The Outlook for the Economy and Housing In Australia

Ben PhillipsAssistant Director – Industry and Policy, HIA

April 2008

• No it isn’t!• The surge in world growth is over, however, and blame America

because the trouble goes back to the sub prime mortgage crisis. • Everybody has an opinion yet nobody knows …• … but Australia and East Asia (excl. Japan) should hold up

reasonably well.• The U.S. is probably in/close to recession and a weak America will

generate uncertainty about the global outlook for some time to come.

The World Economy – is it falling apart?The World Economy – is it falling apart?

Where Australia’s Exports go?

• US only 6% share of export market, North Asia > 50%!

• Most growth in China, India and Korea (26%, 37%, 11%) during 06/07.

• Outlook remains very strong in 2008 for Asian countries – being influenced mainly by domestic demand/development – “decoupling theory”.

The Economic Backdrop for The Economic Backdrop for AustraliaAustralia

Australia’s Economy – picking up steam but for how long?Australia’s Economy – picking up steam but for how long?

• Australia is still growing very strongly and the resources boom is the basis for this growth.

• In the December 2007 quarter GDP grew at 3.9 per cent.

• For the entire year growth was also 3.9 per cent, the fastest pace since 2002.

• In FY terms, growth will be strong in 2007/08 but a slowdown is likely in 2008/09 and it may be quite a significant slowdown as rates and the US economy impacts filter through.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Dec

-04

Mar

-05

Jun-

05

Sep-

05

Dec

-05

Mar

-06

Jun-

06

Sep-

06

Dec

-06

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Per c

ent

Annual Growth Quarterly Growth 5 yr avge

Australia's GDPSource: ABS 5206

Average over currenteconomic expansion

State Economies – vast differencesState Economies – vast differences

• Resource rich states still enjoy the fastest growth.

• NSW and Victoria caught up in 2007 because of the resources boom, and also because of private and public business investment.

• The story won’t really change in 2008.

State Final Demand % ChangeSource: ABS 5206

-2

0

2

4

6

8

10

12

NSW VIC QLD SA WA TAS NT ACT

Per c

ent

2006 2007

• We have had 12 interest rate rises since May 2002.

• The August ’07 – March ’08 period has been particularly savage. Rates have risen about 1.4 percentage points.

• We may be at the peak, but it’s not a foregone conclusion.

• We will probably have one hike too many, but which one?

• If strong inflation figures yesterday continue on to the June quarter (released July 23) the RBA will be more likely to move.

… … the (domestic) interest rate world is now uglythe (domestic) interest rate world is now ugly

Consumer confidence has been battered in 2008 …

Consumer Confidence – at lowest level since 1990

80

90

100

110

120

130

Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08

Inde

x

Long run average

… as has home-buying confidence

Home Buying Sentiment continues to fallWestpac - Melbourne Institute Time to Buy a Dwelling Index

40

60

80

100

120

140

160

180

Mar.1976 Mar.1980 Mar.1984 Mar.1988 Mar.1992 Mar.1996 Mar.2000 Mar.2004 Mar.2008

Inde

x

Time to buy a dwelling Good'/'Bad' Threshold

'Bad' time to buy < 100

'Good' time to buy > 100

The labour market in Australia – still looking good

Australia's Unemployment Rate

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Mar

-89

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Per c

ent 20 Year Average Unemployment Rate

5 Year Average Unemployment Rate

New HousingNew Housing

National building approvals – another claytons recovery?

