the research for me 38% Tailored to my needs 37% Base: All mortgagors and loan intenders n=958; Applied/will apply direct through the lender, n=593, Applied/will apply for a mortgage through a broker, n=346;

16 16 Barometer 2014 Is protecting housing assets important? Mortgagors are well ahead on payments due to low interest rates The RBA s Financial Stability Review in March 2014 found the trend of Australians paying down their mortgage more quickly than required has continued 19. The Fitch Dinkum RMBS Index in March 2014 confirmed only 1.2% of mortgagors are in arrears with their mortgage payments, the lowest proportion since So, whilst property prices and loan sizes are increasing, record low interest rates are relieving the pressure on mortgage repayments. This finding is reflected in our survey data, with half (46%) of Mortgagors saying they are ahead on their payments and another third (34%) having no trouble with payments. The RBA states the aggregate mortgage buffer has risen to almost 15% of outstanding balances, or 24 months of equivalent scheduled repayments at current interest rates. This may help explain why half (53%) of Mortgagors said losing their job would not be a problem for meeting their mortgage repayments, and for those who indicated that job loss would affect their ability to pay their mortgage, they thought they could still manage minimum repayments for an average of six months. In fact only 3% of Mortgagors said job loss would make them unable to pay their mortgage, the same proportion that mentioned experiencing mortgage strain (Chart 10). As the RBA noted in the aforementioned review, it appears households have considerable capacity to continue to meet their debt obligations, even in the event of a spell of reduced income or unemployment.

17 17 Chart 10: Ability to service mortgage Progress on mortgage repayments last 12 months Losing a job would not impact ability to pay mortgage Ahead On track 46% 34% 53 % Mortgage has placed you under financial strain in last 12 months Struggling 3% 21 % Base: Mortgagors, n=712 This lack of mortgage strain may explain the low rate of refinancing (15%) among respondents and why most (71%) refinancing occurs with the same lender, suggesting rate chasing is not a major goal of existing mortgagors. 19 Financial Stability Review, Reserve Bank of Australia (2014) 20 Fitch Dinkum RMBS Index, Fitch Ratings (2014)

18 18 Barometer 2014 Protection against mortgage payments a low priority for those who need it most Given the positive position of most mortgagors in being able to meet or get ahead of their minimum mortgage repayments, it is not surprising that mortgage repayment protection insurance is owned only by a minority (27%) of respondents. While more than two thirds of Mortgagors considered mortgage protection insurance, a further 22% did not believe it was necessary. Price is not a major factor, with only 2% citing expense as a barrier. Protection is also higher amongst investors, possibly because this can be charged as a business expense, but it is still only 35% amongst this group. However respondents who have struggled with mortgage payments in the last 12 months are less likely to have protection than those who are ahead on their repayments (19% vs. 33% have mortgage protection insurance, respectively). The low incidence of mortgage protection insurance reflects a general optimism about financial security which is at odds with respondents reporting interest rates rises will have a substantial negative impact on their finances (see Chart 11). Half of the Mortgagors surveyed (49%) are likely to try to minimise this negative impact by locking in fixed rate loans in the event that interest rates rise, a significant increase on 2013 figures. Chart 11: Impact of an interest rate rise on you and your finances Strength of negative impact of interest rate rise on your finances Would you lock in a fixed rate mortgage if interest rates rose in the next 12 months? Minor Considerable 30% 28% 24% 44% 19 % 46% 13 % 26% Definitely Probably 13 % 36% Strong 19 % 22% 31 % Mortgagor Intender 1 st home buyer Base: Believe interest rated will rise in the second half of 2014 Mortgagors: n=712, intenders n=315, First home buyers n=98 Base: Mortgagors: 2013 n=736, 2014 n=712 Significant increase on 2013 Australian property is underinsured, perhaps due to the misjudgement of likely claims As discussed in the Australian Securities and Investments Commission (ASIC) s 2014 regulatory update 21, a common issue emerging from recent natural disasters (QLD floods and Victorian and NSW bushfires) was that consumers both lack understanding of what their insurance policy covers and have insufficient coverage to rebuild. In 2005 ASIC estimated that 70% of homes were underinsured and a national survey commissioned by the Insurance Council of Australia (ICA) in 2013 confirmed more than four in five Australians are risking their homes and other valuable assets by not having enough insurance 22. Whilst underinsurance is an obvious concern, survey results indicate that non-insurance remains a substantial issue when it comes to Australian property. Only four in five (82%) Mortgagors have building insurance and this drops to 74% amongst First Home Owners (see Chart 12). While the level of contents insurance reported in our research is in line with the findings of the ICA research in 2013, the rate of non-insurance for Mortgagors is substantially higher than the figure of one in 25 homeowners not having building insurance reported by the ICA. This perhaps indicates that Mortgagors are less likely to have insurance than outright home owners. 21 Regulatory update 2014: Insights from the Australian Securities and Investments Commission, Australian Securities and Investments Commission (2014) 22 Underinsured and overexposed - most Australians risk financial hardship through underinsurance, Insurance Council of Australia (2013)

