rpdata capital markets report spring 2013

8/12/2019 RPData Capital Markets Report SPRING 2013

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Property capitalmarkets reportSPRING 2013

On the move

Investors fock

back to property

markets

Economic outlook

Will demand for

credit stay at recordlows?

Policy poser

Lessons from NewZealands mortgagelending market

State by state

Analysis of homevalues, sales andrents across Australia


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02 Introduction

03 Executivesummary

04 Economic overviewWhile economic conditions are comparativelystrong, Australia is not immune from the effectof global economic uncertainty.

14 Lessons from New ZealandWhat can be learnt from New Zealand policy makersand their efforts to put the brakes on that countryshousing market?

16 Housing market overviewSales transactions and home values are generallyincreasing but prudence remains the watch wordfor Australian households.

24 State by State analysisSydney and New South Wales ...................................................... 24Melbourne and Victoria ...................................................................... 26Brisbane and Queensland ............................................................... 28

Adelaide and South Australia ......................................................... 30

Perth and Western Australia ............................................................ 32

Hobart and Tasmania .......................................................................... 34

Darwin ............................................................................................................. 36

Canberra ........................................................................................................ 38

ContentsProperty capitalmarkets reportSPRING 2013

PublisherAndrew Stabback T: +61 2 02 9376 9501 E: [email protected]

Managing Editor:Andrew Starke T:+61 2 9376 9506 E: [email protected]

Art Direction:Six Black Pens, w ww.sixblackpens.com, [email protected]

All rights reserved 2013. No part of this work covered by the publishers copyright may be

reproduced in any form by any means, graphic, electronic or mechanical, including photocopying,

recording, taping, or information storage and retrieval, without the written permission of the

publisher. Any unauthorised use of this publication will result in immediate legal proceedings.

Publishers Note: Although every care has been taken to ensure the accuracy of the information

contained within this publication, neither the publishers, authors nor their employers can be

held liable for any inaccuracies, errors or omissions. Readers are strongly advised to contact their

professional advisor before entering into any contract to buy or sell any security.

Asia-Pacific Banking & Finance

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Sydney, NSW 2000

financialpublications.com.au


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Introduction

RP Datas research team is very pleased to

bring you the fourth edition of the RP Data

Property Capital Markets Report. The report

is released at a time when Australia has a

newly elected government, the economy

is transitioning away from a mining-related

infrastructure boom and housing markets are

well into a recovery with both dwelling values

and transaction volumes on the rise.

The residential housing market in Australia

is the countrys largest and most valuable

asset class; worth an estimated $4.9 trillion,

which is about three and a half times the

value of Australias stock market and about

three times the value of Australias combined

superannuation funds.

Dwelling values across the combined

capital city index have increased by 3.8 per

cent over the most recent financial year. Based

on early data flows, it is clear that dwelling

values have continued to rise over recent

months.

Buyer numbers have moved from their

low base over the past year, rising by close

to twenty per cent compared with a year ago.

Australians are viewing the housing

market in a more positive light, and buyer

demand is being fuelled by the low cost

of debt and the recent improvements in

affordability, brought about by the 7.7 per cent

fall in dwelling values recorded between late

2010 and May 2012, as well as the low interest

rate environment.

The burgeoning housing recovery

is occurring as the Australian economy

enters a period of transition. The resources

infrastructure boom has been winding down

since commodity prices peaked in late 2011,

creating some challenges for economicgrowth.

Policy makers are now looking towards

housing construction to fill part of the

economic void that has been left by the

slowdown in the resources sector. To date

the economic transition could be described

as relatively sedate, however there has been

a considerable lift in the number of new

dwellings approved for construction, which

is likely to gather pace as the housing market

recovery gathers momentum.

With the economy shifting down a

gear, there has also been some softening

in the national labour force. The rate of

unemployment has drifted higher, with the

national rate as at July sitting at 5.7 per cent.

The reading remains low from a historical

measure and an international stand point.

Despite the slightly higher unemployment

reading, Australian mortgage holders are

continuing to demonstrate their capacity to

pay down debt. Housing loan arrears remain

well contained, with the percentage of

mortgages more than ninety days overdue

well below one per cent.

Looking forward, the Australian housing

market is likely to see a continuation of the

growth conditions that are currently evident.

The market drivers will continue to be a mix of

low interest rates, a strong population growth

rate that is trending higher while dwelling

construction fails to keep pace. Vacancy rates

are currently below 3 per cent across most

capital cities. This suggests that rental markets

will continue to experience upwards pressure.

At the time of writing virtually every

housing market indicator was heading in a

positive direction. Homes are selling faster,

vendors are discounting their prices by a

lesser amount and auction clearance rates are

consistently higher than 70 per cent.

Overall, the Australian housing market

will continue to face some challenges. Housing

affordability is an ongoing issue, particularly in

the larger cities such as Sydney and Melbourne

where dwelling prices are higher. Softening

labour markets will result in more Australians

being unemployed or under employed.

This in turn is likely to have an impact on

consumer confidence and, willingness to takeon additional credit. The economic transition

away from the mining sector and towards

other sectors of the economy such

as construction, manufacturing, tourism

and retail remains in the early phases and the

outcome remains uncertain.

We hope that the spring 2013 edition of

the RP Data Property Capital Markets Report

is a useful reference guide. More up to date

information and market indicators are always

available at www.rpdata.com.

Introduction | RP DataProperty Capital Markets Report, Spring 2013

Tim LawlessResearch Director,RP Data


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ExecutivesummaryWhile economic indicators are comparatively

strong, Australia has not been immune to the

effect of global economic uncertainty and

financial markets turmoil. The local economy

is currently experiencing below average

levels of economic growth, falling terms of

trade (from record high levels) and lower

commodity prices are undoubtedly impacting

economic growth. As a result, demand for

credit is growing at near-record low levels and

Australian households are more focussed on

saving rather than spending, with the national

household savings ratio now relatively stable

at their highest levels in 25 years.

With mortgage rates anticipated to

remain low over the next six months it will be

important to monitor how the housing market

responds, particularly in light of a slowing

resources sector, an anticipated increase in

the unemployment rate, low levels of credit

growth and a high level of household savings.

The Reserve Bank (RBA) still has scope to cut

official interest rates further if required.

The residential housing market is

Australias single largest asset class with a total

estimated value of $4.89 trillion as at June

2013. In comparison, the total value of listed

Australian equities is almost three and a half

times smaller at $1.4 trillion.

The national gross domestic product

over the year to March 2013 was $1.48 trillion

indicating that the value of housing assets is

3.3 times larger than the economys annual

output. With such a large proportion of

Australian wealth allocated to residential

housing, providing timely, complete

and accurate measurements about the

performance of Australias largest and most

valuable asset class is essential.Over the 12 months to June 2013, home

values across the eight capital cities of

Australia, which account for 65.5 per cent of

the national population, have increased by

3.8 per cent. In contrast, over the 12 months to

June 2012, combined capital city home values

had fallen by 3.6 per cent, indicating a sharp

reversal of the housing markets performance

over the past year. Over the first six months of

2013, home values have increased by 3.0 per

cent, indicating that much of the annual value

growth has occurred during 2013. Capital city

home values have been recording moderate

rises over the past 12 months, however, they

remain 2.9 per cent lower than they were at

their peak in October 2010.

Most encouraging is the fact that the rise

in home values is being accompanied by a rise

in transaction numbers. Over the three months

to May 2013, capital city house and unit

sales were 19.3 per cent higher than over the

same period a year ago. The fact that values

are rising in line with transaction numbers

suggests that the current increase in values

is likely to be more sustainable.

Sydney houses took an average of 38 days

to sell in June 2013 compared to 58 days a year

earlier. Units are taking an average of 31 days

to sell currently, compared to 46 days a year

earlier.

Melbourne homes are selling much

quicker than they were at the same time a

year ago. In June 2012, it took an average of

57 days to sell a house and 60 days to sell a

unit. Currently it takes an average of 41 days

to sell a house and 37 days for a unit.

It is taking a similar length of time to sell

a Brisbane home to what it was a year ago.

