The Outlook for the Housing Industry in Western Australia

The Outlook for the Housing Industry in Western Australia Dr Harley Dale HIA Chief Economist HIA Industry Outlook Breakfast Perth March 2011

Overview Policy measures and directions The global backdrop is still good for WA so...... the outlook for the WA economy remains bright, but... Home prices and the Renovations Sector The Housing Outlook... WA is a state example of a national problem.... you re stuffed. If you re not directly exposed to the benefits of a resources boom then...

% change Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 The Australian Economy hardly on fire but Gross Domestic Product Source: ABS 5206 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0 Qtrly Annual The RBA is forecasting 4.25% growth in 2011 (we ended 2010 at 2.7%), so something has to give.

Jun.1994 Jun.1995 Jun.1996 Jun.1997 Jun.1998 Jun.1999 Jun.2000 Jun.2001 Jun.2002 Jun.2003 Jun.2004 Jun.2005 Jun.2006 Jun.2007 Jun.2008 Jun.2009 Jun.2010 Jun.2011 Jun.2012 Jun.2013 Jun.2014 Jun.2015 the profile for WA is somewhat different Gross State Product - Western Australia Source: ABS 5220.0; Access Economics 8.0 7.0 6.0 5.0 Long term average Forecast 4.0 3.0 2.0 1.0 0.0 Year ended June

That was then, this is now WA ECONOMY INDICATOR Gross State Product Interest rate outlook Manufacturing Unemployment rate Detached houses Multi-units Renovations investment UPDATE Largely Steady Improved Deteriorated Improved Improved Improved Improved

Australia s extraordinary terms of trade Australia's terms of trade 120 100 80 1923-25 wool boom Korean war wool boom China commodities boom 60 40 Long term average 20 1870 1890 1910 1930 1950 1970 1990 2010 Sources: ABS, Australians Historical Statistics, Wray Vamplew (Ed.); Fairfax, Syme & Weldon Associates, 1987, NAB Global Markets Research 6

Per cent Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Unemployment rate still a key positive Western Australia's Unemployment Rate Source: ABS Labour Force 12.0 11.0 10.0 9.0 8.0 7.0 6.0 20 Year Average Unemployment Rate 5.0 4.0 5 Year Average Unemployment Rate 3.0 2.0 The unemployment rate in WA has been less than 5 per cent over 12 consecutive months.

Unemployment rate still a key positive Unemployment Rate by State - February 2011 Source: ABS Labour Force 6.5 6.0 5.5 5.0 5.6 5.8 5.6 National Unemployment Rate 5.0 4.8 4.5 4.0 3.5 4.2 3.5 3.0 2.5 2.0 NSW VIC QLD SA WA TAS NT ACT 2.3

Trade prices and availability - Perth Trade Prices and Availability - Perth Source: HIA-Austral Bricks Trade Report Index 0.15 0.10 0.05 0.00-0.05-0.10-0.15-0.20-0.25-0.30-0.35 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Index 165.0 160.0 155.0 150.0 145.0 140.0 135.0 Trade Availability (LHS)

Trade prices and availability Regional WA Trade Prices and Availability - Regional WA Source: HIA-Austral Bricks Trade Report Index 0.00-0.05-0.10-0.15-0.20-0.25-0.30 Index 160.0 155.0 150.0 145.0 140.0 135.0-0.35 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 130.0 Trade Availability (LHS) Trade Prices (RHS

% Interest Rate May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Interest rates doing us a favour in 2011? Interest Rates, Australia Source: RBA 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 Discounted Variable Mortgage Rate RBA Cash Rate The RBA lifted the cash rate by 25bps in Nov 10 and the major banks infamously went by more. Rates may be on hold for some time which is good news for our industry, but... the RBA s communication record in 2010 was the poorest for some years.

Index Consumer confidence is faltering and... Consumer Confidence Source: Westpac-Melbourne Institute 125 120 115 110 105 100 95 90 85 80 75 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11

For housing it s about the unaffordability for:- entry level buyers and new homes

So where to for housing from here?

% change The latest update from forward indicators Housing Indicators - WA Source: rpdata.com; ABS; HIA Economics Group 15.0% 10.0% 9.0% 5.0% 3.8% 0.0% 0.4% 0.6% -5.0% -2.1% -2.3% -3.4% -10.0% -7.7% -32% -15.0% Land sales New home lending Investor lending Approvals New home sales Renovations investment Major alts and adds Detached house prices Multi-unit prices

Number Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Housing starts are off the boil, but... Total Dwelling Starts Western Australia Source: ABS 8750.0 7500 7000 6500 6000 5500 5000 4500 4000 3500 3000 seasonally adjusted Trend Housing starts fell by 0.8% in the December 2010 qtr compared to a 7.3% national fall.