19 19 Chart 12: Asset insurance MORTGAGORS INTENDERS Other insurer Mortgagee Other insurer Intended Mortgagee Home 61% 23% 82% 32% 26% 57% Contents 62% 24% 83% 42% 27% 66% Comprehensive Car 70% 13% 81% 54% 17% 69% Landlord s* 50% 23% 73% n/a Any home or car insurance 82% 47% 95% 70% 41% 83% Base: Mortgagors who know their mortgage institution n=683, Intenders who have no current mortgage and have a mortgage institution in mind n=154 *Asked only of current investors n=147 Non-insurance is widespread among respondents and is not a factor of income levels, suggesting non-insurance is not necessarily linked to availability of funds. One possible explanation is misconceptions about insurance claims. Almost half (45%) of insured respondents have made a claim on their home and contents or landlords insurance, with the most common claims being for water damage due to storms (30%) or floods (28%). However when asked which insurance events are most important, water damage ranked well behind fire and theft in importance (See Chart 13), suggesting, as ASIC inquiries have found, 23 that consumers don t adequately understand the need for and types of water damage insurance for their property. Chart 13: Perceived importance of an actual claim rates for home, contents and landlord insurance Rated importance Actual claims 37% 10% 24% 19% 28% 30% 12% 12% 12% 8% 4% 4% 7% 4% 6% 2% 1% 5% Fire Theft Flood Storm damage Falling tree Tenant damage Vandalism Broken glass Animal damage Base: Total sample n=1,061; Have insurance and have made a claim in the last 3 years n= Getting Home Insurance Right: A Report on Home Building Underinsurance, Australian Securities and Investments Commission (2005)

20 20 Barometer 2014 Property purchase could be better utilised as a point of sale for insurance Just over a third (35%) of Mortgagors surveyed recall being offered building insurance at the time of taking out their mortgage by their financial institution. While Big 4 bank customers indicated that they were more likely to be offered building insurance at the point of sale, this was still limited to just 40% (see Chart 14). Chart 14: Offering of insurance by mortgage provider when taking out mortgages Offered by: All mortgage providers Big 4 bank mortgagee Home (Building) 35% 40% Contents 24% 27% Car 17% 21% Landlord s* 37% 41% Life / income protection 26% 32% Not offered any insurance 53% 61% Base: Mortgagors n=712; *Asked only of current investors n=147

21 21 Only 28% of Mortgagors who have building insurance hold it with their mortgage institution. Reasons given for having insurance with a mortgagee focus on trust and positive customer experiences, whereas the barriers to insuring with a mortgagee are perceived to be price based (33%) and because respondents like to keep their insurance and banking separate (27%, see Chart 15). Lack of familiarity with insurance products provided by mortgage institutions is also a barrier to uptake, and is not surprising given the rate of contact at point of purchase discussed above. On 1 February 2014, a new banking code came into effect in Australia that enforces lending institutions to contact their mortgage customers annually to remind them of their obligations to insure their property under the terms and conditions of their mortgage 24. In light of this new requirement it will be interesting to see whether the rate of property insurance increases in the latter half of 2014 and into Chart 15: Reasons for having insurance with mortgage institution 54% 46% WHY HAVE INSURANCE WITH MORTGAGE INSTITUTION? WHY DON T HAVE INSURANCE WITH MORTGAGE INSTITUTION? Trust them 30% Pricing uncompetitive 33% Easy to apply 29% Want to keep banking and insurance separate 27% Good past experience 29% Want to keep banking and insurance together 28% Included or discounted through mortgage 24% Not familiar with their insurance products 18% Not experts in insurance 16% Not aware they offer insurance 16% Base: have insurer with current/intended mortgagee n=321, Do not have insurance with current/intended mortgage n= Revised Banking Code of Practice 2013, Australian Bankers Association Inc (2013)

