Australian Housing Outlook Prepared by BIS Shrapnel for QBE October 2015

Transcription

1 Australian Housing Outlook Prepared by BIS Shrapnel for QBE October 2015

2 DISCLAIMER: The information contained in this publication has been obtained from BIS Shrapnel Pty Limited and does not necessarily represent the views or opinions of QBE Insurance (Australia) Limited ABN (QBE). This publication is provided for information 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 express consent.

3 Table of Contents Introduction Housing Outlook Report About this report 6 1. Executive summary 7 2. Economic outlook 9 3. Buyer activity Rental markets Yields Housing affordability Demand Capital city overviews and price forecasts Appendix 57

4 4 Australian Housing Outlook

5 5 Introduction Housing Outlook Report Welcome to the latest edition of the Australian Housing Outlook Report, exclusively complied and researched for QBE by BIS Shrapnel. This report explores current home value trends in Australia and the expectations for the market across our states and territories. For the first time, median prices in this year s Report are forecast for both houses and units, with additional commentary on regional centres. There has been mixed demand for residential property across the capital cities during 2014/15 as the economy continues to transition from being led by mining investment, to more broadly based economic growth. While the residential property market is forecast to slow, BIS Shrapnel s research shows there will only be a mild correction to house prices during the forecast period of in Perth and Darwin, with compound growth in all other capital cities: Sydney, Melbourne, Adelaide, Hobart and Brisbane. With loans to first home and non-first home buyers either declining or rising very slowly across the states, investors are now the most active market group, accounting for 50% of total residential finance across 2014/15. However, median unit price growth during 2014/15 has been more subdued than houses in most capital cities and is expected to remain so through to The higher number of units being built mean any excess supply in markets is likely to be more concentrated in units than housing. Interest rates remain at historically low levels and there are signs of improvement in the tourism and education sectors, while other sectors such as agriculture and manufacturing should improve, in part thanks to the lower Australian dollar. Stronger economic growth is expected in months as investment in trade-exposed industries picks up and will ultimately drive increased employment, income and private consumption expenditure. QBE LMI has been supporting the mortgage industry for 50 years. Our Financial Institutions team continues to find innovative ways to deliver solutions, which ensure lenders have the confidence to help Australians achieve their dream of home ownership. Our sponsorship of the Australian Housing Outlook Report has developed over more than a decade and reflects our continued commitment to delivering insights into residential property trends. We hope you find this year s Report an insightful read. Phil White Chief Executive Officer QBE LMI

6 6 Australian Housing Outlook About this report This report provides an analysis and forecast of the key drivers influencing the residential market nationally, as well as across each of Australia s state and territory capital cities and selected regional centres. The analysis presents an outlook for the performance of the residential market, as measured by historical and forecast movement in the median house price and median unit price. The unit market in this report refers to the attached dwelling market and includes all forms of multi-unit dwellings including townhouses, villa units and apartments. In the major capital cities, the majority of these dwellings are apartments. The house market refers to detached or separate dwellings that do not share a wall with adjoining dwellings. Where the report refers to the residential market, or to dwellings, the reference is applicable across the whole market. The key forecasts for the market outlook are the median house price and median unit price. The median price refers to the mid-point of sales that have taken place in a period and is considered a better indicative measure of prices than the average, which can be more influenced by extreme results. The median price can also be influenced by changes to the composition of sales in between periods. This edition of the Australian Housing Outlook (compared to previous editions) now refers to a weighted median, which is a median weighted by the geographical distribution of the housing and unit stock. It is considered that the weighted median better accounts for the effect of an imbalance in the sales in the period. Consequently, the price data are now derived from APM PriceFinder raw data instead of the Real Estate Institute of Australia medians. This change has also resulted in minor changes to areas used to indicate sub-regional price growth within the capital cities. In addition to the median price, the report refers to the real median price. This is the median price after accounting for the impact of inflation. The real median price allows for a better comparison of price growth over time as, during periods of high inflation, significant rises in the median house price may be underpinned by the inflation rate and do not necessarily reflect a strong market. The forecast annual percentage changes in the median house price and median unit price in the price forecast charts in this report are rounded to the nearest whole number. Any reference to price growth in the text may not be identical to that indicated in the charts due to the impact of this rounding.

7 October Executive summary The Sydney and Melbourne residential markets have been stand-out performers in the current residential cycle, with cumulative rises of 56% and 33% in median house price during the June 2012 and June 2015 period respectively. Price growth momentum in these markets has been maintained due to the total 50 basis point cut to interest rates in February and May Growth in demand from non-first home buyers appears to have leveled out during 2014/15, with investor demand growing strongly and driving price growth in both markets. Median house price growth has been more moderate in Brisbane, Adelaide, Canberra, and Hobart over the two years to 2014/15. These cities experienced excess dwelling stock and/or weak local economic conditions. Conversely, Perth and Darwin saw declining growth in 2014/15. Demand in these two cities has been most impacted by a decrease in mining investment and lower migration. Median unit price growth in 2014/15 has been below median house price growth in all capital cities apart from Hobart and Darwin. Strong investor demand has resulted in a disproportionately higher level of new unit supply in 2014/15 and this is being reflected in rents and prices. Interest rates are forecast to remain at current low levels through 2015/16, although announcements by the regulator about the rate of investment credit growth and capital adequacy have resulted in a number of financial institutions raising interest rates to investors by 25 to 30 basis points in Together with other measures to keep investment lending growth below the regulator s guidelines, demand in some markets may ease slightly. Median house price growth is forecast to slow in 2015/16, although Sydney will remain solid at 7%. Melbourne and Brisbane are predicted to rise 5%. A softening economy in Perth and Darwin is expected to reduce demand further, resulting in a correction in median house prices, while Australia s other three capitals are expected to see shallower growth due to little pent up demand. A mild correction is forecast in Sydney, Melbourne, Perth, Adelaide and Darwin during Brisbane, where affordability is less strained and there is currently a dwelling deficiency, is forecast to experience price growth. Meanwhile, Hobart and Canberra are forecast to experience some stability after prior weakness, with interstate migration flows expected to improve. The market for units is forecast to be weaker than housing through to More restrictive investor lending practices are expected to impact the capacity for investors to pay a higher price. Moreover, the upturn in construction across most markets has been driven by units. The disproportionately higher number of units being built means any excess supply in markets is likely to be more concentrated in units rather than houses.

8 8 Australian Housing Outlook Table 1: Median prices by capital city House Quarter ended June Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var , Forecast , , , Forecast Growth (%) Unit Quarter ended June Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var Forecast Forecast Growth (%) Source: APM PriceFinder, Real Estate Institute of Australia, Forecasts: BIS Shrapnel

9 October Economic outlook 2.1 State of play The economy continues to transition from being mining investment-led to more broadly based growth. The mining and heavy industry construction boom, which underwrote the strength in Australia s Gross Domestic Product (GDP) growth, peaked in 2013/14 and is now detracting from growth. BIS Shrapnel s forecast is for mining investment to eventually fall around 60% from its peak by 2017/18. This decline is partly offset by the recovery in new dwelling investment, with commencements now at record levels. Improvement is evident in industry sectors such as tourism and education which have been held back in recent years by the high Australian dollar. The fall in the dollar has also improved the position of other tradeexposed sectors including agriculture and manufacturing. Mineral export volumes have increased as new mining capacity comes online, with lower commodity prices usually denominated in US dollars being somewhat offset by the lower dollar. Non-dwelling building is also likely to strengthen, with a healthy pipeline of projects in the office, retail, accommodation, warehouse, aged care and entertainment and recreation segments to push overall building higher in 2015/16. The pipeline, however, needs to be added to for activity to be maintained in subsequent years. Public sector building has weakened as federal and state budgets are tightened. This should start to pick up with an increase in infrastructure projects as state governments embrace asset recycling, where mature assets are sold or leased to finance new ones. Households have been cautious, keeping savings high. Consumption expenditure has only been marginally outpacing growth in household disposable income. Households have built up a considerable savings buffer after several years of high savings ratios. Rising dwelling prices and record low interest rates are expected to result in household consumption expenditure continuing to slightly outstrip the growth in household disposable income. The low Australian dollar, together with greater tourism expenditure, should translate to increased retail turnover and activity in Australia. Stronger growth is forecast to return in 12 to 18 months, as a recovery in non-mining business investment starts to contribute to growth. As trade-exposed industries pick up, related industry sectors are likely to benefit, resulting in revenue and profit growth across a range of industry sectors. This is anticipated to lead to increased business investment, including following through with previously deferred expenditure. Sectors servicing this investment, including business services, will benefit, resulting in a recovery in non-mining investment driving increased employment, income and private consumption expenditure. The Reserve Bank of Australia (RBA) is expected to keep interest rates low while the economy continues to transition. As other sectors of the economy strengthen and offset the decline in resource sector investment, employment growth is forecast to increase. After an extended period of wage restraint, the RBA is expected to become more concerned about the potential for a catch up period of stronger wages growth to create inflationary pressures. As a result, the RBA is expected to tighten interest rate policy through a rise in the cash rate during 2016/17, slowing the pace of growth over 2017/18 and heading off wage and inflationary pressures.

10 10 Australian Housing Outlook Chart 1: Key economic indicators 7 6 Per cent Forecast Year to June GDP Growth Unemployment Rate Employment Growth CPI Growth Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel Employment growth to August and unemployment rate as at August 2.2 External state of play The outlook for Australia s exports, in particular resources exports, is largely dependent on the prospects of the Chinese economy. China accounted for 32.5% of Australia s goods and services exports in 2014/15. Moreover, China accounted for 80% of the total growth in Australia s exports in 2013/14. In China, measures to cool the booming construction market and move to a consumer-led economy have had a moderating effect on Chinese growth. Exports from China have struggled as the global economy continues to stutter. The recent correction in the Chinese stock market could be seen as an indicator that the domestic economy is weaker than previously thought and the transition from investment-led growth is likely to result in slower overall growth. Chinese authorities have implemented several stimulus measures to reach the 7% growth target set for These are a blend of monetary and fiscal measures including reductions to official lending rates, reduced constraints on bank lending through lower reserve requirement ratios, and a construction stimulus program targeting affordable houses, rail and internet infrastructure to the value of approximately $US250 billion. China s growth in 2015 is expected to fall short of the 7% target due to flat exports and slower investment activity. The fragile global market may continue to delay the absorption of the excess industrial capacity which has built up and held back investment by new businesses. Rising domestic incomes in China are supporting the expansion of the services and retail sectors which are growing as a share of total economic activity. Chinese growth is expected to remain below 7% in the short to medium term as the internal adjustment process progresses. This should nevertheless be sufficient to underpin further growth in Australian exports to China in the coming years. Turning to the other major economies, the data from Japan are mixed although it appears positive. Strong first quarter growth in Japan was followed by a contraction in activity in the second quarter. Core inflation has lifted, while the depreciation of the yen has boosted Japanese export volumes. This has fed into business profits which have hit record highs and unemployment is now at its lowest levels since In the United States, economic activity is being driven by stronger retail sales and private consumption expenditure as the unemployment rate falls. Dwelling starts are increasing and on track to reach 1.1 million during 2015; more than double the trough experienced in early 2009, although well short of the long term average of 1.5 million homes. Tight credit conditions continue to impact on borrowers ability to finance new homes. There is now sufficient momentum in the economy for the Federal Reserve to flag tightening monetary policy.

