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 2015 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, GfK 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 express consent. QBE Insurance (Australia) Limited ABN

3 Table of Contents Executive Summary 4 Introduction 7 Property market sentiment 8 Chart 1: Housing economic indicators 8 Chart 2: Perceptions of interest rate changes this year 9 Chart 3: Time to buy dwelling measures 10 Chart 4: Reasons for the next 12 months being the best time to buy 10 Chart 5: Perceptions of residential property prices in the next year 11 Chart 6: Perceptions of property market value 12 Chart 7: Dwelling prices by city (to end March 2015) 13 Chart 8: Intenders perceptions of property affordability in next 12 months 14 Chart 9: Perceptions of property pricing and affordability among First Home Buyers 15 Chart 10: Impact of increasing property unaffordability on buying decisions 16 Chart 11: Intenders concern that foreign investment will make property unaffordable for the average Australian 17 The current mortgage market 18 Chart 12: Reasons for choosing a Big 4 Bank or other lenders 18 Chart 13: Reasons for applying for mortgages through a broker versus direct through a lender 19 Trends that may influence Australia s property market 20 Chart 14: First Home Intenders/Mortgagors new vs. existing property intention and purchase 20 Chart 15: Intended versus actual by property type 21 Chart 16: Interest in Sydney property market 22 Chart 17: Interest in Melbourne property market 23 The importance of protecting housing assets 24 Chart 18: Ability to service mortgage 24 Chart 19: Impact of an interest rate rise on you and your finances 25 Chart 20: Australian interest rates Chart 21: Reasons Mortgagors have insurance with mortgage institution 27 Chart 22: Offering of insurance by mortgage provider when taking out mortgages 27 Chart 23: Type of insurance Mortgagors would consider getting through each institution 28 Methodology 29 Sample profiles 30

4 4 Barometer 2015 Executive Summary

5 5 Since the February 2015 interest rate cut, the appeal of residential property has increased Consumer confidence softened after the May 2014 Budget, dropping 10% in the year to January 2015 (Westpac) 1. Following the February 2015 interest rate cut, both consumer confidence and confidence in the housing market increased, with the Time to Buy Dwelling Index increasing by 9.7% between Jan and Feb 15. Barometer survey results support the housing economic indicators that interest in property remains high In February % of adult Australians intended to buy property in the next 12 months. This is at mid-2014 levels (14.8%) and greater than in mid-2013 (13.2%). Perceptions that interest rates will decline in the next 12 months have strengthened Almost one third (30%) of respondents believe interest rates will fall in 2015 (up from 7% in mid-2014), which may correlate to the recent interest rate cut and the growth in the Time to Buy Dwelling Index 2. Property prices are currently perceived to be high and rising More than half (56%) of respondents think property prices will continue to rise in the next 12 months and only 23% think prices will fall. Housing unaffordability is an increasing concern for those intending to purchase real estate in the next five years Intenders believe housing prices are at least somewhat overvalued (59%) and that affordability will worsen (47%). Intenders perceive it is more important to get into the property market now (53%) than to wait to save a bigger deposit (20%), suggesting property purchases may be being brought forward in the belief housing will become more expensive. Affordability is of particular concern to First Home Buyers (FHBs) FHB activity is declining 3 and affordability seems to be a strong barrier to market entry: FHB loan sizes are increasing 4, property is perceived to be substantially overvalued, property prices are close to reaching or are above what they can afford (76%), three in five FHBs (58%) fear they will never be able to afford their own home, and higher prices are restricting choice 5. The property investment market continues strongly The proportion of borrowings for property investment is increasing 6, as is the proportion of respondents who classify themselves as investors. The results of the Barometer survey indicates that part of this boost in property investment is likely due to the growing number of self-managed super funds and the increase in property being held within the funds. There is increasing concern that foreign investment is boosting property prices Intending property purchasers are increasingly concerned about foreign investment in residential property, with two thirds (69%) concerned it will make property unaffordable (vs. 64% in June 2014 and 58% in May 2013). Those in Sydney are the most concerned (76%). Having an existing relationship remains the key reason to choose a mortgage provider The Barometer survey showed that the majority of Mortgagors have a mortgage with one of the Big 4 banks (73%), and most Mortgagors applied for their loan directly through the financial institution (63%) rather than via a broker (37%). However, more recent purchasers are more likely to obtain their loans through a broker. The current low interest rate environment has enabled mortgage holders to get ahead on their mortgage payments 43% claim they are ahead of their payments and, with the current interest rates, households have considerable capacity to continue to meet their mortgage payments. First Home Buyers have an increasing focus on new properties FHBs have a strong and increasing interest in looking to buy new properties (67% in Feb 2015, up from 60% in June 2014). This could be influenced by a shift towards new properties in the First Home Buyer state government grants, as well as the February 2015 interest rate decline (increasing affordability of new dwellings). The rate of mortgage protection insurance is low, particularly among those who need it most Mortgage repayment protection insurance is held by only 23% of Mortgagors. This drops to only 18% of those who have struggled with mortgage payments in the last 12 months. 1 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015) 2 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015) % in Dec 2014, 15.9% in Dec 2013 and 16.9% in Dec Number of dwelling commitments, ABS (December 2014) 4 Number of dwelling commitments, ABS (December 2014) 5 Results from the Barometer survey. 6 Housing Finance Australia , ABS (Dec 2014) Table 11

