VICTORIAN BUILDING & CONSTRUCTION INDUSTRY OUTLOOK

VICTORIAN BUILDING & CONSTRUCTION INDUSTRY OUTLOOK MARCH 2017 QUARTERLY UPDATE 15 JUNE 2017 PREPARED FOR THE MASTER BUILDERS ASSOCIATION OF VICTORIA

STAFF RESPONSIBLE FOR THIS REPORT WERE: Director Senior Consultant Project Code Mark Dawson Mike Zhang EMR0879 Urbis Pty Ltd ABN 50 105 256 228 All Rights Reserved. No material may be reproduced without prior permission. You must read the important disclaimer appearing within the body of this report. urbis.com.au

TABLE OF CONTENTS 1. Economic Outlook... 2 1.1. National Economy... 2 1.2. Consumer Confidence... 5 1.3. Population... 6 1.4. Labour Market... 8 1.5. Housing Affordability... 10 2. Industry Outlook... 11 2.1. Housing Activity... 11 2.2. Dwelling Approvals & Starts... 12 2.3. Housing Finance... 14 2.4. Non-Residential Activity... 15 2.5. Engineering Construction... 16 Disclaimer... 17 MBAV_QUARTERLY_UPDATE_Q12017 ECONOMIC OUTLOOK 1

1. ECONOMIC OUTLOOK 1.1. NATIONAL ECONOMY The latest national accounts data released by the ABS shows that the Australian economy grew modestly in the first three months of 2017, as illustrated in Charts 1.1 and 1.2 overleaf. Key points to note include: Measured on a quarterly basis, the first quarter of 2017 saw the national economy expand by 0.3%, a modest growth compared to the strong recovery recorded for the previous quarter (1.1%). Accordingly, the economy grew by 1.7% over the past 12 months to March 2017, compared to 2.4% for the previous period (past year to December 2016). The export sector was the biggest drag with total exports dipped by 2.6% on a quarterly basis, let down to a large extent by the bad weather which interrupted iron ore and coal shipments. The growth was supported primarily by the relatively solid increase in consumption (+0.6% quarter-onquarter), although this was achieved by Australian households further reducing their saving rate from 5.1% to 4.7%, a record low since the Global Financial Crisis. Meanwhile, Victoria s State Final Demand also moderated over the same period, having expanded by 1.4% compared to 1.8% for the last quarter of 2016, pegged back primarily by weaker household consumption (0.7% for Q1 2017 vs. 1.4% for Q4 2016) and private sector investment (0.3% vs. 2.3%). Annual growth remained nonetheless strong at 4.5% on Q1 2016. Across other states and territories, economic performance varied during the past quarter, with NSW and QLD recording virtually no growth whilst WA dipped into recession again (-0.2%) after a brief sign of momentum for Q4 2016. In contrast, the SA economy continued to improve (1.4% quarterly) thanks largely to the state s commitment to infrastructure investment. 2 ECONOMIC OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

Australian GDP - Annual Growth Growth on Same Quarter of Previous Year, Q1 2007 Q1 2017 Chart 1.1 6% GDP Growth (Seasonally Adj. %) Quarterly Growth (YoY) 10 Year Average GDP Growth (Seasonally Adj. %) 5% 4% 3% 2% 2.7% 1.7% 1% Australian GDP - Quarterly Growth Growth on Previous Quarter, Q1 2007 Q1 2017 Chart 1.2 2.0% 1.5% Quarterly Growth 10 Year Average 1.0% 0.5% 0.7% 0.0% 0.3% -0.5% -1.0% MBAV_QUARTERLY_UPDATE_Q12017 ECONOMIC OUTLOOK 3

The Bulk Commodity Prices Index produced by the RBA shows that after almost a year of strong growth since the beginning of last year, bulk commodity prices reached the recent peak and took a turn in March. Average bulk commodity prices index measured in the currency weighted Special Drawing Rights or SDR terms (the key determinant of the terms-of-trade) recorded 186 points in March, the highest point over the past year or so (Chart 1.3). As at the end of March 2017, commodity prices had more than doubled in SDR terms and grew by 89% in AUD terms since the start of 2016. Strong demand for Australian commodities had been the key driver behind the price surge up until March, although this has proved to be less sustainable as China s continued financial tightening has slowed its construction sector. The fluctuation in the commodity market has had minimal impact on the Victorian economy due to the State s broad-based economy and limited exposure to the resource exports sector. RBA Index of Bulk Commodity Prices 1 Index Base 2014/15 = 100, March 2009 - March 2017, Monthly Chart 1.3 350 300 AUD SDR Index Base 2014/15 = 100 250 200 150 100 172 186 50 Mar-2009 Mar-2010 Mar-2011 Mar-2012 Mar-2013 Mar-2014 Mar-2015 Mar-2016 Mar-2017 1. SDR refers to Special Drawing Rights, a basket of four major world currencies defined and maintained by the IMF. Source: RBA; Urbis 4 ECONOMIC OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

