Residential Property Risks & Opportunities Report

Residential Property Risks & Opportunities Report AUSTRALIAN STATES & TERRITORIES Quarterly Issue: February 2018

CONTENTS EXECUTIVE SUMMARY 03 ABOUT THIS REPORT 04 QUARTERLY REPORT 05 ECONOMIC FUNDAMENTALS 06 KEY HOUSING MEASURES 12 HOUSING AFFORDABILITY 18 LENDING STANDARDS AND RESTRICTIONS 24 JOBS & EMPLOYMENT 29 POPULATION & DEMOGRAPHICS 34 ALTERNATIVE INVESTMENT OPTIONS 37 STATE & TERRITORY: KEY POINTS 39 OUR MISSION We are redefining risk management with our advanced research of the Australian property market. Using our advanced algorithm, RiskWise assess equity & cash flow risk, helping our clients make in- formed property decisions.

EXECUTIVE SUMMARY HOUSES RISK MAP WA Affordability Economic Fundamentals NT Affordability Low Population Growth QLD Net Interstate Migration Economic Fundamentals SA NSW Low Building Approvals Econ., Pop. Growth Economic Fundamentals TAS Affordability GSP Growth VIC Capital Growth ACT Affordabilty, Invest. Serviceability Clearance Rates Nothing of Significance Rental Return UNITS RISK MAP NT Rental Return WA Low Population Growth QLD Affordability Intra-State Migration SA Econ. Fundamentals, Area of Oversupply Unit Oversupply NSW Affodability Econ., Pop. Growth Employment Market, Areas of Oversupply. TAS Affordability Economic Growth VIC Population Growth Areas of Oversupply ACT Affordability, Areas of Oversupply Underemployment Nothing of Significance Page 3 of 50 Copyright 2018

ABOUT THIS REPORT Welcome to the February 2018 edition of the quarterly Residential Property Risks & Opportunities Report by RiskWise Property Review. Our objective is to provide you with a risk heat map of the residential property market and to provide a comprehensive review of the major risk factors. The report covers thirty risk factors, grouped into seven categories: economic fundamentals; key housing measures; housing affordability; lending standards and restrictions; jobs & employment; population & demographics; and alternative investment options. The report is structured using a top-down approach commencing at the State level, followed by a categorylevel analysis and down to the individual factor level. We have taken this approach in order to simplify the measurements for overall risk and major drivers, whilst still provide detailed information. This is an effective tool that enables you to ascertain the context for each factor (such as population growth) and how the risk factors impact the property market. The report is broken into two sections: 1. A category-based analysis; and 2. State-by-State analysis NSW VIC QLD SA WA TAS NT ACT Economic Fundamentals Housing Affordability Lending Restrictions Jobs & Employment Population & Demographics Alternative Investments Overall Rating (Houses) Overall Rating (Units) Low Low- Medium Medium Medium- High High Extreme Risk Rating Page 4 of 50 Copyright 2018

QUARTERLY UPDATE FEBRUARY 2017 The Top Risks - Housing affordability, lending restrictions and units oversupply In 2017, the major risks associated with residential property investment increased significantly, particularly in the second half of the year. These risks are projected to further grow over the next few years due to: inconsistent and often poor economic growth; unaffordable dwellings in NSW and VIC; units oversupply; lending restrictions; and the uncertainty surrounding potential changes to negative gearing (should Labor win the election). With low interest rates and a lack of alternative investments, residential property was an attractive investment option for 'mum and dad investors throughout the beginning of 2017. However, increasing unaffordability and poor investment serviceability, particularly in NSW and VIC, have slowed property investment. Poor wage growth, a relatively high level of effective unemployment and low GDP growth have forced the RBA to keep the cash rate at a record low. This is unlikely to change in 2018 due to poor wage growth experienced across Australia, as well as the low consumer price index which is just below the RBA target of 2-3%. The economic indicators have had the greatest impact on the property market in recent years. In a low growth environment, the states generally produced average or below-average economic output, which has been inconsistent across the states. Economic growth, government spending and business investment have a strong correlation with healthy employment markets, strong population growth, and particularly external and internal migration, and vice versa. Affordability was a major driver in the property market, particularly in Sydney and Melbourne that are considered very unaffordable from a price-to-income ratio perspective. These capital cities also deliver low rental yields and therefore a low investor serviceability ratio. Therefore, unsurprisingly, lending restrictions have had a major impact on the housing markets of Sydney and Melbourne in 2017. APRA has extended its requirements for banks in ways designed to improve the resilience of the sector to a potential downturn or substantial increase in interest rates. Specifically, the banks were required to maintain investor mortgage growth to less than 10% per year, and to reduce the proportion of new mortgage lending with an interest only option to below 30%. These lending restrictions have cooled the housing market in Sydney and to a lesser extent in Melbourne. It is highly likely that lending restrictions will remain a major factor in the next couple of years. Housing supply has been another contributing factor to the property market. Undersupply of houses, particularly in the inner and middle rings of Sydney and Melbourne, has significantly driven prices up, further increasing their unaffordability. On the other hand, areas with a large number of units in the pipeline and house building approvals suffered from poor and often negative capital growth. This is particularly the case in WA and parts of QLD and VIC. Page 5 of 50 Copyright 2018