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7 7 Introduction Welcome to QBE s fifth annual report into mortgage and property market sentiment and behaviour. For the second time, this report will also highlight consumer attitudes and perceptions towards bancassurance 7. This report has been prepared exclusively for QBE by GfK Australia, based upon an online survey of 1,014 Australians. The randomly selected sample from an online research panel were: 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 5 to 16 February Note that in previous years this survey was conducted in May (2013) or June (2014) so there may be some differences due to seasonal variation when comparing this year with previous years findings. For more information on the survey sample, please see the methodology section at the end of this report, along with summary statistics for key subgroups. As in previous years, the Barometer report focuses on current market sentiment and, where relevant, year-on-year changes are reported/ provided. In 2015 the report also looks more deeply at insurance behaviour among those who own or intend to buy property, to help understand the attitude of this large 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. Note that we believe some of the changes between the June 2014 and February 2015 survey results may have been substantially influenced by two key events: the Federal Budget in May 2014 (which dampened confidence), and the interest rate drop in February 2015 (which has increased interest in housing). 8 These events are likely to have respectively increased conservatism within the 2014 sample and increased confidence in the housing market within the 2015 sample (although this exuberance could be short lived). Prior to the February 2015 interest rate cut, the Consumer Sentiment Index and the Time to Buy Dwelling Index were both on their way down. After the interest rate cut they both rebounded close to the February 2014 levels. It is likely the interest rate cut has arrested, at least temporarily, further declines on both these measures. 9 7 The selling of insurance products and services by banking institutions. 8 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015) 9 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015)

8 8 Barometer 2015 Property market sentiment The February 2015 interest rate cut has boosted interest in property The Australian economy has been a frequently discussed topic in politics and the media since the Federal Budget in May and the release of the Mid-Year Economic and Fiscal Outlook in late Uncertainty surrounding the May 2014 Budget appears to have had a negative impact on consumer confidence, with consumer sentiment dropping 10% in the year to January Following the interest rate cut of 0.25% in February 2015, however, consumer sentiment improved by 8%. This has moved it back to a level of confidence similar to that seen in February 2014 (see Chart 1). This large boost in confidence was likely due to a combination of factors: lower interest rates, a 21% fall in petrol prices in the previous two months, and a 9.7% rise in the share price index since the January 2015 Consumer Sentiment survey 12. The interest rate drop also boosted confidence in the housing market in February The Time to Buy Dwelling Index increased by 9.7%, reaching its highest level since February The index of house price expectations also rose 6.9% between January and February 2015 to its highest level since September It is possible the initial positive response to the February 2015 interest rate cut could subside in the coming months as a consequence/result of continuing unease about unemployment, perceptions of Budget instability and soft growth in personal incomes 14. Looking over the past year, a cash rate at half the 20-year average 15 has led to increased demand and prices in the housing market; the average house price index had grown 6.8% in the year to December 2014 and the average loan size has grown 6.6% (see Chart 1). Chart 1: Housing economic indicators Q Q Q YEAR ON YEAR CHANGE ^ Average house price Index % Average loan size 17 $308,000 $321,000 $342, % Feb 13 Feb 14 Feb 15 YEAR ON YEAR CHANGE ^ Official Cash Rate % 2.50% 2.25% -10.0% Consumer Sentiment Index * +0.5% Time to Buy Dwelling Index * -2.7% ^ Difference in most recent value and previous year as a percentage of previous year value. * Note that the January 2015 Consumer Sentiment Index was 93.2 and the Time to Buy Dwelling Index was The increases between Jan and Feb 2015 are likely due to a.25% interest rate cut in early Feb Budget Overview, Budget Australian Government (2014) 11 Mid-Year Economic and Fiscal Outlook, Australian Government (2014) 12 Melbourne Institute Survey of Consumer Sentiment Bulletin, Westpac (February 2015) 13 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015) 14 Westpac predict that another interest rate cut will follow within three months of the first, Westpac - Melbourne Institute Survey of Consumer Sentiment Bulletin (February 2015) 15 RBA Interest Rate Decisions July 1994-June 2014, average = 5.14%, June rate 2.5% 16 Housing Finance Australia , ABS (Dec 2014) 17 Housing Finance Australia , ABS (Dec 2014) 18 Interest Rate Decisions , Reserve Bank of Australia ( ) 19 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015) 20 Melbourne Institute Survey of Consumer Sentiment, Westpac (2015)