1.2. CONSUMER CONFIDENCE The National Consumer Confidence Index (Chart 1.4 below) continued to portray a period of high fluctuation. As at the end of March, the consumer confidence index recorded 99.7 points, suggesting market uncertainties around the national as well as global economy. Market confidence is likely to remain at the current level for some time. National Consumer Confidence Ending 2016, Monthly Chart 1.4 125 120 115 110 Consumer Confindence 10 Year Average Monthly Index 105 100 95 102.0 99.7 90 85 80 75 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Source: Westpac-Melbourne Institute; Urbis MBAV_QUARTERLY_UPDATE_Q12017 ECONOMIC OUTLOOK 5

1.3. POPULATION Population growth remained robust across the eastern seaboard, now led by Victoria, as shown in Chart 1.5 below. Key points to note include: Over the past year to September 2016, Victoria saw its population grow by over 127,500 people or 2.1%. This was a record high level of annualised growth and the state continued to maintain its lead across all states and territories. As at the end of September 2016, the Victorian population reached over 6.1 million, having grown by more than 31,200 people on June 2016, a comparable level of growth to that recorded over the previous quarter. In comparison, the population of New South Wales increased by around 109,600 people over the same period, picking up from 106,500 recorded for the past year to September 2015. Total population recorded around 7.76 million as at the end of September 2016. Exceptionally strong population growth continued to drive the Victorian economy for the State and is likely to remain so over the medium term. Population Growth by State Year Ending September Chart 1.5 140,000 127,500 2014 2015 2016 2006-2016 Avg. 120,000 Population Growth 100,000 80,000 60,000 40,000 20,000 - NSW VIC QLD SA WA TAS NT ACT 6 ECONOMIC OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

Chart 1.6 below presents a breakdown of components of population growth for Victoria over the past decade Of note: The State s population growth continued with the upward trend since early 2011 and accelerated since the turn of 2016. Overseas migration remained the leading contributor to net population growth for the State, representing now around 54% of total population increase over the past year to September 2016 or 68,610 people between September 2015 and September 2016. Natural increase remained stable as the second largest contributor to population growth for Victoria. A new record of 41,700 net additional residents was recorded over the past year to September 2016. Meanwhile, the proportion of interstate migration continued with its steady pace. The year ending September 2016 saw close to 17,200 people move to Victoria from other states or territories, reaching a record level. Such rapid population growth has provided the fundamental driver for the state and is likely to be so because of the state s relatively better performing economy. Victoria Moving Annual Population Growth Components of Population Growth, Rolling Annual, 2005 2016, Year Ending June Chart 1.6 140,000 Population Change on Previous Year Natural Increase 127,500 120,000 Net Overseas Migration Net Interstate Migration Moving Annual Population Growth 100,000 80,000 60,000 40,000 20,000 0 68,610 41,700 17,190-20,000 MBAV_QUARTERLY_UPDATE_Q12017 ECONOMIC OUTLOOK 7

1.4. LABOUR MARKET Chart 1.7 compares the labour market performance of Australia and selected states in recent times, measured in full-time employment terms. Full-Time Employment Index Australia & Selected States, June 2014 = 100, June 2014-March 2017, Monthly Chart 1.7 Index Base June 2014 = 100 107 106.4 106 105 104 AUS 103 102 NSW 101 VIC 100 QLD 99 SA 98 97 WA 96 95 Of note: Full-time employment recorded growth across all the selected states over the first quarter of 2017, with Victoria leading the job market growth. The state's job market continued to perform relatively well in the March 2017 quarter, supported by a largely healthy construction sector driven by sustained housing demand and commercial properties, as well as large infrastructure investment. Total number of full-time and part-time jobs for Victoria rose to over 3.1 million as at the end of March 2017, representing a solid gain of around 3.2% over the past year or 0.5% over the past quarter. Meanwhile, total full-time jobs grew from around 2.08 million for December 2016 to close to 2.09 million for March 2017, a net gain of approximately 4,700 full-time roles. Part-time jobs also experienced growth, edging up marginally by 0.9% over the quarter or 9,580 parttime opportunities. Despite some potential headwinds in the state s blue collar employment towards the end of 2017 and early 2018 with the closure of car manufacturing in Melbourne, the state's continued commitment to infrastructure development is likely to offset the temporary job losses. 8 ECONOMIC OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