22 22 Barometer 2014 What does the future property market look like? Property type preferences are changing In 2013 we saw an increase in interest in new developments amongst property intenders but this appears to have reversed in ABS housing statistics reveal that while Owner Occupied housing commitments have increased by 7.5% in the year to April 2014, the number of commitments for purchase of new dwellings has fallen 11.1% 25. Survey results confirm that existing dwellings are not only more strongly considered by purchase Intenders but they are also far more likely to be purchased; the conversion from interest to purchase of new developments is less than 50% (see Chart 16). Chart 16: Intended versus actual property type purchases Total First home buyers $ Investors NEW DWELLINGS EXISTING DWELLINGS Intending to buy Bought Intending to buy Bought 37% 18% 20% 6% 16% 3% 8% 1% 5% 4% 44% 18% 19% 9% 12% 5% 8% 0% 5% 3% 36% 27% 14% 19% 9% 5% 10% 2% 5% 4% 55% 51% 20% 9% 17% 3% 8% 2% 60% 56% 21% 18% 8% 11% 1% 1% 53% 44% 25% 13% 18% 2% 9% 3% Owner-occupiers 35% 18% 18% 5% 14% 2% 8% 1% 4% 4% 55% 53% 17% 9% 16% 3% 7% 3% House Unit Townhouse Terrace / semi Land House Unit Townhouse Terrace / semi Base: Intend to buy in the next five years, Total, n=749; First Home Buyers n=167, Investors n=316, Owner-Occupiers n=289 Mortgagors (bought), Total, n=712; First Home Owners n=122, Investors n=148, Owner-Occupiers n=533 Significant decrease on 2013 Changes to First Home Buyer grants appear not to be having the intended impact for this buying group, with First Home Buyers reporting lower interest in all new property types, and significantly lower interest in new units and townhouses. This is potentially a result of being priced out of this market or the benefit of the current grant is not great enough to generate interest in new properties. Outer suburb creep is likely to continue Compared to 2013, there is little change in the locations where respondents want to buy. Less than 10% want to buy in another state, and almost three in four (74%) want to buy in capital cities. There is however a continuation of the outer suburb creep within capital cities, with 53% saying they are looking to buy in the outer suburbs (compared to 48% in 2013 and 42% in 2012). In the last decade we have seen rapid residential development in inner cities, particularly in Sydney and Melbourne, however survey respondents reported a drop in interest in Sydney and Melbourne inner city property amongst Intenders in For those looking to buy in Sydney, the most popular areas are the Inner West (35%), followed by Parramatta (33%) and the North West (24%). Within Melbourne the most popular areas to buy are in the East: the South East (43%), Inner East (30%) and East (26%). 25 Housing Finance Statistics, Australian Bureau of Statistics (2014)

23 23 Chart 17: Interest in Sydney property market Consideration Median house price Growth Median unit price Growth Central Sydney $977,952 8% $665,500 8% Lower North Shore $1,505,063 8% $688,038 8% 22% 24% 33% 16% 12% 18% 9% Upper North Shore $1,019,120 6% $626,167 6% Northern Beaches $1,130,350 7% $642,773 7% North West $790,391 8% $539,174 8% Outer West $403,343 7% $335,667 7% 19% 35% 19% 18% Parramatta $564,867 9% $429,913 9% South West $472,227 6% $306,864 6% Inner West $872,373 9% $525,086 9% 13% Sutherland Shire $880,421 5% $500,308 5% Eastern Suburbs $1,936,367 7% $769,778 7% Southern Suburbs $828,628 8% $512,700 8% Prices from RP Data September 2013, growth is 12 month growth Chart 18: Interest in Melbourne property market Consideration West 17% North West 13% Inner North 20% Inner West 15% Inner City 14% North 20% Inner East 30% South East 43% East 26% Median house price Growth Median unit price Growth Inner City $829,500 7% $510,389 7% Inner East $1,019,500 5% $545,778 5% Inner North $595,830 3% $436,478 3% Inner West $541,053 1% $365,500 1% Western Melbourne $374,075 1% $274,667 1% North West $366,800 2% $303,667 2% Northern Melbourne $455,765 0% $342,800 0% Eastern Melbourne $580,530 5% $436,563 5% South East $555,762 2% $420,904 2% Prices from RP Data September 2013, growth is 12 month growth