No of dwelling starts... last calendar year looked alright, but... WA Housing Starts 30.0 28.0 26.5 26.0 24.0 22.0 20.0 21.7 22.8 24.1 22.9 20.7 20.2 24.6 18.0 16.0 14.0 12.0 10.0 2003 (a) 2004 (a) 2005 (a) 2006 (a) 2007 (a) 2008 (a) 2009 (a) 2010 (a) Housing starts increased by 21 per cent in 2010.

('000)... significant shortages persist Underlying Requirement for Housing vs Dwelling Completions - WA Source: ABS, HIA 30.0 28.0 26.0 24.0 28.1 24.8 26.2 25.1 25.3 22.0 20.0 18.0 16.0 18.1 21.1 20.1 14.0 12.0 10.0 2008/09 (a) 2009/10 (a) 2010/11 2011/12 Completions Our latest estimates have a spot shortage of 4,352 dwellings for Perth and 1,854 for Rest of WA. UR

Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Population update Western Australia's Population Growth by Component - Moving Annual Total Source: ABS 3101.0 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0-10,000 Total MAT Natural Increase MAT Net Interstate Migration Net Overseas Migration MAT

$ Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Number Lack of affordable land is a crucial issue Residential Land - Perth Source: RP Data 280,000 260,000 240,000 220,000 200,000 4,000 3,500 3,000 2,500 180,000 160,000 140,000 120,000 100,000 2,000 1,500 1,000 500 80,000 - No. of sales (RHS) Land sales fell by 32% in the September 2010 quarter. Land per sqm is more expensive in Perth than in Sydney.

Lack of affordable land is a crucial issue Residential Lot Sales Source: RP Data, HIA Economics Group South Eastern -33% South West -37% Perth -69% -80% -70% -60% -50% -40% -30% -20% -10% 0% Annual % change

Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Housing Affordability simply has to improve, but Housing Affordability in Western Australia Source: HIA Affordability Report 150.0 130.0 110.0 90.0 70.0 50.0 30.0 Australia Perth Rest of WA Over the year to December affordability slipped by 4.7% in Perth and by 2.9% in Regional WA.

Ratio focus in the right areas is important House price to houshold income ratio - Capital cities Sources: ABS, Rismark/RP Data, HIA Economics 5.0 4.5 4.0 4.3 4.6 3.9 4.0 4.1 4.8 4.4 3.5 3.0 2.5 2.0 3.1 2.3 2.6 2.2 2.2 2.0 3.4 2.3 1.5 1.0 0.5 0.0 Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra N/A* Sep-95 Sep-10

Number of loans Housing finance not good enough First Home Buyer versus Non-First Home Buyer Loans Source: ABS Housing Finance 16,000 14,000 12,000 10,000 14,523 % change: -5% 13,841 8,000 6,000 4,000 2,000 5,188 % change: -40% 3,129 0 FHB Non-FHB 3mths to Jan 10 3mths to Jan 11

Building approvals steadying isn't the same as growing WA Monthly Dwelling Approvals Source: ABS Building Approvals 3000 2500 2000 1500 1000 500 0 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Total Detached Houses Multi-Units Building approvals increased by 4% in the 3 months to January 2011.

The short term outlook DWELLING STARTS: by state and territory Financial Year Starts NSW Vic Qld SA WA Tas NT ACT Aust 2003/04 (a) 45.71 45.42 44.22 10.44 22.56 2.85 1.04 2.90 175.14 2004/05 (a) 39.41 40.94 39.32 11.01 22.91 2.83 1.33 2.46 160.20 2005/06 (a) 32.89 39.27 37.73 10.64 25.92 2.56 1.35 1.87 152.24 2006/07 (a) 29.75 38.60 41.18 11.18 24.71 2.86 1.42 2.31 152.00 2007/08 (a) 31.53 41.73 44.83 11.87 22.46 2.90 1.05 2.25 158.60 2008/09 (a) 23.61 41.95 28.83 11.97 18.42 2.90 1.12 2.65 131.44 2009/10 (a) 31.88 54.88 33.20 11.99 25.15 3.12 1.25 4.41 165.88 2010/11 30.03 53.50 25.38 11.01 20.91 2.98 1.18 4.41 149.40 2011/12 31.14 44.66 25.37 11.40 20.47 2.85 1.20 2.96 140.05 2012/13 34.70 44.06 30.40 11.56 22.33 2.99 1.43 2.90 150.37 % change: 2004/05 (a) -14% -10% -11% 5% 2% -1% 28% -15% -9% 2005/06 (a) -17% -4% -4% -3% 13% -9% 2% -24% -5% 2006/07 (a) -10% -2% 9% 5% -5% 12% 5% 24% 0% 2007/08 (a) 6% 8% 9% 6% -9% 1% -26% -3% 4% 2008/09 (a) -25% 1% -36% 1% -18% 0% 6% 18% -17% 2009/10 (a) 35% 31% 15% 0% 37% 7% 12% 66% 26% 2010/11-6% -3% -24% -8% -17% -5% -6% 0% -10% 2011/12 4% -17% 0% 4% -2% -4% 2% -33% -6% 2012/13 11% -1% 20% 1% 9% 5% 20% -2% 7%