11 October Euro Zone growth remains constrained by imbalances caused by the common currency. While Germany benefits from a lower Euro, the present level of the Euro is still not low enough for the more poorly performing economies, such as Italy, to be competitive. As a result, growth in these economies remains slow as they look to adjust by cutting labour costs instead. Overall, the lower Australian exchange rate should ultimately facilitate a recovery in Australian export volumes of non-commodity manufactured goods across the board. Even though the Australian dollar has fallen more than 30% since April 2013, improvements in manufacturing exports remain dependant on future global economic conditions. The recovery is likely to gain more speed over the medium term if the global economies return to trend growth rates and if the Australian dollar consistently stays below US 70 cents. 2.3 Interest rates The Consumer Price Index (CPI), which measures inflation, was weak in 2014/15 with headline inflation of 1.5%. Underlying inflation, which excludes the most volatile items and is the measure the RBA focuses on, currently sits at 2.3% and is at the lower end of its target range of 2% to 3%. The low headline figure is likely to be temporary, given this was largely driven by the slump in oil prices. Nevertheless, underlying inflation appears to be contained for now. Although the minutes from the RBA monthly meetings have expressed concerns about the strength of Sydney and Melbourne residential prices, there are no indications that the RBA will raise interest rates in the near future. The Australian Prudential Regulation Authority (APRA) is implementing measures to slow price growth using macro prudential policy targeting investors. This should provide the necessary monetary policy framework to contribute to economic growth and allow residential market upturns in the other states to gain traction and contribute to economic growth. In Australia, the overall outlook for inflation is expected to remain moderate in the immediate term, as weak domestic demand and spare capacity in the economy keeps wages growth and non-tradeables inflation contained. As the economy begins to strengthen through 2016/17, wage pressures are likely to emerge after being contained in recent years. At the same time, there is likely to be increased potential to pass higher costs resulting from the depreciated Australian dollar through to consumers as retailers start to rebuild their margins. As a result, a pre-emptive rise to interest rates is forecast for late calendar year 2016 or early Given the recent 25 basis point rise in investment lending rates in 2015 and the subdued economy, it is believed that a further rise in the cash rate of 25 basis points and a tightening bias will be sufficient to precipitate a shallow economic slowdown through 2017 and into 2018 that will dampen inflationary pressures. The extended period without a major acceleration in economic growth is anticipated to set the scene for a stronger economic upturn through the following cycle as the next round of resource sector projects combine with growth in non-mining business investment. The major banks have increased their home loan rates in October 2015, in addition to their prior increases to investor interest rates. All four banks have indicated that this move is in response to the APRA requirement for banks to increase capital held against their lending portfolio. The rise has ranged from 15 to 20 basis points. Given the need to maintain a relatively stimulatory monetary policy in the current economic environment, it is expected that RBA will reduce the cash rate to offset this rise so that the variable rate is maintained at previous levels. The correlation between changes in the cash rate and the variable rate is not as strong as it has been in the past. Most financial institutions now offer different interest rates to owner occupiers and investors. Approved owner occupiers also receive varying discounts to the standard variable rate on their borrowing. While the standard variable rate is often used as the indicative rate, the RBA sets the cash rate with a view to the impact on the borrowing costs across all loans.

12 12 Australian Housing Outlook Chart 2: Interest rates and inflation 10.0 Percentage Forecast As at June Cash Rate Standard Variable Rate Three year fixed rate Source: Reserve Bank of Australia datasets at September Forecasts: BIS Shrapnel. 2.4 Impact of investor demand Investor purchasers have been a key driver behind capital city residential markets in 2014/15. Nationally, the value of loans to residential investors rose by a significant 24% in 2014/15 compared to 2013/14, which recorded growth of 30% on the prior year. In contrast, owner occupier demand has started to taper off, with loans to first home buyers falling by an annual 3% and loans to non-first home buyers rising by a minimal 0.3% in 2014/15. As a result, investors have now become the dominant player in the market, accounting for 50% of total residential finance in 2014/15, compared with the average of 41% over the 15 years to 2014/15. A corresponding decline in residential finance to owner occupiers has occurred. Strong investor demand, an under-supply of dwellings in some states, and low interest rates have been key factors driving dwelling price growth over the past two years. Growth in investment lending, however, is anticipated to weaken in In response to APRA s guidance on home lending to investors, a number of financial institutions raised interest rates on investor loans by 25 to 30 basis points in July 2015 (despite no change in the RBA cash rate), increased interest rate buffers and tightened loan-to-value ratios. These measures have effectively limited the supply of investor loans. This is anticipated to lead to softer demand from investors, with APRA expressing a preference for financial institutions to contain annual portfolio growth in investment lending to below a 10% threshold. The removal of the most marginal and highly geared investors from the market is likely to alleviate some of the demand pressures on prices. There is also likely to be a negative effect on residential building activity. Multi-residential construction is dependent on investors to underwrite pre-sales, and the prospect of a lower loan-to-value ratio and therefore higher deposit may discourage some investors. Furthermore, there is a risk that some investors may not settle purchases of units bought off-the-plan due to the higher than anticipated equity contribution and/or increased interest rates. The potential for a higher level of sales not proceeding may result in financial institutions applying more onerous pre-sale requirements before agreeing to finance construction. Banks are also containing investment lending growth by tightening lending to foreign investors, an additional factor in anticipated lower overall demand.

13 October The new apartment market has additional risks because a purchaser could elect to forfeit their deposit rather than complete the sale. If the deposit has been secured with a deposit bond, the risk that the sale does not complete is greater as the purchaser needs to find the cash to pay the deposit at settlement, as well as secure the finance for the balance. If this occurs across the market, this would increase re-sale stock on the market and potentially apply further downward pressure on unit prices. Lower investor demand also has the potential to allow owner-occupiers to buy into a less heated property market, particularly given interest rates are expected to remain low and banks are likely to target owner occupiers, who are less impacted by APRA guidelines, to drive growth. This may offset the potential decline in investor demand. Chart 3: Share of loans to residential purchasers by purchaser type, Australia 15 years to 2014/ /15 First home buyers 15% 12% Non-first home buyers 44% 38% Investor 41% 50% Source: Australian Bureau of Statistics

14 14 Australian Housing Outlook Buyer activity 3.1 Current trends Chart 4 illustrates the change in moving annual turnover of residential lending to first home buyers, non-first home buyers (i.e. upgraders and downsizers, which include all purchases made for owner occupation and where the buyer has previously owned another dwelling) and investors. The chart represents trends for Australia, which masks some differences across the states, as outlined later in this report. Chart 4 indicates that first home buyer demand has been declining since the end of calendar 2014 with the turnover in loans 2.6% down over the year to June For non-first home buyer demand, the rate of growth has been slowing since the end of 2013, with loans to non-first home buyers showing almost no growth over the year to June 2015 (+0.3%). Some modest year-on-year growth is evident in the latest data reported in June and July 2015, although further data will be required to determine if this trend is likely to continue. Investor demand has recorded consistent year-on-year growth between 2012 and September Although the rate of growth in the value of lending to investors has started to slow since then, it was still 24% higher over the year to June 2015 compared to the year earlier. Chart 4: Annual growth in home loans moving annual turnover, Australia 60.0 Percentage growth Year ended June First Home Buyers Non-First Home Buyers Investors Investor activity based on value of lending, owner occupier data based on number of loans Source: Australian Bureau of Statistics

15 October First home buyers Incentives available First home buyer demand is important because it creates demand for entry-level properties, facilitating broader demand by encouraging current occupiers to upgrade through the value chain. As a result, incentives have often been put in place to promote first home buyer demand during times of market weakness. Chart 5 shows existing state and federal government incentives offered to first home buyers. It refers to grants available specifically to first home buyers and not broader grants and incentives first home buyers can also access. Where stamp duty concessions are offered, the maximum concession is indicated. It should be noted there are some purchase price limits for grant eligibility which vary by state. Chart 5: First home buyer incentives by state at September 2015 Established Home Grant New Home Grant Cash grant Stamp duty concession (max) Cash grant Stamp duty concession (max) NSW $0 $0 $15.0k $20.2k VIC $0 $15.5k $10.0k $15.5k QLD $0 $8.8k $15.0k $8.8k SA $0 $0 $15.0k $0 WA $3K $14.4k $10.0k $14.4k TAS $0 $0 $20.0k $0 NT $0 $0 $26.0k $0 ACT $0 $0 $12.5k $0 Future expiry Cash grant reduces to $10k 1 Jan /16 state budget to abolish $3k for existing dwellings Cash grant reduced to $10k from 1 Jan /16 budget to reduce cash grant to $10k at Jan 2016 & to $7k at Jan 2017 Source: State Government State Revenue Offices, BIS Shrapnel Over the past four years there have been progressive changes in first home buyer incentives across all states to favour purchasers of new homes over existing homes. The long-term impact will be a shift of first home buyer demand that would have otherwise been for established homes into the new home market, thereby adding to supply. The short-term impacts on the market as a result of the progressive removal of incentives for the purchase of established dwellings are: Future first home buyer demand was brought forward to take advantage of the grants before they expire, leaving a vacuum of first home buyers in the established market immediately afterwards. A delay in the next round of first home buyers who then have to accumulate a larger deposit to compensate for the lack of financial assistance. With first home owner demand being fixed (i.e. households are first home buyers only once), incentives do not create or diminish demand but rather serve to shift existing demand through time. Once the impacts of the changes to incentives are worked through, first home buyer demand should return to long-term averages.