Unemployment / Wage Growth (%) Despite the positive indicators of the Victorian job market in general, the state s unemployment rate further edged up to 6.1% over the March quarter (Chart 1.8), although wage growth improved slightly to record a year-on-year gain of 2.0%. Meanwhile, the State s underemployment remained at a high level, with 33% of the state s total workforce being engaged in part-time employment (Chart 1.9). Regardless of the state s ability to generate more jobs, the obvious spare capacity of the state s labour market will cause unemployment levels to remain at above its long-term average for some time whilst wage growth is unlikely to further pick up. Victoria Quarterly Unemployment Rate & Wage Growth March 2007-March 2017, Wage Growth on Same Quarter of Previous Year Chart 1.8 8% 7% 6% Unemployment Rate Unemployment 10 Year Average Wage Growth Wage Growth 10 Year Average 6.1% 5% 4% 3% 5.5% 3.3% 2% 2.0% 1% Victoria Under-employment Part-time Employment, Year Ending March 2017 Chart 1.9 34% 33% 33% 32% 31% 30% 29% 28% Source : ABS; Urbis MBAV_QUARTERLY_UPDATE_Q12017 ECONOMIC OUTLOOK 9

1.5. HOUSING AFFORDABILITY The Home Loan Affordability Indicator (HLAI) published by the REIA/Adelaide Bank s latest report showed that Victoria s housing affordability improved slightly over the March quarter, as illustrated in Chart 1.10 below. The HLAI is the ratio of median family income to average loan repayments. An increasing value reflects improving affordability of housing loans. Housing affordability for Victoria increased to 30.8 points over the March 2017 quarter, up from 30.1 for the December 2016 quarter. The proportion of household income devoted to loan repayments declined by around 0.7 percentage points over the quarter to record 32.5% on average. This was due to a decrease in average loan amount from close to $395,000 for the December 2016 quarter to around $387,000 for the March 2017 quarter, against an increase in median weekly household income from $1,629 to $1,639 during the same period. Home Loan Affordability Indicator Victoria Index, March 2013-March 2017, Quarterly Chart 1.10 33 More Affordable 32 Less Affordable 31 30.8 30 29 28 Source: Adelaide Bank; REIA; Urbis 10 ECONOMIC OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

2. INDUSTRY OUTLOOK 2.1. HOUSING ACTIVITY According to the latest ABS data on building activity, the value of residential related construction work completed for Victoria for the December 2016 quarter recorded $6.63 billion in total, maintaining at the same level for the previous quarter but growing 4.1% on the corresponding quarter of the previous year. This included $2.63 billion for houses, $2.13 billion for units and apartments and $1.97 billion for renovations, as shown in Chart 2.1 below. Total value of houses completed rebounded over the December 2016 quarter, having grown by 1.9%, whereas the value of new units and apartments dipped by around 0.9% during the same period. Nevertheless, put in context total work done for multi-units remained at a high level. Meanwhile, the value of renovation work remained steady, although having adjusted by 1.2% over the quarter. Victoria Value of Housing Work Completed In 2013/14 Dollar Value, Ending Q4 2016, Quarterly Chart 2.1 3.0 Houses Units & Apartments Renovations 2.8 Value of Work Done (Quarter, $Bn) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 2.53 2.13 1.97 MBAV_QUARTERLY_UPDATE_Q12017 INDUSTRY OUTLOOK 11