No of dwelling starts The short term outlook WA Housing Starts Forecasts Source: HIA Economics Group 30.0 28.0 26.5 26.0 24.0 22.0 20.0 21.7 22.8 24.1 22.9 20.7 20.2 24.6 20.4 Forecast 21.5 22.7 18.0 16.0 14.0 12.0 10.0 2003 (a) 2004 (a) 2005 (a) 2006 (a) 2007 (a) 2008 (a) 2009 (a) 2010 (a) 2011 2012 2013

Renovations

Home prices are falling in WA but... Change in home values - 3 months to January 2011 Source: RP Data, Rismark International 6.0% 4.0% 4.3% 2.0% 0.0% 0.2% -2.0% -4.0% -1.3%-1.4% -1.2% -4.2% -2.2% -2.0% -2.3% -3.3% -3.4% -1.1% -2.5% -1.5% -2.1% -6.0% Sydney Melbourne Brisbane Adelaide Perth Darwin Canberra Australian Capitals Houses Units

$ million (Moving Annual Total) Dec-1988 Dec-1989 Dec-1990 Dec-1991 Dec-1992 Dec-1993 Dec-1994 Dec-1995 Dec-1996 Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec.2009 Dec.2010... renovations enjoyed a strong 2010 Renovations Investment in Western Australia Source: ABS State Final Demand 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Renovations activity in WA increased by 16% in 2010, faster than any other state.

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Major renovations activity is wavering but... The WA Renovations and Additions Market Monthly Lending and Monthly Council Approvals 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Lending for Alts and Adds Value of Council Approved Alts and Adds

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11... steady interest rates should help Australia: Lending for Renovations and Interest Rates Source: ABS Housing Finance; RBA; HIA 5.00 4.50 4.00 3.50 3.00 2.50 2.00 6,300,000 6,100,000 5,900,000 5,700,000 5,500,000 5,300,000 5,100,000 4,900,000 4,700,000 4,500,000 RBA Cash Rate Lending for renovations (moving annual total)

The outlook for renovations HOUSING RENOVATIONS FORECAST: by state and territory Value of investment, $ million, Chain Volume Measure NSW Vic Qld SA WA Tas NT ACT Aust 2003/04 (a) 11,135 7,296 7,431 2,237 3,594 778 233 435 33,139 2004/05 (a) 10,932 7,011 7,810 2,259 3,782 754 335 385 33,268 2005/06 (a) 10,094 6,537 8,243 2,231 3,744 778 363 404 32,394 2006/07 (a) 8,534 6,239 8,266 2,221 3,701 730 269 342 30,302 2007/08 (a) 8,479 6,769 7,938 1,899 4,448 786 208 380 30,907 2008/09 (a) 8,112 6,666 7,455 2,077 4,109 802 213 311 29,745 2009/10 (a) 8,486 6,464 7,732 2,107 4,759 769 262 406 30,985 2010/11 8,668 6,544 7,590 2,033 4,746 747 264 429 31,021 2011/12 8,796 6,440 8,026 2,098 4,801 759 260 414 31,595 2012/13 9,453 6,675 8,294 2,196 4,911 823 265 417 33,035 Source HIA Economics March 2011 % change 2004/05 (a) -2% -4% 5% 1% 5% -3% 44% -11% 0% 2005/06 (a) -8% -7% 6% -1% -1% 3% 8% 5% -3% 2006/07 (a) -15% -5% 0% 0% -1% -6% -26% -15% -6% 2007/08 (a) -1% 8% -4% -14% 20% 8% -23% 11% 2% 2008/09 (a) -4% -2% -6% 9% -8% 2% 2% -18% -4% 2009/10 (a) 5% -3% 4% 1% 16% -4% 23% 31% 4% 2010/11 2% 1% -2% -4% 0% -3% 1% 6% 0% 2011/12 1% -2% 6% 3% 1% 2% -1% -3% 2% 2012/13 7% 4% 3% 5% 2% 8% 2% 1% 5% (a) = actual

Key challenges ahead The WA economy is strengthening at the same time as housing conditions are weakening. We have to get those that are out, in, otherwise it is false economy and it will end up costing us economically and socially. The price of serviceable land is the key, but so too is tax reform and there is no first best solution. The bottom line is that the cost of new housing is too high.

HIA Economics 2011 research agenda Federal Government Taxation Summit and wider tax issues Underlying requirement for housing by state and regional area Housing affordability, with a focus on First home buyer New home costs (particularly land) Rental markets Population and skilled migration Trends in investor activity Labour skills

THANK YOU FOR YOUR TIME THIS MORNING Harley Dale HIA Chief Economist March 2011 http://economics.hia.com.au