The document analyzes the Australian property market and whether it is a good time to buy property. It finds that property prices have risen significantly in recent years due to low interest rates, economic growth, and high demand. However, many of the key demand drivers are expected to slow or decline in the coming years as interest rates rise, economic growth softens, foreign investment decreases, and housing supply increases. While a sharp decline is not expected, prices are forecast to experience flat or low growth going forward. The conclusion is that while waiting a few years carries some risk, it may be better not to rush into the market until the effects of the changing conditions become clearer.

1. 1
Is it a good time to be
buying property?
Cut through the noise: Everything U
need to know about the Australian
property market in 20 slides.

2. 2
The Rise
Residential real estate in Australian has had an incredible 3 year growth period with
combined capital city home values increasing by 30.8%. Over the past twelve months
prices across the combined capital cities have increased by 10.2% with Sydney prices
increasing by a massive 17.6%. This has left people scratching their heads wondering
if now is the time to get into the property market?

3. 3
The performance of real estate has not
been even across all states. This has
been driven by the downswing in
resources and flow on affects on the
states heavily tied to them.
18%
11%
4%
2%
-2%
2%
-5%
-1%
10%
-10%
-5%
0%
5%
10%
15%
20%
State vs State
Chart 1: Annual change in capital city dwelling values
Source: CoreLogic

4. 4
The million dollar question is what is going to
happen next? According to the media – utter
MAYHEM:

5. 5
No need to panic (hopefully)
Taking a more level-headed approach there are, generally speaking, 3 distinct views to
where house prices are heading:
1 THE BULL
This is the positive group who say Australian
property is not over-valued and prices will continue
on their merry way. The bulls will point to the fact
that prices are rising this decade in the same
manner they have in the previous two and that
housing supply continues to lag demand.
2 THE NEUTRAL
The fence sitters will say that Australian property
has had a very good run and that a slow down in
growth is likely.
3 THE BEAR
These people will say that Australian property
prices are not being driven by the fundamentals
and that we are in a bubble. They will point to lower
auction clearance rates, record debt levels and a
recent dip in prices as signs that the bubble is
about to burst.

6. 6
Economics 101 – Demand & Supply
Demand
• Economic Growth
• Interest Rates
• Population Growth
• Foreign Investment and;
• Government Taxes/Policies
Supply
• The number of houses being built relative to this demand, particularly population
growth, is also another major driver of house prices.
To understand where real estate prices are heading we need to look at the drivers:

7. 7
Economic Growth
Strong economic growth means higher employment, higher wages, increased wealth and higher
demand for housing both for investment and living purposes. The Australian economy has been
resilient over the past few years however we think the risks to economic growth are skewed
to the downside. This will be driven by declining commodity prices, weak income growth,
sharp declines in investment expectations and a peaking in the contributions to economic
growth from housing.
2011 2012 2013 2014 2015e 2016e 2017e
2.3% 3.7% 2.5% 2.5% 2% 3% 3%
Table 1: Australia’s GDP growth
Sources: RBA, World Bank

8. 8
Interest Rates & Loan Affordability
The RBA cash rate is currently
sitting at an all time low of 2%.
The cash rate is the driver of
mortgage rates and the low rate
has made housing more
affordable to more people.
However – in the last two weeks
the big four banks have
increased their mortgage
rates while interest rates on
investment loans have also
risen independently of changes
in the cash rate. Our view is that
interest rates will stay very low
for a while longer which could
support property prices.
0
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Feb-15
Jul-15
Chart 2: Australia’s Cash Rate

9. 9
Interest Rates & Debt
The Bears will often point to
Australia’s debt levels as an
indicator that we are heading for a
crash. Chart 3 shows how much
more debt Australians’ have taken
on in the past 10 years. Since 2005
total household debt has doubled.
Meanwhile household
debt/disposable income is at an all
time high having increased by 11%
in just 5 years after being stable for
about 10 years. These high debt
levels leaves Australians very
susceptible to an increase in interest
rates or a slowdown in economic
growth.
0
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2
2.5
0
500
1,000
1,500
2,000
2,500
Jun-90
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Jun-15
Household Debt (LHS) Household debt to income (RHS)
Chart 3: Australia’s Debt Levels
Source: ABS

10. 10
Population Growth
It’s a fact - more people
requires more housing and
Australia is a pretty
popular place to live.
Australia’s population
grows at approximately
1.5%-2% per year
(~350,000 people per
annum) through a
combination of births and
migration. Growth has
slowed a touch in recent
times due to lower Net
Migration.
Chart 4: Australia’s annual population growth
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
Source: ABS