16 16 Australian Housing Outlook The impact of the removal or reduction of first home buyer incentives for established dwellings across most states has now largely flowed through. Tasmania and South Australia removed the first home buyer incentives for existing dwellings relatively recently in July The Northern Territory removed the incentives for existing dwellings in January 2015 and accordingly first home buyer activity in these three states is lower than it otherwise would be. This is evident in the decline in loans to first home buyers in South Australia and Tasmania in 2014/15. New South Wales and Western Australia experienced declines in first home buyer loans in 2015/16, caused by diminishing affordability in New South Wales and a deteriorating economy in Western Australia. Northern Territory experienced a surge in first home buyer demand in late 2014, resulting in a rise in first home buyer loans over 2014/15. There have been declines in the first half of 2015, with a year-on-year fall of 31% in the June quarter In Victoria and the Australian Capital Territory, the stronger year-on-year growth in June quarter 2014/15 suggests that first home buyer loans have trended upwards through 2014/15. In Queensland modest growth in first home buyer loans has occurred. Australian Bureau of Statistics (ABS) data on loans to first home buyers are derived from returns submitted to APRA. A first home buyer is defined as a borrower entering the home ownership market for the first time. The definition includes all first home buyers obtaining a loan (and not just those eligible for grants) but excludes first home buyers who are investors as the data relates to loans for owner occupied properties. There is some evidence to suggest that an increasing percentage of first home buyers, particularly in the higher priced cities of Sydney and Melbourne, are purchasing an investment property as their first home as a stepping stone into the market. Chart 6: Annual growth in number of loans to first home buyers by state NSW -6.9% VIC QLD 4.7% 6.8% WA SA TAS -21.5% -17.9% -15.0% NT -30.6% ACT 30.4% AUS -3.7% -40% -30% -20% -10% 0% 10% 20% 30% 40% June Quarter 2015 Source: Australian Bureau of Statistics

17 October Upgraders and downsizers Upgraders and downsizers have historically represented the largest component of residential demand, being 44% of total residential lending activity in the past 15 years. This is two to three times the size of the first home buyer market. Since bottoming out in 2011 and 2012 in all states, upgrader demand strengthened over 2013 and Over the past twelve months to June 2015, growth in the number of loans to upgraders has stalled, growing by just 0.3% nationally. Some states, however, are still experiencing growth in upgrader demand. Victoria, South Australia, Tasmania and the Australian Capital Territory saw growth in loans to upgraders during 2014/15, although South Australia and Tasmania recorded small year-on-year declines in the June quarter 2015, suggesting activity is trending downwards. In contrast, in Queensland and the Northern Territory, growth in loans to upgraders has declined modestly in 2014/15. In Western Australia, there was a more significant decline in loans during 2014/15. All of these states had an accelerated year-on-year decline in the June quarter New South Wales, consistent with the national average, showed almost no growth over 2014/15 in loans to upgraders. The June quarter 2015 result showed a small (+0.7%) improvement, suggesting a response to the interest rate cuts in the first half of Chart 7: Annual growth in number of loans to upgraders and downsizers by state NSW VIC 0.7% 2.4% QLD -2.2% WA -11.2% SA TAS NT -2.3% -0.7% -0.1% ACT 3.5% AUS -1.1% -15% -10% -5% 0% 5% 10% 15% 20% June Quarter 2015 Source: Australian Bureau of Statistics

18 18 Australian Housing Outlook Investors The ABS provides data on residential investment in terms of the value of total loans rather than the number of loans. As a result, changes in the value of loans over time reflect a change in values for property and purchaser volumes. All states reported an increase in lending for residential investment in 2014/15, and all but South Australia (-5.7%) and the Northern Territory (-6.2%) have continued to show a year-on-year increase in lending for residential investment in the June quarter Notably, investment lending in New South Wales in 2014/15 recorded the strongest growth, rising by 32% to $65 billion over the previous year. Strong growth over the past three years has broken decade-long period of subdued demand for residential investment finance in the state since 2003/04. Of the other states, growth in lending for residential investment during 2014/15 was strong in Tasmania (+30%), Victoria (+24%), Queensland (+18%) and South Australia (+13%). While rising in 2014/15, lending for residential investment in Western Australia and the Australian Capital Territory was more subdued, although both saw strong year-on-year growth over the June quarter 2015, at 19% and 35% respectively. Chart 8: Annual growth in value of loans to investors by state NSW 30.4% VIC 25.6% QLD WA 15.8% 19.1% SA -5.7% TAS 32.8% NT -6.2% ACT 35.0% AUS 22.1% -10% 0% 10% 20% 30% 40% 50% June Quarter 2015 Source: Australian Bureau of Statistics

19 October Rental markets 4.1 Vacancy rates The vacancy rate in each city reflects the level of rental demand and supply. A vacancy rate of 3% in a market is considered balanced, where rents on average will rise broadly in line with inflation. In Sydney, since 2006 there has been a considerable deficiency of residential dwelling stock after an extended period of low new dwelling construction. The increase in new dwelling supply from 2012/13 has alleviated some tightness in the rental market although the vacancy rate remains low at 2.1% as at June Given the extent of the dwelling shortage, the return to a balanced rental vacancy rate is likely to occur beyond 2017/18. In Melbourne, vacancy rates have been below the balanced market level of 3% for the past two years to June 2015, despite record dwelling completions. This highlights the strength of population growth, boosted by record net interstate migration inflows. With population growth forecast to ease from 2015/16, and with further growth in new dwelling supply, vacancy rates are expected to rise to above 3% through 2015/16. Brisbane and Adelaide have seen vacancy rates edge higher in 2014/15 to 2.7% and 2.8% respectively and the vacancy rates in both cities are anticipated to continue to trend upwards. In Brisbane, the forecast is due to forecast dwelling completions outpacing demand, and in Adelaide the excess of dwelling stock may rise further due to weak demand. Perth (4.7%) and Darwin (6.9%) recorded the highest vacancy rates among all capital cities at June 2015, with rental vacancies trending upwards as the year progressed. Rising new dwelling completions, rapidly slowing net overseas migration inflows and falling interstate migration levels are causing an exit from rental properties. As a result, the pace of new rental tenants coming to the market is failing to keep up with the pace of new additions to the rental stock. In Hobart and Canberra, vacancy rates have tightened to 2.9% and 3.5% respectively at June In Tasmania, on the supply side dwelling completions fell below previous peaks and on the demand side there was also low rental growth which is helping to attract new tenants. In the Australian Capital Territory, declines in rents appear to be attracting new tenants. With both states estimated to experience a rising underlying dwelling surplus, the downward trend in vacancy rates is not expected to continue and vacancy rates are likely to remain above 3% through the forecast horizon. Chart 9: Residential vacancy rates, at June quarter 2014 vs % 6.9% 6.0% 5.0% 4.0% 3.0% 2.0% 2.1% 1.8% 2.9% 2.8% 2.7% 2.8% 2.4% 2.5% 4.7% 4.2% 3.9% 2.9% 4.2% 3.5% 4.4% 1.0% 0.0% Sydney Perth Melbourne Brisbane Adelaide Hobart Canberra Darwin Source: Real Estate Institute of Australia

20 20 Australian Housing Outlook Rental growth Rental growth was strong in the latter half of the 2000s after a period of underperformance in the first half of the decade. In recent years, rental growth has generally been moderate, despite vacancy rates remaining tight in all capital cities up to This suggests there may be some rental affordability constraints preventing stronger rises. Surprisingly, Melbourne experienced the highest rental growth of 2.6% in 2014/15, with strong population growth and ensuing robust demand offsetting record new dwelling supply. Vacancy rates remained steady in Melbourne. In Hobart, an improved vacancy rate of 2.9% assisted rental growth which stabilised at just above 1% in 2014/15. In Sydney, Brisbane and Adelaide rising vacancy rates during 2014/15 have led to an easing in rental growth to 2.5% in Sydney, 1.4% in Brisbane and 1.6% in Adelaide. In New South Wales, strengthening economic conditions maintained the rental growth above the level of inflation. In Darwin, rental growth slowed to less than 1% in 2014/15, while in Perth and Canberra, rents declined by 0.4% and 2.7% respectively. This reflects the high level of vacancy rates in each capital city. In both states, while new dwelling supply continues to rise, falling resource investment spending is leading to significant reductions in migration and subsequent weaker tenant demand. Chart 10: Annual rental growth 5.0% 4.8% 4.0% 3.0% 2.0% 1.0% 3.0% 2.5% 2.6% 1.7% 2.2% 1.9% 1.4% 1.6% 2.9% 1.2% 1.1% 0.9% 0.0% -1.0% -0.4% -0.8% -2.0% -3.0% -2.7% Sydney Perth Melbourne Brisbane Adelaide Hobart Canberra Darwin Source: Australian Bureau of Statistics

21 October Yields Chart 11 shows movement in indicative rental yields for houses by capital city. The indicative yield is calculated as the median three-bedroom house rent divided by the median house price. The indicative yield slightly understates actual yields. An investor is more likely to purchase a house below the median house price and therefore the rent is likely to be below that achieved for a median priced house. Nevertheless, movement in the indicative yield should correspond with actual yields. We have compared the rental return with the cost of financing by using the measurements for indicative rental yield and the standard variable interest rate respectively. In Sydney and Melbourne, indicative rental yields for houses are well below other capital cities, with stronger house price growth in these two capitals over the past two years widening the gap. At June 2015, the indicative rental yield for houses in Sydney was 2.4% and in Melbourne was 2.6%. For Melbourne, this was the lowest yield on record, for Sydney, yields are at their lowest level since In Brisbane, Adelaide and Canberra, yields are on par at approximately 4.0% at June Brisbane and Adelaide yields have varied over the past ten years, while Canberra has experienced a fall in yield in recent years as median house rents have declined. In Perth falling rents and in Darwin weaker rental growth has resulted in a decline in housing yields in 2014/15, to 4.3% in Perth and 5.3% in Darwin. Darwin has the highest indicative house yield of the capital cities. Hobart was the only capital city which experienced an increase in indicative house yields in 2014/15, which lifted to 4.6% between June 2014 and June With the exception of Perth, yields in all capital cities are below the 15-year average. Despite the low yields, the corresponding low mortgage interest rates means the gap between rental yields and interest rates in most capital cities remains narrow. In some instances, selected properties in individual markets are likely to be positively geared, particularly with the current ability of purchasers to obtain a rate better than the current standard variable rate. The narrowed gap together with the emergence since 2013/14 of capital growth within segments of many capital cities has been attractive to investors and it is anticipated that these two factors will continue to drive further investor demand across most states in 2015/16. The anticipated further reduction in yields together with the impact of regulatory change may begin to deter investors from 2016/17. Chart 11: Indicative rental yields by capital city, houses 7.0% 6.5% 6.0% 5.5% 5.0% 5.3% 4.5% 4.3% 4.6% 4.0% 3.5% Highest 4.1% 4.0% 4.0% 3.0% 2.5% 2.0% 2.6% Lowest 2.4% Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin 15 year average 2015 Current standard variable rate Source: Real Estate Institute of Australia, Reserve Bank

