Engage through intellecutal discussion on key drivers affecting the property markets throughout Australia.

1. Opinions Economic outlook International State by state
Industry experts Macro view of comparison Detailed analysis
share their views underlying trends Key areas where of home values,
on aspects of the affecting the Australia is different sales and rents
market. property sector. to other economies. across Australia.
RP Data
Property
Capital
Markets
Report
2012

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3. RP Data
Property
Capital
Contents
Markets
Report 02 Introduction
2012
03 summary
Executive
04
Economic overview
T
he micro-economic forces shaping
Australia’s housing market
11 Macro forces
Big picture reasons why Australia is different
14 LMI explained
The role of lenders mortgage insurance
18 overview
Property market
Australia’s home values in perspective
24
State by state analysis
Sydney and New South Wales ���������������������������������������������������� 24
Melbourne and Victoria �������������������������������������������������������������������� 26
Brisbane and Queensland ������������������������������������������������������������� 28
Adelaide and South Australia ������������������������������������������������������ 30
Perth and Western Australia ��������������������������������������������������������� 32
Hobart ����������������������������������������������������������������������������������������������������������� 34
Darwin ����������������������������������������������������������������������������������������������������������� 36
Canberra ����������������������������������������������������������������������������������������������������� 38
Publisher Andrew Stabback All rights reserved © 2012 Publisher’s Note:
T: +61 2 02 9376 9501 No part of this work covered by Although every care has been taken to
astabback@financialpublications.com.au the publisher’s copyright may be ensure the accuracy of the information
reproduced in any form by any means, contained within this publication,
Managing Editor Bernard Kellerman graphic, electronic or mechanical, neither the publishers, authors nor
T: +61 2 9376 9506 including photocopying, recording, their employers can be held liable for
bkellerman@financialpublications.com.au taping, or information storage and any inaccuracies, errors or omissions.
retrieval, without the written permission Readers are strongly advised to contact
Art Direction Six Black Pens of the publisher. Any unauthorised use of their professional advisor before
www.sixblackpens.com this publication will result in immediate entering into any contract to buy or sell
info@sixblackpens.com legal proceedings. any security.
1

4. Introduction | RP Data Property Capital Markets Report
Introduction
Seen against the backdrop of several years land mass, Australia’s population is one of
of global uncertainty and weak property the most centrally urbanised in the world;
markets outside of Australia, the resilience housing demand is very much concentrated
of Australian home values to a material across tight geographical boundaries which
decline has come under an increasing level can generally be classified as having a housing
of scrutiny. under-supply.
Tim Lawless Home values across Australia’s capital cities The current weakness in the Australian
Research Director, peaked in December 2010 after recording a housing market should not be cause for
RP Data
solid rate of capital gain across 2009 and the alarm. The market is cyclical; a growth phase
first half of 2010. Since home values peaked, is normally followed by a consolidation phase.
Australia’s capital city markets have recorded The duration of the decline has been more
an aggregate fall of 3.6 percent. significant in this phase than previous ones
There are a wide number of factors due to the global economic conditions which
that explain Australia’s housing market are dampening consumer sentiment locally.
performance. The national economy has been Looking forward, there will continue to
comparatively strong. Australia has avoided be challenges across the Australian housing
recession, the labour force remains close to market, however we may already be seeing the
capacity, interest rates are around historic first green shoots appear. Lending for home
average levels and mortgage arrears remain loans has been consistently improving off a low
well below one percent. base, transaction volumes were showing some
Australia’s financial regulatory improvement over the last quarter of 2011 and
environment is world class and has our key vendor metrics such as average selling
historically been much more risk adverse time and average vendor discounting have also
than the financial sector in other countries. been showing some subtle improvements.
The vast majority of Australian mortgage Key to a stabilisation in Australian
holders are on floating interest payments housing markets will be ongoing
and it is estimated that around 50 percent improvements in consumer sentiment,
are ahead of their payment cycle. stable interest rates and continued health
Additionally, despite having a very large across the domestic labour markets.
2

5. RP Data Property Capital Markets Report | Executive summary
Executive
summary We don’t
subscribe to
the predictions
The Australian housing sector is the Trends in affordability are also supportive
country’s largest and, arguably, most of dwelling prices. A combination of strong that residential
important asset class. The total value of income growth and falling mortgage rates is housing values
homes across the country as at December boosting affordability in the current cycle. are about to
2011 was $4.54 trillion. Across the capital city markets, value
By way of comparison, Australian equities declines have varied from a 0.3 percent show significant
had a total market capitalisation at the same decline in values in Sydney to a 6.8 percent fall declines.
time of $1.17 trillion. This simple statistic is in Brisbane home values. Capital city home
especially important for Australian banks given values have also become more affordable in
that, unlike their peers elsewhere, our banks real terms over the last 12 months.
have the majority of their assets on balance Along with the macroeconomic
sheet in the form of prime mortgages. arguments working to mitigate risk of a
And according to the Australian Bureau US-style house price collapse, Australia’s
of Statistics, more than 60 percent of all residential property sector benefits from
Australians own a home – one of the highest a strong central bank and prudential
rates of home ownership in the world. regulatory regime.
