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AUSTRALIAN national residential Property MARKET Research NOVEMBER 2012 Intelligent Property Investment

FUTURE ESTATE: AUSTRALIAN national property MARKET research

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Executive summary Residential property still constitutes the major investment asset for most Australians, and is the largest sector of the property market with an estimated total value of $3.8 trillion and comprising around 9.1 million dwellings on a national level. The residential real estate market has had a tough period in recent years, however recent activity has suggested that the tide is now turning in a more positive direction for the sector.

With the annual rate of inflation benign at 1.2%, the lowest recorded rate since 1999, the interest rate easing cycle remains on the cards. Official cash rate sits at 3.25%, only 25 basis points above their historic lows. Future Estate are predicting if the RBA decide to cut rates in the first week of December and the cash rate dips below 3% respectively, we expect to see strengthening of cautious positive movement in terms of residential property investing on a national level. Future Estate expects capital cities to show continued, albeit modest, improvement as the recovery cycle gather pace in 2013.

AT A GLANCE n

A ‘crisis of confidence’, rather than a crisis of fundamentals

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Lower confidence levels have lead to higher savings, mortgage reduction and a buffer against unforseen shocks

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Confidence levels are re-emerging, as indicated by improved National Time to Buy a Dwelling Index Reading

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Aversion to borrowing has meant that affordability and price point are key drivers

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Finance commitments still subdued, however showing improvement during 2012

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Elevated population growth continues, combined with lower dwelling completions

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Housing Market Imbalance grows, 240,000 housing shortage to grow to 400,000 by 2015

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Future Estate expects the recovery to continue with near-term modest capital growth

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FUTURE ESTATE: AUSTRALIAN national property MARKET research

Key themes This Future Estate Market Research Report draws out some of the major themes driving the residential property market.

‘CRISIS OF CONFIDENCE’, RATHER THAN CRISIS OF FUNDAMENTALS The sluggish residential market conditions of recent years have been in many ways reflective of a ‘crisis of confidence’ rather than notably poor residential property market fundamentals.

Whilst overall stock levels and days on the market have been higher than long term levels in most markets, other key indicators such as vacancy rates, affordability and rental yields have generally remained robust. These factors obviously vary by state, city and region however provide a broad national ‘temperature check’.

A key factor for the market has been lower levels of consumer and investor confidence, and a predilection for higher savings and avoidance of new borrowings for the purposes of investment. This can be illustrated by the Westpac-Melbourne Institute Consumer Sentiment Index below, which shows that confidence levels are now improving after a substantial decline between 2010 to mid-2012. The relevance to the residential property market is substantial given the correlation to house prices is historically around 85%.

National Consumer Sentiment Index 125 120 115 110 100 105 95 90 85 80 Nov 96

Nov 98

Nov 00

Source: Westpac-Melbourne Institute

Nov 02

Nov 04

Nov 06

Nov 08

Nov 10

Nov 12

Rolling 3 month trend

FUTURE ESTATE: AUSTRALIAN national property MARKET research

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confidence levels RECENT LOWER CONFIDENCE LEADING TO HIGHER SAVINGS AND BUFFER AGAINST UNFORSEEN SHOCKS A major positive of subdued confidence levels has been the improvement to household balance sheets in the form of households repaying outstanding mortgage principal ahead of schedule. According to the Reserve Bank of Australia (RBA) this buffer has now built up to 10% of total loans outstanding. This can be illustrated by the fact that over 30% of borrowers are in excess of 24 months ahead on their mortgage. This provides a substantial buffer to any unforeseen external shocks that may emerge. The recent interest rate easing cycle is likely to have further increase this buffer, although some of this disposable income may go to consumer spending.

…but CONFIDENCE is RE-EMERGING Positive signs are now emerging indicating that both consumers and investors have a more positive outlook heading into 2013.

One of the subsets of the Consumer Sentiment Index is the ‘Time to Buy a Dwelling Index’, which has shown a significant improvement nationally and across each of the States. The national index is now at the highest level since September 2009 and most of the state level indices are approaching their 2009 highs as well. This sustained trend clearly indicates that the recovery cycle is gathering momentum coming into 2013.

National Time to Buy a Dwelling Index 170 150 130 110 90 70

Source: Westpac-Melbourne Institute

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FUTURE ESTATE: AUSTRALIAN national property MARKET research

Nov 12

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AFFORDABILITY AND PRICE AVERSION TO BORROWING HAS MEANT THAT AFFORDABILITY AND PRICE POINT are KEY DRIVERS Almost half of all house and unit sales in Australia during 2012 have been priced below $400,000 and almost 80% below $600,000. Only 7% of sales have been above $1m. This statistic illustrates just how price sensitive consumers have been. It is also a symptom of the lower confidence and higher savings levels. It also explains in part why units have performed better than houses and why more affordable suburbs and regions have also outperformed traditional ‘blue ribbon’ areas.