Oversupply of units has led, in many cases, to voluntarily lending restrictions by the major banks. These lending restrictions are in addition to broader lending restrictions that have been set by APRA to significantly reduce investor activity and to mitigate the financial risks associated with residential property lending. These restrictions have proven to be very effective, triggering the end of the property boom in Sydney and Melbourne. Legislation and regulation carry high risk in the next couple of years. The potential win of the Labor party and dramatic changes to negative gearing and capital gains tax for residential properties, are likely to change the entire landscape of residential properties in Australia. On the back of unprecedented property price growth, New South Wales displayed strong economic fundamentals. With high economic growth, substantial state government investment in key infrastructural projects, and its ongoing attractiveness for private investment, NSW is in a strong position. Its key weakness is housing affordability with a very high dwelling price to income ratio. Therefore, lending restrictions have the greatest impact in NSW. Victoria attracted the highest population growth across all states and territories, largely due to significant interstate migration. However, due to rising property prices and low rental returns, investment serviceability has become increasingly difficult. Overall, the state performed well for houses, and is likely to deliver strong returns in the western suburbs. However, lending restrictions and reduced property investor demand brings high risk for properties not suited to families. With the Queensland Government taking significant steps to grow its economy, the local property market is likely to prosper. As a result, QLD continues to attract a high number of interstate migrants in search of affordable housing and employment. South Australia performed below average on each of our economic indicators. The state is facing dwelling oversupply with just under three times the stock required to meet population growth. However, SA delivered strong housing affordability relative to NSW and VIC. The worst performer was Western Australia with its struggling economy and unattractive employment market. High levels of oversupply and low migration have impacted capital growth and rental returns, particularly in central Perth. Tasmania leads the country in investment serviceability with its high median rental returns and low average dwelling price. The state delivered consistent capital growth as well as strong rental returns for both houses and units. The Northern Territory experienced poor population growth resulting in negative dwellings growth and a very soft property market. The state performed strongly across each of the economic indicators and also leads the country with its exceptionally low dwelling price to income ratio. The Australian Capital Territory also enjoyed a solid economic growth and experienced the second largest population growth rate in the country, delivering solid capital growth and a healthy property market. Thank you for your interest in this quarterly update. Please register on our website if you wish to subscribe to the next release. Doron Peleg, CEO Page 6 of 50 Copyright 2018

1 ECONOMIC FUNDAMENTALS Economic fundamentals are a group of major measures that are used to assess the overall growth of the economy and to provide state-by-state analysis in order to assess the projected likelihood of sustainable capital growth. Sustained economic growth is strongly correlated solid capital growth across the property market, particularly in a low interest rate (i.e. low economic growth) environment. Economic growth is also strongly correlated to population growth, and vice versa. NSW VIC QLD SA WA TAS NT ACT Risk Rating I. CASH RATE II. III. IV. ECONOMIC GROWTH PRIVATE NEW CAPITAL EXPENDITURE GOVERNMENT EXPENDITURE V. CONSUMER SENTIMENT

CASH RATE The official cash rate (OCR) is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the central bank charges on overnight loans to commercial banks. This allows the Reserve Bank of Australia to adjust the interest rates in each of the nation's economies. A low cash rate means that the interest rate for residential properties is low. Therefore, decisions made by the RBA regarding changes to the cash rate not only has an impact to the immediate cash rate but also on market expectations regarding dwelling prices. 8% Current Projected Impact: Very Positive 6% 4% 2% 0% Nov 07 Oct 08 Sep 09 Aug 10 Aug 11 Jul 12 Jun 13 May 14 Apr 15 Mar 16 Feb 17 Jan 18 CURRENT STATE - The Cash Rate has remained at a record low at 1.5 percent for the fifteenth consecutive month. - The longest run of the same Cash Rate was for 19 months back in 1996. - A key driver of the low cash rate is the poor wage growth experienced across Australia, as well as the low consumer price index which is just below the RBA target of 2-3%. While inflation has increased slowly from the end of 2016 (only 1.2%), currently it is only 1.9% which is below the target. - The key considerations for interest rate changes are typically detailed in speeches made by the Governor of the Reserve Bank. - The latest speech by Reserve Bank governor Philip Lowe issued that low wage growth is at the heart of many of the problems facing the Australian economy - including the boom in house prices and record debt levels. - It is very unlikely that the RBA will decrease the cash rate as: - the impact of any additional cash rate reduction on economic growth would be very low. - previous reductions have fuelled the property market and led to lending restrictions. - An increase is unlikely in 2018. This would test residential mortgage holders with household savings at a five year low. This will be particular true for NSW, where the largest percentage of weekly income is dedicated to servicing mortgage debt. - However, from 2019, it is likely that there will be cash rate increases and therefore interest rate increases. Investor serviceability will therefore be impacted. This will impact capital growth and cashflow. Source: RBA, RiskWise Property Page 8 of 50 Copyright 2018

ECONOMIC GROWTH As a result of gross state product (GSP) only being calculated by ABS on an annual basis, RiskWise created a quarterly measurement of economic growth. Our measurement is an equivalent to GSP. Our method is as follows: Gross national product (the market value of all products and services) plus the difference between exports and imports which are then seasonally adjusted. The growth rate is the percentage change from the same quarter in the previous year. NSW, VIC, QLD, SA WA, TAS, NT, ACT 25% 12.5% NSW QLD VIC SA 25% 12.5% WA NT TAS ACT 0% 0% -12.5% -12.5% -25% Sep 08 Dec 10 Mar 13 Jun 15 Sep 17-25% Sep 08 Dec 10 Mar 13 Jun 15 Sep 17 NSW Good 3.88% 3.00% VIC Strong 4.42% 3.00% QLD Strong 5.20% 3.00% SA Good 3.70% 3.00% WA Very Poor 0.66% 3.00% TAS Poor 2.39% 3.00% NT Very Strong 8.21% 3.00% ACT Average 2.97% 3.00% * Based on RBA growth predictions. CURRENT STATE - NSW and VIC delivered a healthy growth which is above the benchmark. This has a clear connection with population growth, a healthy employment market and the strength of the property market. - QLD and particularly WA suffered a significant decline of their growth rate. In WA, this is closely connected with the high unemployment and low population growth. - Growth across each state experienced relative stability through the 2008 Global Financial Crisis. - NSW & VIC are likely to deliver ongoing growth which will be driven by population growth, and a strong economy. - QLD will continue its transition from a largely mining-based economy which will be driven by government focus to deliver growth improvements and strong internal migration. - WA is likely to experience ongoing below average growth due to its post-mining era economic readjustment. Source: ABS, RiskWise Property Page 9 of 50 Copyright 2018

