Property Capital Markets Report


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Property Capital Markets Report

  1. 1. Opinions Economic outlook International State by stateIndustry experts Macro view of comparison Detailed analysisshare their views underlying trends Key areas where of home values,on aspects of the affecting the Australia is different sales and rentsmarket. property sector. to other economies. across Australia. RP Data Property Capital Markets Report 2012
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  3. 3. RP DataPropertyCapital ContentsMarketsReport 02 Introduction 2012 03 summary Executive 04 Economic overview T he micro-economic forces shaping Australia’s housing market 11 Macro forces Big picture reasons why Australia is different 14 LMI explained The role of lenders mortgage insurance 18 overview Property market Australia’s home values in perspective 24 State by state analysis Sydney and New South Wales ���������������������������������������������������� 24 Melbourne and Victoria �������������������������������������������������������������������� 26 Brisbane and Queensland ������������������������������������������������������������� 28 Adelaide and South Australia ������������������������������������������������������ 30 Perth and Western Australia ��������������������������������������������������������� 32 Hobart ����������������������������������������������������������������������������������������������������������� 34 Darwin ����������������������������������������������������������������������������������������������������������� 36 Canberra ����������������������������������������������������������������������������������������������������� 38 Publisher Andrew Stabback All rights reserved © 2012 Publisher’s Note: T: +61 2 02 9376 9501 No part of this work covered by Although every care has been taken to the publisher’s copyright may be ensure the accuracy of the information reproduced in any form by any means, contained within this publication, Managing Editor Bernard Kellerman graphic, electronic or mechanical, neither the publishers, authors nor T: +61 2 9376 9506 including photocopying, recording, their employers can be held liable for taping, or information storage and any inaccuracies, errors or omissions. retrieval, without the written permission Readers are strongly advised to contact Art Direction Six Black Pens of the publisher. Any unauthorised use of their professional advisor before this publication will result in immediate entering into any contract to buy or sell legal proceedings. any security. 1
  4. 4. Introduction | RP Data Property Capital Markets Report Introduction Seen against the backdrop of several years land mass, Australia’s population is one of of global uncertainty and weak property the most centrally urbanised in the world; markets outside of Australia, the resilience housing demand is very much concentrated of Australian home values to a material across tight geographical boundaries which decline has come under an increasing level can generally be classified as having a housing of scrutiny. under-supply.Tim Lawless Home values across Australia’s capital cities The current weakness in the AustralianResearch Director, peaked in December 2010 after recording a housing market should not be cause forRP Data solid rate of capital gain across 2009 and the alarm. The market is cyclical; a growth phase first half of 2010. Since home values peaked, is normally followed by a consolidation phase. Australia’s capital city markets have recorded The duration of the decline has been more an aggregate fall of 3.6 percent. significant in this phase than previous ones There are a wide number of factors due to the global economic conditions which that explain Australia’s housing market are dampening consumer sentiment locally. performance. The national economy has been Looking forward, there will continue to comparatively strong. Australia has avoided be challenges across the Australian housing recession, the labour force remains close to market, however we may already be seeing the capacity, interest rates are around historic first green shoots appear. Lending for home average levels and mortgage arrears remain loans has been consistently improving off a low well below one percent. base, transaction volumes were showing some Australia’s financial regulatory improvement over the last quarter of 2011 and environment is world class and has our key vendor metrics such as average selling historically been much more risk adverse time and average vendor discounting have also than the financial sector in other countries. been showing some subtle improvements. The vast majority of Australian mortgage Key to a stabilisation in Australian holders are on floating interest payments housing markets will be ongoing and it is estimated that around 50 percent improvements in consumer sentiment, are ahead of their payment cycle. stable interest rates and continued health Additionally, despite having a very large across the domestic labour markets.2