9 9 The results from the Barometer survey support the housing economic indicators that, as of February 2015, interest in property remains high (at mid-2014 levels and greater than in 2013): 14.5% of adult Australians intend to buy property in the next 12 months (virtually unchanged from 14.8% in June 2014, and greater than 13.2% in May 2013); and over one third (37%) of adult Australians cite an intention to buy property in the next five years (compared to 39% in June 2014 and 35% in May 2013). The recent interest rate cut has impacted perceptions of the best time to buy property There has been a significant change in perceptions of the direction that interest rates will shift in In mid-2014, there was an overall expectation that interest rates would increase during the rest of the calendar year (39% increase vs. 7% reduce). By February 2015, however, the expectations of a decline in interest rates in 2015 equalled those of an increase (29% increase vs. 30% decline). This is similar to the expectations found in survey results from May 2013 (see Chart 2). Chart 2: Perceptions of interest rate changes this year Total 1st home buyer 28% 39% 29% HIGHER 30% 60% 38% 29% 7% 30% LOWER 21% 7% 31% May 13 Jun 14 Feb 15 May 13 Jun 14 Feb 15 Base: Total survey sample 2013 n=1,017, 2014 n=1,061, 2015 n=1,014; First home buyers 2013 n=115, 2014 n=167, 2015 n=176 Significant increase on previous wave Significant decrease on previous wave Note: Don t knows have been excluded from proportions 31% Between January and February 2015 there was an increase in the Time to Buy Dwelling Index (from to 125.8). While this is slightly lower than a year ago 21, it is likely the February 2015 interest rate cut has boosted confidence that this is the right time to buy property. February 2015 survey results also show a slight increase in the perception among Mortgagors and Intenders that the best time to buy a residential property is in the next 12 months (39%), compared with the June 2014 survey results (36%; see Chart 3) Feb 2014 Index of (Melbourne Institute Survey of Consumer Sentiment, Westpac (2015)) 22 Note that the lower perception that mid-2014 was a good time to buy was also very likely affected by perceived uncertainty around the impact of the May 2014 Federal Budget. The June 2014 survey found that, when asked, 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 (73%) among First Home Buyers.

10 10 Barometer 2015 Chart 3: Time to buy dwelling measures Time to Buy Dwelling Index Next 12 months best time to buy % 39% Intenders 41% Mortgagors 39% st home buyers 33% Jun '14 Jan '15 Feb '15 Jun '14 Feb '15 Source: Westpac Melbourne Institute Survey of Consumer Sentiment. Base: Total survey sample 2014 = n=1,061, 2015 n=1,014 Verbatim consumer comments indicate that views on the best time to buy are heavily influenced by perceptions about increasing property prices and low interest rates, particularly among those who perceive the next 12 months to be the best time to buy (see Chart 4). Chart 4: Reasons for the next 12 months being the best time to buy Next 12 months best time to buy 39% Interest rates have gone down this week, there is a perception another cut will be applied in 2 to 3 months. The interest rates have just gone down. Price is going to be higher if I wait too long. Property prices are constantly increasing these days. Property prices are perceived to be very high The Reserve Bank of Australia (RBA) has acknowledged that growth in the Australian housing market is strong and may subject the sector to additional scrutiny. At the RBA March board meeting, the cash rate was unchanged at 2.25%. Reasons for keeping rates on hold were related to the robust housing market (particularly in Sydney). Credit is recording moderate growth overall, with stronger growth in lending to investors in housing assets. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain risks that may arise from the housing market Reserve Bank of Australia board meeting minutes (3 March 2015).

11 11 Among survey respondents there is also a continued perception that housing prices will keep rising this year; more than half (56%) believe property prices in 2015 will be higher than they were last year. Perceptions were similar in 2014 within both the total sample and First Home Buyers, following a significant rise between 2013 and Respondents in all states think property prices will increase in the next year (see Chart 5). Over the past two years, those in NSW/ACT and QLD have shown the greatest increase in belief that property prices will increase (see Chart 5). Those in WA are the least likely to think property prices will increase in the next year. This perception is a reflection of housing price growth in the past year: Perth property has shown a price decline in the past year (-0.1%; see Chart 7). Chart 5: Perceptions of residential property prices in the next year Total 1st home buyer 46% 53% 56% HIGHER 47% 56% 53% 24% 24% 23% LOWER 27% 26% 30% May 13 Jun 14 Feb 15 May 13 Jun 14 Feb 15 52% 59% 63% 48% 56% 57% 32% 46% 52% 33% 43% 41% 61% 49% 60% HIGHER 18% 21% 19% 26% 25% 21% 30% 23% 23% 33% 30% 38% 18% 22% 21% LOWER May 13 Jun 14 Feb 15 May 13 Jun 14 Feb 15 May 13 Jun 14 Feb 15 May 13 Jun 14 Feb 15 May 13 Jun 14 Feb 15 NSW/ACT VIC/TAS QLD WA SA/NT Base: Total survey sample 2013 n=1,017, 2014 n=1,061, 2015 n=1,014; First home buyers 2013 n=115, 2014 n=167, 2015 n=176 Significant increase on previous wave Significant decrease on previous wave Note: Don t knows have been excluded from proportions