Houses and units are currently selling after

an average of 62 days and 65 days respectively

on the market. In June 2012 it took an average

of 63 days to sell a house and 68 days to sell

a unit.

Homes are also taking a shorter length

of time to sell across Adelaide than they were

at the same time last year. A year ago, houses

took an average of 70 days to sell and units 74days. In June 2013 houses took an average of

56 days to sell and units took 54 days.

The length of time it takes to sell a house

in Perth has also improved over the year.

Houses are currently taking an average of

49 days to sell and units 52 days. In June 2012

they were taking an average of 60 days and

59 days respectively.

RP DataProperty Capital Markets Report, Spring 2013 | Executive summary

The national grossdomestic productover the yearto March 2013was $1.48 trillionindicating that thevalue of housingassets is 3.3 timeslarger than theeconomys annualoutput.


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Economic overview | RP DataProperty Capital Markets Report, Spring 2013

Key Statistics

Ofcial interest rates arecurrently at their lowest level inmore than 50 years at 2.5 percent. As a result, we are startingto see a response by the housngmarket both in terms of capitalgrowth and sales activity.

The following pages detail some of the keyeconomic factors which are affecting the

Australian residential housing market.

According to the International Monetary

Fund, Australia was the 12th largest economy

in the world in 2012, representing 2.2 per cent

of the worlds economy. In comparison to

most other developed economies, Australia is

performing well, albeit economic growth more

recently has transitioned to a below trend rate

of growth. Australia hasnt had a recession

since the early 1990s, housing markets have

not collapsed following the financial crisis and

the national unemployment rate remains atlow levels.

Although economic conditions arecomparatively strong, Australia is not immune

to the effect of global economic uncertainty

and financial markets turmoil. The Australian

economy is currently experiencing below

average levels of economic growth, falling

terms of trade (from record high levels) and

lower commodity prices. As a result, demand

for credit is growing at near record low levels

and Australian households are more focussed

on saving rather than spending, with the

national household savings ratio now fairly

stable at the highest levels in 25 years.

Official interest rates are currently attheir lowest level in more than 50 years,

EconomicoverviewWhile economic conditions are comparatively strong,

Australia is not immune to the effect of global

economic uncertainty.


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RP DataProperty Capital Markets Report, Spring 2013 | Economic overview

5

Key Statistics

In the recent RBA bi-annualStatement on Monetary Policy,the RBA expects ination willremain within the target rangethroughout 2013 and remainbelow 3 per cent at least untilthe end of 2015.

8%

6%

4%

2%

0%

-2%

-4%

8%

6%

4%

2%

0%

-2%

-4%

Source: RP Data, ABS

G2: Gross Domestic Product

Mar-83 to Mar-13

Quarterly change Annual change

Mar-83 Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13

12%

10%

8%

6%

4%

2%

0%

-2%

12%

10%

8%

6%

4%

2%

0%

-2%

Headline inflation Source: RP Data, ABS

G1: Consumer Price Index (CPI)

Jun-83 to Jun-13

Underlying inflation

Jun-83 Jun-86 Jun-89 Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13

RBA target range

2.5 per cent. As a result we are starting to see a

response by the housing market both in terms

of capital growth and sales activity.

It is important to note that even though

housing markets are recovering, there has

been no deterioration in household savings,

nor has there been a break out in housingcredit growth.

Despite this strong economic position, the

rate of unemployment (5.7 per cent in July) is

currently at its highest level since September

2009 and Federal Treasury has recently

stated that they are forecasting a peak in

unemployment of 6.25 per cent in the middle

of next year. If unemployment does reach this

level, it would be the highest unemployment

rate since September 2002. With the prospect

of rising unemployment, this may dampen

consumer confidence and demand for credit

and subsequently impact on the national

housing market.

With low mortgage rates anticipated to

remain over at least the next six months, it

will be important to monitor how the housing

market responds, particularly in light of a

slowing resources sector, an anticipated

increase in the unemployment rate, low levels

of credit growth and a high level of household

savings. The RBA still has scope to cut official

interest rates further if required.

Low ination provides theGovernment scope for further

monetary policy stimulus if required(See G1)

The Consumer Price Index (CPI) is a quarterly

measure of the level of price inflation within

the Australian economy. As at June 2013,

headline inflation was recorded at 2.4 per

cent over the year. The RBA has a medium-

term target rate for inflation of between two

and three per cent which indicates inflation

currently sits in the middle of their target

range.

The RBA uses other core inflation

indicators as its preferred measure, specifically

the weighted median and the trimmed mean.Over the 12 months to June 2013, these

measures were both recorded at 2.2 per cent

and 2.6 per cent respectively, again indicating

that inflation is comfortably contained. With

headline and underlying inflation comfortably

in the middle of the target range, it is clear that

the RBA has scope, if required, to cut official

interest rates further over the coming months.

You will note from the chart that the RBA

has a target rate for inflation of 2 per cent to

3 per cent over the cycle. This target rate was

introduced in the middle of 1993 and you can

see that since that time, inflation has beenmuch lower and has generally been contained

within this target range.

Focussing on the CPI groups, inflation over

the past year has been highest in health

(6.6 per cent), education (5.7 per cent), housing

(5.3 per cent) and alcohol and tobacco (4.0 per

cent). On the other hand, CPI has fallen by 0.5

per cent for transport, 0.3 per cent for clothing

and footwear and 0.1 per cent for recreation

and culture.

Recent forecasts by the RBA contained in

their bi-annual Statement on Monetary Policy

indicates that the RBA expects inflation will

remain within the target range throughout2013. In fact, the RBA forecasts inflation will

remain below 3 per cent at least until the

end of 2015.

Australia has not had a recessionsince the June 1991 quarter (See G2)Australias Gross Domestic Product (GDP) has

increased by 0.6 per cent over the March 2013

quarter and is 2.6 per cent higher over the

12 months to March 2013. Australia has not

been in recession (defined as two successive

quarters of GDP contraction) since June 1991,

more than 21 years ago. Over the 12 monthsto March 2013, the value of the domestic

economys output was $1.48 trillion.

The GDP data for March 2013 showed


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6

Key Statistics

Australias Gross DomesticProduct (GDP) has increasedby 0.6 per cent over the March2013 quarter and is now 2.6 percent higher over the 12 months toMarch 2013.

110

100

90

80

70

60

50

40


G4: Terms of trade index

Mar-73 to Mar-13

110

100

90

80

70

60

50

40

Mar-73 Mar-77 Mar-81 Mar-85 Mar-01Mar-97Mar-93Mar-89 Mar-05 Mar-09 Mar-13

25%

20%

15%

10%

5%

0%

-5%

25%

20%

15%

10%

5%

0%

-5%


G3: Household savings ratioMar-73 to Mar-13

Mar-73 Mar-77 Mar-81 Mar-85 Mar-01Mar-97Mar-93Mar-89 Mar-05 Mar-09 Mar-13

that the industries providing the largest

contribution to overall GDP growth over

the past year were: mining (9.9 per cent),

financial and insurance services (9.6 per cent),

construction (7.3 per cent) and manufacturing

(7.1 per cent). Ownership of dwellings

contributed a substantial 7.6 per cent to

overall GDP over the year. This result, coupled

with construction, highlights why the RBA

is hopeful that housing construction can fill

some of the void in the economy as investmentin the mining sector falls from here. As a result

of slowing mining investment, its contribution

to overall GDP is also likely to slow.

The RBA and Treasury have recently

lowered their forecast for economic growth

this year to 2.25 per cent. Forecasts also

anticipate economic growth of just 2.25 per

cent for the 2013/14 financial year.

The ABS National Accounts also reveal that

household disposable incomes have increased

by just 1.1 per cent over the past year. Given

the increased level of household savings and

other economic indicators, it is clear that withless income growth, households are showing

a lower propensity to spend the money they

have available or take on additional debt.

Household savings remain at anelevated level (See G3)The ABS National Accounts data, which

contains GDP, also details the level of savings

by households which is measured by the

household savings ratio. This ratio was

recorded at 10.6 per cent over the March2013 quarter and has averaged 9.8 per cent

over the past five years. Based on current

levels, household savings is at its highest

level since 1987. As the chart shows, the jump

in household savings over recent years has

reversed the trend which commenced in 1974.