22 22 Australian Housing Outlook Housing affordability Housing affordability is defined by the mortgage repayments on a 25-year loan of 75% of the median house price at June 30 each year, at the prevailing June 30 standard variable rate, as a percentage of average household disposable income. Chart 12 shows that in Sydney and Melbourne, following strong house price growth of 44% and 28% in the respective capitals during the two years to 2014/15, affordability deteriorated markedly. The ratio of mortgage repayments to household income of 40.6% in Sydney and 34.9% in Melbourne at June 2015 reflects previously challenging levels, indicating limited scope for continuing solid price growth. In all other capital cities affordability ratios at June 2015 are consistent with previous levels. More moderate house price growth and the 50 basis point cut to the standard variable interest rate during the first half of 2015 have combined to maintain affordability in these cities. Interest rates are still low and in a tight market low interest rates should stimulate house price growth. This is evident in the capital cities where there is a housing stock deficiency. An improvement in the economy during 2016/17 is expected to result in the RBA becoming more concerned about wage cost inflationary pressures in the medium term. Interest rates are forecast to enter a mild tightening phase in late 2016 or early In Sydney and Melbourne, with projected price growth in 2015/16 and the cash rate being forecast to rise by only 25 basis points in 2016/17, affordability is expected to deteriorate sufficiently to initiate a mild price correction in In the other capital cities, less challenging affordability should mitigate some of the downward pressure on prices in oversupplied markets and in resource-sector exposed markets such as Perth and Darwin. Chart 12: Mortgage repayments on a median priced home* as a proportion of monthly disposable household income 50.0% 45.0% % 35.0% 40.6% % % 25.0% 20.0% 15.0% 10.0% % 21.4% 20.4% 18.8% % % Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin 2015 year of worst affordability year of best affordability direction over forecast period Source: Australian Bureau of Statistics, Reserve Bank, Real Estate Institute of Australia, Forecasts: BIS Shrapnel * Mortgage repayment based on 75% of the median house price

23 October Demand Underlying demand for new dwellings is driven primarily by population growth which, at the state level, is a combination of an increase in births less deaths and net overseas and net interstate migration flows. The demand from net overseas and net interstate migration is more immediate because this group will require accommodation upon arrival, be it owner occupied or rental. 7.1 Overseas migration Long term arrivals which predominantly comprise people on student or skilled temporary subclass 457 visas surged to an annual record of 638,220 in the year to March Solid employment growth in mining sectorrelated industries resulted in a re emergence of skills shortages which underpinned the rise in long term overseas visitors. Although arrivals from overseas were at record levels in March 2013, departures from Australia have also been increasing, with the net effect that net overseas migration is below the record levels set in Since the second half of 2013, long term arrivals have contracted in response to the slowing conditions in the Australian economy. There has been a decline in work-related visas such as subclass 457 visas as the reduction in the resource sector investment leads to diminished employment opportunities. Long term departures are on the increase as temporary migrants return to their country of origin upon expiry of their visas. Net migration from New Zealand has also declined in this period because its economy has improved relative to Australia. With the decline in annual net inflow from long term arrivals, net overseas migration decreased to 184,100 at December This trend and increasing departures, due to the lack of opportunities for temporary migrants to extend their stay, is forecast to continue over the period to June Mitigating this decline is increased overseas student arrivals, a function of the lower Australian dollar. The Department of Education and Training reports that the number of overseas students commencing courses in Australia has increased by 27% in the two years to 2014/15. Net overseas migration is forecast to decrease to 150,000 nationally by 2017/18, which remains high in an historical context. Chart 13: Arrivals and departures (movements) and net overseas migration (persons), moving annual totals, Australia Persons ('000s) Persons ('000s) Forecast Year Ending June Net Overseas Migration (Left Hand Axis) Permanent and long term departures (Left Hand Axis) Permanent and long term arrivals (Right Hand Axis) Source: Australian Bureau of Statistics, BIS Shrapnel

24 24 Australian Housing Outlook All states have benefited from an increase in net overseas migration inflows nationally since 2006/07. Compared to the long term average of 178,700 per annum in the sixteen years from 1999/2000 to 2014/15, net overseas migration inflows have risen to an average 201,000 per annum during the nine year period to 2014/15. Western Australia and the Northern Territory were the main beneficiaries due to the skills shortage generated by resource sector investment. Compared with the long term average, both states experienced an increased share of national net overseas migration in the 2006/07 to 2014/15 period, at 16.1% and 0.9% respectively. The share of net overseas migration settling in Queensland fell by about the same amount as the increased share settling in Western Australia and the Northern Territory, with the figure for Queensland being 18% in the same period. Weak economic conditions outside of the resource sector after the Global Financial Crisis held back overseas inflows to Queensland. New South Wales and Victoria generally account for the greatest share of overseas migrants, with Victoria closing the gap between the states during the nine years to 2014/15. The weakness in the New South Wales economy in the past decade saw a decreased share of overseas migration, which was down to 30.8% in the period. In contrast, Victoria s proportion of total net overseas migration edged higher to 26.8%. South Australia, Tasmania and the Australian Capital Territory all experienced a slightly increased share. The transition in the economy from resource sector investment has seen strength maintained in non-resource states since 2013/14, with the business services sector picking up and boosting employment in New South Wales and Victoria. As a result, overseas migration is forecast to hold up better in these two states through to 2017/18. New South Wales and Victoria are forecast to account for an increased 40% and 31% share of the national net overseas migration inflow. Moreover, the share is projected to rise in South Australia to 6.5% and remain steady in Tasmania and the Australian Capital Territory. These states did not benefit from the rise in resource sector investment, and as a result the impacts will be less pronounced. The contraction in resource-related investment has created fewer job opportunities in the mining states. Consequently, the proportion total net overseas migration is expected to decrease to 13% in Queensland, 8% in Western Australia, and 0.5% in Northern Territory, with a commensurate decline in population growth. Chart 14: Annual net overseas migration by state Australia No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Period No. ('000s) Share % % f % Source: Australian Bureau of Statistics. Forecasts: BIS Shrapnel

25 October Interstate migration The main drivers of migration between the states are relative housing affordability and economic conditions. Reduced interstate movement occurs when economic conditions deteriorate i.e. limited job prospects elsewhere encourage people to stay where they are. Queensland s net interstate migration inflow has declined from its long term annual average of 18,600 ( ) to 11,200 ( ), reflecting recent economic conditions. Moreover, net interstate migration is expected to decline further to a net inflow averaging just 8,000 per annum in the three years to 2017/18, with net interstate migration improving toward the end of this period as the state economy recovers. In contrast, New South Wales net interstate population outflow has improved from a long term annual average of 18,600 ( ) to 14,700 ( ). Despite house price growth from 2013/14 and affordability becoming more strained, a strong economy is forecast to continue to reduce the state s net outflow to an average 6,500 per annum in the three years to 2017/18. In Victoria, net interstate migration inflows have improved from a long term average of 2,200 per annum ( ) to 3,300 per annum ( ). Based on the latest published data published in September 2015, which provided information as at March 2015, it is anticipated that there will be a net intake of approximately 9,500 in 2014/15, which will be a record and the highest annual total among all states. Victoria s net interstate migration inflow is expected to remain strong, although it is expected to ease to an average of 5,800 per annum in the next three years to 2017/18. In Western Australia, weakening employment conditions as resource sector investment winds down is expected to result in interstate migration reverting from a net inflow of 4,900 per annum ( ) to a net outflow of 3,000 per annum ( ). In the Northern Territory and the Australian Capital Territory, the same move to an increased net interstate migration outflow is also expected to occur due to fewer job opportunities. In South Australia, the current net interstate migration outflow of slightly above 3,000 persons per annum is projected to persist through to 2017/18. In Tasmania interstate migration is anticipated to revert from a net outflow to a net inflow during the next three years. Improved affordability relative to Sydney and Melbourne is expected to result in increased tree change migration to Tasmania. Chart 15: Annual net interstate migration by state Period f No. (000s) Period f Period f No. (000s) No. (000s) Period No. (000s) f 8.0 Period f No. (000s) Period f No. (000s) Period f Period No. (000s) f -0.2 No. (000s) Source: Australian Bureau of Statistics. Forecasts: BIS Shrapnel

26 26 Australian Housing Outlook Demand and supply The underlying demand for new dwellings is driven largely by the increase in households, which is largely underpinned by population growth. The balance between underlying demand and supply has an impact on vacancy rates, rents, prices and construction. Chart 16 shows the forecast average underlying demand for additional dwellings by state in the next three years compared with current supply, as indicated by total new dwelling starts in 2014/15. The recent upturn in residential construction activity has been widespread across Australia, with new dwelling starts in 2014/15 in all states on track to be higher than forecast annual underlying demand over the three years to 2017/18. The boost to new dwelling supply should absorb any deficiency in dwelling stock, or cause an increase in the states estimated to be in oversupply. Chart 16: Annual underlying demand and supply by state 70.0 Dwellings ('000s) Dwellings ('000s) TAS NT ACT Australia NSW VIC QLD WA SA TAS NT ACT Avg Ann Underlying Demand 2015/16 to 2017/18 Dwelling Commencements 2014/15 Source: Australian Bureau of Statistics, BIS Shrapnel, Forecasts: BIS Shrapnel The states where commencements are now highest relative to forecast underlying demand is Western Australia (100% above), the Northern Territory (84% above) and the Australian Capital Territory (68% above). Chart 17 shows dwelling stock deficiency by state as a percentage of forecast annual underlying demand as at June While Western Australia is estimated to contain an underlying dwelling deficiency at June 2015, this does not reflect the high 4.7% vacancy rate in Perth (which is an indicator of a dwelling surplus). Western Australia s temporary skilled migration did not translate to demand for dwellings, with many workers living in camps onsite and in temporary accommodation during periods of not working. Consequently, any measured dwelling stock deficiency in Western Australia is probably overstated. As the Western Australia economy continues to slow and the temporary migrants return to their country of origin, the oversupply emerging in the state from 2016/17 is expected to be more indicative of the actual dwelling stock balance. By 2017/18, the oversupply is forecast to have increased further as people continue to leave and dwelling construction projects currently underway are completed.