PRIVATE NEW CAPITAL EXPENDITURE Private New Capital Expenditures is a measure of the total investment by private businesses across each state and territory. This provides a good indication of the business attractiveness, opportunities and the projected demand for labour. The measurement is strongly correlated to economic growth which, in turn, impacts the strength of the property market. NSW, VIC, QLD, SA (millions) WA, TAS, NT, ACT (millions) $20K NSW QLD VIC SA $20K WA NT TAS ACT $15K $15K $10K $10K $5K $5K $0K Mar 07 Sep 10 Mar 14 Sep 17 $0K Mar 07 Sep 10 Mar 14 Sep 17 NSW Good $7,294 $6,306 VIC Good $5,491 $4,983 QLD Low $5,969 $7,816 SA Average $1,690 $1,374 WA Poor $7,062 $10,629 TAS Average $292 $254 NT Good $1,521 $1,126 ACT Average $220 $204 * Based on 10 year average. CURRENT STATE - WA and QLD experienced the greatest losses of private capital expenditure as a result of the decline of the mining industry. - NSW and VIC have been a recipient of a consistent flow of private investment over the past ten years. This has been a key contributor to their stable job environment. - ACT and SA also received consistent levels of private capital expenditure. - Private investment is set to improve over the medium to long term in correlation with gradual improvement to the national labour market and wage growth. - QLD looks to attract increased private investment as a result of the state government s effort to strengthen its economy following the end of the successful mining years. The Advance Queensland Initiative is an example of this. - WA is likely to experience slow improvement to private expenditure as its economy continues to adjust to the postmining era. Source: ABS, RiskWise Property Page 10 of 50 Copyright 2018

GOVERNMENT EXPENDITURE Government spending or expenditure includes all government consumption, investment, and transfer payments in each state and territory. This measurement has a similar sentiment to private new capital expenditure and provides an indication of employment market changes, wage growth expectations and spending initiatives that may impact the property market. NSW, VIC, QLD, SA (millions) WA, TAS, NT, ACT (millions) $40K $30K NSW QLD VIC SA $40K $30K WA NT TAS ACT $20K $20K $10K $10K $0K Dec 06 Sep 08 Jun 10 Mar 12 Dec 13 Sep 15 Sep 17 $0K Dec 06 Sep 08 Jun 10 Mar 12 Dec 13 Sep 15 Sep 17 NSW Good $30,735 $25,987 VIC Good $23,687 $19,570 QLD Good $20,308 $18,593 SA Average $7,058 $6,247 WA Average $11,637 $10,007 TAS Average $2,163 $2,014 NT Average $2,215 $2,055 ACT Good $6,032 $5,488 * Based on 10 year average. CURRENT STATE - Across all states and territories, spending by each government is above the benchmark. - NSW is currently undertaking a large number of major projects which is illustrated by their high capital expenditure. This investment is likely to be engine for economic growth over the medium to long-term. - The QLD Government also has a strong focus on infrastructure and job growth. This is illustrated by the initiatives like Advance Queensland which seeks to bring the best of Australian business to the sunshine state. - Overall, government expenditure across all states and territories is likely to continue to increase in the short to medium term. This will be a result of state and territory governments seeking to drive stronger economic growth in their respective areas. - These government investments are likely to stimulate the employment market, create ongoing wage growth and generally contribute to economic growth. Source: ABS, RiskWise Property Page 11 of 50 Copyright 2018

CONSUMER SENTIMENT Consumer sentiment is an economic indicator of the overall health of the economy as determined by consumer opinion. Consumer sentiment takes into account an individual's feelings toward his or her own current financial health, the health of the economy in the short term and the prospects for longer term economic growth. Consumer sentiment has a direct impact on consumer spending which is typically around 70 percent of GDP. 115 Current Projected Health: Inclining 110 105 100 95 90 85 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Dec 17 Dec 17 Jan 18 CURRENT STATE - Currently consumer sentiment is moderate. This is driven by poor wage growth, high effective unemployment, high household expenses and a greater portion of household incoming going to rent and mortgage repayments. - Consumer sentiment has shown severe volatility over the past 15 years. Unsurprisingly, the greatest shift in consumer confidence was during the Global Financial Crisis in 2008 and 2009. - In recent years, consumer sentiment has been volatile as a result of mixed economic results across the country. - It is projected that there will be steady improvement to consumer sentiment over the short to medium-term as has already been witnessed since September 2017. Source: Westpac, RiskWise Page 12 of 50 Copyright 2018

2 KEY HOUSING MEASURES This category assesses the key supply and demand factors belonging to the housing market. This section provides a small snapshot of what is happening in the housing market, particularly around supply and demand. It should be noted that the RiskWise algorithm used in the creation of reports contains dozens of housing variables. Overall, oversupply of dwellings has a significant impact on capital growth and has been flagged as a high risk area for the property market by the lenders and has a direct impact on specific lending restrictions. The risk of oversupply has been realised particularly around the CBD of Brisbane, Perth, Adelaide and Melbourne. Property demand is indicated by both price growth rates and auction clearance rates. NSW VIC QLD SA WA TAS NT ACT Risk Rating Houses Units I. PRICE GROWTH RATES II. III. IV. HOUSE BUILDING APPROVALS UNIT BUILDING APPROVALS DWELLING SUPPLY TO POPULATION GROWTH V. AUCTION CLEARANCE RATES