The decline in savings by households

reached a record low in the June 2002 quarter

when the ratio reached -2.4 per cent, which

indicated households spent all of their

disposable income plus an additional 2.4

per cent. Since that time, the savings ratio

has been trending higher, with the increase

hastened by the onset of the financial crisis.

However, spending patterns had shown some

signs of changing prior to the onset of the

crisis.

The high level of household savings, we

believe, is one of the reasons why there has

been restraint in other areas of the economy,

including retail trade and housing market

activity.

Terms of trade is declining as mininginvestment peaks (See G4)The terms of trade index was recorded at 90.8

points over the March 2013 quarter, with the

index having fallen by 14.7 per cent since it

peaked over the September quarter of 2011.

Having moved beyond the peak in the terms

of trade, there is likely to be some impact on

economic growth and other sectors of the

Australian economy, given the recent strength

of the mining and resources sector and its

significant contribution to economic growth

over recent years.

More recent data on commodity prices

indicates that resource prices have continued

to trend lower over recent months. However,

commodity prices are lower than their 2011peak, on average they remain significantly

higher than historic levels.

Population growth continues toincrease from already high levels(See G5)

Australias population increased by 394,233

persons throughout the 2012 calendar year,

up from an increase of 339,650 persons over

the 2011 calendar year. In terms of the total

population, Australias population increased

by 1.8 per cent over the year which was in-line

with the average annual increase over thepast five years but, was the highest level of

population growth since the 12 months to

December 2009.


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7

80,000

60,000

40,000

20,000

0

80,000

60,000

40,000

20,000

0


G5: Quarterly change in national populationDec-82 to Dec-12

Natural increase Net overseas migration

Dec-82 Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12

There are two components to population

growth at the national level: net overseas

migration and natural increase (births

minus deaths). Both measures remain

elevated on a historical basis with natural

increase contributing 40 per cent of national

population growth (158,319) and net overseasmigration contributing the additional 60 per

cent (235,914).

More recently available data on overseas

arrivals and departures shows that net long-

term overseas arrivals continue to increase

and were at their highest annual level in June

2013 (306,500) since November 2009 (312,430).

This is likely to be reflec ted over the coming

quarters by further increases to net overseas

migration which should drive population

growth higher.

Of course, the increase in population

translates to higher demand for housing across

the country. As will be detailed in the coming

pages, the unemployment rate is anticipated

to rise over the coming year, which may

result in a lower level of population growth.

Based on the labour force data, 122,912 new

jobs were created over the 12 months to July

whilst net long-term overseas arrivals were

recorded at 306,500 persons to June 2013. If

job creation slows, employment prospects for

those moving here from abroad will be lower

which may result in lower levels of overseas

migration.

A highly centralised nation (See G6)The population of Australia is highly

centralised and largely concentrated in and

around a few key centres, mostly along the

eastern seaboard. As at June 2012, 65.5 per

cent of Australians (slightly more than 15

million) lived within a capital city. Of this 65.5

per cent, 38.9 per cent lived in either Sydney

or Melbourne with 56.8 per cent of Australians

located in Sydney, Melbourne, Brisbane or

Perth. One in five Australians live within the

Greater Sydney region.

The fact that so many Australians live in

a handful of capital cities creates significanthousing demand within these regions. The

further challenge is that housing is much more

expensive as you move closer to the city centre

as the more affordable areas on the outskirts

of the city often have limited provision of

much needed transport infrastructure and

facilities. This goes some way to explaining

why home values in Australia appear high on

an international basis.

Private sector appetite for credit isat low levels on an historic basis

(See G7)Private sector credit (including securitisations)

has increased by 3.1 per cent over the 12

months to June 2013. The result is made up

of a 4.6 per cent increase in housing credit, a

0.2 per cent increase in other personal credit

and a 0.9 per cent increase in business credit.

As the chart highlights, credit growth is at an

anaemic level. At June 2012, overall credit had

grown by 4.4 per cent over the year.

The RBA has been tracking the annual

growth in private sector credit since

September 1977. Between then and June

2013 private sector credit has increased at an

average annual rate of 11.9 per cent. Given thisyou can appreciate just how low consumer

appetite for credit is.

The slowdown in the demand for credit

is a response to the financial crisis and the

higher levels of global economic volatility.

Growth in private sector credit has been

much slower since mid 2008, and looks set

to remain at low levels for as long as

consumers, and to a lesser extent, businesses

are more focussed on reducing leverage.

The annual growth in private sector

credit has been consistently below 5.0 per

cent since March 2009, highlighting the extentof the ongoing slowdown and the reluctance

by the private sector to take on additional

debt.

G6: Estimated population by capital city as at June 2012

Capital city State PopulationPer cent ofcapital citypopulation

Per cent

of totalpopulation

Sydney NSW 4,667,283 31.1% 20.4%

Melbourne VIC 4,246,345 28.3% 18.5%

Brisbane QLD 2,189,878 14.6% 9.6%

Adelaide SA 1,277,174 8.5% 5.6%

Perth WA 1,897,548 12.6% 8.3%

Hobart TAS 216,959 1.4% 0.9%

Darwin NT 131,678 0.9% 0.6%

Canberra ACT 374,658 2.5% 1.6%

Combined capital cities 15,001,523 65.5%


Key Statistics

Australias population increasedby 394,233 persons throughoutthe 2012 calendar year, up from339,650 persons over the 2011calendar year. Australias totalpopulation increased by 1.8 percent over the year which was

in-line with the average annualincrease over the past ve years.


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8

Key Statistics

Private sector housing creditincreased by just 4.6 per centover the 12 months to June 2013and is at near record low levels.Between August 1977 to June2013, housing credit has grownat an average annual rate of 13.5

per cent. At the same time 12months ago, housing credit hadgrown by 5.0 per cent over theyear.

25%

20%

15%

10%

5%

0%

25%

20%

15%

10%

5%

0%

Source: RP Data, RBA

G8:Annual growth in private sector housing creditJun-78 to Jun-13

Jun-78 Jun-83 Jun-88 Jun-93 Jun-98 Jun-03 Jun-08 Jun-13

25%

20%

15%

10%

5%

0%

-5%

25%

20%

15%

10%

5%

0%

-5%


G7:Annual growth in private sector credit

Jun-78 to Jun-13


Demand for housing credit by theprivate sector at near record lowlevels (See G8)Over the 12 months to June 2013, private

sector housing credit has increased by just 4.6

per cent. Over recent months there has been

a slight increase in housing credit growth,

however, it remains at an extremely low level.

The data series for private sector housing

credit extends back to August 1977. Between

then and June 2013, credit has grown at anaverage annual rate of 13.5 per cent. At the

same time 12 months ago, housing credit

had grown by 5.0 per cent over the year.

The data further breaks the housing credit

aggregates into owner occupier and investor

housing credit. Owner occupier housing

credit has increased by 4.1 per cent over the

12 months to June 2013, compared to a 4.9

per cent increase over the year to June 2012.

Investor housing credit has risen by 5.7 per

cent over the past year compared to a more

moderate 5.3 per cent annual increase to

June 2012. Growth in housing credit has beentrending lower ever since February 2004,

which was the peak of the Sydney housing

market. This time period also marked the end

of the 2001 to 2003 housing boom. It was also

around this time that households started to

increase their rate of savings. The household

savings ratio increased dramatically in late

2008 and has been at an elevated level ever

since. The record low level of growth in private

sector housing credit is reflective of both lowerdemand for new housing loans and the fact

that home owners are paying off their home

loans at a more rapid pace.

Households remain highly indebted(See G9)

As at March 2013, the typical Australian

household had a level of debt which was 147.3

per cent higher than their disposable income.

Although that figure remains at a very high

level, the debt level has been at a similar level

now since the end of 2005 as detailed in the G9

chart. It is also important to note that housing

accounts for 90.5 per cent of the outstanding

debt to households. This highlights that

housing is the single largest asset purchase

that most Australians will ever make. Unlike

many other countries, the level of debt hasnt

decreased over recent years, however, it has

seemingly reached a plateau.