  5. 5. RP Data Property Capital Markets Report | Executive summaryExecutivesummary We don’t subscribe to the predictionsThe Australian housing sector is the Trends in affordability are also supportivecountry’s largest and, arguably, most of dwelling prices. A combination of strong that residentialimportant asset class. The total value of income growth and falling mortgage rates is housing valueshomes across the country as at December boosting affordability in the current cycle. are about to2011 was $4.54 trillion. Across the capital city markets, value By way of comparison, Australian equities declines have varied from a 0.3 percent show significanthad a total market capitalisation at the same decline in values in Sydney to a 6.8 percent fall declines.time of $1.17 trillion. This simple statistic is in Brisbane home values. Capital city homeespecially important for Australian banks given values have also become more affordable inthat, unlike their peers elsewhere, our banks real terms over the last 12 months.have the majority of their assets on balance Along with the macroeconomicsheet in the form of prime mortgages. arguments working to mitigate risk of a And according to the Australian Bureau US-style house price collapse, Australia’sof Statistics, more than 60 percent of all residential property sector benefits fromAustralians own a home – one of the highest a strong central bank and prudentialrates of home ownership in the world. regulatory regime. Nonetheless, Australia’s bankers have This regulatory oversight is backed – ashad to deal with a persistent fear amongst far as the property market is concerned – byglobal investors and commentators that the work carried out by lenders mortgageAustralia’s housing sector is overvalued and insurers, who work to maintain underwritingat risk of collapse. This view, which dates standards throughout the home loan sector.back to 2003, has been refreshed by the This approach was also reflected in theongoing European crisis. capital markets. Throughout the global These comments have been surfacing financial crisis, the Australian mortgageonce again, after the Australian housing market experience has been very differentsector experienced a sharp slowdown in from markets such as the US for a numberthe 2011 calendar year, with the estimated of reasons. First, there was not the samevolume of sales transactions in November competition to squeeze margins almostrecorded at 15 percent lower than the five flat, so the pressure to come up with risky ifyear average and 8.1 percent lower than they innovative structures was not present.were in November 2010. And in contrast to the practices adopted The slowdown in transaction activity is by Australian residential mortgage-commensurate with the slowing of property backed securities (RMBS) issuers, wherevalue growth, and we are predicting subordination was the mechanism bycontinued softness in 2012. which lenders chose to credit enhance We don’t subscribe, however, to the securitisation deals in the United States,predictions that residential housing values Australian issuers turned to lendersare about to show significant declines. mortgage insurance providers to provide the Australia’s market economists point to the backstop to their subordinate tranches.demand-supply imbalance in the Australian Even at its peak, subprime lending washousing market, arguing that it is supporting only ever a tiny fraction of the total. The so-house prices and is unlikely to change. First called ‘low-doc’ loans were also a small niche.up, Australian demographic trends are In Australia in recent years, around two-thirdsconsistent with an underlying new housing of new mortgage borrowers from banks haddemand of 180,000 to 200,000 new houses an initial loan-to-valuation ratio below 80 perper annum, with land releases and new cent. Looking across the whole mortgagebuildings falling short of that figure each year. book, that fraction is even higher. 3
  6. 6. Economic overview | RP Data Property Capital Markets Report 2012 Economic overview A macroeconomic analysis of the Australian economy reveals the forces behind the country’s strong housing market. In the following pages, some of the key Further, as the majority of home factors affecting Australia’s residential finance is through variable loans, theKey Statistics housing market are set out in detail. These central bank can influence supply andThe Consumer Price are followed by some ‘big picture’ views demand to a far greater degree thanIndex (CPI), measures from a number of economists, who explain in countries such as the US by eitherthe level of price inflation why Australia’s housing market equilibrium ratcheting up or easing the overnightwithin the economy. point is higher than many external cash rate.As at December 2011, commentators seem to realise. That said, there are a number ofthe all groups indicator While interest rates in Australia are factors to watch in coming months toshowed that annual at relatively low levels, they remain get a clearer view of the strength of theheadline inflation fell to3.1 percent which is only above rates in other countries. However, Australian housing sector. These includeslightly outside of the in contrast to many of its OECD peers, the effects of the winding back of firstRBA’s long-term target Australia has benefited from low home buyers’ incentives, the level ofrange of 2 to 3 percent. unemployment and a long-term shortfall investor housing finance commitments in construction of new dwellings in its and refinancing activity by existing owner major capital cities. occupiers.4