12 12 Barometer 2014 Property is thought to be overvalued but perceptions differ by state In addition to the perception property prices are going to increase, over half (59%) continue to perceive that property prices are currently overvalued, with one in three (34%) believing property is substantially overvalued by more than 10%. First Home Buyers are particularly likely to judge that property is substantially overvalued (51%, up from 43%; see Chart 6). Chart 6: Perceptions of property Perceptions market value of property market value 2015 Substantially overvalued (>10%) Somewhat overvalued (up to 10%) 20% 31% 34% 28% 28% 25% 51% 27% 23% 28% 45% 32% 24% 28% 27% 28% 23% 21% 26% 30% Somewhat undervalued (up to 10%) Substantially undervalued (>10%) 10% 9% 18% 6% 8% 9% 5% 9% 4% 7% 4% 6% 6% 6% 9% 8% 22% 13% 8% 10% Jun 13 Jun 14 Feb 15 1st home buyer Owner/ occupier NSW/ACT VIC/TAS QLD WA SA/NT Base: Total sample: 2013 n=1,017, 2014 n=1,061, 2015 n=1, : First Home Buyers n=176, Owner-Occupiers n=493, NSW/ACT n=314, VIC/TAS n=338, QLD n=157, WA n=105, SA/NT n=100 Significant increase on previous wave Significant decrease on previous wavenote: Don t knows have been excluded from proportions Perceptions of recent property prices in each state seem to broadly reflect the market. Residents of NSW/ACT were the most likely to rate the market as substantially overvalued, with 45% believing property is overvalued by at least 10%, followed by Victorian residents (32%; see Chart 6). This matches the ranking of dwelling value increases in the capital city of each state: Sydney ranking first with an annual increase of 13.9% in the past year to March 2015, Melbourne ranking second with an annual increase of 5.6% It is worth noting, however, that the average annual price increase over the past ten years in Sydney is only 4.8%, lower than the average of all capital cities (5.1%); see Chart 7). 24 Conversely, residents in QLD perceive the property market to be the most undervalued (32%; see Chart 6). These perceptions may still be linked to the Gold Coast property slump that started in While Brisbane has reported the third-highest dwelling growth in the past year (2.7%), 26 the median housing price is only at 2010 levels. Combined with the increasing perception amongst Queenslanders that prices will grow in the next year (from 32% in May 2013 to 52% in February 2015; see Chart 5), there may be additional opportunities for growth in QLD. 27 Also, WA residents are significantly less likely to perceive that the property market is substantially overvalued than they were in June 2014 (27%, down from 44%). This perception reflects findings from other data sources; Perth has shown a decline in price in the past year (-0.1%; see Chart 7). 24 Housing and Economic Market Update, CoreLogic RP Data (to 31 March 2015) 25 Housing Market Review Gold Coast Queensland, CoreLogic RP Data (May 2014) 26 Housing and Economic Market Update, CoreLogic RP Data (to 31 March 2015) 27 Real Estate Institute of Australia

13 An annual study of the mortgage market in Australia 13 Chart 7: Dwelling prices by city (to end March 2015) 28 Median dwelling price City Month End Value % Change Year on Year % Change over past 10 years Combined Capitals $530, Sydney $690, Melbourne $518, Brisbane $445, Adelaide $405, Perth $513, Darwin $540, Canberra $530, Hobart $310, CoreLogic RP Data 31 March 2015 The increase in investor activity is likely to be contributing to the housing price increases, particularly in Sydney. 29 The proportion of total dwelling borrowing for investment has increased (from 30.5% in December 2012 to 32.8% in December 2013 and 34.9% in December 2014). 30 Housing affordability is of increasing concern Property prices have increased by 7.4% across the five capital cities over the year to March 2015 (see Chart 7), 31 and affordability remains a very significant concern among respondents. Intenders perceive that property prices are high and affordability will worsen: the majority of Intenders (82%) believe future generations will find it harder to purchase their first home; over half of Intenders (53%) think it is more important to get into the property market now than to wait and save a bigger deposit (only 20% think a bigger deposit should be saved); 29% of Intenders stated prices are so high they cannot afford what they want (stable since June 2014 at 29%, and up from 25% in May 2013); and half of Intenders (47%) continue to believe property will become increasingly unaffordable (stable since June 2014 but a significant increase on 2013; see Chart 8). 28 Housing and Economic Market Update, CoreLogic RP Data (to 31 March 2015) 29 The proportion of total dwelling borrowing that is for investment is increasing (from 30.5% in December 2012 to 32.8% in December 2013 to 34.9% in December 2014), Housing Finance Australia , ABS (Dec 2014) Table Housing Finance Australia , ABS (Dec 2014) Table Daily Home Value Index: Monthly Values, CoreLogic RP Data (28 February 2015)

14 14 Barometer 2015 Intender s perceptions of property affordability in next 12 months Chart 8: Intenders perceptions of property affordability in next 12 months 8% Don t Know 13% Property will become more affordable 32% There won t be much change in property affordability 47% Property will become increasingly unaffordable Base: Intender, n=701 This might suggest some property purchases may have been brought forward due to perceptions that the market will continue to increase and become less affordable. The current low interest rate environment has boosted housing affordability. In the absence of a housing market correction or significant salary increase, it is likely affordability will decrease as interest rates rise. There is also the risk some Intenders may default. At particular risk are the 35% who would consider an interest-only loan in order to purchase a more expensive property (up from 31% in June 2014). To limit riskier lending and offset the stimulatory impact of RBA rate cuts, regulators may introduce more macro-prudential controls on banks this year. In December 2014, APRA announced closer monitoring of banks investor mortgage portfolios. 32 Affordability is particularly concerning for First Home Buyers According to recent ABS statistics First Home Buyer activity continues to decline, accounting for only 14.5% of total owner occupier housing finance commitments in December 2014, a fall of 1.4% on the previous year and the lowest share of owner occupier housing finance in the past ten years. 33 Survey results indicate affordability is perceived by First Home Buyers to be a strong barrier to market entry: ABS figures show First Home Buyer loan sizes are increasing (from $296k in December 2012 to $313k in December 2013 and $332k in December 2014) 34 half (51%) perceive that property is substantially over-valued (to a greater extent than the total sample 34%); (see Chart 6); they are increasingly likely to feel that future generations will find it harder to purchase their first home (from 76% in June 2014 to 85% in February 2015); and 58% fear they will never be able to afford their own home (see Chart 9). 32 APRA outlines further steps to reinforce sound residential mortgage lending practices, APRA (December 2014) % in Dec 2013,16.9% in Dec 2012, 21.1% in Dec 2011, 17.3% in Dec 2010, 23.5% in Dec 2009, 27.2% in Dec 2008, 19.4% in Dec 2007, 18.0% in Dec 2006, 18.8% in Dec 2005, 16.6% in Dec 2004., Number of dwelling commitments, ABS (December 2014) 34 Number of dwelling commitments, ABS (December 2014)