The RBA recently published detailed

research on the slow rate of credit growth by

the private sector and the level of household

debt in their March 2013 Financial Stability

Review. They noted that a contributing factor

to the slower pace of credit growth is the fact

that households have been taking advantage of

the lower interest rate environment to pay down

their debt faster. Mortgage buffers (balances

in mortgage offset and redraw facilities) are

now estimated to be equivalent to around 14

per cent of the outstanding stock of housing

loans. When interest rates fall, not all borrowers

reduce their mortgage payments, resulting in

an increase in prepayment rates. The increase

in the rate of prepayments as a result of the

decline in mortgage lending rates since late

2011 is estimated to have reduced the growth

rate of housing credit by around 0.5 percentage

points over 2012. Measured a different way, inaggregate, households mortgage buffers are

equivalent to around 20 months of scheduled

repayments (principal plus interest) at current

interest rates. This provides considerable scope

for many borrowers to continue to meet their

loan repayments even during a temporary spell

of unemployment or reduced income.

Falling mortgage rates are poweringthe current housing market recovery(See G10)

Official interest rates, as set by the RBA, started

on a loosening bias in November 2011 whenthe official cash rate was cut by 25 basis points.

Since that time the cash rate has fallen by 225

basis points to 2.5 per cent, its lowest level in


11/44


9

Key Statistics

With mortgage rates at suchlow levels, the housing marketis clearly responding to thelow interest rate charges onmortgage debt. The RBA still hasthe scope to cut rates further.

14%

12%

10%

8%

6%

4%

14%

12%

10%

8%

6%

4%


G10: Typical home loan lending rates across AustraliaAug-91 to Aug-13

Standard variable mortgage rate Discounted variable mortgage rate 3 yr fixed rate

Aug-91 Aug-93 Aug-95 Aug-97 Aug-99 Aug-01 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11 Aug-13

160

140

120

100

80

60

40

20


G9: Household debt to disposable income

Mar-77 to Mar-13

160

140

120

100

80

60

40

20

Mar-77 Mar-81 Mar-85 Mar-01Mar-97Mar-93Mar-89 Mar-05 Mar-09 Mar-13

more than 50 years. To August 2013, standard

variable mortgage rates have fallen by

approximately 185 basis points over that time,

from 7.8 per cent to 5.95 per cent. In reality,

most mortgagees receive the discounted

variable mortgage rate which currently sits

at 5.1 per cent. The average three year fixedmortgage rate is currently 4.9 per cent.

With mortgage rates at such low levels, the

housing market is clearly responding to the low

interest charges on mortgage debt. The RBA

still has scope to cut rates further should the

need arise. The likelihood of further interest

rate cuts seems fairly high given that Federal

Treasury is now forecasting that economic

growth will slow to 2.5 per cent this year and

the unemployment rate will peak at 6.25 per

cent. Of course, the challenge will be once

interest rates inevitably move higher, will

mortgagees be able to continue to repay their

loans and what impact will interest rate rises

have on home values? The predominance of

variable or floating rate mortgages in Australia

means that changes to official interest rates

quickly flow through to the budgets and

spending patterns of those with a mortgage.

Low returns in lower risk assetclasses are driving investors into thehousing market (See G11)Investor activity in the Australian housing

market has been extremely strong over

the past year. When you look at the returns

currently available on relatively risk-free asset

classes such as bank deposits and government

bonds you can understand why investors are

targeting other asset classes such as property.

At the end of July 2013, the overnight cash rate

was recorded at 2.75 per cent, one year term

deposits had an interest rate of 3.7 per cent

and five and 10 year Australian Government

Bonds were returning 3.09 per cent and 3.75

per cent respectively. The returns for low risk

investment classes have severely reduced due

the fact that there is stronger demand for risk

free investment.

The reduced return in risk-free assetclasses was recently noted in a speech by

the Reserve Bank Governor Glenn Stevens.

Absolute borrowing costs for most bo rrowers

are very low despite higher spreads, because

the return on one of the least risky assets the

cash rate is the lowest for 50 years or more.

The market yields on government securities,

the lowest risk assets of all, have likewise been

very low. In other words, with many investors

wanting safety, the price of safety has risen. It

has to rise by enough to prompt at least some

people to start to shif t their portfol ios in the

direction of taking some more risk by holdingequities, physical assets and so on, though

obviously we dont want too much risk-taking.

One of the things we have been watching for as

we have been reducing interest rates has been an

indication of savers shifting portfolios towards

some of the slightly more risky asset classes, as

that is one of the expected and intended effects

of monetary policy easing. There are clearly

signs of policy working in this respect, though

not, to date, by so much that we see a serious

impediment to further easing, were that to be

appropriate from an overall macroeconomic

point of view.

When you consider 4.9 per cent growthin capital city home values over the past year

accompanied by a 4.2 per cent gross rental

yield on a typical investment property, it is no

surprise that investor interest in the housing

market is currently so strong.

Consumer sentiment has beentrending higher over the past year(See G12)

The monthly survey of consumer sentiment

undertaken by Westpac and the Melbourne

Institute shows that Australian consumers

are currently more optimistic than pessimisticabout economic conditions. The Index

measures views on the financial situation

of Australian households over the past


12/44


10

Key Statistics

Over the 12 months to June2013, there was $259.646 billionspent on retail across Australia.The total value of retail tradewas 2.9 per cent higher over the2012/13 nancial year than forthe 2011/2012 nancial year.

130

120

110

100

90

80

70

60

130

120

110

100

90

80

70

60

Source: RP Data, Westpac-Melbourne InstituteConsumer sentiment 12 mth average

G12:Australian consumer sentiment

Aug-77 to Aug-13

Aug-77 Aug-83 Aug-89 Aug-95 Aug-01 Aug-07 Aug-13

12%

10%

8%

6%

4%

2%

12%

10%

8%

6%

4%

2%


G11: Returns on selected low-risk asset classes

Jul-91 to Jul-13

1 yr term depositsOvernight cash rate 5 yr bonds 10 yr bonds

Jul-91 Jul-93 Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13

and coming year, anticipated economic

conditions over the coming year and five

years, as well as buying conditions for major

household items. When the Index is above

100 points, consumers are more optimistic

than pessimistic, and when below 100 points

pessimism outweighs optimism.

The Consumer Sentiment Index has

been above 100 points for nine of the past

12 months. While the month-to-month

movement shows some volatility, the 12month rolling average has remained above

the 100 mark over the past 12 months. The

result suggests that consumers are slowly

responding to the low mortgage rate

environment.

If we look at the components of the index

on a 12 month average basis, we also see

ongoing improvements. Most encouraging is

that the index of family finances over the next

12 months has trended higher since July of last

year, with optimism outweighing pessimism

over the past three months. If consumers

are confident that the next year is going tobe better, they are likely to show a greater

propensity to spend which should translate

good news for the retail and housing sector.

The Index also regularly tracks where

consumers believe to be the best place for

savings. Over the June 2013 quarter, 34.0 per

cent of respondents felt bank deposits were

the wisest place for savings. If this figure is

extended to all financial institutions (building

societies and credit unions) it rises to 37.1 percent. Real estate showed the second highest

response, with 24.6 per cent of respondents

believing that was the best savings vehicle.

Interestingly, just 8.4 per cent of respondents

felt that shares were the wisest place for

savings. These figures highlight the significant

change in consumer attitudes by Australians

over recent years, away from spending and

higher risk investments to increased savings

and repaying debt.

It is interesting to note that the percentage

of respondents nominating real estate as the

best place for savings rose from 21.3 per cent

in March 2013 to 24.6 per cent in June. With

lower interest rates resulting in lower returns

on savings, some are now looking to other

investment vehicles in which to invest such as

real estate, particularly given the rental yields

available and the capital gains that are starting

to crystalize.

Retail trade fails to re as consumerconservatism reigns supreme (See G13)Over the 12 months to June 2013, there was

$259.646 billion spent on retail across Australia.