  7. 7. RP Data Property Capital Markets Report 2012 | Economic overviewConsumer sentiment falls following G1: Australian consumer sentimentDecember’s interest rate cut but Feb-92 to Feb-12rebounds thereafter 130 130The monthly survey of Consumer Sentiment 120 120undertaken by Westpac and the MelbourneInstitute shows that Australian consumers 110 110are slightly more optimistic than pessimistic 100 100about economic conditions. The Indexmeasures views on the financial situation 90 90of Australian households over the pastand coming year, anticipated economic 80 80conditions over the coming year and five 70 70years and buying conditions for major Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12household items. When the Index isabove 100 points, consumers are more Consumer sentiment index 6 month rolling average Source:, Westpac-Melbourne Instituteoptimistic than pessimistic and when itsits below 100 points it indicates there ismore pessimism than optimism. Following G2: Percentage change in GDP Sep-81 to Sep-11December’s interest rate cut consumer 8% 8%sentiment fell but has recovered most ofthat loss over the two most recent months. 6% 6%Despite the improvement, the Index iscurrently recorded at 101.1 points indicating 4% 4%consumer confidence is only slightly above 2% 2%a neutral level.See G1: Australian consumer sentiment 0% 0% -2% -2%Australia’s economic conditionsimprove after the natural disasters -4% -4%affected GDP decline recorded over Sep-81 Sep-87 Sep-93 Sep-99 Sep-05 Sep-11the March 2011 quarter Quarterly change Annual change Source:, ABSGross Domestic Product (GDP) measuresthe final value of all goods and servicesproduced in an economy over a givenperiod. As such, GDP is an important G3: RBA GDP growth forecasts* Dec-11 to Jun-14indicator as it shows whether an economy is Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14expanding or contracting. End of year growth 2.75% 3.50% 3.25% 3.25% 3.50% 3.50% The latest GDP results showed * Where a range has been provided we have published the mid point of that forecast Source:, RBA Statement on Monetary Policy February 2012continuing overall strength in the Australianeconomy. Over the September 2011 quarter,GDP increased by 1.0 percent and over theyear GDP was up by 2.5 percent. According Recent Reserve Bank (RBA) forecasts forto the GDP calculation Australia has not GDP suggest that the Australian economy Key Statisticsslipped into a recession (defined as two will grow at an annual rate in excess of 3consecutive quarters of negative GDP percent from June 2012 onwards. The fact that the vastgrowth) since June 1991. See G2: Percentage change in GDP and majority of home loans The GDP statistics also reveal data relating G3: RBA GDP growth forecasts* in Australia are on ato household expenditure highlighting the variable rate has provengrowing propensity for consumers to save The cash rate has not been adjusted to be a positive over recent years. The highrather than spend. The household savings since December 2011 however, proportion of loans onratio was recorded at 10.1 percent over the variable interest rates have increased a variable interest ratequarter. The savings ratio hasn’t been at these Average standard variable mortgage rates means that changes tolevels since the mid 1980’s. are currently recorded at 7.39 percent and monetary policy have an Disposable household incomes are the official cash rate is set at 4.25 percent almost immediate impactalso growing fairly robustly, increasing by following successive 25 basis point interest on consumer behaviour.6.0 percent over the year however, most of rate cuts in November and December 2011.this increase is going to savings rather than The average 3 year fixed mortgage rate isspending. 6.31 percent which implies that most banks 5
  8. 8. Economic overview | RP Data Property Capital Markets Report 2012G4: Standard variable mortgage rates vs. 3 yr fixed mortgage rates vs. cash rate rates rather than to increase. The cash rate futures market is currently15% 15% pricing in around 60 basis points worth of cash rate decreases to November 2012.12% 12% The market is currently volatile and is just as likely to change substantially each day9% 9% depending on local and international news. See G4: Standard variable mortgage rates vs.6% 6% 3 year fixed mortgage rates vs. cash rate3% 3% Headline inflation just outside the RBA’s target range but underlying is0% 0% comfortably within the range Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12 The Consumer Price Index (CPI), measures Standard variable mortgage rates 3 yr fixed mortgage rates Cash rate Source:, RBA the level of price inflation within the economy. As at December 2011, the allG5: Consumer Price Index (CPI) groups indicator showed that annualDec-91 to Dec-11 headline inflation fell to 3.1 percent which is8% 8% only slightly outside of the RBA’s long-term target range of 2 to 3 percent.6% 6% Other inflation indicators, which are the preferred measures by the RBA,4% 4% are the weighted median (2.6 percent) and trimmed mean (2.6 percent). Both2% 2% measures are now in the middle of RBA target the RBA target range. With the RBA’s0% range 0% preferred measures well within their target range and headline