Nonetheless, Australia’s bankers have This regulatory oversight is backed – as
had to deal with a persistent fear amongst far as the property market is concerned – by
global investors and commentators that the work carried out by lenders mortgage
Australia’s housing sector is overvalued and insurers, who work to maintain underwriting
at risk of collapse. This view, which dates standards throughout the home loan sector.
back to 2003, has been refreshed by the This approach was also reflected in the
ongoing European crisis. capital markets. Throughout the global
These comments have been surfacing financial crisis, the Australian mortgage
once again, after the Australian housing market experience has been very different
sector experienced a sharp slowdown in from markets such as the US for a number
the 2011 calendar year, with the estimated of reasons. First, there was not the same
volume of sales transactions in November competition to squeeze margins almost
recorded at 15 percent lower than the five flat, so the pressure to come up with risky if
year average and 8.1 percent lower than they innovative structures was not present.
were in November 2010. And in contrast to the practices adopted
The slowdown in transaction activity is by Australian residential mortgage-
commensurate with the slowing of property backed securities (RMBS) issuers, where
value growth, and we are predicting subordination was the mechanism by
continued softness in 2012. which lenders chose to credit enhance
We don’t subscribe, however, to the securitisation deals in the United States,
predictions that residential housing values Australian issuers turned to lenders
are about to show significant declines. mortgage insurance providers to provide the
Australia’s market economists point to the backstop to their subordinate tranches.
demand-supply imbalance in the Australian Even at its peak, subprime lending was
housing market, arguing that it is supporting only ever a tiny fraction of the total. The so-
house prices and is unlikely to change. First called ‘low-doc’ loans were also a small niche.
up, Australian demographic trends are In Australia in recent years, around two-thirds
consistent with an underlying new housing of new mortgage borrowers from banks had
demand of 180,000 to 200,000 new houses an initial loan-to-valuation ratio below 80 per
per annum, with land releases and new cent. Looking across the whole mortgage
buildings falling short of that figure each year. book, that fraction is even higher.
3

6. Economic overview | RP Data Property Capital Markets Report 2012
Economic
overview
A macroeconomic analysis of the Australian
economy reveals the forces behind the
country’s strong housing market.
In the following pages, some of the key Further, as the majority of home
factors affecting Australia’s residential finance is through variable loans, the
Key Statistics housing market are set out in detail. These central bank can influence supply and
The Consumer Price are followed by some ‘big picture’ views demand to a far greater degree than
Index (CPI), measures from a number of economists, who explain in countries such as the US by either
the level of price inflation why Australia’s housing market equilibrium ratcheting up or easing the overnight
within the economy. point is higher than many external cash rate.
As at December 2011, commentators seem to realise. That said, there are a number of
the all groups indicator
While interest rates in Australia are factors to watch in coming months to
showed that annual
at relatively low levels, they remain get a clearer view of the strength of the
headline inflation fell to
3.1 percent which is only above rates in other countries. However, Australian housing sector. These include
slightly outside of the in contrast to many of its OECD peers, the effects of the winding back of first
RBA’s long-term target Australia has benefited from low home buyers’ incentives, the level of
range of 2 to 3 percent. unemployment and a long-term shortfall investor housing finance commitments
in construction of new dwellings in its and refinancing activity by existing owner
major capital cities. occupiers.
4

7. RP Data Property Capital Markets Report 2012 | Economic overview
Consumer sentiment falls following G1: Australian consumer sentiment
December’s interest rate cut but Feb-92 to Feb-12
rebounds thereafter 130 130
The monthly survey of Consumer Sentiment
120 120
undertaken by Westpac and the Melbourne
Institute shows that Australian consumers 110 110
are slightly more optimistic than pessimistic
100 100
about economic conditions. The Index
measures views on the financial situation 90 90
of Australian households over the past
and coming year, anticipated economic 80 80
conditions over the coming year and five 70 70
years and buying conditions for major
Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12
household items. When the Index is
above 100 points, consumers are more Consumer sentiment index 6 month rolling average Source: rpdata.com, Westpac-Melbourne Institute
optimistic than pessimistic and when it
sits below 100 points it indicates there is
more pessimism than optimism. Following G2: Percentage change in GDP
Sep-81 to Sep-11
December’s interest rate cut consumer
8% 8%
sentiment fell but has recovered most of
that loss over the two most recent months. 6% 6%
Despite the improvement, the Index is
currently recorded at 101.1 points indicating 4% 4%
consumer confidence is only slightly above
2% 2%
a neutral level.