PRICE GROWTH RATES Price growth rates give a strong indication of historical housing demand in a particular area and help to assess changes in the property market. Demand could be informed by a variety of factors including migration, jobs, affordability or lifestyle factors. For example, dwellings in affordable areas with good access to the city typically deliver strong growth rates, particularly in unaffordable markets such as in NSW. Houses 3 Months, 12 Months, 3 Years Units 3 Months, 12 Months, 3 Years 50% 50% 35% 35% 20% 5% -10% 1.9% 3.9% 0.6% 2.3% -0.7% 1.8% 0% 2.2% 20% 5% -10% 0.8% 2.2% -0.5% 1.1% -2% 2.4% -0.3% 0.7% -25% NSW VIC QLD SA WA TAS NT ACT -25% NSW VIC QLD SA WA TAS NT ACT 50% 50% 35% 35% 20% 5% 11% 16% 4% 4% 10% 10% 20% 5% 7% 7% 0% 8% 5% -10% -3% -2% -10% -1% -7% -5% -25% NSW VIC QLD SA WA TAS NT ACT -25% NSW VIC QLD SA WA TAS NT ACT 50% 35% 20% 5% 46% 43% 13% 10% 16% 24% 50% 35% 20% 5% 33% 18% 3% 4% 15% 8% -10% -25% -8% -8% NSW VIC QLD SA WA TAS NT ACT -10% -25% -14% -12% NSW VIC QLD SA WA TAS NT ACT CURRENT STATE - NSW and VIC have been the top price growth performers. - WA and NT are the weakest markets having delivered negative growth for both houses and units. - Houses in QLD delivered reasonable growth in both over the past 3 years. However, units carry high risk and experience negative price growth. - Houses have consistently outperformed unit price growth across Australia. - Price growth rates are likely to experience gradual decline over the medium to longterm. - This will be particularly relevant for units which are likely to show significantly slower growth rates than houses, particularly in the inner-city suburbs where oversupply is high. - The projections are greatly varied among the states and capital territories. For state by state analysis, refer to the end section. Source: CoreLogic, RiskWise Page 14 of 50 Copyright 2018

HOUSE BUILDING APPROVALS The number of house building approvals helps to create a forward-looking view around supply & demand. In many cases, the supply of houses in a particular area may be greater than what the market can absorb, often leading to poor capital gains and rental losses. An example of this includes the oversupply of house in mining towns, inflicting significant losses on investors. Increasing housing approvals can also be an indication of strong economic conditions in a particular area meaning that high supply should not be analysed in isolation of other statistics. NSW, VIC, QLD, SA (Monthly Data) WA, TAS, NT, ACT (Monthly Data) 6,000 4,500 NSW QLD VIC SA 6,000 4,500 WA NT TAS ACT 3,000 3,000 1,500 1,500 0 Feb 07 Apr 09 Jun 11 Aug 13 Oct 15 Dec 17 NSW VIC QLD SA 0 Feb 07 Apr 09 Jun 11 Aug 13 Oct 15 Dec 17 WA TAS NT ACT % of Existing Supply (past 24 months): 2.1% 3.0% 3.1% 2.6% % of Existing Supply (past 24 months): 2.8% 1.9% 2.0% 1.9% NSW Good 2,069 1,734 VIC Average 2,446 2,727 QLD Average 1,742 1,895 SA Average 527 679 WA Average 1,053 1,496 TAS Good 176 176 NT Good 26 52 ACT Good 75 123 * Based on 10 year average. CURRENT STATE - VIC has consistently delivered the largest additional supply of houses over the past 10 years. This can be attributed to ongoing confidence in the Victorian economy. - It should be noted that overall, VIC and NSW have demonstrated proven ability to absorb a large number of new houses and still delivered solid capital growth. - Unsurprisingly, building approvals in WA have declined amid low confidence in the state economy. - It is likely that house building approvals will continue to increase in NSW, VIC & QLD over the short to medium-term. This will be driven by continued economic and population growth. - WA is predicted to continue its decline due to very poor housing demand as a consequence of ongoing economic decline. This market is unlikely to show any signs of improvement over the short to medium-term. Source: ABS, RiskWise Property Page 15 of 50 Copyright 2018

UNIT BUILDING APPROVALS The number of units in the pipeline helps to create a forward-looking view around supply by projecting the number of new units against existing supply. In many cases, the supply of units in a particular area may be greater than what the market can absorb, often leading to poor capital gains and rental losses. Increasing unit supply can also be an indication of strong economic conditions in a particular area meaning that high supply should not be analysed in isolation of other statistics. NSW, VIC, QLD, SA (Monthly Data) WA, TAS, NT, ACT (Monthly Data) 6,000 4,500 NSW QLD VIC SA 6,000 4,500 WA NT TAS ACT 3,000 3,000 1,500 1,500 0 Feb 07 Apr 09 Jun 11 Aug 13 Oct 15 Dec 17 NSW VIC QLD SA 0 Feb 07 Apr 09 Jun 11 Aug 13 Oct 15 Dec 17 WA TAS NT ACT % of Existing Supply (past 24 months): 10.9% 14.6% 13.6% 9.5% % of Existing Supply (past 24 months): 8.2% 3.3% 9.6% 8.6% NSW Poor 2,654 2,258 VIC Very Poor 2,821 2,009 QLD Average 1,267 1,268 SA Average 225 252 WA Average 436 473 TAS Average 62 44 NT Good 1 63 ACT Good 75 240 * Based on 10 year average. CURRENT STATE - A significant number of new developments have led to very high supply of units in NSW, VIC, QLD and WA. In many areas inside these states, there has been major oversupply, inflicting significant losses on investors. - High supply in our major cities, particularly in the CBDs, has often impacted capital growth and rental returns, leading to the instatement of lending restrictions. - The strength of the units market must be assess on the suburb by suburb basis. - High supply of units in NSW, VIC, QLD and WA are likely to slow the market in many areas. Examples include the ongoing losses as a result of high supply in South Brisbane, Docklands and Perth. This slowdown is likely remain at least in the medium term. - Investment in units is typically higher risk. The following points should be noted: - Higher demand for houses. - High units supply - Increased lending restrictions - Off-the-Plan units carry additional risk. Source: CoreLogic, RiskWise Property Page 16 of 50 Copyright