The total value of retail trade was 2.9 per cent

higher over the 2012/13 financial year than

the 2011/12 financial year. As the chart shows,

growth in retail trade has been quite low over

the year, reflective of the slow credit growth

and general caution which is being shown by

consumers. It is also important to note that this

series does not measure purchases made from

overseas or on-line, only those in Australian

stores.

There have been much sharper rises on an

annual basis across several retail sectors. Cafes,

restaurants and take-away food services

(4.7 per cent) and food retailing (4.4 per

cent) each recorded much higher increasesover the financial year. On the other hand,

trade has increased at much more moderate

rates over the year for household goods (1.2

per cent), clothing, footwear and personal

accessories (2.3 per cent), department stores

(0.3 per cent) and other retailing (0.8 per cent).

As mentioned, the data does not include

purchases from overseas, however, the

categories of retail which fell over the year

or grew modestly are the types of items

which can be purchased from overseas

and often at prices much cheaper than those

available in Australia. On the other hand, thedata indicates Australians are spending much

more on food purchased for consumption

both inside and outside of the home.


13/44


11

Key Statistics

The national unemployment ratewas recorded at 5.8 per cent inAugust 2013, at its highest levelsince August 2009. Over thepast year, the unemployment ratehas slowly trended higher from5.2 per cent in July 2012.

30%

25%

20%

15%

10%

5%

0%

30%

25%

20%

15%

10%

5%

0%

Source: RP Data, ABSProportion of fixed rate home loans Rolling 12 mth average

G14: Proportion of home loans on a fixed rate mortgageJun-93 to Jun-13

Jun-93 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13

4%

3%

2%

1%

0%

-1%

-2%

4%

3%

2%

1%

0%

-1%

-2%

Source: RP Data, ABSMonthly change Rolling 12 mth average change

G13: Change in Australian retail tradeJun-03 to Jun-13


Loan types Australiansoverwhelmingly prefer variablemortgage rate loans (See G14)Historically, Australians have favoured a

variable or floating rate mortgage rather

than a fixed rate (note that fixed rate loans

are typically three to five years in duration).Housing finance data for June 2013 shows

that over the month, 17.8 per cent of owner

occupier loans written were on a fixed rate

mortgage. Over the past 12 months, an

average of 14.8 per cent of home loans written

each month were on a fixed rate. The result

highlights that Australians overwhelmingly

prefer a variable rate loan as opposed to the

short-term security of a fixed rate loan.

The fact that most Australian home

loans are on a variable rate has proven to be

a positive outcome for policy makers over

recent years. Due to the popularity of variable

mortgages, changes to monetary policy have

an almost immediate impact on household

balance sheets and consumer behaviour.

In turn, this assists the RBA when it makes

monetary policy adjustments as they directly

and quickly filter through to most households.

It is interesting to note that fixed rate loans

are currently available at a lower interest rate

than variable loans which potentially means

the popularity of fixed rate mortgages will

continue to grow over the coming months.

The unemployment rate was at its

highest level in almost four years inJune and July 2013 (See G15)The national unemployment rate was recorded

at 5.7 per cent in July 2013, at its highest

level since August 2009. Over the past year,

the unemployment rate has slowly trended

higher from 5.2 per cent in July 2012. The

number of employed persons has increased

by 122,912 persons over the past 12 months

which is the equivalent of just 10,243 persons a

month. Breaking the data down further, 37,657

additional full time jobs have been created

and 85,254 part-time roles have been created

over this period. The data indicates that almost70 per cent of new jobs created over the year

have been part-time. Recently released figures

by the Australian Bureau of Statistics (ABS)

showed that employment underutilisation

was most recently recorded at 12.9 per cent,

highlighting that many employees would

like to be working more hours than they

currently do. The proportion of the working

age population, either employed or actively

looking for work, was recorded at 65.1 per cent

as at July 2013. Over the past year, the size of

the labour force has expanded by 1.6 per cent

to 12.35 million persons, however, the numberof persons unemployed that are actively

looking for work has increased by 10.8 per cent

to 705,000 persons.

The ABS also releases a quarterly analysis

of job vacancies across the country. The latest

analysis which focusses on the three months

to May 2013 found that there were 138,900

job vacancies across Australia, which was the

fewest since the three months to November

2005 and 28 per cent lower than its most

recent peak in November 2010. Job vacancies

have been trending lower over recent years as

the unemployment rate has been increasing.

Given this factor it is reasonable to expectfurther increases to the unemployment

rate over the coming months. As already

mentioned, Federal Treasury is forecasting

that the unemployment rate will peak at 6.25

per cent during 2013.

First home buyer activity hasincreased from recent lows butremains at below average levels(See G16)

In June 2013, there were 7,331 housing finance

commitments to first home buyers which is

slightly lower than the 12 month average of7,546 commitments. Over the past 12 months,

there were 90,551 commitments by first home

buyers which is 8.9 per cent lower than over


14/44


12

Key Statistics

Over the past 12 months, therewere 90,551 housing nancecommitments by rst homebuyers which is 8.9 per centlower that over the same 12month period in 2012. Firsthome buyer commitments have

accounted for 16.2 per centof all owner occupier nancecommitments over the last 12months.

20,000

16,000

12,000

8,000

4,000

20,000

16,000

12,000

8,000

4,000


G16: National number of first home buyer finance commitments

Jun-93 to Jun-13

First home buyer finance commitments Rolling 12 mth change


12%

10%

8%

6%

4%

2%

12%

10%

8%

6%

4%

2%


G15: National unemployment rate

Jul-80 to Jul-13

Unemployment rate Rolling 12 mth average

Jul-80 Jul-83 Jul-86 Jul-89 Jul-92 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13

the same 12 month period in 2012. First home

buyer finance commitments have accounted

for 16.2 per cent of all owner occupier finance

commitments over the last 12 months.

As the chart shows, first home buyer

finance commitments have begun to increase

over recent months, off a very low base. First

home buyer housing finance commitments

reached a recent peak in activity back in

2009 when more than 18,000 commitments

were being made a month. At that time, thefederal government had introduced additional

incentives for first home buyers, over and

above the First Home Buyers Grant. These

incentives, coupled with the lowest mortgage

rates in more than a generation, resulted in

a surge of first home buyers entering the

market. Since that time the number of first

home buyer finance commitments have been

much lower due to the pull forward of demand

brought about by these favourable conditions.

Interestingly, the first home owners grant

is now being offered exclusively for new

homes only (first home buyers purchasingan established home are no longer eligible

to receive the Grant) in New South Wales,

Queensland and Victoria, Australias three

largest states. The policy objective is that

focussing this incentive on new homes will

encourage a higher level of demand for new

dwellings and consequently drive a higher

level of housing construction. The change

didnt come into effect in Victoria until July

1 2013. However, in New South Wales andQueensland, activity by first home buyers

has recently slumped to record lows following

these changes. The challenge is that new

homes are typically available in outer areas

of the city that are less desirable to first home

buyers and new stock is often more expensive

than pre-existing stock in these areas. Despite

the incentives, the higher cost acts as a

disincentive to purchase.

Owner occupier nancecommitments improving, largelydriven by new loans rather thanrenances (See G17)In June 2013, there were 34,461 owner

occupier finance commitments for new

loans compared to 16,541 commitments for

refinance purposes. There have been 379,517

owner occupier finance commitments for

new loans over the 12 months to June 2013,

compared to 182,489 refinance commitments.

On an annual basis, the number of new loan

commitments are 7.1 per cent higher while

refinance commitments have fallen by 2.6 per

cent. The lower levels of refinancing over the

year is a little surprising given that mortgage

rates have been trending much lower and

many financial institutions are offering

competitive home loan rates.

The data is further split into three

categories which include both new loans and

refinances: loans for new construction, loans

for the purchase of new dwellings and loans

for the purchase of established dwellings.

Over the past year the number of loans for

new construction has increased by 5.3 per

cent, loans for purchase of new dwellings have

risen by 30.9 per cent and loans for purchase

of existing dwellings have risen by 2.1 per cent.