See G1: Australian consumer sentiment 0% 0%
-2% -2%
Australia’s economic conditions
improve after the natural disasters -4% -4%
affected GDP decline recorded over Sep-81 Sep-87 Sep-93 Sep-99 Sep-05 Sep-11
the March 2011 quarter
Quarterly change Annual change Source: rpdata.com, ABS
Gross Domestic Product (GDP) measures
the final value of all goods and services
produced in an economy over a given
period. As such, GDP is an important G3: RBA GDP growth forecasts* Dec-11 to Jun-14
indicator as it shows whether an economy is Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
expanding or contracting. End of year growth 2.75% 3.50% 3.25% 3.25% 3.50% 3.50%
The latest GDP results showed * Where a range has been provided we have published the mid point of that forecast
Source: rpdata.com, RBA Statement on Monetary Policy February 2012
continuing overall strength in the Australian
economy. Over the September 2011 quarter,
GDP increased by 1.0 percent and over the
year GDP was up by 2.5 percent. According Recent Reserve Bank (RBA) forecasts for
to the GDP calculation Australia has not GDP suggest that the Australian economy
Key Statistics
slipped into a recession (defined as two will grow at an annual rate in excess of 3
consecutive quarters of negative GDP percent from June 2012 onwards. The fact that the vast
growth) since June 1991. See G2: Percentage change in GDP and majority of home loans
The GDP statistics also reveal data relating G3: RBA GDP growth forecasts* in Australia are on a
to household expenditure highlighting the variable rate has proven
growing propensity for consumers to save The cash rate has not been adjusted to be a positive over
recent years. The high
rather than spend. The household savings since December 2011 however,
proportion of loans on
ratio was recorded at 10.1 percent over the variable interest rates have increased
a variable interest rate
quarter. The savings ratio hasn’t been at these Average standard variable mortgage rates means that changes to
levels since the mid 1980’s. are currently recorded at 7.39 percent and monetary policy have an
Disposable household incomes are the official cash rate is set at 4.25 percent almost immediate impact
also growing fairly robustly, increasing by following successive 25 basis point interest on consumer behaviour.
6.0 percent over the year however, most of rate cuts in November and December 2011.
this increase is going to savings rather than The average 3 year fixed mortgage rate is
spending. 6.31 percent which implies that most banks
5

8. Economic overview | RP Data Property Capital Markets Report 2012
G4: Standard variable mortgage rates vs. 3 yr fixed mortgage rates vs. cash rate rates rather than to increase.
The cash rate futures market is currently
15% 15% pricing in around 60 basis points worth
of cash rate decreases to November 2012.
12% 12% The market is currently volatile and is just
as likely to change substantially each day
9% 9%
depending on local and international news.
See G4: Standard variable mortgage rates vs.
6% 6%
3 year fixed mortgage rates vs. cash rate
3% 3%
Headline inflation just outside the
RBA’s target range but underlying is
0% 0%
comfortably within the range
Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12
The Consumer Price Index (CPI), measures
Standard variable mortgage rates 3 yr fixed mortgage rates Cash rate Source: rpdata.com, RBA the level of price inflation within the
economy. As at December 2011, the all
G5: Consumer Price Index (CPI) groups indicator showed that annual
Dec-91 to Dec-11 headline inflation fell to 3.1 percent which is
8% 8% only slightly outside of the RBA’s long-term
target range of 2 to 3 percent.
6% 6% Other inflation indicators, which
are the preferred measures by the RBA,
4% 4% are the weighted median (2.6 percent)
and trimmed mean (2.6 percent). Both
2% 2% measures are now in the middle of
RBA
target the RBA target range. With the RBA’s
0% range 0% preferred measures well within their
target range and headline inflation
-2% -2%
falling, inflationary pressures appear to
Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 be easing after many feared a breakout of
All groups Average of trimmed mean and weighted median Source: rpdata.com, ABS, RBA inflation in the second half of 2011.
Recent forecasts by the RBA included in
their Statement on Monetary Policy suggest
G6: Unemployment rate – seasonally adjusted
Jan-82 to Jan-12 they expect underlying inflation to remain
12% 12%
within their target range until at least the
end of 2013.
10% 10% See G5: Consumer Price Index (CPI)
8% 8% Unemployment rate remains at low
levels but workers are doing fewer
6% 6% hours and employment growth is
slowing
4% 4% The national unemployment rate was
recorded at 5.1 percent in January 2012, the
2% 2% same as it was 12 months earlier. Over the
Jan-82 Jan-88 Jan-94 Jan-00 Jan-06 Jan-12 year total employment has increased by 0.3
Unemployment Rate Moving annual average Source: rpdata.com, ABS
percent which is well below the average rate
of employment growth annually over the
past ten years of 2.3 percent.
The number of unemployed persons
expect official rates will be cut further. The is up by 0.3 percent over the year. Over
change in official interest rates in November the past year full-time jobs have increased
Key Statistics
was the first adjustment in 12 months and (0.6 percent) while part-time employment
Consumers are the first cut in 31 months. has actually fallen (by 0.2 percent). The
currently only slightly With inflation falling and economic employment participation rate (the
more optimistic than growth slowing across many economies proportion of working age population
they are pessimistic. it seems as if the bias over the coming either employed or actively looking
months will be for the RBA to cut interest for work) is currently recorded at 65.3
6

9. RP Data Property Capital Markets Report 2012 | Economic overview
percent and is lower than the 65.9 percent G7: Growth in outstanding private sector housing credit
recorded in January 2011. Dec-81 to Dec-11
Across individual states and territories, 25% 25%
unemployment is at its lowest level in the
Australian Capital Territory (3.7 percent) 20% 20%
and highest in Tasmania (7.0 percent).