15 15 Further, one in five First Home Buyers (19%) perceive that they are better off renting than owning (see Chart 9). Chart 9: Perceptions of property pricing and affordability among First Home Buyers Perceptions of property pricing and affordability among 1st home buyers Future generations will find it harder to purchase their first home I am worried about the level of debt people are getting into in order to buy property I m worried that foreign investment will make property unaffordable for the average Australian I am worried I ll never be able to afford my own home I think that property prices will increase strongly in the next three years I think the housing price bubble will burst and prices will fall I think it s more important to get into the property market now than to wait and save a bigger deposit I would consider an interest only loan in order to purchase a more expensive property# I am better off renting than owning a home 53% 45% 53% 44% 46% 30% 41% 22% 33% 21% 19% 63% 58% 68% 70% 70% 76% 85% Jun 2014 Feb 2015 Base: First Home Buyers, June 2014, n=167, February 2015 n=176 Significant increase on previous wave Significant decrease on previous wave The perceived unaffordability of housing is restricting the choices of intending home buyers, particularly First Home Buyers. Three quarters (76%) of First Home Buyers believe property prices are close to reaching, or are above, what they can afford (much higher compared to 58% of all Intenders; see Chart 10). Since the June 2014 survey, an increasing number of First Home Buyers are indicating that high property prices mean they will need to buy something smaller or need a larger loan (see Chart 10).

16 16 Barometer 2014 Chart 10: Impact of increasing property unaffordability on buying decisions Impact of increasing property unaffordability on buying decisions Prices affordable Prices high but I still afford what I want 13% 29% 6% 19% 29% May have to give up on buying property Will end up buying something smaller than I want Will end up buying in another location 14% 17% 36% 40% Up from 25% in June 14 33% 40% Prices are close to where I can t afford what I want 29% 47% Will buy less than I want Considering a larger loan 20% 28% 19% 23% Up from 14% in June 14 Prices are high and I cannot afford what I want 29% Considering buying an investment property instead of a property to live in 12% 7% Intender 1st home buyer Intender 1st home buyer Base: Intender, n=701, 1st home buyer, n=176 Base: Can t afford/almost can t afford what I want: Intender, n=394, 1st home buyer n=125 Note that don t knows are excluded from the proportions. Recent changes to First Home Buyer grants have restricted their applicability to new dwellings in most states and this, as well as high prices, may have impacted First Home Buyers ability to enter the property market. Concern is growing that foreign investment is boosting property prices Media attention on the impact of foreign investment on property prices in Australia continues. A foreign investor can purchase new dwellings in Australia 35 but there are restrictions for existing homes. All purchases must be approved (in advance of purchase) by the Foreign Investment Review Board (FIRB). 36 Foreign investment in Australian real estate is not spread evenly across the country. According to the RBA, FIRB data suggests most foreign residential purchases are for new, high-density, inner-city properties, primarily in Sydney and Melbourne, as well as properties close to universities. The properties purchased, however, tend to be valued well above the average national sales price and therefore in a different price bracket to the typical first home owner dwelling Foreign need to apply to the Foreign Investment Review Board (FIRB) to purchase new residential property but such proposals are normally approved without conditions. (FIRB, Guidance Note 3 Residential Real Estate Non Residents) 36 Report on Foreign Investment in Residential Real Estate, House of Representatives Standing Committee on Economics (November 2014), p. iv 37 Submission to House of Representatives Standing Committee on Economics, Report on Foreign Investment in Residential Real Estate, Dr Christopher Kent, Assistant Governor, RBA, (November 2014)