RiskWise Property Review DWELLING SUPPLY TO POPULATION GROWTH The dwelling supply to population growth ratio is a useful measure to assess supply and demand. The metric provides an indication of the number of dwellings required to service population growth and therefore provides an indication as to what changes in capital growth property investors can expect. For example, a high ratio indicates that there is an increased likelihood of dwelling oversupply. NSW, VIC, QLD, SA WA, TAS, NT, ACT 700% 560% NSW QLD VIC SA 700% 560% WA NT TAS ACT 420% 420% 280% 280% 140% 140% 0% Mar 07 Sep 09 Mar 12 Sep 14 Sep 17 0% Mar 07 Sep 09 Mar 12 Sep 14 Sep 17 NSW B. Average 198% 100% VIC Average 121% 100% QLD Average 129% 100% SA Poor 278% 100% WA Poor 276% 100% TAS B. Average 180% 100% NT Good 47% 100% ACT Poor 269% 100% * Based on 100% being the equilibrium point between supply and demand. CURRENT STATE - NSW, WA and SA and ACT have delivered an increase in dwelling supply over the past 12 months. In these area, supply fluctuates between two and three times population growth. These supply increases have often delivered capital growth losses, particularly for off-the-plan properties (the dwelling supply is nearly three times population growth). - The current number of building approvals is significantly higher than the population growth rate. - In VIC and QLD, the current number of building approvals is moderately above average. - NSW, WA, SA and ACT are projected to show little changes to their dwelling supply to population growth ratio. This is a result of the consistent dwelling supply levels and population growth rates. Source: ABS, RiskWise Property Page 17 of 50 Copyright 2018

AUCTION CLEARANCE RATES The Auction Clearance Rate (ACR) is the percentage of properties on the market that have been sold. The rate is typically measured weekly and give the public, property professionals and decision makers a good indication as to the current market conditions. A high clearance rates would typically indicate high buyer confidence and a strong residential property market. Therefore low clearance rate would typically indicate a strong buyers market and a high clearance rate would mean a strong sellers market. 100% NSW, VIC, QLD, SA 100% WA, TAS, NT, ACT 75% 75% 50% 50% 25% Sydney Melbourne Brisbane Adelaide 0% Sep 08 Mar 10 Sep 11 Mar 13 Sep 14 Mar 16 Dec 17 25% Perth Tasmania Canberra 0% Sep 08 Mar 10 Sep 11 Mar 13 Sep 14 Mar 16 Dec 17 NSW Average 59% 60% VIC Good 71% 60% QLD Good 47% 40% SA Good 64% 55% WA Good 44% 36% TAS Good 66% 37% NT - - - - ACT Good 68% 59% * NSW & VIC are set at 60% given their status as a traditional markets. The rest are 10 year average. CURRENT STATE - Over the past three years, all capital cities have performed close to their benchmark. - Auction clearance rates in both Sydney and Melbourne have shown a significant decline from the second half of 2017 due to the following factors: - as a result of lending restriction on investors - the cooling property market and; - high supply of units. - The auction clearance rate in Perth declined 3% over the past twelve months, illustrating the ongoing economic problems facing the state. - Auction clearance rates are likely to slow and the Australian property market cools. This will be driven by increased regulations, high supply, and mandatory and voluntary lending restrictions. Source: CoreLogic, RiskWise Property Page 18 of 50 Copyright 2018

3 HOUSING AFFORDABILITY The measures in the housing affordability category assess different aspects in relation to housing affordability, the price of dwelling against household income and a variety of serviceability measures. These are: dwelling price to income ratio; discounted variable interest rate; investor serviceability ratio; median rental yields; and securitised mortgage arrears rates. The less affordable dwellings are, the greater the likelihood for slow / poor capital growth, and vice versa. Affordability measures significantly differ among the states and territories. NSW VIC QLD SA WA TAS NT ACT Risk Rating I. DWELLING PRICE TO INCOME RATIO II. III. IV. DISCOUNTED VARIABLE INTEREST RATES INVESTOR SERVICEABILITY RATIO MEDIAN RENTAL YIELDS V. MORTGAGE DELINQUENCY RATE

DWELLING PRICE TO INCOME RATIO Dwelling Price to Income Ratio is a measure that illustrates the affordability of a particular property market. This ratio is measured by comparing the mean household income to the median price of dwellings in a particular area. For example, a high ratio indicates an unaffordable property market relative to the average wage in that area (such as NSW & VIC in the graph below). NSW, VIC, QLD, SA WA, TAS, NT, ACT 8 7 8 7 WA NT TAS ACT 5 5 4 NSW VIC QLD SA 2 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 4 2 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 NSW Poor 7.47 5 VIC Poor 7.22 5 QLD Average 5.12 5 SA Average 5.30 5 WA Average 4.61 5 TAS Average 5.33 5 NT Strong 3.03 5 ACT Average 5.29 5 * Our research suggests that a benchmark of 5 is an affordable ratio. CURRENT STATE - The property market in NSW has been very unaffordable compared to other states and territories. The average income relatively to the median dwelling price is very low. - While VIC has also been unaffordable for those on the average income, there are many suburbs in the Greater Melbourne area offering affordable investment opportunities. - QLD, WA, SA, TAS & NT are affordable relative to the NSW & VIC markets. As a result, QLD, in particular, has become increasingly popular among investors and home-buyers. - With slow wage growth and no significant dwelling price correction predicted over the short to medium-term, unaffordability is likely to remain consistent in NSW & VIC. - Affordable property markets such as in QLD are likely to become increasingly more expensive to buy into as demand increases. - The poor jobs and property market in WA is unlikely to significantly improve given its inability to strong economic growth following the high wage-growth period driven by the mining boom. Source: ABS, RiskWise Property Page 20 of 50 Copyright 2018