15% 15%
See G6: Unemployment Rate – seasonally
adjusted
10% 10%
Demand for housing credit is at
5% 5%
record low levels
Over the 2011 calendar year, demand for 0% 0%
housing credit by the private sector grew
Dec-81 Dec-87 Dec-93 Dec-99 Dec-05 Dec-11
by its lowest level on record, increasing by
just 5.4 percent over the year. To put this Source: rpdata.com, RBA
in some sort of context, based on annual
growth figures dating back to August 1977, G8: Quarterly change in population growth
Jun-83 to Jun-11
private sector housing credit has grown at
80,000 80,000
an average of 13.9 percent over the period.
The slowdown in private sector
housing credit growth is reflective of the 60,000 60,000
current cautious nature of consumers
characterised by a high savings ratio,
40,000 40,000
lower propensity to use credit cards, low
levels of growth in retail trade and falling
home values. 20,000 20,000
Over the 2011 calendar year, owner
occupier housing credit increased by 0 0
5.7 percent and investor housing credit Jun-83 Jun-87 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11
increased by 4.8 percent both of which
Natural increase Net overseas migration Source: rpdata.com, ABS
were record lows. Growth in housing
credit has been trending lower since 2004
at the end of our largest ever housing
G9: Dwelling approvals houses vs. units (private sector)
market boom. Dec-91 to Dec-11
See G7: Growth in outstanding private sector 12,000 12,000
housing credit
10,000 10,000
Over the year, population growth is
8,000 8,000
now starting to increase due to an
increase in migrant numbers 6,000 6,000
In raw number terms, Australia’s population
4,000 4,000
grew by 320,779 persons over the year
to June 2011. The result indicates that 2,000 2,000
the rate of population growth is now
starting to increase after easing since it 0 0
peaked at 462,000 persons over the year Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11
to March 2009. The previously high rate Private house approvals ( rolling 6 month average) Private unit approvals ( rolling 6 month average)
of population growth was largely fuelled Source: rpdata.com, ABS
by the significant increase in net overseas
migration to the country. Over the last
year net migration has contributed an to increase. The Federal Government had
additional 170,000 persons to the Australian previously cut skilled migration to around
Key Statistics
population however, the recent slowdown 170,000 persons annually (which is still well
in population growth is largely the result of above long-term average levels of 120,000 Australia has not slipped
a decline in net migrant numbers. persons annually) however, in the most into a recession (defined
More recent monthly data on long-term recent Budget the Government increased as two consecutive
overseas arrivals and departures shows the skilled migrant intake by a further quarters of negative GDP
that net overseas migration is continuing 16,000 persons. Despite the lower migration growth) since June 1991.
7

10. Economic overview | RP Data Property Capital Markets Report 2012
G10: Dwelling approvals vs. population growth approved for construction indicating that
Dec-83 to Dec-11 approvals fell by 15 percent over the 2011
120,000 120,000 calendar year.
See G9: Dwelling approvals houses vs. units
100,000 100,000
(private sector)
80,000 80,000
With building approvals falling, the
60,000 60,000
imbalance between housing demand
40,000 40,000 and supply persists
The demand-supply imbalance is
20,000 20,000 highlighted by many reports from a
number of Government departments and
0 0
private institutions. With fewer dwellings
Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11
being constructed, the supply shortage
Total quarterly dwelling approvals Quarterly change in population growth Source: rpdata.com, ABS will continue to be exacerbated. It is likely
the shortage of housing will worsen as the
G11: Projected housing supply gap by state population grows further and required
2011 projections (000’s) dwelling approval and commencement
targets continue to go unfulfilled.
NSW 83.9
Migration had been decreasing until
Qld 70.5 recently but is now climbing once more
WA 33.3 and the current level of population
growth remains well above long term
Vic 19.2
averages which indicates that in order to
NT 11.2 cater for this demand the country will be
Tas 1.1 required to construct an above average
volume of new homes.
ACT -0.6
Graph 10 highlights that although
SA -4 population growth has taken off in
000’s -10 0 10 20 30 40 50 60 70 80 90 recent years the number of new dwelling
Source: rpdata.com, National Housing Supply Council approvals has well and truly been unable
to keep pace.