11. 11
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12. 12
Foreign Investment
The impact of overseas buyers,
particularly the Chinese, has
gotten a lot of press lately and is
expected to be a contributor to
the recent surge in prices;
especially in Sydney &
Melbourne. However – this could
change due to the dual impact of
new taxes imposed on foreign
investment in residential property
and tightening of capital outflows
restrictions by the Chinese
government. Despite these
policy changes, Australia
remains an attractive investment
destination due to a low
Australian dollar a resilient (to
this point!) economy. 0%
5%
10%
15%
20%
25%
30%
35%
NSW VIC QLD WA SA ACT AUS
Mar-15 Jun-15 Sep-15 Dec-15
Chart 5 – Foreign Residential Property Sales
Over the past 3 months, what proportions of total residential property sales in your business have been to
foreign (non-Australian) buyers
Source: ANZ/Property Council Survey, CoreLogic

13. 13
Government Policies
Aside from monetary policy (setting the cash rate) the government (usually through APRA –
regulator of banks) sometimes sets certain rules that has a direct impact on the property
market. Recently there have been three major announcements that could have a real
impact on property prices:
Jul-15
• APRA decides banks can’t
grow property investment
loans by more than 10% p.a.
To enforce this rule – banks
have increased interest
rates on investment loans
by 25 basis points. Higher
interest rates means less
people borrowing which
means less demand for
property.
Jul-15
• APRA decides banks need
more capital. Without getting
to technical, the result of
APRA’s decision is that costs
for banks have increases and
to offset these costs banks
have decided to increase
rates on mortgages
2015
• Throughout 2015 the
Australian Government has
introduced a number of
measures to both crack down
on the number of foreign
buyers in Australia and
impose new taxes on them.
Longer term these changes
may put a brake on demand
for Australian property by
foreign buyers.

14. 14
Supply
Oversupply of any product will cause a
price decline while undersupply will cause a
price rise. The same rings true in the
property market.

15. 15
Dwelling units completed
Australia completes, on
average, around 40,000
“dwelling units” (i.e a
structure or the part of a
structure that is used as a
home, residence or sleeping
place) per year. As Chart 6
suggests, this number
fluctuates quite a bit. The
recent spike in
construction is largely
attributed to developers
wanting to capitalize on the
surge in real estate prices.
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
Mar-85
Mar-86
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Mar-15
Chart 6: Dwelling units completed in Australia
Source: ABS

16. 16
Housing vs Population
Looking at chart 7,
which compares
population growth to
dwelling growth, we
can see that since
June-2005 population
growth has outstripped
housing growth by
2.4x.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
M…
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Dwelling units completed Australia Population growth in Australia
Chart 7: Housing vs Population growth
Source: ABS

17. 17
Undersupply?
• The ABS census finds an average 2.5 people per dwelling. Keeping this in
mind, the question that needs to be asked is this – are enough houses being
built for the additional population? For a 3-4 year period starting in 2007 the
answer was no. There was a housing shortage over this period as
population growth outstripped housing by more than 3 to 1.
• However, a combination of higher dwelling construction and lower net
migration has seen dwelling units/population growth hover around 2.4x
which would suggest that the recent surge in prices has been driven by
“non-residential” sources of demand (i.e. foreign investment, domestic
investment, speculation etc.)

18. 18
What will the drivers be?
The table below sums up the various drivers of house prices and what we
think the trend will be over the next few years:
2011 -
Present
Rest of 2015 2016 2017 2017+
Eco Growth
Interest Rates
Pop. Growth
Foreign
Investment
Govt. Policies
Supply

19. 19
Is it time to buy a property
• Over the past 3-4 years the stars have aligned to drive property prices higher.
• At capitalU we feel that a lot of these drivers are going to turn neutral or
negative in the short to medium term. A slow down in economic growth,
increase in housing supply and a decrease in speculative investment by both
domestic and foreign buyers will take some heat out of the market. Some of
the downward pressure will be offset by a continuation of record low interest
rates.
• Overall we do not see a sharp decline in residential prices but rather a period of
flat to low growth. The risk is definitely to the downside – we believe there is
no harm in waiting a couple years to see how the market performs before
jumping in. At capitalU we can help you plan for your eventual property
purchase through a free financial plan that will help you budget, plan, invest and
save your way to your dream property

20. 20
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be one of the first in Australia to try us out.