DISCOUNTED VARIABLE INTEREST RATES A discounted variable interest rate loan is a loan in which the interest rate charged on the outstanding balance is discounted (the actual interest rate) and varies as market interest rates change. As a result, your payments will vary as well (as long as your payments are blended with principal and interest). Different interest rates typically apply to owner-occupiers and investors, particularly if there are lending restrictions. Discounted Variable Interest Rates (By Owner-Occupiers and Investors) 9 Owner-Occupiers Investors 7 5 2 0 Jan 07 Mar 09 May 11 Jul 13 Sep 15 Dec 17 Note: Data for investors begins in August 2015. CURRENT STATE - Overall, the discounted variable interest rate is very low in historical terms. - Currently, there is a significant gap between the discounted variable interest rates (DVIR) offered to owner-occupiers and investors. This gap of 0.6 percent is reflective of the increased lending restrictions on investors. - This gap is 0.35 percent greater than at the same period last year and 24 months ago. - The DVIR has shown steady decline onwards from 2011, which comes after the steep drop in 2008 following the Global Financial Crisis. PROJECTED - It is likely that RBA s cash rate will remain unchanged during 2018. - It is possible that lending restrictions for investors in NSW and VIC may be reduced if the high growth rates in these markets continues to decrease (from their previous record levels). - Any reduction of DVIR to investors is likely to be only moderately moderately to ensure regulatory compliance. - There is a high likelihood that during 2019 with continued improvements to the economy, the cash rate will increase. This will have a downstream impact on the DVIR for both investors and owneroccupiers. Source: ABS, RiskWise Property Page 21 of 50 Copyright 2018

INVESTMENT SERVICEABILITY RATIO The Investment Serviceability Ratio (ISR) is the ratio between the gross rental return and the amount that is required to service a discounted variable loan, based on a 80 per cent loan-to-value ratio (LVR). The ratio details the profitability, and therefore demand, of residential properties among investors. I.e. the higher the ratio, the more serviceable a loan becomes. 160% NSW, VIC, QLD, SA 160% WA, TAS, NT, ACT 130% 130% 100% 100% 70% NSW VIC QLD SA 40% Jul 07 Dec 09 May 12 Oct 14 Nov 17 70% WA TAS NT ACT 40% Jul 07 Dec 09 May 12 Oct 14 Nov 17 NSW B. Average 105% 120% VIC Average 114% 120% QLD Strong 139% 120% SA Strong 134% 120% WA Average 122% 120% TAS V. Strong 154% 120% NT Strong 140% 120% ACT Strong 140% 120% * In a low interest-rate environment the benchmark is 120% to take into consideration potential interest rate rises. CURRENT STATE - In NSW & VIC, the combination of low rental returns, high interest rates, and new lending restrictions have led to lowest serviceability ratios across Australia. This has had a significant impact on investor demand, resulting in low/moderate capital growth in Sydney and Melbourne. - WA also performed poorly due to its relatively low rental returns across the state. - TAS delivered an exceptional ratio that should be viewed very favourably among investors. - It is likely that interest rates for investors will be slightly improved in 2018 once lending restrictions are slightly lifted. - It is projected that rental returns will remain largely unchanged, over the short to medium-term for all states and territories. - These ratios are likely to be significantly impacted only by significant economic and regulatory changes (such as through the anticipation of, or actual change, of negative gearing policy). - The high likelihood of cash rate changes in 2019 will have a strong impact on investment serviceability. Source: ABS, CoreLogic, RiskWise Page 22 of 50 Copyright 2018

MEDIAN RENTAL RETURN Rental return is the rental income as a percentage of the property s value. In this instance, it is calculated as a gross percentage, before expenses are deducted. Median rental returns across a particular area give a broad indication of the rental potential in a particular market. For example, a high rental return would indicate a property market in high demand. NSW, VIC, QLD, SA WA, TAS, NT, ACT 8% 6% NSW QLD VIC SA 8% 6% WA NT TAS ACT 4% 4% 2% 2% 0% Houses Units 0% Houses Units Houses Units Benchmark* Proj. NSW 3.2% 4.0% 4.5% VIC 3.3% 4.4% 4.5% QLD 4.6% 5.2% 4.5% SA 4.6% 5.1% 4.5% Houses Units Benchmark* Proj. WA 4.1% 4.5% 4.5% TAS 5.5% 5.9% 4.5% NT 4.8% 5.3% 4.5% ACT 4.4% 5.4% 4.5% * Based on research conducted by RiskWise Property Review. CURRENT STATE - NSW and VIC have consistently underperformed the benchmark, particularly for houses. This is largely due to the significant price growth these property markets have experienced over the past five years and only minor changes to weekly rent. - QLD and SA both delivered good rental return for both houses and units. South- East QLD, in particular has become an attractive destination for property investors. - WA has unsurprisingly underperformed in the units market due to significant oversupply, low demand and a weakened economy. High vacancy rate have led to increased costs in some areas such as in Brisbane CBD. - Median rental returns are likely to remain low particulate for houses houses (but also for units) in NSW, VIC and WA in the short to medium-term. - Rental returns in QLD, SA, and ACT are likely to remain strong as a result of low housing and high demand. These areas should be a target for those investors seeking affordability and high rental returns in the house rental market. However, gradual price increases particularly in South-East QLD are likely to result in declining rental return in the short to medium-term across some suburbs. - It should be noted, that units, and particularly in the inner-city carry higher risk, particularly in Brisbane CBD. Source: CoreLogic, RiskWise Property Page 23 of 50 Copyright 2018