See G10: Dwelling approvals vs. population
numbers, the rate of natural increase is at growth
heightened levels; over the year to June
Key Statistics 2011 more than 150,000 more children were National Housing Supply Council
Over the 2011 calendar born than persons passed away. projects a housing undersupply of
year, demand for See G8: Quarterly population growth 214,600 homes in 2011
housing credit by the Although an analysis of population
private sector grew New housing supply shows a short growth against approvals and/or
by its lowest level on lived improvement commencements provides an indication
record, increasing by
Although Australia’s population has of housing demand, other factors need
just 5.4 percent over
been growing strongly and has recently to be taken into consideration such as
the year. To put this in
some sort of context, been at record levels, dwelling approvals demolitions and household formation.
based on annual have not been sufficient to cater to According to the National Housing Supply
growth figures dating increasing demand through an increase Council’s latest Report (2011) the housing
back to August 1977, in population. Dwelling approvals have supply gap in 2011 is projected to be
private sector housing still not returned to those levels recorded 214,600 homes. The amount of homes
credit has grown at an between 2002 and 2003. required in each state varies greatly.
average of 13.9 percent The data shows that the number of South Australia (4,000) and the Australian
over the period. approvals has fallen by 24.5 percent over Capital Territory (600) actually already
the year and have fallen for three of the have a surplus of supply according to the
last four months. Over the 12 months report. On the other hand, New South
to December 2011 there were 149,799 Wales (83,900) and Queensland (70,500)
dwelling approvals with 92,655 approvals have a severe stock deficiency with
of private houses and 52,963 approvals of demand far outstripping supply.
private units. Over the 2010 calendar year See G11: Projected housing supply gap by state
a much greater 176,495 dwellings were 2011 projections
8

11. RP Data Property Capital Markets Report 2012 | Economic overview
First home buyer volumes surge but G12: Owner occupier finance commitments to first home buyer vs.
can it be sustained? non first home buyers Dec-93 to Dec-11
First home buyer activity has been ramping 60,000 60,000
up over recent months and in December
50,000 50,000
2011 this buyer segment accounted for
10,421 owner occupier commitments, or 20.9 40,000 40,000
percent of all owner occupier commitments
30,000 30,000
over the month. The volume of first home
buyer commitment in December 2011 was 20,000 20,000
the highest it’s been since December 2009
(11,825). In recent years first home buyer 10,000 10,000
activity has eased on the back of the removal
0 0
of Federal Government incentives and
Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11
higher interest rates however, some State
Governments offered their own incentives. Non first home buyers (monthly finance commitments) First home buyers (monthly finance commitments)
Source: rpdata.com, ABS
In New South Wales, the State Government
provided a stamp duty exemption for first G13: Percentage of fixed rate home loans
time buyers over the December quarter; Dec-93 to Dec-11
much of the improvement is likely due to 30% 30%
a last minute rush by first home buyers.
Nevertheless, first home buyer volumes have 25% 25%
risen by 25.8 percent over the year. 20% 20%
Non-first home buyer finance
commitments to owner occupiers have 15% 15%
remained relatively unchanged over the year
10% 10%
and this result reflects the results for the
housing market in which sales volumes are 5% 5%
estimated to be 8.1 percent lower than they
0% 0%
were a year ago.
See G12: Owner occupier finance commitments Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11
to first home buyer vs. non first home buyers Monthly % Rolling 12 month average Source: rpdata.com, ABS
The majority of home loans in Australia
are on a variable interest rate has proven to be a positive over recent
Housing finance data reveals that most years. The high proportion of loans on a
home loans are on a variable interest rate. variable interest rate means that changes to
Key Statistics
At their absolute peak in March 2008, fixed monetary policy have an almost immediate 64.0 percent of
rate home loans accounted for just 25.5 impact on consumer behaviour. Australia’s population
percent of all new loans over that month. See G13: Percentage of fixed rate home loans live within the eight
In December 2011, 11.7 percent of all new capital cities and
loans were on a fixed rate and at the same Investor activity increasing but still 55.5 percent of the
population live in the
time in 2010, at which time mortgage rates well below 2007 peaks
four largest cities
were actually higher, 9.3 percent of home The total value of investor housing finance
(Sydney, Melbourne,
loans were on a fixed rate. The propensity commitments has risen over six of the last Brisbane and Perth).
for Australian’s to favour variable rate eight months. Despite the recent increase,
mortgages is not a new phenomenon. investor activity in December 2011 was
Australian’s are typically fairly reluctant to only 1.8 percent higher than it was in
fix their mortgage rates and tend to only do December 2010.
so at times when interest rates are at very With home values having fallen over the
high levels. When fixed rate loan volumes last 12 months and rental rates increasing,
peaked in March 2008, the standard the lure of relatively more affordable
variable mortgage rate was 9.35 percent. housing is probably increasing investors
The recent rise in fixed rate mortgages is interest in the housing market. Investors
likely due to the fact that three year fixed accounted for about one third of the total
rate home loans are actually cheaper than value of all housing finance commitments in
variable rates. December 2011. Despite the improvement
The fact that the vast majority of home in investor activity, it remains 21.6 percent
loans in Australia are on a variable rate below the peak. Investors that are active
9

12. Economic overview | RP Data Property Capital Markets Report 2012
G14: Total value of investment finance commitments finance commitments in December 2011
Dec-01 to Dec-11 has increased by 5.6 percent compared
$9.5bn $9.5bn to volumes in December 2010. The data
shows that the real strength has been
$8.5bn $8.5bn
within the established homes market
$7.5bn $7.5bn with the volume increasing by 7.4 percent
over the year compared to a 3.5 percent
$6.5bn $6.5bn
increase in commitments for the purchase
$5.5bn $5.5bn of new dwellings and a 6.2 percent fall in
commitments for the construction of new
$4.5bn $4.5bn dwellings.