17 17 It is likely that foreign investment is having some impact on Australian residential property prices: The value of residential foreign investment is growing. According to FIRB statistics, in the first nine months of the financial year, FIRB approved foreign investment into residential property of around $24.8 billion, 44% higher than the $17.2 billion approved during all of When asked at a public parliamentary hearing on 27 June 2014 whether it is fair to say foreign investment is having some impact on house prices, Dr Kent of the RBA stated: I think it is hard to deny. If you imagine an auction on a weekend where you throw in an extra buyer who is willing to pay a little bit more than everyone else there, if that buyer happens to be foreign, maybe as a temporary resident, and they are buying the single place that they are able to get approval for, it is hard to deny that it would not push up the price. 39 Intending property purchasers perceive that foreign investment in residential property is an increasing influence on increasing prices, with two thirds (69%) concerned foreign investment will make property unaffordable (vs. 64% in June 2014 and 58% in May 2013; see Chart 11). Sydney Intenders report the greatest concern (76%, up from 66% in June 2014). Intenders concern that foreign investment will make property unaffordable for the average Australian Chart 11: Intenders concern that foreign investment will make property unaffordable for the average Australian I m worried that foreign investment will make property unaffordable for the average Australian 58% 64% 69% 20% 16% 12% UPWARD TREND AGREE DISAGREE May 13 Jun 14 Feb 15 Base: Intenders 2013 n=680, 2014 n=749, 2015 n=701 Significant increase on previous wave Significant decrease on previous wave In response, it appears the government may be starting to move to tighter control of foreign investment in the housing market by, for example: proposing foreign investors pay an application fee starting at $5,000 for a residential property under $1 million. 40 proposing Australia s Foreign Investment Policy be amended to explicitly require a temporary resident to divest an established property within three months if it ceases to be their primary residence; and proposing the establishment of a national register of title transfers for foreign purchasers of real estate in Australia Report on Foreign Investment in Residential Real Estate, House of Representatives Standing Committee on Economics (November 2014), 39 Submission to House of Representatives Standing Committee on Economics, Report on Foreign Investment in Residential Real Estate, Dr Christopher Kent, Assistant Governor, RBA, (November 2014) 40 Transcript of interview between Treasurer Joe Hockey and Sky News, Treasury (February 2015) 41 Report on Foreign Investment in Residential Real Estate, House of Representatives Standing Committee on Economics, Recommendation 8 (November 2014)

18 18 Barometer 2015 The current mortgage market Mortgaging with the Big 4 banks is still the norm Barometer survey results show the intended loan-to-value ratio (LVR) is approximately 70% for those looking to buy within the next five years. This is very close to the actual LVR of purchases in December 2014 of 67.7% 42, indicating Intenders are quite realistic about property prices and the loan required. The Big 4 banks (Commonwealth Bank, National Australia Bank, Westpac and ANZ) are more likely to be chosen as a provider by loan Intenders (83%) than by current Mortgagors (73%). The higher preference among Intenders is possibly because loan Intenders may not have been through the provider search and consideration process yet. The choice of a Big 4 bank among Intenders has risen from 80% in 2014 and 73% in This indicates the selection of a Big 4 bank for mortgages in the future may strengthen further. The main motivation by far, for both those with a current mortgage and those who intend to get a mortgage with one of the Big 4 banks, is their existing relationship with that institution. Half the respondents (49%) who chose or would choose a Big 4 bank have stated it is due to an existing relationship. Reputation and better rates are also key factors for the Big 4 banks, with 30% stating these as reasons for choosing them. Big 4 banks are seen to offer better rates than last year; this perception has increased significantly from 23% in 2014 to 30% in The main two reasons for choosing other lenders over the Big 4 banks is a perception that they have better rates (49%) and provide a more customised approach, with 46% stating the other lenders have mortgages that best suit their needs (see Chart 12). Chart 12: Reasons for choosing a Big 4 Bank or other lenders Big 4 banks 1. Existing relationship 49% Other lenders 1. Better rates 49% 2. Better rates 30% 2. Mortgages best suit needs 46% 3. Better reputation 30% 3. Care more about customers 35% 4. Better financial security 29% 4. Existing relationship 33% 5. Mortgages best suit needs 28% 5. Better reputation 16% Base: Have/intend to have mortgage with Big 4 bank, n=595; Have/intend to have mortgage with another lender, n=238 Base: Total sample, n=1, AFG Mortgage Index, Australian Finance Group (March 2015)

19 19 Most go direct to a lender due to ease and convenience In line with results from the 2014 Barometer, two in three (63%) loan Intenders/Mortgagors will go direct to a lender, with just over a third (37%) going through a mortgage broker. Younger respondents were more likely than older respondents to go through a broker, possibly because they were less experienced in the property market and needed guidance (see Chart 13). The main reasons people chose to go direct through their bank were that it s easier (44%) and more convenient (43%). This ease rises to 49% for those who have gone/intend to go with a Big 4 bank. Reasons to choose a mortgage broker were related to help and customisation of the offer that they help understand the different mortgage options (45%), are more convenient (44%) and do the research for their customers (42%; see Chart 13). Interestingly, the number of people who reject dealing with banks has increased significantly from 9% to 16%. While this hasn t affected the share of mortgage lending currently, it may be an early indicator of future sentiment if the trend continues. Chart 13: Reasons for applying for mortgages through a broker versus direct through a lender Direct with a lender 1. Going with my bank because its easier 44% More convenient Think I will get a better deal Tailored to my needs 43% 28% 25% Through a mortgage broker Helps understand the different mortgage options More convenient Do the research for me Tailored to my needs 45% 44% 42% 39% 63% 37% Under 45 years old: 39% 45 years plus: 31% I prefer not to deal with banks has increased from 9% - 16% since last wave Base: All mortgagors and loan intenders n=891; Applied/will apply direct through the lender, n=562, Applied/will apply for a mortgage through a broker, n=329