Building Approvals - Australia

8000

10000

12000

14000

16000

18000

20000

Feb-84 Feb-87 Feb-90 Feb-93 Feb-96 Feb-99 Feb-02 Feb-05 Feb-08

Num

ber

Seasonally adjusted Trend

Australia’s population – dominated by record immigration

Australia's Population Growth by ComponentMoving Annual Total

0

50000

100000

150000

200000

250000

300000

350000

Sep-

87

Sep-

88

Sep-

89

Sep-

90

Sep-

91

Sep-

92

Sep-

93

Sep-

94

Sep-

95

Sep-

96

Sep-

97

Sep-

98

Sep-

99

Sep-

00

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Total MTA Natural Increase MTA Net Overseas Migration MTA

Components of Growth by StateNatural

Increase

OS Migration

Interstate

Migration

Total

NSW 44,600 53,500 -26,700 71,400

VIC 32,000 48,200 -2,100 78,100

QLD 30,000 33,700 27,000 90,700

WA 17,000 27,400 4,200 48,600

Natural increase and OS migration are roughly in line with state population shares, State population change story is driven by those moving from NSW over the Tweed into QLD.

WA also punching above its weight on OS and interstate migration thanks to resources boom.

Housing Starts Forecasts

The The RenovationsRenovations Market Market

Renovations – going ok, not as strong as 2002/03.

Renovations and Additions Market - AustraliaMonthly Lending and Monthly Council Approvals

0

100000

200000

300000

400000

500000

600000

700000

Feb-0

1

Apr-

01

Jun-0

1

Aug-0

1

Oct

-01

Dec-

01

Feb-0

2

Apr-

02

Jun-0

2

Aug-0

2

Oct

-02

Dec-

02

Feb-0

3

Apr-

03

Jun-0

3

Aug-0

3

Oct

-03

Dec-

03

Feb-0

4

Apr-

04

Jun-0

4

Aug-0

4

Oct

-04

Dec-

04

Feb-0

5

Apr-

05

Jun-0

5

Aug-0

5

Oct

-05

Dec-

05

Feb-0

6

Apr-

06

Jun-0

6

Aug-0

6

Oct

-06

Dec-

06

Feb-0

7

Apr-

07

Jun-0

7

Aug-0

7

Oct

-07

Dec-

07

Feb-0

8

Lending for Alts and Adds Value of Council Approved Alts and Adds

Renovations Forecasts

Other IssuesOther Issues

House Prices – unsustainable growth

Summary of Median House Prices - December 2007 QtrSource: REIA

23.4%

20.8%

18.6%

13.8%

11.6%

11.5%

4.8%

1.1%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Melbourne

Brisbane

Adelaide

Hobart

Canberra

Darwin

Sydney

Perth

House Prices – a narrowing of the gap with Sydney

CityAverage of Sydney house value over last ten years

% of Sydney house value Jan 08

Adelaide 51.4% 74.0%Brisbane 55.3% 83.3%Canberra 65.6% 83.9%Melbourne 64.8% 79.7%Perth 56.6% 94.4%

Percentage of Sydney House Value

Source: RP Data

Housing Affordability at record lowsHousing Affordability Index - AustraliaSource: HIA-Commonwealth Bank Affordability Report

80

100

120

140

160

180

200

220

240

Dec.1985 Dec.1987 Dec.1989 Dec.1991 Dec.1993 Dec.1995 Dec.1997 Dec.1999 Dec.2001 Dec.2003 Dec.2005 Dec.2007

Inde

x

Capital cities Regional areas Australia

First Home Buyers – a stagnant year ahead?

First Home Buyers in AustraliaSource: ABS Housing Finance

0

2000

4000

6000

8000

10000

12000

14000

16000

Fe

b-0

1

Ma

y-0

1

Au

g-0

1

No

v-0

1

Fe

b-0

2

Ma

y-0

2

Au

g-0

2

No

v-0

2

Fe

b-0

3

Ma

y-0

3

Au

g-0

3

No

v-0

3

Fe

b-0

4

Ma

y-0

4

Au

g-0

4

No

v-0

4

Fe

b-0

5

Ma

y-0

5

Au

g-0

5

No

v-0

5

Fe

b-0

6

Ma

y-0

6

Au

g-0

6

No

v-0

6

Fe

b-0

7

Ma

y-0

7

Au

g-0

7

No

v-0

7

Fe

b-0

8 0.0

50.0

100.0

150.0

200.0

250.0

300.0

First home buyers - Dwellings financed (no.) FHB Average loan size ($000)

Investor Lending – holding up better than most, although rates a new concern.