Importantly, the data includes
$3.5bn $3.5bn
refinances and to get an idea of demand
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
for new loans you need to remove this
Investment 3 month average Source: rpdata.com, ABS data which accounts for around one third
of all owner occupier commitments. In
G15: Owner occupier refinance vs. non-refinance commitments comparison to volumes in December 2010,
Dec-93 to Dec-11 refinance commitments have increased
50,000 50,000 by 7.7 percent while non-refinance
commitments have increased by 4.6
40,000 40,000 percent. Although the increase in non-
refinance commitments has been below
30,000 30,000 that of refinances, the number of non-
refinance commitments has risen over nine
20,000 20,000 of the last 10 months and they are at their
highest level since February 2010.
10,000 10,000 See G15: Owner occupier refinance vs. non-
refinance commitments
0 0
Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Australia has a highly centralised
Refinances Total excluding refinances Source: rpdata.com, ABS population with more than half of the
population living in the four largest
cities
G16: Percentage of population in capital cities June 2010 Despite the fact that Australia is a vast
percent of state percent of national country, much of the land is sparsely
Capital city State population population populated or uninhabitable. The large
Sydney NSW 63.3% 20.5% majority of Australian’s live either along
Melbourne Vic 73.5% 18.3% the Eastern Seaboard or within the capital
Brisbane Qld 45.3% 9.2% cities. As a result, 64.0 percent of Australia’s
Adelaide SA 73.2% 5.4% population live within the eight capital cities
Perth WA 74.0% 7.6% and 55.5 percent of the population live in
Greater Hobart Tas 42.3% 1.0% the four largest cities (Sydney, Melbourne,
Canberra ACT 99.9% 1.6% Brisbane and Perth). Sydney alone is
Darwin NT 55.5% 0.6% home to one in every five Australian’s. The
National 64.0% highly centralised nature of the Australian
population creates a significant amount of
Source: rpdata.com, ABS
competition for resources as well as strong
demand for homes in more desirable areas
should be focusing on rental return rather of the country. This goes some way to
than capital gains given the current housing explaining why property values in the capital
Key Statistics market conditions. cities (in particular the major capital cities)
According to the See G14: Total value of investment finance appear so high on an international basis.
National Housing commitments The significant competition for homes and
Supply Council’s latest an ongoing undersupply of housing has
Report (2011) the Owner occupier finance contributed to significant increases in values
housing supply gap in commitments continue to increase over recent years.
2011 is projected to be
from a low base over recent months See G16: Percentage of population in capital
214,600 homes.
The total number of owner occupier cities
10

13. RP Data Property Capital Markets Report 2012 | Feature
The economics Securitisation:
of house prices
bellwether for the
property market
In a report dating from 9
February 2012, the ratings
agency, Moody’s Investors
Service, said that the outlook
A persistent fear amongst global investors and commentators is for Australian securitisations
that Australia’s housing sector is overvalued and at risk of collapse. will be characterised
by stable collateral
This view, which dates back to 2003, has been refreshed by the performance.
ongoing European crisis. “Australia’s economic
growth forecast of 3.8 per
Some of Australia’s most prominent economists demand for dwellings,” said Chronican. “We cent, steady unemployment
have, in recent times, put the debate on don’t see that in other areas – if the demand for in the low 5 per cent range,
Australia’s home values into perspective. plasma TVs goes up, we make more.” official interest rates at 4.25
Since the middle of last year, Australia’s per cent, and the ability of
major banks have been keen to hose down Supply-demand equation policymakers to implement
criticism of the local housing market. This Michael Blythe, chief economist for the rate cuts, will support stable
is especially important for them, given that Commonwealth Bank of Australia, points performance of these
different asset classes in
Australian banks, unlike their peers elsewhere out that the demand-supply balance in the
2012,” said Richard Lorenzo,
have the majority of their assets on balance Australian housing market is supporting house
a Moody’s vice president
sheet as prime mortgages. prices and is unlikely to change. He asserts there and senior credit officer.
Philip Chronican, the ANZ Bank’s chief is limited risk of a US-style house price collapse, “The recovery rates for
executive officer for Australia, and an noting that Australian demographic trends are asset backed securitisations
economist by training, was keen to deal with consistent with an underlying new housing (ABS) will remain stable
the consistently raised topic of asset pricing demand of 180,000 to 185,000 new houses per due to these good
in the housing market. “If you’re using the annum. “This demand is lower than in recent macroeconomic conditions,
historical ratio of rents to house prices, it puts us years but is still running well ahead of new while the stability of RMBS
comfortably at the top of the table,” he said in a construction,” he wrote in a recent economics property prices will be
series of presentations to business leaders and note on the topic of house prices. supported by shortages
in housing supply,” added
investors in July 2011. As Blythe also noted, this excess has been
Treasa Boyle, a Moody’s
There is a degree of contention as to in place for a number of years, so a pent-up or
analyst.