inflation-2% -2% falling, inflationary pressures appear to Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 be easing after many feared a breakout of All groups Average of trimmed mean and weighted median Source:, ABS, RBA inflation in the second half of 2011. Recent forecasts by the RBA included in their Statement on Monetary Policy suggestG6: Unemployment rate – seasonally adjustedJan-82 to Jan-12 they expect underlying inflation to remain12% 12% within their target range until at least the end of 2013.10% 10% See G5: Consumer Price Index (CPI)8% 8% Unemployment rate remains at low levels but workers are doing fewer6% 6% hours and employment growth is slowing4% 4% The national unemployment rate was recorded at 5.1 percent in January 2012, the2% 2% same as it was 12 months earlier. Over the Jan-82 Jan-88 Jan-94 Jan-00 Jan-06 Jan-12 year total employment has increased by 0.3 Unemployment Rate Moving annual average Source:, ABS percent which is well below the average rate of employment growth annually over the past ten years of 2.3 percent. The number of unemployed persons expect official rates will be cut further. The is up by 0.3 percent over the year. Over change in official interest rates in November the past year full-time jobs have increasedKey Statistics was the first adjustment in 12 months and (0.6 percent) while part-time employmentConsumers are the first cut in 31 months. has actually fallen (by 0.2 percent). Thecurrently only slightly With inflation falling and economic employment participation rate (themore optimistic than growth slowing across many economies proportion of working age populationthey are pessimistic. it seems as if the bias over the coming either employed or actively looking months will be for the RBA to cut interest for work) is currently recorded at 65.36
  9. 9. RP Data Property Capital Markets Report 2012 | Economic overviewpercent and is lower than the 65.9 percent G7: Growth in outstanding private sector housing creditrecorded in January 2011. Dec-81 to Dec-11 Across individual states and territories, 25% 25%unemployment is at its lowest level in theAustralian Capital Territory (3.7 percent) 20% 20%and highest in Tasmania (7.0 percent). 15% 15%See G6: Unemployment Rate – seasonallyadjusted 10% 10%Demand for housing credit is at 5% 5%record low levelsOver the 2011 calendar year, demand for 0% 0%housing credit by the private sector grew Dec-81 Dec-87 Dec-93 Dec-99 Dec-05 Dec-11by its lowest level on record, increasing byjust 5.4 percent over the year. To put this Source:, RBAin some sort of context, based on annualgrowth figures dating back to August 1977, G8: Quarterly change in population growth Jun-83 to Jun-11private sector housing credit has grown at 80,000 80,000an average of 13.9 percent over the period. The slowdown in private sectorhousing credit growth is reflective of the 60,000 60,000current cautious nature of consumerscharacterised by a high savings ratio, 40,000 40,000lower propensity to use credit cards, lowlevels of growth in retail trade and fallinghome values. 20,000 20,000 Over the 2011 calendar year, owneroccupier housing credit increased by 0 05.7 percent and investor housing credit Jun-83 Jun-87 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11increased by 4.8 percent both of which Natural increase Net overseas migration Source:, ABSwere record lows. Growth in housingcredit has been trending lower since 2004at the end of our largest ever housing G9: Dwelling approvals houses vs. units (private sector)market boom. Dec-91 to Dec-11See G7: Growth in outstanding private sector 12,000 12,000housing credit 10,000 10,000Over the year, population growth is 8,000 8,000now starting to increase due to anincrease in migrant numbers 6,000 6,000In raw number terms, Australia’s population 4,000 4,000grew by 320,779 persons over the yearto June 2011. The result indicates that 2,000 2,000the rate of population growth is nowstarting to increase after easing since it 0 0peaked at 462,000 persons over the year Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11to March 2009. The previously high rate Private house approvals ( rolling 6 month average) Private unit approvals ( rolling 6 month average)of population growth was largely fuelled Source:, ABSby the significant increase in net overseasmigration to the country. Over the lastyear net migration has contributed an to increase. The Federal Government hadadditional 170,000 persons to the Australian previously cut skilled migration to around Key Statisticspopulation however, the recent slowdown 170,000 persons annually (which is still wellin population growth is largely the result of above long-term average levels of 120,000 Australia has not slippeda decline in net migrant numbers. persons annually) however, in the most into a recession (defined More recent monthly data on long-term recent Budget the Government increased as two consecutiveoverseas arrivals and departures shows the skilled migrant intake by a further quarters of negative GDPthat net overseas migration is continuing 16,000 persons. Despite the lower migration growth) since June 1991. 7