-200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,0002,000,000

Jan.

2005

Apr.2

005

Jul.2

005

Oct

.200

5

Jan.

2006

Apr.2

006

Jul.2

006

Oct

.200

6

Jan.

2007

Apr.2

007

Jul.2

007

Oct

.200

7

Jan.

2008

Loans for Investment Properties, QLD ($'000)

The Rental Market – a dire lack of new stock

• The real casualty of the current housing squeeze

• Public housing supply has all but disappeared

• Vacancy rates are at crucially ‘tight’ levels …

• … and rents keep creeping up

Vacancy Rate, Capital Cities, December 2007Source: REIA

1.0

1.6

1.8

1.1

1.6

2.6

2.2

2.1

1.4

1.2

1.6

1.5

2.5

2.2

2.2

0.7

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Sydney

Melbourne

Brisbane

Adelaide

Perth

Canberra

Hobart

Darwin

Per CentDec-07 Sep-07

Tight Market Easy Market

Trade Prices – persistent upward pressure

Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Qtly Change Annual Change

Sydney 128.1 127.8 125.5 124.0 123.0 125.5 125.7 127.1 129.0 134.0 134.8 136.6 1.3% 7.5%

Regional NSW 112.8 110.8 116.1 111.6 114.5 109.1 112.1 112.3 118.2 122.4 121.4 124.3 2.4% 10.7%

Melbourne 119.6 117.5 116.3 117.5 112.9 112.9 117.9 118.1 117.0 125.0 124.1 123.8 -0.2% 4.9%

Regional Vic 94.7 99.3 104.5 101.2 95.5 99.9 102.7 104.6 110.6 104.3 111.3 110.1 -1.1% 5.2%

Brisbane 125.9 120.0 121.6 121.7 120.3 123.3 119.6 123.7 126.2 130.8 129.8 135.0 4.0% 9.1%

Regional QLD 114.6 118.9 114.9 118.5 118.8 112.9 118.5 121.5 129.7 126.7 126.4 131.1 3.7% 7.9%

Adelaide 108.1 135.6 129.0 125.3 115.1 114.4 111.2 112.2 115.4 111.8 115.8 119.4 3.1% 6.5%

Regional SA 105.4 108.5 113.1 111.6 103.9 112.3 114.1 109.7 111.6 106.2 105.9 116.0 9.5% 5.7%

Perth 117.8 118.5 120.8 119.3 120.3 124.5 129.4 133.0 125.5 137.5 138.5 142.3 2.8% 7.0%

Regional WA 139.4 133.3 136.4 134.0 135.2 138.9 142.1 137.4 129.6 130.9 139.2 139.2 0.0% 1.3%

All of Australia 118.1 119.0 120.2 119.9 120.5 120.4 122.6 124.1 124.5 128.1 129.2 130.9 1.3% 5.5%

(Sep 02 All Trades, All Regions = 100)

HIA Trade Contractor Price Index - by Region

Trade Availability – still very tight

Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07Quarterly Movement in

Availability

Sydney 0.04 0.11 -0.20 -0.03 0.04 -0.21 -0.07 0.03 -0.14 -0.10 -0.14 -0.30

Regional NSW -0.24 -0.25 -0.10 -0.14 -0.26 -0.09 -0.10 0.46 -0.07 -0.18 -0.23 -0.17

Melbourne -0.42 -0.26 -0.10 -0.28 -0.25 -0.23 -0.42 -0.29 -0.23 -0.25 -0.27 -0.29

Regional Vic -0.16 -0.52 -0.43 -0.41 -0.36 0.38 -0.14 -0.20 -0.22 -0.09 -0.20 -0.37