27 October In the Northern Territory and the Australian Capital Territory, the current dwelling surplus, is mirrored by the high vacancy rates at June 2015 in Darwin and Canberra. The dwelling surplus is expected to increase through to 2017/18 to constitute around three times average annual underlying demand. In South Australia and Tasmania, based on current and forecast construction levels, the current dwelling surplus is forecast to rise further through to 2017/18 and be considerably higher than annual underlying demand. In Victoria and Queensland, new dwelling starts are noticeably higher than underlying demand at 30% and 40% above respectively, driven by record high-rise apartment construction activity in the inner city areas of both state capitals. As a result, the dwelling stock deficiency in each state at June 2015 is anticipated to erode, with a forecast dwelling stock surplus by June This dwelling stock surplus is projected to increase with the surplus likely to be most concentrated in the apartment sector. New South Wales is experiencing the highest dwelling stock deficiency of all states at June 2015, which is reflected in Sydney having the lowest vacancy rate amongst all capital cities. With starts also more in line with underlying demand, being only 13% higher, the dwelling stock deficiency in New South Wales is forecast to remain greater than one year s worth of underlying demand through to 2017/18. Chart 17: Dwelling stock deficiency/surplus by state, percentage of forecast annual underlying demand, as at June 200% 100% 0% -100% -200% -300% -400% -500% NSW VIC QLD WA SA TAS NT ACT Source: Australian Bureau of Statistics, BIS Shrapnel, Forecasts: BIS Shrapnel Note a positive percentage represents a dwelling deficiency and a negative percentage represents a surplus

28 28 Australian Housing Outlook Capital city overviews and price forecasts 8.1 Sydney House Market Sydney has experienced a considerable escalation in its median house price, with a total increase of 44% during the past two years to 2014/15. This price growth has resulted in the median house value exceeding the $1,000,000 mark, reaching a record $1,034,100 at June Purchaser demand was initially buoyed by affordability, which was at its most attractive level since the early 2000s heading into 2013/14 after the prior cumulative 185 basis point reduction in the standard variable interest rate. Confidence has since strengthened due to the improved New South Wales economy. Investors have been driving the market, with the value of residential investment loans in New South Wales surging by 89% over the two years to 2014/15. In comparison, solid growth in the volume of loans to owner occupiers occurred in 2013/14 (+13%), although it appears that owner occupier demand may have plateaued in 2014/15, albeit remaining at elevated levels. Median house price growth in Sydney by region, per cent, 2014/15 INNER MIDDLE OUTER MEDIAN Annual % increase Source: APM PriceFinder, BIS Shrapnel House price growth has been underpinned by the sizeable deficiency of dwelling stock across Sydney, highlighted by house price growth in the inner, middle and outer regions of Sydney being above 20% over 2014/15. This shortage in residential dwellings is expected to maintain upward pressure on house prices in 2015/16, as tight vacancy rates continue to encourage investor demand. With the standard variable rate expected to remain at a stimulatory 5.45% through 2015/16, owner occupier demand should remain elevated despite more challenging affordability. Consequently, Sydney s median house price is forecast to rise by 7% to $1,110,000 at June Investors have been largely driving demand and price escalation in Sydney for both houses and units investment finance accounted for 59% of total residential finance in New South Wales in 2014/15, Changes to regulatory guidelines in mid-2015 saw an interest rate rise of 25 basis points for investment loans. Interest rates are forecast to rise further and tightening bias by the Reserve Bank during 2016/17 is likely to weigh on affordability and purchaser confidence. Investors are expected to seek higher yields to compensate. The impact is forecast to result in a cumulative 5% correction in house prices during the two years to 2017/18, decreasing the median house value to $1,055,000 by June Although affordability will remain constrained, the sizeable dwelling stock deficiency in the Sydney market is expected to prevent greater price declines. Unit market New South Wales is the only state forecast to experience a sizeable and sustained underlying dwelling deficiency through to 2018, despite a strong upturn in residential construction. Moreover, compared to many of the other capital city markets, where growth in new supply is dominated by the unit/apartment sector, new dwelling supply in Sydney is characterised by a proportional increase in both new house and unit supply. As a result, both the house and unit markets will remain in deficiency through the forecast period. Investors are more prevalent, however, in the unit market than the detached house market. The unit market is expected to be more greatly impacted by regulatory guidelines to slow growth in investment lending. With higher interest rates and lower loan-to-value ratios offered to investors by the financial institutions, the capacity for investors to pay higher prices is being curtailed. Consequently, median unit price growth is forecast to be 5% in 2015/16, slightly below median house price growth. As price growth slows, the expectation by investors for future price growth is expected to wane. The prospect of a tightening interest rate policy in 2016/17 is likely to impact on investor demand, with limited potential to offset interest rate rises given Sydney s low rental yields. Consequently, investor demand is anticipated to weaken considerably over 2016/17 and 2017/18, with unit prices forecast to fall by a cumulative 6% in this period.

29 October Chart 18: Sydney dwellings, prices and activity 1, Real house price Sydney ($'000) +22 Forecast House price Sydney ($'000) Unit price Sydney ($'000) Real Unit price Sydney ($'000) Commencements ('000) New South Wales (Quarterly, MAT) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

30 30 Australian Housing Outlook Chart 19: Sydney regions

31 October Regional NSW centres In addition to local economic demand and supply factors, house prices in the Newcastle region, including Local Government Areas of Newcastle and Lake Macquarie, and Wollongong region, including LGAs of Wollongong, Shellharbour and Kiama, are often impacted by the timing of Sydney s residential cycle. Relative house prices, which drive migration between the capital and the regional centres, also play a role. In Newcastle, purchaser sentiment strengthened through 2013/14, stimulated by the low borrowing rate of 5.95% at the start of the financial year. The region also saw a 53% surge in total dwelling starts. Median house price growth picked up to 8.9% during 2013/14. In the Hunter region, local economic conditions have become more challenging as declines in coal sector investment weigh on employment growth. Moreover, the boost to dwelling starts in 2013/14 and corresponding increase to new dwelling supply in 2014/15 has seen vacancy rates move above the balanced market rate of 3% from March Median house price growth has eased over 2014/15, although remained solid at 7.7%. Low interest rates and the 50 basis point cut to housing interest rates in the first half of 2015 have further supported demand. At June 2015, the median house value in the Newcastle region was $483,100. The economic outlook for the Newcastle region remains positive. The city s role as a logistics hub has increased in recent years. Together with employment growth from other industries assisted by the lower dollar, this should eventually offset the resource sector-related declines to employment. Plans to revitalise Newcastle are expected to have a positive impact with new infrastructure, such as the relocation of the train terminus and development of the light rail line, to encourage new investment. A widened disparity with Sydney prices should also provide incentive for migration to the region, thus stimulating demand for dwellings and underpinning forecast house price growth of 15% over the next three years, lifting the median value to $540,000 by June The Wollongong region has experienced a sharper escalation in median house prices during the past two years, with growth of 9.3% in 2013/14 accelerating to 17.9% in 2014/15, and the median house value increasing to $580,600 at June Despite setbacks in the steel sector and other industries, purchaser demand in the region has benefitted from the relatively more buoyant Sydney economy, with the 2011 Census indicating that around 20% of the Wollongong region s working population commuted to Sydney. The positive employment growth and stronger wage growth in Sydney are likely to have contributed to the sizeable growth in house prices. Investor demand is also likely to have focused on the Wollongong region, with below 3% balanced market vacancy rates since the middle of 2013 underpinning solid growth in house rents. The local economy in the Wollongong region is relatively diversified, with the tourism, services and education sectors contributing to economic conditions significantly, which should continue to support buoyant demand. The median house price in the Wollongong region at June 2015 is 44% below the Sydney median house price, making it an increasingly attractive option for Sydneysiders opting to relocate, particularly with low borrowing costs. Median house prices are forecast to increase by 5.9% over 2015/16, before more strained affordability slows growth during the following two years. The projected median house price in the Wollongong region of $630,000 at June 2018 will represent an 8.5% increase over the three year forecast period.

32 32 Australian Housing Outlook Chart 20: Regional New South Wales, median house prices 640 Forecast House price Wollongong ($'000) House price Newcastle ($'000) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

33 October Melbourne House Market In Melbourne, strong population growth in the two years to 2014/15, underpinned by high net overseas migration and record net interstate migration inflows, has supported a considerable increase in purchaser demand. Furthermore, the reduction in the standard variable rate to 5.95% by August 2013 at the start of this period led to a significant increase in demand for relatively more expensive established houses within the inner and middle suburbs of Greater Melbourne. Demand has been maintained through to 2015, aided by the additional 50 basis point cut during the first half of the calendar year. Melbourne s median house price has risen by 28% over this two year period to $734,300 at June Median house price growth in the inner (39%) and middle (36%) regions of Melbourne has been more than double the house price growth in the outer (17%) region in the two years to 2014/15. The recent high Australian dollar has weighed on the manufacturing and retail sectors, which are key employers in Outer Melbourne. Median house price growth in Melbourne by region, per cent, 2014/15 INNER MIDDLE OUTER MEDIAN Annual % increase Source: APM PriceFinder, BIS Shrapnel Underlying demand is expected to remain strong over 2015/16, attributed to high net overseas and interstate migration inflows into Victoria, and the standard variable interest rate remaining at an historical low of 5.45%. This is projected to be sufficient to induce a further 5.0% annual increase in the median house price to an estimated $770,000 by June This will represent a significant slowdown in the rate of price growth from the previous two years. Victoria is likely to face economic headwinds in the form of a diminishing automotive manufacturing sector as all three car assembly plants cease operations by Residential construction activity (a key economic driver) is also expected to weaken given the emerging excess of residential dwellings. Although largely a result of substantial new apartment supply coming on line in Inner Melbourne, which is not in direct competition with the house market, the consequent increase in vacancy rates above the balanced market rate of 3% is likely to still have some negative effect on house rents, and in turn investor demand. Lower net migration and subsequently slower population growth will lead to weaker underlying dwelling demand from 2016/17. Housing affordability, which will have deteriorated considerably over the three years to 2015/16 due to strong price growth, is likely to be further impacted by an expected tightening in monetary policy in 2016/17. For investors at the margins, who have already experienced a 25 basis point rise in interest rates in 2015 due to regulatory directives, the impact will be even greater. Consequently, the median house price is forecast to remain steady over 2016/17, before contracting by 2 per cent over 2017/18 to $755,000. Unit market Price growth in Melbourne s unit market has been more subdued over the past two years, with the median unit price rising by 11%, compared to growth of 28% in the median house price. This reflects the growth in new unit supply, with new unit starts in Melbourne increasing by 48% between 2012/13 and 2014/15, compared to a corresponding 22% rise in house commencements. The record new unit supply is expected to weigh on the Melbourne unit market over the next three years as these dwellings are progressively completed. At the state level, the residential market is forecast to move into an increasing oversupply though to 2018, although the excess is estimated to be primarily concentrated in the unit sector. The oversupply is also expected to be compounded by the more restrictive policies on lending to investors, and this should impact on prices. While the median unit price is forecast to tread water over 2015/16, a cumulative 6% decline is forecast over 2016/ /18 as the impact of oversupply becomes more pronounced.