Finance commitments for new constructionand new purchase have risen at a much greater

rate than commitments for existing homes

over the year. Although both construction of

new homes and purchase of new homes have

recorded significant increases over the year,

finance commitments for the purchase of

established dwellings accounted for 83.5 per

cent of all commitments throughout the year.

Investment activity has improvedmarkedly over the year (See G18)There was $8.3 billion worth of finance

commitments for investment purposes in June2013, which was 18.3 per cent higher than in

June 2012. Based on commitments over the

12 months to June 2013, investment finance


15/44


13

commitments were 15.3 per cent higher over

the year.

The total value of investment finance

commitments has clearly risen significantly over

the past year. In fact, investment activity is now

at its highest level since it peaked in June 2007.

Investment activity is so strong at the momentbecause the returns on less risky assets are

comparatively low, hence many investors are

seeking a higher level of return. In Australia,

housing is typically viewed as relatively low

risk and when you factor in capital growth and

rental yields, the return on residential property

is currently quite attractive.

Dwelling approvals trending higherover the year o a very low base(See G19)

There were 93,554 houses and 64,096 units

approved for construction nationally over

the 2012/13 financial year. As the chart shows,

approvals have trended higher over the year

with the annual number of house approvals

up 2.7 per cent and unit approvals rising by

9.1 per cent. Although dwelling approvals are

trending higher it is off a very low base with

dwelling approvals now sitting right at the

20 year average. The data splits out dwelling

approvals to those by the public and the

private sector. Over the past 12 months,

the public sector received just 3,436 dwelling

approvals which represent 2.2 per cent of all

approvals. Historically, approvals to the private

sector have shown an overwhelming majority.

Over the year, 40.7 per cent of new

dwelling approvals were for units as opposed

to 59.3 per cent for houses. Although detached

houses remain the dominant dwelling type,

the 40.7 per cent of units approved over the

year is an almost record high proportion

of unit approvals. Not only are units more

affordable than detached houses, they are

also largely being delivered into inner city

areas and along strategically located transport

spines where a large proportion of the

population prefers to live. There has been

a strong trend towards a greater proportionof unit approvals over recent years and we

believe affordability factors will result in a

continuation of this trend over coming years.

$billion

8

6

4

2

0

$billion

8

6

4

2

0


G18: Monthly value of finance commitments for investment purposes

Jun-93 to Jun-13


50,000

40,000

30,000

20,000

10,000

0

50,000

40,000

30,000

20,000

10,000

0


G17: National number of owner occupier refinance vs. non-refiannce commitments

Jun-93 to Jun-13

Refinances New loans


14,000

12,000

10,000

8,000

6,000

4,000

2,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

Source: RP Data, RBAUnit approvals Unit 12 mth average

G19: National house and unit approvals

Jun-85 to Jun-13

House approvals House 12 mth average



16/4414

Commentary | RP DataProperty Capital Markets Report, Spring 2013

Lessons from

New ZealandWhat can be learnt from New Zealand policy makers and their

efforts to put the brakes on that countrys housing market?

This article explores the recent decision by

the Reserve Bank of New Zealand (RBNZ) to

impose macro-prudential policy on the New

Zealand residential policy mortgage lending

market in order to help slow the rate of

housing related credit growth and house price

inflation in New Zealand.

It explores the rationale for the potential

application of such a policy in Australia and

explains why the author believes such a policy

is unlikely to be introduced in the near to

medium term.

What did the RBNZ do and why didthey do it?On 20 August 2013, the Governor of RBNZ,

Mr Graeme Wheeler, announced a new

macro-prudential tool in order to limit the rate

of housing-related credit growth and house

price inflation in that market. RBNZ noted that

house prices increased by 16 per cent and 10

per cent respectively in Auckland

and Christchurch over the 12 months.

Given this strong rate of growth, RBNZs

view that house prices in New Zealand were

already high by international standards and

the extent of household leverage in that

market (household debt at 145 per cent of

household income), RBNZ felt the need to

impose a new macro-prudential instrument

in order to seek to limit the rate of future home

price appreciation and therefore mitigate the

risk of a material correction in home values inthe New Zealand market.

Prior to the implementation of this

macro-prudential instrument, approximately

30 precent of all new lending activity by New

Zealand banks had a loan to value ratio (LVR)

80 per cent or higher. The macro-prudential

instrument announced by RBNZ, with effect

from 1 October 2013, places a speed limit

on the amount of high LVR lending (over 80

per cent LVR) a financial institution is able

to undertake.

In summary, New Zealand banks will be

required to restrict high LVR to no more than10 per cent of the dollar value of their new

housing lending loans until further notice.

After taking into account certain exemptions,

the impact of this new rule will mean that New

Zealand banks will effectively need to halve

their high LVR lending from current levels.

This is expected to have a material impac t

on lending volumes and the availability of

mortgage finance in the New Zealand market

in the short to medium term.

Is it likely that such a macro-prudential instrument will beintroduced in Australia in the nearto medium term?In the authors opinion, the answer is no.

The first point to make is that Australia

hasnt seen nearly the level of home

price appreciation that New Zealand has

experienced over the past 12 months.

Whilst it is fair to say that current

housing market conditions in Australia,

particularly lead by markets such as Sydney

and Melbourne, are particularly strong, the

point remains that capital city home values

still remain approximately 1 per cent below

their peak, having recovered 7 per cent since

their trough. Markets such as Brisbane in

particular remain nearly 10 per cent below

their previous peak.

Whilst capital city home values have

increased by around 4 per cent over the

past three months (a rate at which policy

makers would feel uncomfortable with

were it to continue at that pace over a 6 to

12 month period), the Australian housingmarket has not seen the rapid level of home

price appreciation witnessed in parts of

the Auckland market over the past 12 to 18

months.

Further, the more modest 0.5 per cent gain

in home values over the month of August is a

more sustainable rate of growth and will be

a welcome turn of events for policy makers.

It is important to remember that the average

annual capital gain over the past decade has

been just 4.3 per cent across the combined

capital cities. In Sydney the annual rate of

growth has been a much lower level of 2.4per cent.

Also, the rate of home value growth seen

across the capital cities in recent months is

Craig MacKenzie,Head of Corporate Affairsand General Counsel,RP Data


17/4415

RP DataProperty Capital Markets Report, Spring 2013 | Commentary

not evenly shared. The softer housing market

conditions during August can be attributed

mostly to a lower rate of growth across the

Sydney and Melbourne housing markets,

where dwelling values rose by 0.6 per cent

and 0.2 per cent respectively. Several citiesrecorded a fall in values over the month,

with Hobart seeing the largest decline with

a 1.2 per cent fall and Perth values slipping

by 0.2 per cent.

Accordingly, it is argued that the problem

that RBNZ is seeking to solve in New Zealand

is not currently present in the Australian

housing market.

Second, other similarities and differences

between the Australian and New Zealand

housing and mortgage markets need to be

understood and explored.

One of the key similarities is that, like in

New Zealand, approximately 30 per cent of all

new lending in Australia is for LVRs over 80 per

cent. A recent report issued by the Australian

Prudential Regulation Authority (APRA) on

property exposures by Approved Deposit-

taking Institutions (ADIs) noted that

32 per cent of new residential lending in the

June 2013 calendar quarter was for LVRs of

80 per cent or above.

The level of high LVR lending in Australia

has typically varied between 20 and 30 per

cent over the past decade, mainly driven by

first home buyer and investor activity (both

of which typically fall in the high LVR category).

At present first home buyers are

largely sitting on the side lines, impacted

by affordability constraints. In contrast,

in Australia investors are very active in

the market, and to a lesser degree, owner

occupiers seeking to upgrade their property.

Notwithstanding the similarities in the

current levels of high LVR lending activity

in Australia and New Zealand, this does not

mean that there is a material proportion

of reckless or irresponsible lending taking

place in the Australian market. In particular,

a key difference between the Australianand New Zealand mortgage markets is the

widespread presence of lenders mortgage

insurance (LMI) in Australia. LMI companies

have a strong financial incentive to ensure that

credit standards are maintained with respect

to high LVR lending, as the risk is completely

transferred by the lending institution to the

LMI provider.