  10. 10. Economic overview | RP Data Property Capital Markets Report 2012G10: Dwelling approvals vs. population growth approved for construction indicating thatDec-83 to Dec-11 approvals fell by 15 percent over the 2011120,000 120,000 calendar year. See G9: Dwelling approvals houses vs. units100,000 100,000 (private sector) 80,000 80,000 With building approvals falling, the 60,000 60,000 imbalance between housing demand 40,000 40,000 and supply persists The demand-supply imbalance is 20,000 20,000 highlighted by many reports from a number of Government departments and 0 0 private institutions. With fewer dwellings Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 being constructed, the supply shortage Total quarterly dwelling approvals Quarterly change in population growth Source:, ABS will continue to be exacerbated. It is likely the shortage of housing will worsen as theG11: Projected housing supply gap by state population grows further and required2011 projections (000’s) dwelling approval and commencement targets continue to go unfulfilled.NSW 83.9 Migration had been decreasing untilQld 70.5 recently but is now climbing once moreWA 33.3 and the current level of population growth remains well above long termVic 19.2 averages which indicates that in order toNT 11.2 cater for this demand the country will beTas 1.1 required to construct an above average volume of new homes.ACT -0.6 Graph 10 highlights that althoughSA -4 population growth has taken off in000’s -10 0 10 20 30 40 50 60 70 80 90 recent years the number of new dwelling Source:, National Housing Supply Council approvals has well and truly been unable to keep pace. See G10: Dwelling approvals vs. population numbers, the rate of natural increase is at growth heightened levels; over the year to JuneKey Statistics 2011 more than 150,000 more children were National Housing Supply CouncilOver the 2011 calendar born than persons passed away. projects a housing undersupply ofyear, demand for See G8: Quarterly population growth 214,600 homes in 2011housing credit by the Although an analysis of populationprivate sector grew New housing supply shows a short growth against approvals and/orby its lowest level on lived improvement commencements provides an indicationrecord, increasing by Although Australia’s population has of housing demand, other factors needjust 5.4 percent over been growing strongly and has recently to be taken into consideration such asthe year. To put this insome sort of context, been at record levels, dwelling approvals demolitions and household formation.based on annual have not been sufficient to cater to According to the National Housing Supplygrowth figures dating increasing demand through an increase Council’s latest Report (2011) the housingback to August 1977, in population. Dwelling approvals have supply gap in 2011 is projected to beprivate sector housing still not returned to those levels recorded 214,600 homes. The amount of homescredit has grown at an between 2002 and 2003. required in each state varies greatly.average of 13.9 percent The data shows that the number of South Australia (4,000) and the Australianover the period. approvals has fallen by 24.5 percent over Capital Territory (600) actually already the year and have fallen for three of the have a surplus of supply according to the last four months. Over the 12 months report. On the other hand, New South to December 2011 there were 149,799 Wales (83,900) and Queensland (70,500) dwelling approvals with 92,655 approvals have a severe stock deficiency with of private houses and 52,963 approvals of demand far outstripping supply. private units. Over the 2010 calendar year See G11: Projected housing supply gap by state a much greater 176,495 dwellings were 2011 projections8
  11. 11. RP Data Property Capital Markets Report 2012 | Economic overviewFirst home buyer volumes surge but G12: Owner occupier finance commitments to first home buyer vs.can it be sustained? non first home buyers Dec-93 to Dec-11First home buyer activity has been ramping 60,000 60,000up over recent months and in December 50,000 50,0002011 this buyer segment accounted for10,421 owner occupier commitments, or 20.9 40,000 40,000percent of all owner occupier commitments 30,000 30,000over the month. The volume of first homebuyer commitment in December 2011 was 20,000 20,000the highest it’s been since December 2009(11,825). In recent years first home buyer 10,000 10,000activity has eased on the back of the removal 0 0of Federal Government incentives and Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11higher interest rates however, some StateGovernments offered their own incentives. Non first home buyers (monthly finance commitments) First home buyers (monthly finance commitments) Source:, ABSIn New South Wales, the State Governmentprovided a stamp duty exemption for first G13: Percentage of fixed rate home loanstime buyers over the December quarter; Dec-93 to Dec-11much of the improvement is likely due to 30% 30%a last minute rush by first home buyers.Nevertheless, first home buyer volumes have 25% 25%risen by 25.8 percent over the year. 20% 20% Non-first home buyer financecommitments to owner occupiers have 15% 15%remained relatively unchanged over the year 10% 10%and this result reflects the results for thehousing market in which sales volumes are 5% 5%estimated to be 8.1 percent lower than they 0% 0%were a year ago.See G12: Owner occupier finance commitments Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11to