34 34 Australian Housing Outlook Chart 21: Melbourne dwellings, prices and activity 1,280 Forecast Real house price Melbourne ($'000) House price Melbourne ($'000) Real Unit price Melbourne ($'000) Unit price Melbourne ($'000) Commencements ('000) Victoria (Quarterly, MAT) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

35 October Chart 22: Melbourne regions

36 36 Australian Housing Outlook Regional Victorian centres As well as local economic demand and supply factors, house prices in Geelong, Ballarat and Bendigo can be impacted by the timing of the residential cycle in Melbourne. New infrastructure, and the relative house prices, which drive migration between the capital and regional centres, can be contributing factors. All three regions are expected to benefit from the completion of the Regional Rail Link in While not necessarily resulting in a faster trip to Melbourne, the more frequent and reliable transport service is likely to increase the attraction to live in these centres. The potential for house purchasers to settle in a regional centre, where there are more services and infrastructure in place, and similar affordability to Melbourne s outer fringe housing estates, may create additional demand for dwellings. However, competition with Melbourne s outer suburbs and fringes, which offer an abundance of affordable housing options and closer proximity to Melbourne, is likely to limit any momentum in price growth. The median house price in Geelong increased by a moderate 4.6% during 2013/14 but then edged down by 0.3% in 2014/15 to $384,000. Healthy dwelling construction is contributing to supply. Vacancy rates have remained persistently above the balanced market rate of 3% since the start of 2013, as demand has been hit by economic setbacks in the Geelong region, such as the closure of the Alcoa aluminium smelter and redundancies at Australian retailer Target s head office. The gradual winding down of operations at the Ford engine plant has weakened demand, and the impact is set to continue through to its closure in late Service industries are playing an increasingly important role in the local Geelong economy. Employment is likely to receive a boost from the establishment of the National Disability Insurance Scheme headquarters and the relocation Worksafe Victoria s headquarters to the region. The contraction of Geelong s manufacturing sector is likely to dampen confidence and restrict median house price growth to below 2% over the next three years, with a forecast median house value of $390,000 at June In Ballarat, the median house price of $302,600 at June 2015 represented annual growth of 2.9%, which was stronger than median house price movements in Geelong and Bendigo. Population growth across Ballarat has held up relatively well in recent years compared with other regional Victorian locations. In Ballarat, the population growth of 1.7% in 2013/14 was supported by a relatively solid performing employment market with links to Melbourne. Sizeable growth in new dwelling starts in 2014/15 has already translated into vacancy rates moving above the balanced market rate of 3% from April 2015, with the downward pressure on prices forecast to result in mild growth of 2.5% during the three years to 2017/18, with the median house value reaching $310,000 by June In Bendigo, the benefits from the boost to dwelling demand due to the $600 million investment in the construction of Bendigo Hospital in 2013/14 have been largely confined to that year, with median house price growth slowing from 8.3% in 2013/14 to 1.6% in 2014/15. Furthermore, vacancy rates increased to 2.8% by mid-2015 after being 2.0% a year earlier, which suggests that some of the earlier pressures in the Bendigo market have eased. With few new major construction projects to offset the decline in building activity after the completion of the Bendigo Hospital, employment conditions are expected to weaken and house price growth is forecast to remain muted over the next three years to 2017/18, totalling 1.5%. The median house value is forecast to edge higher from $325,000 at June 2015 to $330,000 in June 2018.

37 October Chart 23: Regional Victorian centres, median house prices 640 Forecast House price Bendigo ($'000) House price Geelong ($'000) House price Ballarat ($'000) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

38 38 Australian Housing Outlook Brisbane House Market Median house price growth has been more moderate in Brisbane during the two years to 2014/15 in comparison to Sydney and Melbourne. This primarily reflects the weaker local economic conditions relative to the southern states, which has slowed population growth. The net overseas migration inflow in 2014/15 is projected to be a third of its peak net intake in 2008/09. The net interstate migration inflow collapsed to a long term low of below 6,000 in 2013/14, and is expected to have contracted further in 2014/15. In line with weak underlying demand, total new dwelling supply remained subdued in 2013/14, and has only picked up significantly in 2014/15 due to the surge in high rise apartment completions. Nevertheless, an overall deficiency of residential housing stock is still in place. This has applied upward pressure on prices over the two years to 2014/15 and supported a cumulative 10% increase in Brisbane s median house price to $511,300 at June In this two-year period, middle ring Brisbane (14%) has experienced the strongest median house price growth followed by the inner (8%) and outer (5%) regions. In the past twelve months, price growth in inner Brisbane (+5.3%) has been greatest. Median house price growth in Brisbane by region, per cent, 2014/15 INNER MIDDLE OUTER MEDIAN Annual % increase Source: APM PriceFinder, BIS Shrapnel In real, inflation adjusted terms, Brisbane s median house price at June 2015 remained 6% below its peak in June Since November 2011 there have also been successive cuts to the cash rate and these two factors have combined to significantly improve housing affordability in Brisbane. The continuing contraction in mining investment is expected to stymie economic activity and dampen migration and population growth. Consequently, Brisbane s median house price is forecast to rise by a moderate 4.6% in 2015/16 to $535,000 at June Population growth is forecast to increase from 2016/17, as Brisbane s affordability advantage over Sydney and Melbourne begins to boost net interstate migration into South East Queensland. Median house price growth is projected to escalate to 5.6% in 2016/17, although momentum is anticipated to be brief, with price growth slowing again to 1.8% in 2017/18. Rises to interest rates through 2016/17, together with weaker economic conditions forecast in 2017/18, and the emerging oversupply in the unit market, are likely to have a broader impact in negating demand for houses as well. By June 2018, the forecast median house value in Brisbane of $575,000 will be 13% above the median at June 2015, representing the highest price growth over this three-year period among all state capital cities. Unit market The current upturn in residential construction in Brisbane has been dominated by the unit and apartment sector. While new house starts rose by 38% from 2012/13 to 2014/15, unit starts increased by a massive 119% over the same period to account for 58% of total new dwelling starts in 2014/15. This increased supply has been concentrated in large projects in inner Brisbane suburbs. The supply pressures are reflected in the 3% decline in Brisbane s median unit price in 2014/15. This is also due to the subdued nature of the Queensland economy. Some stabilisation of the state economy, together with the prospect of increased interstate demand arising from higher price points in Sydney and Melbourne, is expected to see unit prices stabilise and even show a modest increase in 2015/16 and 2016/17. Prices are forecast to weaken again in 2017/18 as new units are completed and become available for occupation, impacting on both rents and prices. The median unit price is forecast to rise by a total of 2% to $420,000 in the three years to June 2018.

39 October Chart 24: Brisbane dwellings, prices and activity 640 Real house price Brisbane ($'000) Forecast House price Brisbane ($'000) Real Unit price Brisbane ($'000) Unit price Brisbane ($'000) Commencements ('000) Queensland (Quarterly, MAT) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

40 40 Australian Housing Outlook Chart 25: Brisbane regions

41 October Regional Queensland centres Median house prices in the regional Queensland markets of the Gold Coast, Sunshine Coast, Townsville and Cairns have generally remained relatively flat over the period from 2008/09 to 2014/15. These markets were hampered by an oversupply of dwellings after the 2007/08 peak and generally weak local economic conditions, while other parts of regional Queensland enjoyed a boom in resource sector investment. In the Gold Coast, the median house price reached a new peak of $550,000 at March This surpassed the previous peak in December 2007, although the median house value edged down to $540,000 at June The decline is contrary to other indicators in the Gold Coast, and could be the result of a change in the composition of sales over the quarter. The decline resulted in house price growth slowing to 1.9% in 2014/15, after solid annual increases of between 6% and 6.5% in the previous two years. Key economic drivers for the Gold Coast should result in more favourable economic conditions, with the lower Australian Dollar boosting the region s tourism industry. This trend is expected to also apply to the Sunshine Coast, Townsville and Cairns as the Gold Coast becomes a more cost-competitive holiday destination than overseas locations. Local economic conditions in the Gold Coast are likely to receive impetus from infrastructure and non-dwelling construction projects associated with the 2018 Commonwealth Games and other related work. The current tight vacancy rate of 2.3% in June 2015 should underpin rental growth and encourage investor demand and residential construction activity. Consequently, the Gold Coast median house price is forecast to increase by 14% to $615,000 over the three years to June Compared to the separate house market, there was a more substantial oversupply of units in the Gold Coast after a number of major buildings were completed over 2008 to As a result, the median unit price has still not recovered from its June 2008 peak of $390,000, being $355,000 at June Much of the excess is now anticipated to have been absorbed and price growth is expected to return in 2015/16, with total growth in the median unit price of 13% forecast in the three years to June Approximately 1,200 apartment dwellings are currently being constructed for the Commonwealth Games Village and these could have a dampening effect on both rents and prices in the unit market in the Gold Coast beyond 2018 when they are placed on the market for sale after the Commonwealth Games. The Sunshine Coast is experiencing a rising undersupply of housing stock, due to a collapse in residential construction during the three years to 2013/14. This has been highlighted by tight vacancy rates below 2% since mid The upward pressure on prices has resulted in the median house value increasing by 5.2% per annum to $517,900 over the three years to June While construction activity has ramped up in 2014/15, the lag from commencement to completion should maintain tight vacancy rates in the short term, encouraging investors. Momentum in the owner occupier market is likely to emerge from the expected increased movement of empty nesters and retirees from Sydney and Melbourne given the recent house price growth in these cities. Migration from Brisbane should rise given the stronger price growth in inner and middle Brisbane suburbs. The median house price is projected to rise by 11% to $575,000 in three years to June Employment within Townsville has been negatively impacted by fiscal consolidation by the Federal Government affecting the key industries of public administration and defence, and the decline in investment in thermal coal sector projects. Lower population growth has led to falling underlying demand. With solid residential construction maintained, it appears the Townsville market has an excess of dwellings, and this is supported by the high vacancy rate of 5.9% at March Consequently, the median house price at June 2015 of $350,000 is 8% below the peak value recorded in June With the fall in new dwelling supply, the existing dwelling oversupply is expected to eventually be absorbed and price growth should return. The median house value is forecast to increase by 6% to $370,000 at June In Cairns, median house price growth has eased from an average of 5.9% per annum over the two years to 2013/14, to 2.8% in 2014/15, lifting the median house value to $400,000 at June Price growth is forecast to moderate over the next three years to 2017/18, totalling 9%, equating to a median house price of $435,000 by June Prices are expected to be supported by a local undersupply (with vacancy rates at 2.7% at June 2015) and improving local economic conditions, attributed to a pick-up in the international tourism sector and higher migration inflows into Cairns. This should boost underlying demand and residential construction activity.