Brisbane -0.65 -0.48 -0.53 -0.85 -0.58 -0.59 -0.47 -0.44 -0.56 -0.60 -0.69 -0.76

Regional QLD -0.48 -0.34 -0.45 -0.68 -0.83 -0.64 -1.00 -0.73 -0.80 -0.60 -0.76 -0.81

Adelaide -0.33 -0.67 -0.47 -0.73 -0.35 -0.32 -0.58 -0.31 -0.17 -0.13 -0.24 -0.97

Regional SA -0.42 -0.50 -0.17 -0.80 -0.44 -0.54 -0.29 -0.60 -0.60 -0.40 -0.40 -0.44

Perth -0.96 -0.76 -0.94 -0.92 -0.83 -1.10 -0.92 -0.95 -0.71 -0.82 -0.93 -0.68

Regional WA -0.55 -1.17 -1.33 -0.50 -1.00 -0.67 -1.00 -0.75 -0.70 -0.89 -0.60 -0.20

All of Australia -0.42 -0.34 -0.35 -0.35 -0.43 -0.41 -0.42 -0.37 -0.41 -0.43 -0.46 -0.51

Source: HIA Austral Bricks Trades Report

Trade Availability - by Region

*Note: Critical Short Supply is between -2 and -1, Moderate Short Supply is between -1 and 0, In balance = 0

Moderate oversupply is between 0 and 1, and massive oversupply is between 1 and 2.

The Medium Term OutlookThe Medium Term Outlook

Investment in Residential Infrastructure (Housing Affordability Fund)

• Close to HIA’s suggested Residential Infrastructure Fund

• $500m competitive grant scheme to reduce state and local government infrastructure charges on new developments

• Under the plan local governments will apply for funding via a competitive process for grants to cover part of the cost of infrastructure to support new residential development

• Expected to reduce the price of serviceable land

National Housing PoliciesThe Supply side: Infrastructure provision

National Rental Affordability Scheme (NARS)

• Initially involves an investment of $1.2B by the Government to private investors and is aimed at increasing the supply of residential dwellings for those on Commonwealth Rent Assistance

• Expected to create 100,000 new affordable rental properties over the next 10 years throughout Australia by providing private investors with tax credits of $6,000 a year for 10 years for properties that are rented at 20 per cent below the prevailing market.

National Housing PoliciesThe Supply side: the tight rental market

Home Super Saver Accounts

• Has as its basis the HIA Home Super Saver Scheme

• Announced by Federal Treasurer last month

• Savings of up to $5,000 per year will be eligible for a government contribution (minimum of 15%) paid directly into the Home Super Saver Account.

• Account earnings taxed at statutory tax rate of 15%.

• The minimum saving period is four years with individual contributions of at least $1,000 in each of the years.

National Housing PoliciesThe ‘Demand’ side: a savings vehicle

Housing Representation

• The Hon Jenny Macklin (Cabinet) and The Hon Tanya Plibersek will each have housing as a Ministerial responsibility

• Resembling the U.K model, the Government will establish a National Housing Supply Research Council and will publish an annual State of Supply Report to analyse the adequacy of construction and land supply

National Housing PoliciesA greater recognition?

Investment in Training Facilities

• The Federal Government has announced an intention to transfer existing Australian Technical Colleges to State and Territory Governments

• An investment of $2.5 billion in capital funding over the next decade to build new trade centres in Australia’s 2,650 secondary schools

• There is a strong basis for this – the successful HIA Youthbuild program

National Housing PoliciesThe Labour element

• The world economy will slow but it won’t fall over.• Economic growth in Australia is likely to slow in 2008/09. • Strong Asian economies, population growth and investment to shield

the economy from a struggling world (ex-Asia) economy.• Housing starts face a challenging environment 2008/09 with high

rates and low affordability.• We should experience further growth in the renovations market.• There is no quick fix for tight rental markets and very low housing

affordability, but there is a greater cause for optimism.

Some points to take awaySome points to take away

Ben PhillipsAssistant Director – Industry and Policy, HIA

April 2008

http://economics.hia.asn.au