20 20 Barometer 2015 Trends that may influence Australia s property market First home buyers/owners have an increasing focus on new properties First Home Intenders/Mortgagors are showing an increased interest in new developments. Compared with June 2014, Intenders are more likely to be interested in looking to buy new properties (67%, up from 60%) and First Home Mortgagors are increasingly likely to have bought First a new dwelling home (41%, Intender up from 35%; see / Chart Mortgagor 14). - new vs. existing property intention and purchase Chart 14: First Home Intenders/Mortgagors new vs. existing property intention and purchase First Home Intenders / Mortgagors Jun-14 Feb New Existing New Existing First Home Intender First Home Mortgagor Base: : First home buyer intend to buy in the next five years 2014 n=167, 2015 n=176; First home mortgagors 2014 = 67, 2015 = 95 When splitting properties into types, the recent preference for new developments by First Home Buyers/Owners is even clearer (see Chart 15): In February 2015 the last property purchased by First Home Owners was more likely to have been a new house than it was in June 2014 (28%, up from 18%), and less likely to be an existing house (41%, down from 56%). First Home Buyers (Intenders) are also showing a shift towards new houses (intention to buy new houses increased from 44% to 50%, and intention to buy existing houses declined slightly from 60% to 56%).

21 21 Chart 15: Intended versus actual by property type Intended versus actual by property type NEW DWELLINGS EXISTING DWELLINGS Intending to buy Bought Intending to buy Bought Total 39% 20% 21% 16% 9% 5% 4% 1% 7% 2% 53% 50% 19% 19% 9% 3% 10% 2% 1st home buyer 50% 28% 19% 17% 5% 6% 9% 1% 9% 1% 56% 41% 22% 20% 12% 13% 2% 3% Investors 40% 17% 32% 23% 14% 7% 8% 7% 1% 2% 51% 43% 26% 23% 13% 13% 4% 2% Owner/ occupier 32% 19% 11% 5% 8% 3% 4% 1% 6% 2% 52% 54% 10% 7% 13% 3% 7% 2% House Unit Townhouse Terrace / semi Land House Unit Townhouse Terrace / semi Base: Intend to buy in the next five years, Total, n=701; First Home Buyers n=176, Potential investors n=284, Potential owner-occupiers n=256 Mortgagors (bought), Total, n=656; First Home Owners n=95, Current investors n=151, Current owner-occupiers n=492 Significant increase on previous wave Significant decrease on previous wave This interest in new properties among First Home Buyers/Owners is likely to be influenced by two key factors: 1. Changes in the First Home Buyer state government grants, many of which are now only provided for the purchase of new dwellings. Over the past three years there have been changes in First Home Buyer incentives and benefits to favour the purchase of new properties over existing properties. In an examination of the impact of First Home Buyer incentives, the QBE Australian Housing Outlook report found the impact across states is linked with the level of incentives offered. The greatest losses in incentives for existing houses have been in NSW, the NT and QLD. These same states reported the greatest declines in loans to First Home Buyers The recent interest rate decline may have encouraged the idea First Home Buyers have increased borrowing capacity and can afford a new property. ABS figures show First Home Buyer loan sizes are actually increasing (from $296k in December 2012 to $313k in December 2013 and $332k in December 2014). 44 Furthermore, there is an increased openness by First Home Owner/Intenders to purchasing a greater range of property types. In June 2014, First Home Buyers were each open to an average of only 1.8 different types of property. This has increased significantly in February 2015 to 2.4 different types of property (noting that total Intenders were stable at 1.8 different types of property). This would suggest, as property prices and the perception they are overvalued rise, First Home Buyers are needing to become more flexible in their housing options and are more open in particular to looking at new properties. This trend is most noticeable for houses (up from 44% to 50%) and townhouses (up from 12% to 17%). The other significant change in the types of property sought is an increase in the intention to buy a holiday house (up from 6% in June 2014 to 11% in February 2015). This increase is possibly influenced by the increased high prices (and equity to spend) in capital city properties. 43 Australian Housing Outlook , Prepared by BIS Shrapnel for QBE (October 2014) 44 Number of dwelling commitments, ABS (December 2014)

22 22 Barometer 2015 Sydney has increased in popularity Compared to June 2014, there are few changes regarding where people want to buy. Only 6% want to buy in another state (down from 9%) and a stable three in four (76%) want to buy in capital cities. The increase in the outer suburb creep within capital cities found in Barometer 2014 and 2013 results has now stabilised at that higher level, with 51% saying they are looking to buy in the outer suburbs (compared to 53% in 2014, 48% in 2013 and 42% in 2012). Most Intenders based in NSW or VIC are looking to buy in the capital city of their state (72% Sydney and 74% Melbourne). For Sydney this is a significant increase from 61% in June 2014, despite having the most expensive property in Australia. 45 Sydney s continued capital growth prospects and the February 2015 interest rate cut are likely to be driving this shift, despite low rental yields. 46 While Intenders reported a drop in interest in Sydney and Melbourne inner-city property between 2013 and 2014, there was some recovery in inner-city Sydney in 2015 (up from 9% to 13%). In NSW 29% intend to buy in regional centres, 12% in rural centres and just 7% plan to move interstate. First Home Buyers are the most likely to want to buy in rural areas (21%). In Sydney the West continues to dominate with the most popular areas being: Inner West (31%), North West (25%), Lower North Shore (24%), Parramatta (22%, down slightly from 33%) and Eastern suburbs (21%; see Chart 16). Chart 16: Interest in Sydney property market Consideration Outer West 15% South West 18% North West 25% Parramatta 22% Inner West 31% Upper North Shore 19% Southern Sydney 19% Northern Beaches 17% Lower North Shore 24% Central Sydney 13% Eastern Suburbs 21% Sutherland Shire 9% 45 Daily Home Value Index: Monthly Values, CoreLogic RP Data (28 February 2015) 46 A gross dwelling yield of only 3.6%, the 2nd lowest capital city yield (after Melbourne) in the country (CoreLogic RP Data February 2015).