what constitutes the right measure for such a accumulated demand exists as well. She suggested that
comparison of fair value, he asserted. “Low residential vacancy rates and above- CMBS property prices will
“If you’re measuring by rental yields, what average growth in dwelling rents are the visible remain strong, as demand is
you’re effectively doing is assessing housing signs of this imbalance. Financial intermediaries absorbing any new supply
with other investment classes. Measuring house are willing to finance housing activity. So there is entering the market, and
prices against incomes [means] you’re talking a mechanism to translate demographic demand keeping vacancy rates in the
about affordability, which is a different concept,” into real demand,” he said. low single digits.
he said. In Moody’s view, RMBS
The only meaningful conversation to have Affordability trends deals will become less
conservative than those
is why the price of residential land is so high in Trends in affordability are also supportive
completed after the global
Australia, suggested Chronican. of dwelling prices. “A combination of strong
financial crisis, as issuers
“The price of an inner city apartment in income growth and falling mortgage rates is attempt to make their
Sydney or Melbourne is very similar to that boosting affordability,” Blythe noted. “Some deals more economical by
as Hong Kong or Singapore,” he said, before rough estimates show that the CBA-Housing providing less subordination,
pointing out that in those cities there were Institute of Australia housing affordability index while still keeping them within
natural constraints to land use that were not at the end of 2011 was 13 per cent above year the Aaa range.
apparent here. earlier levels. With a lead of a little over a year, There will be additional
In Australian cities, there is clearly an the trend in affordability is a useful guide to the operating risks with RMBS,
opportunity for medium density housing direction of house prices.” ABS and CMBS deals via
to be improved. However, the price of land CBA’s analysis shows interest rate trends the new Personal Property
Securities Act, which
in Australian cities is well in excess of land in are also consistent with a lift in residential
requires transaction parties
comparably sized US cities, he observed. construction activity. “We expect new dwelling
to adopt new procedures
“So it’s a supply side problem, with the construction to lift a little from 148,000 units in to protect the numerous
housing market failing to keep up with the 2011 to 155,000 in 2012,” said Blythe. “Such an securities interests.
11

14. Feature | RP Data Property Capital Markets Report 2012
G1: Excess mortgage repayments ranging analysis piece on the Australian
100% 100% economy, the bank’s economics team made
90% 90% the further observation that, “despite many
80% 80% comments from observers to the contrary,
70% 70% Australia’s house prices have not actually grown
60% 60%
exceptionally quickly over the past six years
50% 50%
40% 40%
compared to a number of other international
30% 30% markets.” (see G2: International house prices)
20% 20% These observations notwithstanding,
10% 10% national house price measures are below recent
0% 0% peaks, noted Blythe, adding: “House prices do
year 1 2 3 4 5 6 7 8 9 10 11
adjust in Australia. But nominal price falls are
Borrowers ahead of schedule* Ratio to scheduled** typically small and shortlived. And the sort of
* Percent of owner-occupier households with mortgages
** Percent to scheduled (principal plus interest) repayments; excludes repayments due to sales and refinancing nominal house price falls that would trouble the
Sources: APRA; HILDA Release 10.0
financial system and the real economy are rare.”
G2: International house prices Luci Ellis, head of the financial stability
department at the Reserve bank of Australia,
250 250
followed a similar tangent when she addressed a
House price index (March 2002=100)
230 230
mortgage industry conference, also in February
210 210
2012. She observed that the rate of home
190 190
mortgage defaults remains low in comparison to
170 170
other asset classes.
150 150
“The source of the threat to financial
130 130
110 110
stability is more often in commercial property
90 90
or property development than in home
70 70
mortgages,” she told the audience of industry
50 50 professionals.
Further, home mortgage markets with
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
prudent lending standards do not generally
Australia NZ Singapore US Canada Hong Kong UK China pose risks to financial stability.
Sources: Australian Bureau of Statistics, ANZ, Bloomberg
“So I think we need to keep the risks posed
by the housing and home mortgage markets in
outcome would still be a little below long-run perspective.” It is not unusual for housing prices
averages and a long way below underlying to fall, especially if they had been booming
Key Statistics demand.” previously, or if the economy has turned down.
The typical valuation ANZ’s estimates point to an even larger But for that to translate into a big upswing in
based on capital city imbalance, suggesting a shortage of dwellings mortgage defaults, the economy generally has
house prices and in Australia since 2005-06 has built up to about to have weakened first.
Australia-wide incomes 230,000. “This supply side is going to become “All the same, the recent US experience
shows a price-to- even more critical; and control of supply rests shows that painful housing busts can happen.
income ratio of 5.5. with governments,” said Chronican. We would certainly want to avoid one here.