24 24 Barometer 2014 Impact of SMSFs ABS statistics reveal that loans to investors have increased 9% in the last year, compared to only 6% growth for the traditional property heartland of owner occupiers 26. The RBA also reports that increased turnover in the property market has been driven by investors (35% growth in value of loan approvals 27 ). Survey data confirms an increased interest in investing; of those looking to buy residential property in the next five years, 46% said they were doing so for an investment (up from 42% in 2013 and 26% in 2012). The survey identified that 7.6% of Australians aged 18 and over classify themselves as Investors, while a further 16.8% intend to become investors in 2013, indicating that investor growth is set to continue. Investment through Self-Managed Superannuation Funds (SMSFs) is also likely to be an increasing factor in the property market. ATO data reveals more than 1 million Australians are now SMSF members and hold a third, or $547 billion, of the superannuation market s value. SMSFs are the fastest-growing segment of the Australian superannuation industry and property now makes up approximately 16.3% of all invested funds 28. However this investment is largely directed at nonresidential property, with domestic residential property accounting for 3.8% of all invested funds. Survey data reflects the growth in SMSFs, with 19% of survey respondents claiming to have an SMSF versus 15% in One sixth (15%) of these already own property as part of their SMSF and two thirds (66%) are open to buying property through their SMSF. 26 Housing Finance Australia, Australian Bureau of Statistics (2014) 27 Box B: The Housing Market, Rserve Bank of Australia (2014) 28 Self-managed Super Fund Statistical Report March 2014, Australian Taxation Office (2014)

25 25 Methodology The survey upon which this report is based was an online survey targeting Australian adults (aged 18+) who either have a current residential mortgage or who intend to buy residential property (as an investment or a home) in the next five years. The survey was developed by GfK Australia in consultation with QBE Australia, and fieldwork was conducted via an online panel from 19 to 26 June Data was weighted to the Australian population according to 2013 population data from the Australian Bureau of Statistics. Minimum samples of n=500 were set for the two core target sample groups: Mortgagors and Intenders, which were met through natural fall out of the sample. Of the 1,061 responses collected, 712 were Mortgagors and 749 were Intenders, with 400 qualifying for both. Throughout the report the following subgroups are referred to as follows: Mortgagors (have a current residential mortgage) 34.1% of the population,67% of the sample, n=712 Intenders (intend to buy a residential property in the next five years) 34.9% of the population, 70% of the sample, n=749 First Home Buyers (house hunters looking for their first home) 8.1% of the population, 16% of the sample, n=167 Owner-Occupiers (have a mortgage for the home they live in) 26.4% of the population, 50% of the sample, n=533 Current Investors (currently have a mortgage for an investment property) 7.6% of the population, 14% of the sample, n=150 Potential Investors (intend to buy an investment property in the next 5 years) 16.2% of the population, 30% of the sample, n=316 First Home Owners (currently have a mortgage on their first home) 6.3% of the population, 12% of the sample, n=123 The total target group for this survey represents 53.51% of the Australian adult population.

26 26 Barometer 2014 Sample profiles

27 27 Total market profile % % Property Ownership % When bought / Intend to buy Mortgagor Intender Mortgagor, no intention 29.6 Last / next 6 months Mortgagor and intend to buy 37.5 Last / next 7-12 months No mortgage, intend to buy 32.9 Last / next months Nett Mortgagor 67.1 Last / next 3-5 years Nett Intender 70.4 More than 5 years ago 52.1 n/a Subgroup Classification - Mortgagors % Property type bought / Intend to buy Mortgagor Intender First home owner 12.0 Existing house Owner-occupier only 40.4 Existing unit Investor only 4.8 Other existing property Investor & owner-occupier 9.2 New house Subgroup Classification - Intenders % New unit First Home Buyer 16.1 Other new development Subsequent home buyer 47.0 Land Investor 43.4 Sentiment % Mortgage / Intended mortgage Mortgagor Intender Best time to buy is next 12 months 35.8 Avg. property price (max. Intenders) $432,367 $486,968 Interest rates will rise in second half of 2014* 38.9 Avg. loan at purchase (max. Intenders) $215,389 $383,730 Interest rates will fall in second half of 2014* 7.4 Avg. LVR at purchase (max. Intenders) Property prices have risen in 2014* 53.4 Current LVR 51.0 n/a Property prices have fallen in 2014* 23.5 Loan with Big 4 bank Property is undervalued* 17.4 Use mortgage broker Property is overvalued* 58.3 Future generations will find harder to buy 80.6 Insurance Mortgagor Intender^ Worry foreign inv. making property unaffordable 65.1 Home I am better off owning a home than renting 63.9 Contents Housing price 'bubble' will burst + prices will fall 43.0 Landlords 14.9 n/a Worry I ll never be able to afford my own home 31.1 Mortgage repayment protection 27.1 n/a Amongst Intenders % Amongst Mortgagors % Prices are high and I cannot afford what I want* 29.3 Ahead on minimum mortgage repayments 46.0 Property will become increasingly unaffordable* 47.0 Mortgage caused financial strain last year 21.2 Could pay mortgage ongoing if lost job 53.4 Gender % Location % Household Income # % Male 51.4 Capital city 68.0 Sole income earner 25.5 Female 48.6 Regional centre 19.0 Joint income earner 43.5 Rural area 13.0 Main income earner 22.7 Age % State/Territory % $50,000 or less years 13.2 NSW & ACT 34.3 $50,001 - $75, years 23.3 VIC & TAS 29.8 $75,001 - $100, years 22.5 QLD 15.9 $100,001 - $150, years 18.4 WA 12.2 $150,001 - $200, years 13.5 SA & NT 7.8 More than $200, Over 65 years 9.0 Lifestage % Investments # % SINKs 14.5 No investments 25.8 DINKs 16.2 $50,000 or less 13.8 Family, primary aged kids 25.8 $50,001 - $150, Family, high-school kids 9.4 $150,001 - $250, Adult family 12.0 $250,001 - $350, Older (55+) singles/couples 10.2 $350,001 - $550, Retirees 11.9 $550,001 - $1 million 12.5 More than $1 million 5.3 Base: Total sample, n=1,061 Mortgagors n=712; Intenders n=749; ^ Intenders who don t have a mortgage n=349 *Percentage excluding don t know /prefer not to say responses