23 23 In Melbourne the most popular areas are: South East (40%), Inner East (39%), Inner North (25%), East Melbourne (23%) and Inner West (23%). The Inner West has increased significantly from 15% since 2014 (see Chart 17). Chart 17: Interest in Melbourne property market Consideration West 17% North West 12% Inner North 25% Inner West 23% Inner City 12% North 20% Inner East 39% Outer West 15% South East South 40% West 18% East 23% North West 25% Parramatta 22% Inner West 31% Upper North Shore 19% Southern Sydney 19% Northern Beaches 17% Lower North Shore 24% Central Sydney 13% Eastern Suburbs 21% The investment market continues strongly Sutherland Shire 9% ABS statistics reveal property investment activity is strong and growing. The proportion of total dwelling borrowing for investment is increasing (from 30.5% in December 2012 to 32.8% in December 2013 and 34.9% in December 2014). 47 Low interest rates make property investment doubly appealing: low repayments of interest on a loan plus a potentially better return than putting savings into deposit accounts. The Barometer survey data shows 8.2% of Australians aged 18 and over currently classify themselves as Investors (up from 7.6% in June 2014), while 14.9% intend to become investors in This suggests strong investor activity is set to continue. Part of this investment growth is likely to be coming from self-managed super funds (SMSFs). The survey results confirmed the growth in SMSFs, with 21% of survey respondents claiming to have an SMSF versus 19% in 2014 and 15% in One third (33%) of these now own property as part of their SMSF, which is a very significant increase in only eight months (up from 15% in June 2014). The growth in interest for investing in property through SMSFs has been very strong and, if this continues, it would keep boosting the property market. 49 A range of other economic activities may influence the impact of any future interest rate cuts The RBA has made it clear that while it is concerned about the real estate price boom, it is more concerned about the weakening economy and may make further interest rate cuts. Any further rate cuts this year are likely to further stimulate the housing market, particularly in Sydney. 50 Conversely, it is possible we might not see the lower interest rate environment stimulate the housing market to the same degree it has in the past. Some counterbalance to future rate cuts (and potential higher property prices) might be provided by the current environment of decreasing affordability, lower rental yields, softer wages growth, possible stricter lending conditions to investors, possible restrictions in foreign investment, higher unemployment and political insecurity Housing Finance Australia 5609, ABS (December 2014) Table The Australian Tax Office (ATO) also reports the growth of SMSF members from 758,589 in June 2009 to 1,0011,686 in June (Self-managed super fund statistical report, ATO (June 2014)) 49 Note that although the survey question referred to the purchase of property ( Do you have or plan to buy property as part of your self-managed superannuation fund (SMSF)? ), there is the possibility that some may have included property trusts and/or commercial property when responding. 50 Why Sydney s property market is running so hot, Alan Kohler in the Business Spectator (March 2015) 51 Dwelling values continue to rise while rental yields compress further, Core Logic (March 2015)

24 24 Barometer 2015 The importance of protecting housing assets The current low interest rate environment has enabled mortgage holders to get ahead on their mortgage payments Reserve Bank of Australia figures show that, on average, Australians are now more than two years ahead on their mortgage repayments. 52 Although property prices 53 and loan sizes 54 are increasing, the historically low interest rates are reducing financial strain on Mortgagors. These findings are reflected in the survey data, with just under half of Mortgagors (43%) saying they are ahead on their payments and a further 41% on track with their repayments. This financial buffer may explain why 49% of Mortgagors said losing their job would not be a problem for meeting their mortgage repayments. Furthermore, for the 51% who said job loss would affect their ability to pay their mortgage, they could still manage minimum repayments for an average of 6.8 months. Not everyone is coping however; 16% said they were struggling (a few times or frequently) to pay their mortgage. This proportion is likely to rise with an interest rate increase (see Chart 18). Those who have purchased property in the last 12 months are experiencing increasing difficulty servicing their mortgage (with only 36% having paid more than the minimum, down from 46%). Overall, however, it appears that in the current low interest rate environment, households have considerable capacity to continue to meet their mortgage payments. Mortgagors perceive this is the case even in the event of a period of reduced income or unemployment. Chart 18: Ability to service mortgage Progress on mortgage repayments last 12 months For half, losing a job would impact ability to pay mortgage Ahead 43% (46%) 51% (47%) On track 41% (34%) Struggling 16% (20%) 2014 data shown in brackets They would be able to meet minimum mortgage repayments for average of 6.8 months Base: Mortgagors 2014 n=712, 2015 n= Household and Business Finances, Reserve Bank of Australia, (September 2014) 53 Daily Home Value Index: Monthly Values, CoreLogic RP Data (28 February 2015) 54 According to the Australian Finance Group (AFG), Australian s largest broking services company, their average mortgage size rose from $401k in July 2013 to $433k by the end of June 2014 a 7.9% increase. Mortgage Index, Australian Finance Group (July 2014)

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