42 42 Australian Housing Outlook Chart 26: Regional Queensland centres, median house prices House price Gold Coast ($'000) Unit price Gold Coast ($'000) House price Sunshine Coast ($'000) Forecast House price +3 Cairns ($'000) 160 House price Townsville ($'000) Source: BIS Shrapnel, ABS & APM PriceFinder data Year ended June

43 October Adelaide House Market After peaking at $429,700 at June 2010, Adelaide s median house price declined in the following years and only recovered its lost ground in March In real terms, this was a decline of 9%. Since March 2014, median house prices have risen moderately in Adelaide, with the median house price increasing to $446,600 at June This represents a 2% rise for the year. Median house prices declined in the inner suburbs of Adelaide (-9.8%), while median house price growth was weak in outer Adelaide (1.9%), and more moderate growth was experienced in the middle suburbs (+4.8%). Median house price growth in Adelaide by region, per cent, 2014/15 INNER MIDDLE OUTER MEDIAN Annual % increase Source: APM PriceFinder, BIS Shrapnel First home buyer activity decreased over 2014/15 (-16%), with June quarter 2015 indicating a greater year-on-year decline and suggesting that this trend is accelerating. The magnitude of the 2014/15 decline was a consequence of the pull-forward of demand before the $5,000 First Home Owner s Grant to purchasers of established dwellings was removed from 30 June With the weakening of first home buyer demand, there was reduced market appetite for upgraders to sell their existing properties and non-first home buyer activity has also started to show signs of weakening. Low growth in loans to upgraders of 2.6% was reported in 2014/15, with a decline in the June quarter Adelaide faces headwinds in key industry sectors, with trade exposed industries such as manufacturing having been weakened by a high Australian dollar. Many are not in a position to invest in the short term, while automotive manufacturing will be discontinued with the closure of the Holden plant in This will impact the businesses servicing the industry such as automotive parts manufacture. While new dwelling activity declined by 4% over 2014/15 after the $8,500 Home Construction Grant for all new buildings was removed at the end of calendar 2013, it was still around 22% above the level of underlying demand. South Australia s dwelling oversupply was steadily absorbed over 2012/13 and 2013/14, but construction has remained relatively high while population growth has weakened, and the oversupply has expanded in 2014/15. Vacancy rates in Adelaide, which have declined over the past three years, are therefore likely to start to rise. With the exception of the Northern Territory, South Australia is the only state to have shown a decline in investor loan activity in the June quarter Nevertheless, low interest rates mean affordability in Adelaide has improved on its worst point in 2008, and is better than its long term average. In the short term, low interest rates should continue to support house price rises, albeit modest ones. Median house price growth of 1.9% is forecast over 2015/16, before a rising oversupply and slower economic activity halt price growth in 2016/17 and induce a 1.1% decline in 2017/18. Total price growth of 0.8% over the three-year forecast horizon is expected, taking the median house price to $450,000 by June This equates to a decline in real terms of 7.3%. Unit Market Compared with the east coast capital cities, Adelaide does not experience the same level of new unit or apartment development activity and the unit market in Adelaide is consequently forecast to move in line with the forecast for house prices. However, given the prevalence of investor purchasers in the unit market, marginally more downward pressure on unit prices exists due to tighter lending policies in place on investors by financiers in response to regulatory guidelines. As a result, the median unit price is forecast to remain relatively flat, falling by an aggregate 1% over the three years to June 2018.

44 44 Australian Housing Outlook Chart 27: Adelaide dwellings, prices and activity Real house price Adelaide ($'000) Forecast House price Adelaide ($'000) Unit price Adelaide ($'000) Real Unit price Adelaide ($'000) Commencements ('000) South Australia (Quarterly, MAT) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

45 October Chart 28: Adelaide regions

46 46 Australian Housing Outlook Perth House Market Perth s median house price grew by a strong 22% over the two years to 2013/14, underpinned by record net overseas and interstate migration inflows, leading to tightening vacancy rates and considerable rent growth. Demand was assisted by strong economic conditions and significantly improved affordability. Net overseas migration inflows have rapidly slowed, from 53,200 in 2011/12 to 22,800 in 2013/14. It is anticipated that net overseas migration inflows will continue to slow, being approximately 14,000 in 2014/15. Over the same period, net interstate migration has reversed from an intake of 11,400 persons to an estimated net outflow of 1,500 persons. This quick turnaround in population flows has resulted in Perth s vacancy rate rising to 4.7%, with rents showing an annual decline of 0.4%, and median house prices reducing by an annual 3.3% to $579,100 at June Median house prices declined by the greatest percentage in the inner Perth suburbs (-5.0%), followed by middle Perth (-4.0%), while outer Perth s prices fell by the smallest margin (-2.2%). The higher priced inner and middle suburbs are likely to have borne the brunt of the weakness in higher paid resource sector jobs. Median house price growth in Perth by region, per cent, 2014/15 INNER MIDDLE OUTER MEDIAN Annual % increase Source: APM PriceFinder, BIS Shrapnel Growth in investor activity in Western Australia is continuing, with the value of lending for residential investment increasing by 8% in 2014/15 after a strong 2013/14. With rents reducing and vacancy rates high, the fundamentals do not seem to support this level of activity. Given this, it appears investors are primarily responding to low interest rates. First home buyer demand is on the decline with a 9% reduction in the number of loans to this segment over 2014/15 and June quarter 2015 loans down 15% on the prior year. Upgrader loans are also on a downward trend, falling by 6% in 2014/15 and the June quarter declining by 12% in year-on-year terms. The state unemployment rate has risen and was 6.4% at July 2015, compared with the national figure of 6.1%. Investment in the resource sector is rapidly weakening and this will further impact employment and migration, causing underlying demand to continue to decline. Although the market for dwellings has been measured in deficiency in 2015, much of the demand has been for accommodation in workers camps and other similar accommodation rather than regular dwelling stock. The market for dwellings already appears to be in oversupply across both houses and units and this is reflected in Perth s high vacancy rate. With the current strong construction pipeline exceeding underlying demand, the dwelling stock surplus is expected to continue to grow in the short term. As a result, the Perth market is forecast to weaken steadily across both houses and units. The impact of a rising dwelling stock surplus and the slowing state economy is likely to result in further house price declines. Relatively low interest rates should prevent greater falls, and over the three years to June 2018, Perth s median house price is forecast to be $565,000, or 2.4% below the June quarter 2015 level. In real terms, this represents a 10% decline. Unit Market While unit and apartment construction has increased significantly in Perth over the past three years, units still account for less than a third of total new dwellings built. However, from a demand perspective, the decrease in overseas and interstate migration in Western Australia is anticipated to be felt in the unit sector because many of these migrants are likely to have favoured units over houses as temporary accommodation while living in Perth. Consequently, it is expected that units will continue to have higher vacancy rates than houses over the next three years. These impacts on the unit market already appear evident in the 4% decline in Perth s median unit price, compared with a 3% decline in Perth s median house price. Further downward pressure is expected through to 2018 as declining mining investment continues to impact on the economy with an additional forecast decline in the median unit price of 5% to $410,000 at June 2018.

47 October Chart 29: Perth dwellings, prices and activity 640 Real house price Perth ($'000) House price Forecast Perth ($'000) Real Unit price Perth ($'000) 160 Unit price Perth ($'000) Commencements ('000) Western Australia (Quarterly, MAT) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

48 48 Australian Housing Outlook Chart 30: Perth regions

49 October Hobart House Market Hobart s median house price peaked at $360,000 at June 2014 reflecting the 17% rise in first home buyer demand over the year, and the 17% rise in lending to non-first home buyers (i.e. upgraders and downsizers). After the expiry of the $7,000 First Home Owner s Grant on 30 June 2014, first home buyer activity has declined 16% in 2014/15 and the median house price has declined 2% to $352,900. The decline in demand for entry level properties by first home buyers has had the flow-on effect of reducing demand from upgraders. Growth in the number of loans to this segment reduced to 1.6% over the year. This is down 0.6% in the June quarter 2015 on a year earlier. In contrast, loans to investors rose by 30% during 2014/15, with the June quarter 7% higher year-on-year. While vacancy rates appear to be tightening, rents are not showing significant growth, and with house prices now declining, yields have improved. The unemployment rate in Tasmania has improved in recent years, although remains higher than the national total at 6.7%, suggesting the strength in investment lending will be temporary. House price growth has been unevenly spread across the Local Government Areas of Hobart. Median house price growth in Kingborough (+10.3%) and Brighton (+9%) was particularly strong in 2014/15. While prices in Sorell grew moderately (+4%), there was no significant change in Glenorchy (+0.7%), and prices fell markedly in Hobart (-8.9%). Median house price growth in Hobart by region, per cent, 2013/14 BRIGHTON CLARENCE GLENORCHY HOBART SORELL KINGBOROUGH MEDIAN Annual % increase Source: APM PriceFinder, BIS Shrapnel Despite an estimated excess of dwelling stock, dwelling construction in Tasmania is rising strongly. Buoyed by a $20,000 grant to first home buyers of new dwellings which has been extended through to the end of Calendar 2015, the increased activity is expected to push the market further into oversupply, keeping pressure on rents. The Hobart market remains affordable at current interest rates and based on the current median house price its ratio of mortgage repayments to income sits below its long term average. Tasmania s net interstate outflow has improved, reducing from a loss of 2,600 in 2011/12 to an estimated net outflow of 1,500 in 2014/15. The net overseas intake has remained steady in the face of a declining national inflow. Rising house prices in Melbourne and Sydney are likely to be contributing to migration into the more affordable Tasmanian cities by tree changers either retiring or close to retirement. Net interstate migration is forecast to revert to a small net inflow by the end of the forecast period, or possibly sooner. Tasmania lacks strong industry drivers to generate strong employment growth. With an excess dwelling stock in the market, price growth is likely to be modest and mainly underpinned by low interest rates. The median house price is forecast to rise by 1%-2% per annum, or a total 5%, to $370,000 by June This reflects a price decline of 4% in real terms, although there could be further growth in house prices if net interstate migration strengthens more than expected. Unit Market With a significantly smaller unit market than the mainland capital cities, growth in the median unit price in Hobart can b vary from quarter to quarter. Overall, however, prices in the unit market appear to have been relatively flat over the past five years. Compared to most of the other state capital cities, Hobart has not experienced a significant increase in unit construction in 2014/15. Nevertheless, investment loans in Tasmania grew by 30% in the year, suggesting an increase in rental dwellings. New house starts have also risen in response to Tasmania s first home buyer stimulus, which suggests that many are moving out of the rental market to build new homes. The first home buyer stimulus is expected to continue to impact on the rental market, and therefore the unit market through With population growth making little impact on Tasmania s oversupply through to 2018, Hobart s median unit price is forecast to fall by a cumulative 2% over the three year forecast horizon.