MORTGAGE DELINQUENCY RATE The Securitised Mortgage Arrears Rate is a measure used by the Reserve Bank of Australia to show the rate borrowers fail to remain current on their loans. This measure is used by lenders as a measure of household financial distress and of potential losses to lenders. A high delinquency rate is an indication of unfavourable property market condition, such as in WA. This has been primarily driven by the end of the strong economic conditions created by the mining boom. State Health Proj. NSW Strong VIC Strong QLD B. Average SA B. Average WA Poor TAS Average NT - - ACT - - CURRENT STATE - It is not surprising that WA led the mortgage arrears rates throughout 2015-17. With poor wage growth, high unemployment and rapidly falling dwelling prices, many investors and homebuyers have been forced to default. - NSW has been an unsurprisingly strong performer in recent years. Despite record levels of property lending, unprecedented levels of property value growth and a healthy employment market have resulted in the lowest mortgage delinquencies across Australia. - The relative ease of servicing loans in TAS and VIC has also led to low mortgage arrears. - According to a Digital Finance Analytics report, mortgage arrear rates are likely to rise across Australia. The report showed that more than 910k households are now under stress to meet mortgage repayments (compared to 905k the previous month). - More than 21,000 households are currently under extreme stress meaning that their current income does not meet repayment fees. - With an increased number of mortgages in arrears, combined with increased awareness of property risk by lenders, it is likely to lead to conservative lending standards. However, the volume of the mortgage delinquencies and forced sales is unlikely to have a major impact on supply. Source: RBA, RiskWise Property Page 24 of 50 Copyright 2018

4 LENDING STANDARDS & RESTRICTIONS Lending Standards & Restrictions are: 1. Measures in relation to residential mortgage lending that are set by APRA (Australian s banking regulator) or voluntarily by the lenders to mitigate the financial risks in the Australian property market. These include, among others, black lists of areas with potential oversupply of dwellings, smaller proportion of interest-only loans and a limited growth rate of lending for property investors. 2. Legislation, regulation and tax regimes, that dictate what property buyers are able to do. These encourage or discourage buyer s activity, and currently have a major impact on investor activity in the form of negative gearing and reduced capital gain tax for investment properties. APRA has extended its requirements for banks in ways designed to improve the resilience of the sector to a potential downturn or substantial increase in interest rates. Subsequently, the banks were required to maintain investor mortgage growth to less than 10% per year, and to reduce the proportion of new mortgage lending with an interest only option to below 30%. NSW VIC QLD SA WA TAS NT ACT Risk Rating I. LEGISLATION, REGULATIONS & TAX REGIMES II. III. IV. VOLUNTARY LENDING RESTRICTIONS LENDING VOLUME INTEREST-ONLY HOUSING LOANS V. INVESTOR AND HOME-BUYER ACTIVITY

LEGISLATION, REGULATIONS & TAX REGIMES Legislation, regulations and tax regimes dictate exactly what property buyers are able to do. These legal frameworks determine things like who can invest, what amount of funds can be borrowed and how an investment impacts your tax position. For example, legislation may restrict foreign buyers from purchasing a particular property type. As these laws and regulations are constantly changing, property buyers should be aware of all the challenges and benefits. CURRENT STATE - Foreign buyers are generally required to apply for approval before purchasing residential properties in Australia. - Government policy indicates that foreign investment should be channeled into new dwellings instead of purchasing existing ones. - Favourable policies around negative gearing have continued to support property investors across Australia. - Should the Labour Party form a government at the next Federal Election, investors should expect changes to negative gearing and the capital gains tax discount. - The current regulations are not projected to be changed in the short term and they are projected to remain tight. Current Projected Health Favourable VOLUNTARY LENDING RESTRICTIONS Voluntary Lending Restrictions are determined by each lender and go beyond regulatory requirements. These restrictions can be applied to both investors and owner-occupiers and are often used by banks to respond to market changes. One of its common forms is to have a significantly higher interest rate for investors. CURRENT STATE - With greater awareness of the risks associated with residential properties, the major lenders have taken additional steps to further restrict the market. E.g. CBA recently armed its mortgage brokers with a postcode lookup tool which will require borrowers to have a higher loan-to-value ratio. - ANZ recently tightened lending rules for units in the inner-city Brisbane and Melbourne markets. - The major lenders have applied significantly higher interest rates on investors. The discounted variable interest rate for investors is current 0.6% higher than for owner-occupiers. - Lending restrictions targeting investors are likely to tighten across inner-city suburbs as the risk of unit oversupply is fully realised. - It should be of no surprise for the major lenders to increase voluntary restrictions on specific residential property loans or areas. - In a case of poor growth in the value and volume of new loans, it is possible that voluntary lending restrictions set by some of the lenders will be somewhat lifted. Current Projected Health Average Source: ATO, Westpac, RiskWise Page 26 of 50 Copyright 2018

LENDING VOLUME Lending volume is the number of new loan commitments signed within a set period. The ABS collects the data on a monthly basis which can be tracked to see the number of new loans approved within any given month. This data is a useful measure to obtain an insight into factors like consumer confidence and market strength. Lending Volume (Percentage Change) Lending Volume (Percentage Change) 35% 24% NSW QLD VIC SA 35% 24% WA NT TAS ACT 13% 13% 3% 3% -8% -8% -19% -19% -30% May-07 Nov-10 May-14 Nov-17-30% May-07 Nov-10 May-14 Nov-17 NSW Good 17,393 14,867 VIC Good 16,675 13,337 QLD Average 10,895 10,339 SA Average 3,681 3,658 WA B. Average 5,250 6,636 TAS Average 1,039 959 NT B. Average 271 373 ACT Good 1,268 887 * Based on 10 year average. CURRENT STATE - NSW and VIC delivered constant lending volume growth (which is currently significantly above the 10 year benchmark). This has been driven by very high supply of units that have attracted many investors to the property market. - Lending volume in WA has unsurprisingly fallen since the end of the mining boom in 2012. This change correlates with falling house prices and increasing mortgage arrears rates in the state. - NT has shown some decline which can be attributed to reduced lending demand as a result of the ending mining boom. - Lending volume are projected to deliver only moderate growth over the short to medium term. This is as a result of the end of the Sydney & Melbourne housing boom and transition to more moderate growth, as well as declining growth in Melbourne. - The increasing strength of the QLD economic is likely to attract higher lending demand as investors look to capitalise on the local property market. - Lending volume in the other states show no indications of a significant uplift in activity that will lead to a strong increase in the value and volume of loans. Source: ABS, RiskWise Property Page 27 of 50 Copyright 2018