first home buyer vs. non first home buyers Monthly % Rolling 12 month average Source:, ABSThe majority of home loans in Australiaare on a variable interest rate has proven to be a positive over recentHousing finance data reveals that most years. The high proportion of loans on ahome loans are on a variable interest rate. variable interest rate means that changes to Key StatisticsAt their absolute peak in March 2008, fixed monetary policy have an almost immediate 64.0 percent ofrate home loans accounted for just 25.5 impact on consumer behaviour. Australia’s populationpercent of all new loans over that month. See G13: Percentage of fixed rate home loans live within the eightIn December 2011, 11.7 percent of all new capital cities andloans were on a fixed rate and at the same Investor activity increasing but still 55.5 percent of the population live in thetime in 2010, at which time mortgage rates well below 2007 peaks four largest citieswere actually higher, 9.3 percent of home The total value of investor housing finance (Sydney, Melbourne,loans were on a fixed rate. The propensity commitments has risen over six of the last Brisbane and Perth).for Australian’s to favour variable rate eight months. Despite the recent increase,mortgages is not a new phenomenon. investor activity in December 2011 wasAustralian’s are typically fairly reluctant to only 1.8 percent higher than it was infix their mortgage rates and tend to only do December at times when interest rates are at very With home values having fallen over thehigh levels. When fixed rate loan volumes last 12 months and rental rates increasing,peaked in March 2008, the standard the lure of relatively more affordablevariable mortgage rate was 9.35 percent. housing is probably increasing investorsThe recent rise in fixed rate mortgages is interest in the housing market. Investorslikely due to the fact that three year fixed accounted for about one third of the totalrate home loans are actually cheaper than value of all housing finance commitments invariable rates. December 2011. Despite the improvement The fact that the vast majority of home in investor activity, it remains 21.6 percentloans in Australia are on a variable rate below the peak. Investors that are active 9
  12. 12. Economic overview | RP Data Property Capital Markets Report 2012 G14: Total value of investment finance commitments finance commitments in December 2011 Dec-01 to Dec-11 has increased by 5.6 percent compared$9.5bn $9.5bn to volumes in December 2010. The data shows that the real strength has been$8.5bn $8.5bn within the established homes market$7.5bn $7.5bn with the volume increasing by 7.4 percent over the year compared to a 3.5 percent$6.5bn $6.5bn increase in commitments for the purchase$5.5bn $5.5bn of new dwellings and a 6.2 percent fall in commitments for the construction of new$4.5bn $4.5bn dwellings. Importantly, the data includes$3.5bn $3.5bn refinances and to get an idea of demand Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 for new loans you need to remove this Investment 3 month average Source:, ABS data which accounts for around one third of all owner occupier commitments. In G15: Owner occupier refinance vs. non-refinance commitments comparison to volumes in December 2010, Dec-93 to Dec-11 refinance commitments have increased 50,000 50,000 by 7.7 percent while non-refinance commitments have increased by 4.6 40,000 40,000 percent. Although the increase in non- refinance commitments has been below 30,000 30,000 that of refinances, the number of non- refinance commitments has risen over nine 20,000 20,000 of the last 10 months and they are at their highest level since February 2010. 10,000 10,000 See G15: Owner occupier refinance vs. non- refinance commitments 0 0 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Australia has a highly centralised Refinances Total excluding refinances Source:, ABS population with more than half of the population living in the four largest cities G16: Percentage of population in capital cities June 2010 Despite the fact that Australia is a vast percent of state percent of national country, much of the land is sparsely Capital city State population population populated or uninhabitable. The large Sydney NSW 63.3% 20.5% majority of Australian’s live either along Melbourne Vic 73.5% 18.3% the Eastern Seaboard or within the capital Brisbane Qld 45.3% 9.2% cities. As a result, 64.0 percent of Australia’s Adelaide SA 73.2% 5.4% population live within the eight capital cities Perth WA 74.0% 7.6% and 55.5 percent of the population live in Greater Hobart Tas 42.3% 1.0% the four largest cities (Sydney, Melbourne, Canberra ACT 99.9% 1.6% Brisbane and Perth). Sydney alone is Darwin NT 55.5% 0.6% home to one in every five Australian’s. The National 64.0% highly centralised nature of the Australian population creates a significant amount of Source:, ABS competition for resources as well as strong demand for homes in more desirable areas should be focusing on rental return rather of the country. This goes some way to than capital gains given the current housing explaining why property values in the capital Key Statistics market conditions. cities (in particular the major capital cities) According to the See G14: Total value of investment finance appear so high on an international basis. National Housing commitments The significant competition for homes and Supply Council’s latest an ongoing undersupply of housing has Report (2011) the Owner occupier finance contributed to significant increases in values housing supply gap in commitments continue to increase over recent years. 2011 is projected to be from a low base over recent months See G16: Percentage of population in capital 214,600 homes. The total number of owner occupier cities10
