Global Investor Update on the Australian Housing Market Marten Touw - - PowerPoint PPT Presentation

Commonwealth Bank of Australia

July 2004

Global Investor Update on the Australian Housing Market

Marten Touw Group Treasurer Commonwealth Bank of Australia + 612 9378 3783 Michael Blythe Chief Economist Commonwealth Bank of Australia + 612 9312 4135

2

Important Information

As this advice has been prepared without considering your objectives, financial situation, or needs, you should, before acting on the advice, consider its appropriateness to your circumstances.

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Our View

• The housing boom

– part of a global trend; – a rational response to background economic conditions; – households left with more debt and riskier asset mix; – households now net payers of interest and less savings.

• The outlook

–

• ngoing housing market slowdown not assured;

– construction activity likely to remain at high levels.

• The house price threat

– generalised house price falls unlikely; – the first-home buyer segment is a significant deadweight - but State governments are providing assistance; – dominance of investor activity has distorted the market - but most investors well placed to withstand any negatives.

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Background Drivers

From 33-1/3 to 78rpm

GROWTH & INFLATION

(10-yr averages)

3 6 9 Sep-90 Sep-93 Sep-96 Sep-99 Sep-02 2 4 6 Inflation (lhs) GDP growth (rhs) %pa %pa

UNEMPLOYMENT & RATES

6 1 2 1 8 Sep-90 Sep-93 Sep-96 Sep-99 Sep-02 6 1 2 1 8 Unemployment rate M ortgage rate % %

• Growth stepped up and inflation stepped down.
• Falls in unemployment and interest rates followed.

5

Balance Sheet & Cashflow Changes

More debt

HOUSEHOLD LIABILITIES

(% of disposable income)

40 80 1 20 1 60 1 988 1 990 1 992 1 994 1 996 1 998 2000 2002 2004 40 80 1 20 1 60 Japan Italy France Australia US UK Germany Canada

Source: OECD

% %

NET INTEREST RECEIPTS

(% of after-tax income)

• 3

3 6 Jun-60 Jun-68 Jun-76 Jun-84 Jun-92 Jun-00

• 3

3 6 % %

• Household debt has risen sharply.
• Households now net payers of interest.

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Offsets

Padding up

• Household debt repayment

practices have changed.

• Constant dollar repayments

have accelerated payoff of principal.

• 2/3 of CBA customers paying

faster than necessary.

• A sizeable buffer exists.
• Effective mortgage rate 7%.

PRINCIPAL REPAYMENTS

1 20 30 Sep-97 Sep-99 Sep-01 Sep-03 5 1 1 1 6 % $ bn Cumulative

• verpayment
• f principal*

(rhs) P rincipal (% o f mo rtgage payment) (lhs)

*assumes prinipal repayment ratio fixed at 1 995-98 level

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Housing

One-way bet - but which way?

FIXED RATE LENDING

(% of total)

1 20 30 40 Jan-01 Jan-02 Jan-03 Jan-04 1 20 30 40 % % Investor Owner-

• ccupier

CBA LENDING INDICATORS

(Jun'01=100)

50 1 00 1 50 200 250 Jan-01 Jan-02 Jan-03 Jan-04 60 75 90 1 05 1 20

Owner-occupiers (new, no., rhs) Investor (value, lhs) (lh )

Index Index

• Lending has stabilised after earlier large falls.
• Unemployment low, confidence high, buyers market, sentiment turning -

could housing bounce?

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Construction Risks

Excess supply or excess demand?

NET MIGRATION

60 1 20 1 80 1 949/50 1 961 /62 1 973/74 1 985/86 1 997/98 60 1 20 1 80 '000 '000

UNDERLYING DEMAND

• 1

00 1 00 200 Sep-78 Sep-83 Sep-88 Sep-93 Sep-98 Sep-03

• 1

00 1 00 200

Underlying demand Dwelling commencements

'000 '000

Pent-up demand Excess supply QII (f)

• Commencements running only a little above underlying demand.
• Relative price shifts favour alts & adds.

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House Prices: The First Home Owner Deadweight

Sidelined

• 3

3 6 9 Home Loans Investment Loans

RESIDENTIAL LENDING*

(change in relative position, NSW vs ROA)

* 3wks prior vs 1 3 wks since tax changes

FIRST HOME OWNERS

(% of total lending)

1 20 30 40 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 1 20 30 40 % %

• Absence of first-home buyers putting downward pressure on prices?
• State Government now providing significant assistance.
• Pent-up demand?