LMI companies do not currently operate

in New Zealand, with the lending institutions

in that market maintaining the credit risk

associated with high LVR loans on their

balance sheets, having typically receiveda low equity premium from the borrower

when applying for the loan.

Their presence and market influence

in Australia serves as a very useful vehicle

through which to monitor and influence

the extent and quality of high LVR lending

in Australia.

Third, there are several adverse and

potentially unintended consequences likelyto flow as a consequence of any regulatory

intervention to limit high LVR lending

in Australia.

Policies such as this undoubtedly have

an adverse impact on first home buyers by

effectively limiting the supply of available

finance. This is a very unpopular political

message to deliver and arguably against the

Australian ethos of promoting (responsible)

home ownership.

What else can APRA and theReserve Bank of Australia do to putsome breaks on an overly heatedhousing market?

1. Diligent SupervisionThis is the main weapon in APRAs armoury.

APRA closely supervises its regulated

institutions to monitor the quality and

composition of new mortgage originations so

as to ensure that each regulated institution is

not growing materially over and above system

credit growth, either overall or in a particular

geographic market or sub market.

If APRA were to form the view that a

regulated institution was writing too much

high LVR business or otherwise poor credit

quality business, APRA would have no

hesitation in reigning in the horns of that

institution.

This diligence and supervision, combined

with repeated commentary by both APRA and

the Reserve Bank of Australia that regulated

institutions should not seek to counter balance

weak credit growth with a loosening of credit

standards, means that this weapon will be the

main vehicle through which APRA ensures that

prudent lending activity continues to occur

and does not, of itself, act as an instrumentwhich contributes to an overheated Australian

housing market.

2. Increase capital on high loan tovalue ratio loansPrior to the introduction of the macro-

prudential instrument in New Zealand, RBNZ

increased capital on high LVR loans written

by New Zealand regulated institutions.

Whilst APRA would have closely followed

this initiative, APRA is unlikely to adopt such

an approach in Australia as APRA already

follows a relatively conservative approach tothe capital treatment of high LVR loans, with

the introduction of a minimum 20 per cent

LGD floor for internally rated institutions (the

international floor is 10 per cent).

That is, the large banks would argue that

APRAs conservative approach is requiring

them to hold more capital than is necessary

in respect of their respective residential

mortgage portfolios, and in particular theirhigh LVR loans in that book.

3. Product RestrictionsAPRA was a pioneer in defining a high quality

residential mortgage. In 2008 it introduced

the definitions of a standard and non-standard

mortgage, with non-standard mor tgages

requiring more capital to be held.

It is important to note that the definition

of standard mortgage and non-standard

mortgages are not dependant on LVR.

Currently, the only effective type of non-

standard loans being written in the Australian

market is a small number of low doc loans by

regulated financial institutions.

However, were APRA to consider that

a certain type of mortgage lending activity

was leading to either a weakening of credit

standards or credit induced home price

appreciation beyond that felt comfortable,

APRA could follow the lead of other global

banking regulators and seek to re-define

the definition of a standard mortgage.

For example, in the Unites States

regulators are currently implementing rules

associated with qualified mortgages (QM)

and qualified residential mortgages (QRM)

which will influence lenders risk appetite to

originate mortgages that fall outside of these

definitions.

For example, interest only loans and

loans with a debt to income servicing ratios

above 43 per cent are unable to qualify as QM

loans. Similarly, in Canada the regulator (OSFI)

has introduced rules which limit loan terms

beyond 35 years from being originated in that

market, and are currently considering lowering

this to 25 years. OSFI has also placed LVR caps

on loans for refinance purposes.

This is a possible approach APRA maytake down the track, if they consider that a

certain type of lending product is leading to

outcomes which they consider undesirable.

ConclusionFor the reasons set out above, neither the

Reserve Bank of Australia nor APRA is likely

to introduce macro-prudential instruments

along the lines of RBNZ in the near term.

However, with interest rates at historically low

levels and capital city home values increasing

by 4 per cent over the past three months, both

institutions will have a keen eye on ensuringstrong credit standards are maintained and that

the rate of home price appreciation does not

become unsustainable.


18/44

Housing market overview | RP DataProperty Capital Markets Report, Spring 2013

16

Housing

marketoverviewSales transactions and home values are generally increasing

but prudence remains the watch word for Australian

households.

The residential housing market is Australias

single largest and most valuable asset class

with a total estimated value of $4.89 trillion

as at June 2013. In comparison, the total value

of listed Australian equities is almost three

and a half times smaller at $1.4 trillion.

The national gross domestic product

over the year to March 2013 was $1.48 trillion

indicating that the value of housing assets is 3.3

times larger than the economys annual output.

With such a large proportion of Australian

wealth allocated to residential housing,

providing timely, complete and accurate

measurements about the performance

of Australias largest asset class is essential.

This is why RP Data, together with Rismark

International, developed the suite of Hedonic

Indices that have become the benchmark

in understanding how dwelling values have

changed across Australias housing markets. It

also highlights why the stability of the housing

market is so important to the overall wellbeing

of the Australian economy.

Over the 12 months to June 2013, home

values across the eight capital cities of

Australia, which account for 65.5 per cent

of the national population, have increased by

3.8 per cent. In contrast, over the 12 months toJune 2012, combined capital city home values

had fallen by 3.6 per cent indicating a sharp

reversal of the housing markets performance

over the past year. Over the first six months

of 2013, home values have increased by 3.0

per cent indicating that much of the annual

value growth has occurred during 2013. Capital

city home values have now been recording

moderate rises over the past 12 months

however, they remain 2.9 per cent lower than

they were at their October 2010 peak.

Most encouraging is the fact that the rise

in home values is being accompanied by arise in transactions. Over the three months

to May 2013, capital city house and unit sales

were 19.3 per cent higher than over the same

period a year ago. The fact that values are rising

in line with transactions suggests that the

current increase in values is likely to be more

sustainable.

Although the number of sales transactions

and home values are generally increasing,

Australian households are continuing to act

in a prudent nature, saving around 10 per cent

of their disposable income. There also has not

been any substantial increase in housing credit

growth, with it continuing to increase but at

near record low levels.

Despite the fact that the economy

continues to grow and home values and

transaction numbers are now increasing, there

have been ongoing reductions to interest rates

over recent years by the Reserve Bank. Official

interest rates have been trending lower since

November 2011 falling by 225 basis points since

that time. As at August 2013, the official cash

rate was recorded at 2.5 per cent, its lowest

level in more than 50 years.

Adjustments to interest rates and the

subsequent changes to mortgage rates

generally have an almost immediate impact

on consumers. Not only do interest rate

changes affect the interest received on their

cash at bank, the prominence of variable orfloating mortgage rates means that changes

to interest rates are passed directly on to

anyone with money in the bank as well as the

vast majority of mortgagees. Subsequently,

changes to the cost of debt have a significant

and immediate impact on consumer sentiment

and their spending patterns.

Although dwelling values are broadly

climbing across the capital city housing

markets, as always there are variations in the

rate of growth on a city-to-city basis. The gains

being recorded across the combined capital

city Index are mainly being driven by a 6.0 percent annual value increase in Perth and a 5.6

per cent annual increase in Sydney. Values have

also risen by 6.1 per cent in Darwin but the

Over the 12months to June2013, homevalues acrossthe eight capitalcities of Australia,which accountfor 65.5 per centof the nationalpopulation, haveincreased by3.8 per cent. Incontrast, over the12 months to June2012, combinedcapital city homevalues had fallen

by 3.6 per centindicating a sharpreversal of thehousing marketsperformance overthe past year.


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RP DataProperty Capital Markets Report, Spring 2013 | Housing market overview

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Key Statistics

Along with the broad rise inhome values, there has beena marked improvement in otherlead indicators. The number ofproperties available for sale hasfallen and is now lower than atthe same time last year. Auction

clearance rates are noticeablyhigher than they have beenin a number of years. Vendordiscounting has also reducedand homes are selling fasterthan they were a year ago.