  13. 13. RP Data Property Capital Markets Report 2012 | FeatureThe economics Securitisation:of house prices bellwether for the property market In a report dating from 9 February 2012, the ratings agency, Moody’s Investors Service, said that the outlookA persistent fear amongst global investors and commentators is for Australian securitisationsthat Australia’s housing sector is overvalued and at risk of collapse. will be characterised by stable collateralThis view, which dates back to 2003, has been refreshed by the performance.ongoing European crisis. “Australia’s economic growth forecast of 3.8 perSome of Australia’s most prominent economists demand for dwellings,” said Chronican. “We cent, steady unemploymenthave, in recent times, put the debate on don’t see that in other areas – if the demand for in the low 5 per cent range,Australia’s home values into perspective. plasma TVs goes up, we make more.” official interest rates at 4.25 Since the middle of last year, Australia’s per cent, and the ability ofmajor banks have been keen to hose down Supply-demand equation policymakers to implementcriticism of the local housing market. This Michael Blythe, chief economist for the rate cuts, will support stableis especially important for them, given that Commonwealth Bank of Australia, points performance of these different asset classes inAustralian banks, unlike their peers elsewhere out that the demand-supply balance in the 2012,” said Richard Lorenzo,have the majority of their assets on balance Australian housing market is supporting house a Moody’s vice presidentsheet as prime mortgages. prices and is unlikely to change. He asserts there and senior credit officer. Philip Chronican, the ANZ Bank’s chief is limited risk of a US-style house price collapse, “The recovery rates forexecutive officer for Australia, and an noting that Australian demographic trends are asset backed securitisationseconomist by training, was keen to deal with consistent with an underlying new housing (ABS) will remain stablethe consistently raised topic of asset pricing demand of 180,000 to 185,000 new houses per due to these goodin the housing market. “If you’re using the annum. “This demand is lower than in recent macroeconomic conditions,historical ratio of rents to house prices, it puts us years but is still running well ahead of new while the stability of RMBScomfortably at the top of the table,” he said in a construction,” he wrote in a recent economics property prices will beseries of presentations to business leaders and note on the topic of house prices. supported by shortages in housing supply,” addedinvestors in July 2011. As Blythe also noted, this excess has been Treasa Boyle, a Moody’s There is a degree of contention as to in place for a number of years, so a pent-up or analyst.what constitutes the right measure for such a accumulated demand exists as well. She suggested thatcomparison of fair value, he asserted. “Low residential vacancy rates and above- CMBS property prices will “If you’re measuring by rental yields, what average growth in dwelling rents are the visible remain strong, as demand isyou’re effectively doing is assessing housing signs of this imbalance. Financial intermediaries absorbing any new supplywith other investment classes. Measuring house are willing to finance housing activity. So there is entering the market, andprices against incomes [means] you’re talking a mechanism to translate demographic demand keeping vacancy rates in theabout affordability, which is a different concept,” into real demand,” he said. low single digits.he said. In Moody’s view, RMBS The only meaningful conversation to have Affordability trends deals will become less conservative than thoseis why the price of residential land is so high in Trends in affordability are also supportive completed after the globalAustralia, suggested Chronican. of dwelling prices. “A combination of strong financial crisis, as issuers “The price of an inner city apartment in income growth and falling mortgage rates is attempt to make theirSydney or Melbourne is very similar to that boosting affordability,” Blythe noted. “Some deals more economical byas Hong Kong or Singapore,” he said, before rough estimates show that the CBA-Housing providing less subordination,pointing out that in those cities there were Institute of Australia housing affordability index while still keeping them withinnatural constraints to land use that were not at the end of 2011 was 13 per cent above year the Aaa range.apparent here. earlier levels. With a lead of a little over a year, There will be additional In Australian cities, there is clearly an the trend in affordability is a useful guide to the operating risks with RMBS,opportunity for medium density housing direction of house prices.” ABS and CMBS deals viato be improved. However, the price of land CBA’s analysis shows interest rate trends the new Personal Property Securities Act, whichin Australian cities is well in excess of land in are also consistent with a lift in residential requires transaction partiescomparably sized US cities, he observed. construction activity. “We expect new dwelling to adopt new procedures “So it’s a supply side problem, with the construction to lift a little from 148,000 units in to protect the numeroushousing market failing to keep up with the 2011 to 155,000 in 2012,” said Blythe. “Such an securities interests. 11