INVESTOR AND HOME-BUYER ACTIVITY Investor and home-buyer activity is the aggregated value of loan commitments undertaken by home buyers and investors. The measure checks the proportion of investors and home-buyers. When investor activity is high, it is likely that prices will increase, the number of first-home buyers will decline and possible that government policy will change (such as Labor s plans to restrict negative gearing to new dwellings). 80% Owner-Occupiers and Investors as a Proportion of Lendees Owner Occupiers Investors 65% 50% 35% 20% Nov 07 Jan 10 Mar 12 May 14 Jul 16 CURRENT STATE - Overall, investors have shown strong lending growth and a high proportion relative to owner-occupiers. NSW & VIC have been notable drivers of such growth. However, this has decline due to the introduction of new lending restrictions. - The reduced proportion of property investors have led to a cooler market, demonstrating the strong correlation between investor activity and price growth. - As the property market produces lower returns for investors, particularly in NSW, lending values among investors are expected to continue their decline. This will likely happen alongside a general cooling of the market. However, lending value may experience a gradual increase among investors in QLD. - The volume of first home buyers is predicted to increase over the short to medium-term due to ongoing lending restrictions targeting investors. First Home Buyers (No. Of Lendees) First Home Buyers (No. Of Lendees) 7,000 NSW QLD VIC SA 7,000 3,500 3,500-1 Nov 07 Jul 09 Mar 11 Nov 12 Jul 14 Mar 16 Nov 17 WA TAS NT ACT 0 Nov 07 Jul 09 Mar 11 Nov 12 Jul 14 Mar 16 Nov 17 Source: ABS, RiskWise Property Page 28 of 50 Copyright 2018

INTEREST-ONLY HOUSING LOANS As the name suggests, an Interest Only Loan is exactly that, a mortgage whereby your repayments only cover the interest on the amount you have borrowed, during the interest only-period. This type of loan is very popular among investors but it does come with increased risk and costs significantly more in the long-run. 75% New Interest-Only Loans to Total Residential Loans Interest-Only Loans 56% 38% 19% 0% Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 CURRENT STATE - Interest-only loans have become an increasingly popular lending product among investors (around 30 percent of total leading). - Lending criteria has the most significant impact on the uptake of interest-only housing leans. - Interest only loans are at a low proportion of total loans and it is highly likely that their proportion will be increased once voluntary lending restrictions set by the banks will be eased, to improve their profitability. - In March 2017, APRA clamped down on interest-only loans in an effort to cool the property market. The regulator issued that these loans must be restricted to 30 percent of new residential mortgage loans. This has had a significant impact on the investment housing market. - The banks have since taken steps to implement these new restrictions, with many lenders applying voluntary measures to further reduce interest-only residential lending (significantly beyond regulatory expectations). Source: RBA, RiskWise Property Page 29 of 50 Copyright 2018

5 JOBS & EMPLOYMENT The jobs & employment category measures the overall health of the labour market in Australia and in each of the states and territories. These measures are: unemployment; underemployment; effective unemployment; and wage growth. Strong employment market with many employment opportunities triggers stronger migration, higher wage growth and stronger demand for housing. On the other hand, areas that suffer from poor employment opportunities experience poor and often negative property capital growth. NSW VIC QLD SA WA TAS NT ACT Risk Rating I. UNEMPLOYMENT II. III. IV. UNDEREMPLOYMENT EFFECTIVE UNEMPLOYMENT WAGE GROWTH

UNEMPLOYMENT The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate. Unemployment is strongly correlated to poor economic growth. NSW, VIC, QLD, SA WA, TAS, NT, ACT 10% 7.5% NSW QLD VIC SA 10% 7.5% WA NT TAS ACT 5% 5% 2.5% 2.5% 0% Jan 08 Jun 09 Nov 10 Apr 12 Sep 13 Feb 15 Jul 16 Dec 17 0% Jan 08 Jun 09 Nov 10 Apr 12 Sep 13 Feb 15 Jul 16 Dec 17 NSW Good 4.70% 5.30% VIC B. Average 5.80% 5.60% QLD B. Average 5.90% 5.70% SA Average 5.90% 6.00% WA Poor 6.10% 4.80% TAS Average 6.00% 6.20% NT Poor 5.20% 3.90% ACT Good 3.70% 3.80% * Based on 10 year average. CURRENT STATE - Overall, while there has been a consistent reduction in unemployment, the unemployment rate in Australia of 5.4% as at 19 December 2017, is higher than the 5% benchmark for an equilibrium, as set by the RBA. - High unemployment plagued TAS and SA in recent years, largely due to the decline of the mining industry. - ACT has consistently delivered low unemployment, largely due to the high supply of government jobs in Canberra. As a result, it is highly unlikely that unemployment in ACT will rise without a major economic downturn. - Unemployment rates across Australia are predicted to gradually improve in 2018. - The economy is generally strengthening and is likely to produce stable job growth over the medium to long term. - However, in the unlikely event of declining global economic conditions, expect Australian unemployment to increase, particularly in centres more exposed to economic fluctuations, such as NSW. Note: Unemployment provides limited insight into the job market. To truely understand the health of the job market, underemployment, effective unemployment and wage growth must also be considered. Source: ABS, RiskWise Property Page 31 of 50 Copyright 2018