28 28 Barometer 2014 Current Mortgagors profile % % Property Ownership % When bought / Intend to buy Mortgagor Intender Mortgagor, no intention 44.1 Last / next 6 months Mortgagor and intend to buy 55.9 Last / next 7-12 months No mortgage, intend to buy 0.0 Last / next months Nett Mortgagor Last / next 3-5 years Nett Intender 55.9 More than 5 years ago 52.1 n/a Subgroup Classification - Mortgagors % Property type bought / Intend to buy Mortgagor Intender First home owner 17.8 Existing house Owner-occupier only 60.2 Existing unit Investor only 6.9 Other existing property Investor & owner-occupier 13.7 New house Subgroup Classification - Intenders % New unit First Home Buyer 0.0 Other new development Subsequent home buyer Land Investor 63.4 Sentiment % Mortgage / Intended mortgage Mortgagor Intender Best time to buy is next 12 months 37.6 Avg. property price (max. Intenders) $432,367 $493,531 Interest rates will rise in second half of 2014* 34.2 Avg. loan at purchase (max. Intenders) $215,389 $383,967 Interest rates will fall in second half of 2014* 7.1 Avg. LVR at purchase (max. Intenders) Property prices have risen in 2014* 50.7 Current LVR 51.0 n/a Property prices have fallen in 2014* 24.7 Loan with Big 4 bank Property is undervalued* 20.5 Use mortgage broker Property is overvalued* 52.6 Future generations will find harder to buy 82.1 Insurance Mortgagor Intender^ Worry foreign inv. making property unaffordable 67.6 Home 82.4 n/a I am better off owning a home than renting 65.8 Contents 83.4 n/a Housing price 'bubble' will burst + prices will fall 41.2 Landlords 14.9 n/a Worry I ll never be able to afford my own home 26.0 Mortgage repayment protection 27.1 n/a Amongst Intenders % Amongst Mortgagors % Prices are high and I cannot afford what I want* 23.3 Ahead on minimum mortgage repayments 46.0 Property will become increasingly unaffordable* 44.6 Mortgage caused financial strain last year 21.2 Could pay mortgage ongoing if lost job 53.4 Gender % Location % Household Income # % Male 50.3 Capital city 68.0 Sole income earner 23.8 Female 49.7 Regional centre 18.0 Joint income earner 43.7 Rural area 14.0 Main income earner 24.4 Age % State/Territory % $50,000 or less years 9.9 NSW & ACT 33.1 $50,001 - $75, years 24.2 VIC & TAS 30.3 $75,001 - $100, years 25.0 QLD 15.3 $100,001 - $150, years 20.7 WA 13.0 $150,001 - $200, years 13.1 SA & NT 8.2 More than $200, Over 65 years 7.1 Lifestage % Investments # % SINKs 12.6 No investments 23.2 DINKs 15.9 $50,000 or less 13.4 Family, primary aged kids 29.5 $50,001 - $150, Family, high-school kids 10.4 $150,001 - $250, Adult family 11.0 $250,001 - $350, Older (55+) singles/couples 11.1 $350,001 - $550, Retirees 9.4 $550,001 - $1 million 13.8 More than $1 million 5.2 Base: Mortgagors n=712; Mortgagors also Intenders n=400; *Percentage excluding don t know /prefer not to say responses xx Significantly higher than Intenders xx Significantly lower than Intenders

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