50 50 Australian Housing Outlook Chart 31: Hobart dwellings, prices and activity 640 Forecast 320 Real house price Hobart ($'000) House price Hobart ($'000) Real Unit price Hobart ($'000) 80 Unit price Hobart ($'000) 40 Commencements ('00) Tasmania (Quarterly, MAT) Year ended June Source: BIS Shrapnel, ABS & APM PriceFinder data

51 October Chart 32: Hobart regions

52 52 Australian Housing Outlook Canberra House Market Canberra s median house price has risen since 2012 to reach $580,000 at June This reflects a 5.5% rise over the previous 12 months. This level of growth is contrary to many of the indicators in the Australian Capital Territory market. Record construction up to 2013/14 resulted in an oversupply in the market, primarily in the apartment sector where building has boomed. While construction levels are now falling, they are still well above underlying demand. This has resulted in vacancy rates above the balanced market level at 3.5% at June 2015 and rents falling by 2.7%. With the Australian Capital Territory having a net interstate migration outflow, underlying demand is not expected to improve. The rise in the median house price appears to be a result of the improved level of affordability. With the cost of servicing 75% of the median priced home in Canberra falling to just 13.5% of average household disposable income, it is the most affordable capital city. First home buyer demand has strengthened considerably, rising by a healthy 25% over 2014/15. This is supported by the $12,500 First Home Owner Grant for new or substantially renovated properties which increased from $7,000 at September Lending to investors (+7.8%) and non-first home buyers (+2.1%), who are most likely upgraders, has continued to rise moderately throughout 2014/15. It appears the current low interest rate environment is encouraging investors, despite a fall in indicative yields. The oversupply in the Canberra market is forecast to increasingly dampen the residential property market over the next three years. Public sector employment is expected to continue to weaken because in the 2014 Federal Budget, the Government announced a reduction in public sector employment of 16,500 over the following three years. As a result, vacancy rates should take some time to come down. These factors are likely to reduce demand for houses. However, given the high incomes in Canberra, housing is expected to remain generally affordable at current interest rates and there is unlikely to be too much downward pressure on prices. This should keep prices relatively flat over the next three years, with the forecast median house price of $600,000 at June 2018 being 3.4% up on the June 2015 median. In real terms, the Canberra median house price is forecast to decline by 4.7% in this period. Unit Market Over the long term, Canberra has typically experienced a greater level of new house development compared to units. However, over the five years to 2014/15, units have accounted for 61% of new dwelling starts. With a modestly rising median house price and increased first home buyer demand, this greater level of new house development suggests that renters are moving into owner occupied accommodation, particularly given demand isn t supported by strong migration. There is also an estimated aggregate oversupply estimated across the broader Canberra market, with the greater recent supply of units suggesting that this oversupply is concentrated in the unit sector. These factors suggest conditions in the unit market will be more challenging relative to the housing market, with an overall price decline of 3% forecast over the three years to 2018, compared to the modest growth forecast across the house market. Price declines are expected to be more concentrated in the first two years before prices stabilise by 2017/18 as the impacts of cost cutting through the Federal Public Service are worked through.

53 October Chart 33: Canberra dwellings, prices and activity Real house price Canberra ($'000) House price Canberra ($'000) Forecast Real Unit price Canberra ($'000) 160 Unit price Canberra ($'000) Commencements ('00) A.C.T. (Quarterly, MAT) Source: BIS Shrapnel, ABS & APM PriceFinder data Year ended June

54 54 Australian Housing Outlook Darwin House Market Darwin s median house price reduced by 1.7% in 2014/15, with the median house price at $610,000 at June This decrease follows strong price growth in 2012 and The upturn coincided with the commencement of infrastructure, oil and gas projects over For example, the Inpex LNG project, with a reported value of $US34 billion, included development of the gas field, an onshore LNG plant, a pipeline and a port component. New dwelling construction in the Northern Territory has remained at a relatively high 2,050 dwellings in 2013/14 and 2014/15 after reaching their highest level in 16 years in 2012/13 (2,320). Supply has been dominated by the apartment sector and was reflected in record levels of investor demand in 2013/14, with loans to investors rising by 25%, and remaining at the same level in 2014/15. The Northern Territory s First Home Owner Grant was one of the most generous housing grants of the states, at $25,000. With the Grant being confined to new home purchasers from January 2015, there was a surge in first home buyers taking advantage of the Grant in late 2014 before it expired, which saw growth in first home buyer loans of 18% during 2014/15. First home buyer demand is now falling, with first home buyer finance contracting by 31% in June quarter 2015 in year-on-year terms. Conditions in the Northern Territory property market are becoming increasingly challenging. Since the commencement of the Inpex LNG project, activity has ramped up, although work underway appears to be running around peak levels and is likely to be sustained in the short term. Despite high levels at present, additional investment activity is limited, and minimal additional growth in employment is likely. Meanwhile, in Gove, the aluminium refinery has closed down and elsewhere, marginal iron ore mines have been temporarily shut down due to low commodity prices. The market for dwellings was estimated to be relatively in balance in June 2014, with a deficiency of only 300 dwellings. However, with demand tapering off due to a decline in population recent figures point to net overseas migration nearing zero and a net loss to interstate migration in 2014/15 a rising dwelling stock excess is expected to emerge. There is also a high vacancy rate of 6.9% and rental growth is flat-lining. On the supply side, completions of dwellings currently in the construction pipeline are likely to result in an increasing dwelling stock excess. Median prices were down 2.7% over 2014/15 in the inner suburbs and showed similar declines ( 2.8%) in the Northern Suburbs. The more affordable suburbs of Palmerston experienced a more substantial decline with median prices falling by 8.5%. Median house price growth in Darwin by region, per cent, 2014/15 INNER NORTHERN SUBURBS PALMERSTON MEDIAN Annual % increase Source: Real Estate Institute of Australia, BIS Shrapnel Affordability in Darwin has improved to be better than the long term average and significantly better than the 2008 extreme. A rising dwelling stock excess, slowing demand, rising vacancy rates and little to no rental growth indicate that Darwin s median house price is expected to continue to decline over the three-year forecast period. By June 2018 the median house price is expected to be 2.5% lower at $595,000. In real terms, this will result in a 10% decline in the median house price. Unit Market New housing starts in the Northern Territory have been largely flat since 2009/10. In contrast, new unit starts were just over 500 dwellings in 2009/10, peaking at 1,500 dwellings in 2012/13, and have remained high at an estimated 1,200 dwellings in 2014/15. This growth coincided with rising demand created by growth in net overseas migration stemming from booming resource sector investment. However, net overseas migration flows are now weakening rapidly, while a net interstate migration outflow remains. The weaker demand is impacting the unit market, as indicated by the 1% decline in the median unit price in 2014/15. With population growth projected to remain weak, and the strong supply of units to continue as the current round of developments progress to completion, rents and consequently prices are forecast to weaken further. Darwin s median unit price is forecast to decline by an additional 5% to $455,000 at June 2018.

55 October Chart 34: Darwin dwellings, prices and activity Forecast 1, Real house price Darwin ($'000) House price Darwin ($'000) Real Unit price Darwin ($'000) 160 Unit price Darwin ($'000) Commencements ('00) Northern Territory (Quarterly, MAT) Source: BIS Shrapnel, ABS & APM PriceFinder data Year ended June

56 56 Australian Housing Outlook Chart 35: Darwin regions

57 October Appendix 9.1 Foreign investment There has been substantial media coverage about the escalation in buyer demand from temporary and overseas residents and its impact on prices and in pricing out first home buyers. Temporary residents can purchase established dwellings while in Australia, although must sell the dwelling once they return to their country of origin. Overseas residents can only purchase new dwellings. A foreign purchaser can make an application to the Foreign Investment Review Board (FIRB) to purchase a property, or a developer can have up to 100% of its project pre-approved for foreign buyers to purchase off-the-plan. Recently published residential data about foreign investment indicated: The number of individual new dwellings approved for purchase by the FIRB increased from 4,499 in 2012/13 to 11,338 in 2013/14 (+152%), with a total value of $7.72 billion. The number of projects pre-approved to sell to foreign purchasers increased from 50 in 2012/13 to 103 in 2013/14, with a total realisable value of $16.38 billion. However, not all dwellings in these projects will be sold to overseas buyers. The number of existing dwellings approved for purchase by the FIRB increased from 5,091 in 2012/13 to 7,915 in 2013/14 (+55%), with a total value of $7.17 billion. Foreign investment in new and off-the-plan residential dwellings has the potential to assist affordability by adding to the pool of rental stock. This is likely to help contain rents and therefore prices. While foreign purchasers of existing homes will add to demand and potentially increase prices, they will also add to stock on the market when they return to their country of origin and re sell the dwelling. CoreLogic-RP Data reports around 500,000 established dwelling sales took place nationally in 2014/15. FIRB approvals for existing dwellings represent around 1.6% of this total. However, given that the majority of these sales are expected to be in the capital cities, the figure is probably a little above 2% of capital city sales. The percentage is higher in Sydney and Melbourne than other capital cities. This small percentage of total sales should not have a significant impact across the market. Moreover, the average value of an existing home approved for purchase by the FIRB is $906,000, indicating that demand is likely to be concentrated in the higher priced areas rather than competing against first home buyers. 9.2 Median house price forecast comparison Chart 37 shows the forecast record of the Australian Housing Outlook since the inaugural 2002 report, comparing the forecast national median house price in each report over the three years of the forecast period with the actual movement in the national median house price. The national median is derived from a weighted median of each capital city forecasts. Note the series in the following charts is based on median price data provided by the Real Estate Institute of Australia, the data source for previous reports. The median house price forecasts have typically been more conservative than the actual median price rises over most three-year periods. Through the middle of the decade, the sharp rises in prices over 2007 and 2008 were not anticipated. At the time, the interest rate rises were expected to have had a greater dampening effect on price growth. Forecasts made over 2007 to 2009 were generally on track in terms of total growth over the three-year forecast period, despite the challenging economic conditions and the negative expectations at the time, which made forecasting difficult. The forecasts of the national median house price in the 2010 edition of the Australian Housing Outlook were more optimistic than eventual growth. The estimate of the national median house price was 12% above the June 2013 median of $520,000. Subsequent publication of Census data suggested that household formation rates, and therefore underlying demand, were lower than originally expected, leading to a lower dwelling deficiency in most areas and therefore less pressure on prices. The 2011 edition forecast for 2014 was 2% below the actual figure and the 2015 forecasts in the 2012 to 2014 reports also underestimated the actual figure. The strength of growth in Sydney and Melbourne house prices, which have a large impact on the national median, has been underestimated, although price growth forecasts across the other capital cities have been more accurate.

58 58 Australian Housing Outlook Chart 36: Comparison between actual and three year forecasts, national weighted median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Australian Bureau of Statistics, Real Estate of Australia, Forecasts: BIS Shrapnel Chart 37: Comparison between actual and three year forecasts, Sydney median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel

59 October Chart 38: Comparison between actual and three year forecasts, Melbourne median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel Chart 39: Comparison between actual and three year forecasts, Brisbane median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel

60 60 Australian Housing Outlook Chart 40: Comparison between actual and three year forecasts, Adelaide median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel Chart 41: Comparison between actual and three year forecasts, Perth median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel

61 October Chart 42: Comparison between actual and three year forecasts, Hobart median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel Chart 43: Comparison between actual and three year forecasts, Canberra median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel

62 62 Australian Housing Outlook Chart 44: Comparison between actual and three year forecasts, Darwin median house price Median House Price ($'000s) Forecast Quarter Ending June Actual Source: Real Estate Institute of Australia, BIS Shrapnel

63 October House Quarter ended June Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var , Forecast , , , Forecast Growth (%) Unit Quarter ended June Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var Forecast Forecast Growth (%)

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