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House Prices: The Investor Threat

• The hotspots:

– Inner Sydney (inc Homebush, Dee Why, Arncliffe); – Inner Melbourne; – Inner Brisbane (inc Surfers Paradise, Cairns).

• Share of investor lending:

– <1% of home loan portfolio.

• The stress test:

– gross rents drop 50%; – prices drop 40%.

• The result:

– 0.1% of portfolio fail commitment level test. Inner city & other hotspots

0.4 0.8 1 .2 0.4 0.8 1 .2

INNER CITY & OTHER HOTSPOTS

(lending to investors)

% % A s a share o f ho using po rtfo lio % o f ho using po rtfo lio failing co mmitment level test S tre s s T e s t (re nts do wn 5 0 %, pric e s do wn 4 0 %)

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UNIT PRICES

(% change between Oct'03 and Jun'04)

• 45
• 30
• 15

15 30

NSW Sydney City Ultimo Darlington Darling Island Darlinghurst Elizabeth Bay Alexandra Redfern Waterloo Roseberry M ascot Forest Lodge (Glebe) Glebe Island Camperdown Dee Why Homebush Arncliffe (Wolli Creek) Queensland Brisbane City Newstead West End Dutton Park Labrador Anglers Paradise et al M ain Beach Broadbeach Cairns Buchan Point Victoria M elbourne City Southbank Docklands n.a. n.a.

House Prices: Investor Threat

Hotspots not so hot

• Unit prices largely unchanged over

October-June period at national level.

• Prices in “hotspot” areas of Sydney

and Melbourne have fallen.

• Qld still rising.
• No obvious economic fallout.

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Housing: The RBA Roadmap

Are we heading in the right direction?

• RBA’s “preferred scenario” has

housing credit slowing to a sustainable pace of 9%pa.

• Initial slowdown faster than

consistent with preferred path: – collapse scenario? – So RBA on sidelines.

• Latest ABS data shows we were

back on track in April.

• CBA data suggests now off track
• n the upside.

30 50 70 90 1 1 Jan-03 Sep-03 M ay-04 Jan-05 Sep-05 30 50 70 90 1 1 Index Index

RBA HOUSING FINANCE SCENARIOS

(peak=100)

• 8%
• 4%
• 2%

0% Actual RBA's "preferred" scenario CBA M ay/Jun (e) Outside the range

• f previous experience

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Housing: The RBA Roadmap

Engineering the desired scenario

RATES & HOUSE PRICES

(annual % change)

• 20

20 40 60 Sep-82 Sep-86 Sep-90 Sep-94 Sep-98 Sep-02

• 40
• 20

20 40 % % House prices (lhs) M ortgage rate (rhs) 20% rise in mortgage rate

RATES & HOUSING CREDIT

(annual % change)

7 1 4 21 28 Sep-82 Sep-86 Sep-90 Sep-94 Sep-98 Sep-02

• 40
• 20

20 40 % % Housing credit (lhs) M ortgage rate (rhs) 20% rise in mortgage rate

• Past cycles show a 20% rise in mortgage rate needed to slow credit to

desired pace and kill house price rises.

• Implied cash rate: 5½-5¾%.

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Housing: Mortgage Write-offs

1 2 3 4 5 92 93 94 95 96 97 98 99 00 01 02 03

Years Basis Points

4.0 5.4 6.8 8.2 9.6 1 1 .0

%

C B A M o rtgage Write-o ffs (LH S) Unemplo yment R ate (R H S) 1 2 3 4 5 92 93 94 95 96 97 98 99 00 01 02 03

Years Basis Points

4.0 6.8 9.6 1 2.4 1 5.2 1 8.0

% Mortgage rate advanced 3 yrs (RHS) CBA Mortgage Write-

• ffs (LHS)

1 2 3 4 5 92 93 94 95 96 97 98 99 00 01 02 03

Years Basis Points

• 2
• 1

1 2 3

% Change in Unemployment rate (RHS) CBA Mortgage Write-offs (LHS)

CBA Mortgage Write-offs v Unemployment rate CBA Mortgage Write-offs v Advanced Interest rates CBA Mortgage Write-offs v Change in Unemployment rate

CBA Mortgage Write-offs v Australian Residential Property Index

1 2 3 4 5 92 93 94 95 96 97 98 99 00 01 02 03

Years B asis P

• ints

50 1 00 1 50 200 250

Index Housing Price Index (RHS) CBA Mortgage Write-offs (LHS) CBA Average Write-off Level (LHS)

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