8%

6%

4%

2%

0%

-2%

8%

6%

4%

2%

0%

-2%

G2: Capital city performanceAnnual change in dwelling values year ending June 2013

Source: RP Data, RP Data - Rismark Home Value Index

Perth Darwin Sydney MelbourneCanberra Brisbane Adelaide Hobart Australiancapitals

25%

20%

15%

10%

5%

0%

-5%

25%

20%

15%

10%

5%

0%

-5%

Quarterly change Annual change

G1: Rolling quarterly and annual change in Sydney home values

Source: RP Data, RP Data - Rismark Home Value Index

Jun-97

Jun-99

Jun-01

Jun-03

Jun-05

Jun-07

Jun-09

Jun-11

Jun-13

small size of the city means it has a relatively

insignificant impact on the combined capital

city figure. Elsewhere, annual value growth has

been recorded at 3.4 per cent in Melbourne,

0.6 per cent in Brisbane, 0.2 per cent in

Adelaide and 1.1 per cent in Canberra whilst

values have fallen by 1.8 per cent over the yearin Australias southernmost capital city, Hobart.

Broadly speaking, the increase in home values

over the year has been driven by the lower

valued stock in the market as opposed to the

prestige housing markets.

Along with the broad rise in home values

there has been a marked improvement in other

lead indicators. The number of properties

available for sale has fallen and is now lower

than at the same time last year. Auction

clearance rates are noticeably higher than they

have been in a number of years. The amount

of discounting by vendors has also reduced

and homes are selling faster than they were a

year ago. All of these signs suggest that home

values are likely to continue to trend higher

over the coming months.

The unemployment rate is forecast

to rise to as high as 6.25 per cent over the

2013/14 financial year and economic growth

is expected to be below trend at 2.5 per cent.

Although these softening indicators may

provide some headwinds for the housing

market, an unemployment rate of 6.25 per cent

is still quite low and the last time unemployment

was that high (September 2002) capital city

home values were increasing at an annualised

rate of 18.2 per cent. Australias economic future

is of course not certain, but forecasts indicate

slowing economic growth on the back of a

slowdown in mining investment.

The RBA has stated that they would

like to see an improvement in dwelling

investment as the mining sector slows,

however, the transition is unlikely to be

smooth. Nevertheless, the economy is forecast

to continue to grow and unemployment is

forecast to remain relatively low, albeit much

higher than those levels we have become

accustomed to over recent years.Over the next six months we anticipate

that housing market conditions will continue

to improve and we expect that the current

value and volume increases may gather pace

as cities which have lagged in their recovery

potentially begin to experience improved

market conditions. On the other hand, those

markets more heavily exposed to the mining

and resources sector may see weakening

conditions over the coming six months

as housing demand falls and economic

conditions taper.

Capital city home values increasethroughout 2013 (See G1)According to the RP Data-Rismark Home

Value Index, combined capital city home

values increased by 0.2 per cent over the

second quarter of 2013.

The result indicates slower market

conditions given that home values rose by

2.8 per cent over the first three months of

2013. However, the second quarter of the year

is seasonally softer than the first quarter. Over

the first six months of 2013, combined capital

city home values have risen by 3.0 per cent and

they are 3.8 per cent higher than they were inJune 2012. The detached housing market has

outperformed the unit market over the past

year with values growing by 4.0 per cent and

2.4 per cent respectively.

Based on the median selling price of

homes over the three months to June 2013,

capital city units are $80,000 more affordable

than houses.

Although capital city home valueshave increased by 3.8 per cent overthe past year, they remain 2.9 per

cent lower than their historic highlevels (See G2)The annual rise in capital city home values has

been broad-based with Hobart (down


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Housing market overview | RP DataProperty Capital Markets Report, Spring 2013

18

Key Statistics

Although all sectors of thehousing market are improving,the premium sector has laggedwhere over the 12 months toJune 2013; the premium sectorof capital city housing marketshas been the weakest performer

for capital gains.

1.8 per cent) the only capital city in which

home values have fallen over the past year.

Across the remaining capital cities, annual

value growth has been recorded at 6.1 per

cent in Darwin, 6.0 per cent in Perth, 5.6 per

cent in Sydney, 3.4 per cent in Melbourne, 1.1

per cent in Canberra, 0.6 per cent in Brisbane

and 0.2 per cent in Adelaide.

Although home values are rising across

each city except for Hobart, they remain lower

than they were at the time of their respectivemarket peaks in all cities except for Sydney.

Sydney home values are now 1.2 per cent

higher than their previous market peak. On

the other hand, dwelling values across the

combined capital cities are 2.9 per cent lower

than their October 2010 peak.

Across the other capital cities, the decline

in values from their respective market peaks

are recorded at 11.1 per cent in Darwin, 10.8

per cent in Brisbane, 10.6 per cent in Hobart,

6.6 per cent in Melbourne, 4.4 per cent in

Adelaide, 2.1 per cent in Canberra and 1.6

per cent in Perth. Although home valuesare broadly improving across the capital city

marketplaces, the housing market still has a

way to go, outside of Sydney, before reaching

a technical recovery. It is also important to

remember that these figures are not inflation

adjusted; the decline in housing markets

from their peak and the period at which

the respective markets peaked varies quite

dramatically once inflation is taken into

consideration.

Although all sectors of the housingmarket are improving, the premiumsector has lagged (See G3)Over the 12 months to June 2013, the premium

sector of capital city housing markets has been

the weakest performer for capital gains. RP

Data and Rismark analyse the performance of

the national housing market across different

value segments using a stratified hedonic

regression index which provides a measure

of value changes across the most affordable

25 per cent of capital city suburbs, the broad

middle 50 per cent of suburbs and the most

expensive 25 per cent of capital city suburbs.

Each of these broad value based segments

of the capital city housing market has recorded

growth over the past 12 months. Home

values across the broad middle market have

increased by 4.1 per cent compared to a 4.0

per cent increase across the most affordable

suburbs and a 3.0 per cent increase in the most

expensive suburbs.

Dwelling values across the most affordable

and the middle priced suburbs have recorded

a rise in values of 4.5 per cent and the middle

market has seen values rise by 5.0 per cent

since their respective troughs. Since the most

expensive suburbs reached their trough,

values have increased by 4.4 per cent. Values

across the most affordable suburbs were at

an historic high level in June 2013 while values

across the middle market were 0.4 per cent

lower than their previous peak. Values across

the most expensive suburbs are still 5.3 per

cent lower than they were at their previous

peak.

Overall, it is clear that the housing market

is picking up across all sectors. Growth

has initially been spurred across the moreaffordable sectors of the market and that is

now starting to flow through to the more

expensive sector of the market. We would not

be surprised if the premium housing sector of

the market records the strongest growth over

the next six to twelve months.

The instances of homes selling at aloss has begun to ease (See G4)Over the three months to May 2013, 11.8 per

cent of home sales were transacted at a gross

loss (ie their sale price was lower than their

previous purchase price). 12 months ago,12.1 per cent of all homes sold over the three

months period sold for less than their previous

purchase price.

25%

20%

15%

10%

5%

0

-5%

-10%

25%

20%

15%

10%

5%

0

-5%

-10%

G3:Annual change across market segments Most affordable 25% vs. middle 50% vs. most expensive 25%

Middle 50%Most affordable 25% Most expensive 25% Source: RP Data, RP Data - Rismark Home Value Index

Jun-01 Jun-04 Jun-07 Jun-10 Jun-13

50%

40%

30%

20%

10%

0%

50%

40%

30%

20%

10%

0%

Source: RP DataProportion of homes sold for more than double purchase price Proportion of homes sold at a loss

G4: Proportion of homes sold at a loss vs. homes sold for more than doubletheir previous purchase price

May-03 May-05 May-07 May-09 May-11 May-13


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RP DataProperty Capital Markets Report, Spring 2013 | Housing market overview

19

Key Statistics

Based on RP Data salesvolumes estimates, there hasbeen a noticeable increase intransactions during 2013. Theincrease in sales activity hasoccurred across both the houseand unit markets and is indicative

of a lower mortgage marketenvironment at play.

60,000

50,000

40,000

30,000

20,00

rpdata capital markets report spring 2013

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