  14. 14. Feature | RP Data Property Capital Markets Report 2012 G1: Excess mortgage repayments ranging analysis piece on the Australian 100% 100% economy, the bank’s economics team made 90% 90% the further observation that, “despite many 80% 80% comments from observers to the contrary, 70% 70% Australia’s house prices have not actually grown 60% 60% exceptionally quickly over the past six years 50% 50% 40% 40% compared to a number of other international 30% 30% markets.” (see G2: International house prices) 20% 20% These observations notwithstanding, 10% 10% national house price measures are below recent 0% 0% peaks, noted Blythe, adding: “House prices do year 1 2 3 4 5 6 7 8 9 10 11 adjust in Australia. But nominal price falls are Borrowers ahead of schedule* Ratio to scheduled** typically small and shortlived. And the sort of * Percent of owner-occupier households with mortgages ** Percent to scheduled (principal plus interest) repayments; excludes repayments due to sales and refinancing nominal house price falls that would trouble the Sources: APRA; HILDA Release 10.0 financial system and the real economy are rare.” G2: International house prices Luci Ellis, head of the financial stability department at the Reserve bank of Australia, 250 250 followed a similar tangent when she addressed aHouse price index (March 2002=100) 230 230 mortgage industry conference, also in February 210 210 2012. She observed that the rate of home 190 190 mortgage defaults remains low in comparison to 170 170 other asset classes. 150 150 “The source of the threat to financial 130 130 110 110 stability is more often in commercial property 90 90 or property development than in home 70 70 mortgages,” she told the audience of industry 50 50 professionals. Further, home mortgage markets with Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 prudent lending standards do not generally Australia NZ Singapore US Canada Hong Kong UK China pose risks to financial stability. Sources: Australian Bureau of Statistics, ANZ, Bloomberg “So I think we need to keep the risks posed by the housing and home mortgage markets in outcome would still be a little below long-run perspective.” It is not unusual for housing prices averages and a long way below underlying to fall, especially if they had been booming Key Statistics demand.” previously, or if the economy has turned down. The typical valuation ANZ’s estimates point to an even larger But for that to translate into a big upswing in based on capital city imbalance, suggesting a shortage of dwellings mortgage defaults, the economy generally has house prices and in Australia since 2005-06 has built up to about to have weakened first. Australia-wide incomes 230,000. “This supply side is going to become “All the same, the recent US experience shows a price-to- even more critical; and control of supply rests shows that painful housing busts can happen. income ratio of 5.5. with governments,” said Chronican. We would certainly want to avoid one here. But a comparison of And governments have a vested interest Housing lending is a larger fraction of the Australia-wide dwelling in terms of revenue raising items such as land balance sheets of Australian banking institutions prices to Australia-wide rates and capital gains tax, so it is hard to get than for their US counterparts. So in the unlikely incomes reveals a “true” ratio of 4.25, not that them interested in the face of such a conflict of event a US-style bust did happen, it would be different from most other interest, asserted Chronican. harmful to financial stability in Australia,” she countries. (Source: CBA In further commentary as to why the said. Economics Update, 23 local housing market is still strong, without That was the pattern of the housing busts February 2012) being overblown, Chronican observed that of the 1930s and early 1990s in many countries. delinquency rates are low, with overall LVR “It is also what we see in Ireland, Spain and the figures are well below those of the US, for United Kingdom today. In those countries, as in instance. He pointed to the balance sheet of his the past, commercial real estate and property own bank, as at mid-year 2011. development have been the bigger problems. “Out of 800,000 home mortgages, we have The recent cycle in commercial property prices 105 mortgagee in possession [cases],” Chronican has been at least as large as that in housing said of his own bank’s portfolio. prices for essentially every country for which we In the 2 March 2012 edition of the Australian have good data, including the United States as Monthly Chartbook, ANZ’s regular and wide- well as countries like Spain and Ireland,” Ellis said.12