2.2. DWELLING APPROVALS & STARTS Over the March quarter, approvals for both new detached dwellings and multi-units remained steady (Chart 2.2), although the latter have been declining on a monthly basis since the turn of the year (Chart 2.3). In seasonally adjusted terms, total number of new dwellings approved recorded approximately 16,836, around 125 dwellings more or 0.7% higher than those approved in the December 2016 quarter. Compared with the same period in 2016, total approvals declined marginally by 315 dwellings or -1.8%. Victoria New Dwelling Approvals - Quarterly Seasonally Adjusted, Quarter Ending March 2017 Chart 2.2 11,000 10,000 9,000 Houses Units & Apartments 8,836 8,000 7,000 8,027 6,000 5,000 4,000 3,000 Victoria New Dwelling Approvals - Monthly Seasonally Adjusted, Ending April 2017 Chart 2.3 5,000 Houses Units & Apartments 4,500 4,000 3,500 3,000 2,500 2,000 1,500 2,956 3,029 2,489 1,748 1,000 As Chart 2.3 shows, the approvals of new units and apartments continued to drop in April following a sharp downturn in March. A total of 1,748 units or apartments were approved, down by 741 dwellings on March 2017 and 1,103 on April 2016. The low level of approvals granted to larger apartment projects of four storeys or more (667 dwellings for April compared to close to 1,800 for January) caused total multi-unit approvals to decline further. Although the subdued approvals for multi-units since the beginning of the year partly reflect the evolving market conditions, the large development pipeline which remains at a record high level is likely to be the reason behind the recent downturn. Given the cyclical nature of multi-unit dwelling approvals, it is not unlikely that the following months might see some level of recovery in the sub-sector. 12 INDUSTRY OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

As Chart 2.4 further depicts, the downturn in the number of new houses starts ensued following the recent peak recorded mid-year 2016. The periodical adjustment in new approvals over the second half of 2016 is likely to have caused new houses starts to decline further during the March quarter and potentially into the June quarter. It is estimated that total new houses starts are likely to be around 8,500 dwellings for the March 2017 quarter and easing to around 8,400 dwellings for the June 2017 quarter. Victoria New Houses Approvals & Starts Forecasts Units & Apartments Approvals & Starts Ending March 2017 1, Quarterly, Seasonally Adjusted Chart 2.4 11,000 New Houses Approvals New Houses Starts Forecasts 10,000 New Hoses Approvals & Starts 9,000 8,000 7,000 6,000 8,836 8,400 1. Houses starts data available till December 2016. Compared to the relatively stable and healthy growth outlook in the detached house sector for the first half of 2017, the apartment market is likely to continue to show a mixed picture. As illustrated earlier in Chart 2.3, monthly approvals plummeted since early this year and continued on into March and beyond, exhibiting the nature of high volatility in this sector. As Chart 2.5 shows, following the sharp decline in new commencements since the March 2016 quarter on the back of weak approvals for the first quarter of 2016, new starts in units and apartments bottomed out during the September 2016 quarter, thanks to the increased approvals in the June and September 2016 quarters. Over the coming quarter or so, total apartments and units commencements are estimated at around 8,000 dwellings for the March 2017 quarter and forecast to decline to around 7,300 dwellings for the June quarter of 2017, given the recent downturn in approvals. Put in context, such levels of new starts are nonetheless considered high. Victoria New Units & Apartments Approvals & Starts Forecasts Ending March 2017 1, Quarterly, Seasonally Adjusted Chart 2.5 11,000 10,000 New Apartments & Units Approvals New Apartments & Units Starts Forecasts 9,000 8,000 7,000 8,027 7,300 6,000 5,000 1. Apartments & Units starts data available till December 2016. MBAV_QUARTERLY_UPDATE_Q12017 INDUSTRY OUTLOOK 13

2.3. HOUSING FINANCE Total housing finance commitments recorded around $33 billion nationally as at the end of March 2017 (Chart 2.6) in seasonally adjusted terms, edging down marginally by 0.7% compared to that for December 2016. Owner occupation finance across the country plateaued since early last year, albeit maintaining at a historically high level. Total loans made to owner occupiers recorded $20.1 billion as at the end of March 2017, remaining virtually unchanged from December 2016. Similarly, investment loans also remained stable at around the $13 billion mark since December 2016, recording $12.9 billion as at the end of March 2017. Housing Finance - Australia Value of Housing Finance, Seasonally Adjusted, Ending March 2017, Monthly Chart 2.6 40 Owner Occupation Finance Investor Finance Total 35 33.0 Value of Housing Finance ($Bn) 30 25 20 15 10 5 20.1 12.9 Victoria recorded a total housing finance for owner occupiers of around $5.8 billion as at the end of March 2017 (Chart 2.7) in original terms, following a seasonal downturn over January and February. The vast majority of loans remained to be for the purchase of existing dwellings ($4.9 billion). Housing Finance (Owner Occupation) - Victoria Total Value of Owner Occupation Housing Finance, Original, Ending March 2016, Monthly Chart 2.7 6.0 Purchase of New Dwellings 5.0 4.0 Purchase of Established Dwellings Construction of Dwellings 4.9 3.0 2.0 1.0 0.0 0.6 0.4 14 INDUSTRY OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