National house and unit sale by price point 12 months to Aug - 12 2m+

0.9%

1m-2m

4.5%

800K-1m

4.6%

600K-800K

11.2% 30.4%

400K-600K

41.2%

200K-400K 7.1%

<200K

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Source: RP-Data

FINANCE COMMITMENTS SHOWING IMPROVEMENT DURING 2012 The latest Australian Bureau of Statistics (ABS) Housing Finance data broadly indicates a continuation of the recent trend towards greater willingness to take on borrowing. This trend is beginning to reverse the post GFC aversion to debt. Over the 12 months to September 2012, refinance commitments have fallen by 4.3% compared to a 10.3% increase in non-refinance commitments. The number of finance commitments has been trending higher for most of 2012, another positive sign that housing market conditions are gradually improving. Over the past 12 months, the total value of owner occupier finance commitments has risen by 4.4% (9.0% ex-refinances) and by 8.8% for investment commitments. This indicates that investors are returning to the market, which is likely driven by the lower interest rates and higher yields emerging this year.

FUTURE ESTATE: AUSTRALIAN national property MARKET research

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housing market balance LOWER DWELLING COMPLETIONS DESPITE ELEVATED POPULATION GROWTH Traditionally there has been a correlation between dwelling completions and population growth. This relationship has broken down in recent years. Although new construction and sales of existing properties has been trending lower since 2004, Australia’s population has continued to grow at elevated levels since that time. Over that timeframe, Australia has had annual population gains significantly higher than the historic level of 200,000 - 250,000.

This increase in population also increases the demand for existing and new housing.

Population growth is presently 16.3% above the long-term average, highlighting that despite population growth now being below peak levels, it is well above average over recent times.

Gross Population Growth vs Dwelling Completions 1976 - 2010 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

Years Source: ABS

Annual Dwelling Completions

Annual Population Gain

HOUSING MARKET IMBALANCE CONTINUES TO GROW Long term the housing market has generally remained quite balanced, however the market has trended to undersupply since 2006. Recent lower dwelling completions and elevated population growth has combined to exacerbate the market imbalance to a shortage of in excess of 240,000 dwellings. This is forecast to grow in excess of 400,000 dwellings by 2015 if current trends continue. Whilst not the ‘be all and end all’ for the housing market, the imbalance provides a meaningful support for prices and is also a substantial reason behind the recent rental growth in most markets. This rental growth, combined with lower debt servicing is no doubt a factor behind an improvement in investor interest and finance commitments.

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FUTURE ESTATE: AUSTRALIAN national property MARKET research

housing market balance Housing Market Balance 1986 - 2015 400,000 360,000 320,000 280,000 240,000 200,000 160,000 120,000 80,000 40,000 0 -40,000 -80,000 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Source: ABS

House Surplus/Shortage

Completions

Underlying Demand

With the local economy patchy AND CONTINUED equity market volatilitY, investors will be turning to the property markets for conservative returns With the local economy patchy, equity market volatility, outlook skeptical and commodity prices below recent peaks, most investors will be searching for ‘safe haven’ assets outside of Cash and Term Deposits to invest in such as residential real estate. This is especially so given the lower interest environment we are now in.

The four month run of continuous dwelling price growth stalled in October. Coming months will indicate whether this is merely a ‘bump in the road’ to recovery. Dwelling values across all of Australia’s capital city housing markets, except Perth and Darwin, fell over the October month, interrupting the recovery across the country. According to RP Data, both Sydney and Brisbane markets recorded a 0.9% fall in values, while Melbourne values experienced a larger 1.1% fall. Off the mainland capitals, the largest recorded fall was in Adelaide at 2.4% in October 2012. It is important to note that most market remains substantially above recent lows generally reached in May-June.

FUTURE ESTATE: AUSTRALIAN national property MARKET research

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MARKET outlook Future Estate expects a modest recovery in capital housing values in the short term 2012 so far has been viewed as another weaker year for the residential property market sector. Future Estate expects a modest recovery in capital housing values over the course of 2013 representing between 0% and 5% growth. However, we recommend that buyers do their research and seek advice from suitably qualified experts to ensure they source assets in areas offering demand side drivers and attractive demand / supply dynamics. Whilst confidence and affordability have improved materially, global headwinds may re-emerge to de-rail the recovery. Whilst appearing to gain momentum, the recovery remains tepid, as illustrated by the October fall in capital values after four consecutive months of gains nationwide. We do however expect that the housing market will continue its trend towards cautious improvement in coming months.

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FUTURE ESTATE: AUSTRALIAN national property MARKET research

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Copyright Š Future Estate Group Pty Ltd 2012

This document contains general information and does not contain personal advice or financial product advice. This information has been prepared without taking account of your objectives, financial situation or needs. Accordingly, before acting on this information and making financial decisions, you should consider whether this information is appropriate for you and are recommended to seek independent financial, investment, tax and/or legal advice having regard to your own objectives, financial situation and needs. This information may contain material provided to Future Estate Group Pty Ltd by third parties. While such material is published with necessary permission, Future Estate Group Pty Ltd and its related entities accept no responsibility for the accuracy or completeness of this information, nor endorses it. To the maximum extent permitted by law, Future Estate Group Pty and its related entities disclaim all liability for any loss, costs or damage which arises in connection with the use or reliance on the information and material contained in this document. Any forward looking statements and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Furthermore, past performance is not a true indicator of future performance. Any past performance information in this document has been given for illustrative purposes only and should not be relied upon as an indication of future performance.

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FUTURE ESTATE: AUSTRALIAN national property MARKET research