But a comparison of And governments have a vested interest Housing lending is a larger fraction of the
Australia-wide dwelling
in terms of revenue raising items such as land balance sheets of Australian banking institutions
prices to Australia-wide
rates and capital gains tax, so it is hard to get than for their US counterparts. So in the unlikely
incomes reveals a “true”
ratio of 4.25, not that them interested in the face of such a conflict of event a US-style bust did happen, it would be
different from most other interest, asserted Chronican. harmful to financial stability in Australia,” she
countries. (Source: CBA In further commentary as to why the said.
Economics Update, 23 local housing market is still strong, without That was the pattern of the housing busts
February 2012) being overblown, Chronican observed that of the 1930s and early 1990s in many countries.
delinquency rates are low, with overall LVR “It is also what we see in Ireland, Spain and the
figures are well below those of the US, for United Kingdom today. In those countries, as in
instance. He pointed to the balance sheet of his the past, commercial real estate and property
own bank, as at mid-year 2011. development have been the bigger problems.
“Out of 800,000 home mortgages, we have The recent cycle in commercial property prices
105 mortgagee in possession [cases],” Chronican has been at least as large as that in housing
said of his own bank’s portfolio. prices for essentially every country for which we
In the 2 March 2012 edition of the Australian have good data, including the United States as
Monthly Chartbook, ANZ’s regular and wide- well as countries like Spain and Ireland,” Ellis said.
12

15. RP Data Property Capital Markets Report 2012 | Feature
Ability to pay G3: Urban population (% in two largest cities)
Much of the subprime and other non-prime
New Zealand
lending that went on was not based on proper Australia
assessments of borrowers’ ability to service the France
loan. Brokers and lenders did not verify incomes Belgium
Canada
or other financial obligations. All they seemed
Spain
to care about was the value of the collateral. If Netherlands
housing prices kept rising, they assumed, the Italy
borrower could either refinance or sell, and Poland
Ukraine
everything would be fine. Germany
So subprime markets and lax lending United Kingdom
decisions were key differences between the US Russia
and Australian markets. What happens during United States
Japan
the life of the loan also matters a great deal,
Source: RBA 0% 20% 40% 60%
noted Ellis. Some recent research by economists
This data was sourced from an RBA Research Discussion Paper using global figures from 2001 to allow comparison to be made on a
at the Federal Reserve suggests that it was consistent basis.
not high proportions of subprime loans that
predicted which districts would have worse market that is rarely seen overseas.”
outcomes for prices and loan defaults. Rather, By way of example, in their 2010-11 full year
it was the proportion of new lending that was results ANZ disclosed that 37 per cent of its Key Statistics
interest-only loans. These loans were not being mortgage customers were “at least one month Australia is one of the
paid down. In some cases, the loan balance ahead” in repayments. most highly urbanised
was increasing through cash-out refinancing or countries in the world.
explicit negative amortisation options. The urban concentration effect About 54 per cent of
Blythe also notes that there is what he the total capital city
Avoiding a US-style situation characterises as “a significant measurement population live in the two
As the RBA has made clear many times before, issue” with the usual valuation calculations.
largest cities (Sydney
and Melbourne). This
one important reason Australia did not go “Australia is one of the most highly urbanised
share compares with
down the same road as the United States is that countries in the world. Most households reside about 16 per cent in the
lending standards did not ease as much here. in the capital cities,” he says. US and 19 per cent in
Even at its peak, subprime lending was only “This population concentration puts the UK. (Source: CBA
ever a tiny fraction of the total. The so-called upward pressure on capital city dwelling Economics Update, 23
‘low-doc’ loans were also a small niche. “And we prices. So house price to income ratios should February 2012)
never saw here the explosion of zero-deposit vary with urban density. And equilibrium
loans – or worse, the 125 per cent loans that house price to income ratios should be higher
were available in the United Kingdom,” said Ellis. in Australia than elsewhere.” And incomes are
In Australia in recent years, around two-thirds also higher in the capitals, so valuations based
of new mortgage borrowers from banks had an on capital city prices and Australia-wide
initial loan-to-valuation ratio below 80 per cent. incomes will have a natural upward bias, he
If we look at the whole mortgage book, that points out.
fraction is even higher.” High population densities have some other
implications for Australia:
Ahead of the game • The dominance of the larger cities means
Another important mainstay against a US-style Australia should be more susceptible to
outcome is that many Australian households housing booms. In countries with less
actually pay their mortgages down, often quite concentrated urban populations, price
quickly (see G1: Excess mortgage repayments). booms in one city have less effect on
Estimates vary, but it seems as many as half national average prices.
of owner-occupiers with mortgages pay it down • Higher equilibrium house price to income
faster than the contract requires. “The faster ratios should mean that household debt to
they pay it down, the less likely they are to end income ratios will be higher in equilibrium
up in negative equity; they have a head start if as well.
prices should fall,” wrote the CBA’s Blythe. The implication is that Australia’s housing
“Some of them must be running their debt market is not the “bubble” that offshore
down quite fast: data from lenders suggest that observers perceive, but rather has a higher
the total amount of excess repayments made is equilibrium point due to unique domestic
similar to the amount of required repayments. factors that are well understood and have been
This is a welcome feature of the Australian in place for some time.
13