2.4. NON-RESIDENTIAL ACTIVITY Chart 2.8 below presents the value of non-residential work completed over the past five years. We note: Total work done for the past year ending December 2016 recorded $9.0 billion measured in constant 2013/14 dollar value terms, trending up for the first time since the December 2015 quarter. There was up to 1.9 years of work in the supply pipeline (including work approved, work yet to be done and work already under construction) as at the end of December 2016, down from around 2.2 years as at the end of September 2016. As some $2.6 billion of new work has been approved over the March 2017 quarter (3.7%+ on the December 2016 quarter), it is likely that the value of non-residential work will further pick up in the following months. Victoria Value of Non-Residential Work Completed Year Ending December 2016 1, Rolling Annual Chart 2.8 Value of Work Done (Annual, $Bn) 10.5 Value of Non-Residential Work Done 5 Year Average 10.0 9.5 9.0 9.0 8.9 8.5 8.0 7.5 1. Data available till December 2016. MBAV_QUARTERLY_UPDATE_Q12017 INDUSTRY OUTLOOK 15

2.5. ENGINEERING CONSTRUCTION Engineering construction activities in Victoria remained healthy over the March 2017 quarter, supported by the sustained investment in large scale infrastructure projects across the state, now piloted by the $11 billion Melbourne Metro Rail project. As depicted in Chart 2.9, total engineering construction work completed within the State continued to grow, achieving a total value of $11.5 billion over the past year to March 2017, representing a solid yearon-year growth of 6.8%. Going forward, engineering construction activity across the state is expected to remain at around the current level. The forecast value of work to be completed remains unchanged at around $11.7 billion for FY2016/17 compared with our previous forecast, representing an estimated growth of around 5.5% over the FY2015/16 level. Victoria Value of Engineering Construction Work Completed Year Ending March 2017 1, in Constant 2013/14 Prices, Rolling Annual Chart 2.9 15.0 Engineering Construction Non-Residential Units & Apartments Value of Work Done (Annual, $Bn) 13.0 11.0 9.0 7.0 5.0 9.0 11.5 8.7 3.0 1. Data on units, apartments and non-residential available till December 2016 16 INDUSTRY OUTLOOK MBAV_QUARTERLY_UPDATE_Q12017

DISCLAIMER This report is dated 15 June 2017 and incorporates information and events up to that date only and excludes any information arising, or event occurring, after that date which may affect the validity of Urbis Pty Ltd s (Urbis) opinion in this report. Urbis prepared this report on the instructions, and for the benefit only, of The Master Builders Association of Victoria (Instructing Party) for the purpose of Industry Outlook (Purpose) and not for any other purpose or use. To the extent permitted by applicable law, Urbis expressly disclaims all liability, whether direct or indirect, to the Instructing Party which relies or purports to rely on this report for any purpose other than the Purpose, and to any other person which relies or purports to rely on this report for any purpose whatsoever (including the Purpose). In preparing this report, Urbis was required to make judgements which may be affected by unforeseen future events, the likelihood and effects of which are not capable of precise assessment. All surveys, forecasts, projections and recommendations contained in or associated with this report are made in good faith and on the basis of information supplied to Urbis at the date of this report, and upon which Urbis relied. Achievement of the projections and budgets set out in this report will depend, among other things, on the actions of others over which Urbis has no control. In preparing this report, Urbis may rely on or refer to documents in a language other than English, which Urbis may arrange to be translated. Urbis is not responsible for the accuracy or completeness of such translations and disclaims any liability for any statement or opinion made in this report being inaccurate or incomplete arising from such translations. Whilst Urbis has made all reasonable inquiries it believes necessary in preparing this report, it is not responsible for determining the completeness or accuracy of information provided to it. Urbis (including its officers and personnel) is not liable for any errors or omissions, including in information provided by the Instructing Party or another person or upon which Urbis relies, provided that such errors or omissions are not made by Urbis recklessly or in bad faith. This report has been prepared with due care and diligence by Urbis and the statements and opinions given by Urbis in this report are given in good faith and in the reasonable belief that they are correct and not misleading, subject to the limitations above. MBAV_QUARTERLY_UPDATE_Q12017 DISCLAIMER 17

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