UDIA NSW Annual State Conference

UDIA NSW Annual State Conference Westpac Institutional Bank Presented by Bill Evans September 217

The Big Issues Inflation and Central Bank policies; Australia s growth challenge; Australia s construction cycle; House prices in Australia; The Markets; China s Financial system. 2

Nominal wages growth 4 3 2 1-1 -2-3 st dev Nominal Wages* st dev Canada US Germany *note that wage measures differ significantly across countries; Source: Reuters, CEIC, Statistics Canada, Bundesbank, BLS, Westpac Economics -4 Mar 98 Mar 4 Mar 1 Mar 16 4 3 2 1-1 -2-3 -4 3

Core inflation: well below targets 4 3 %yr Canada US Euro Area %yr *CPI ex food & energy (Euro Area ex food, energy, Alcohol & tobacco) 4 3 2 2 1 1 Source: CEIC, Statistics Canada, Eurostat, BLS, Westpac Economics Mar 98 Mar 4 Mar 1 Mar 16 4

National home prices realtor associations 18 17 16 15 14 13 12 11 1 9 8 index Canada CREA HPI* US S&P CoreLogic Case-Shiller HPI^ Australia CoreLogic home value index# *11 major markets; ^2 major cities. *5 major capital cities; all rebased to 1 at Jan 21. Source: CREA, S&P CoreLogic, Case-Shiller, Westpac Economics Jan 1 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 index 18 17 16 15 14 13 12 11 1 9 8 5

Annual GDP growth- Canada s growth lifts %yr %yr 6 Canada Fcs 6 4 Australia 4 2 2-2 Sources: CEIC, DX, Statistics Canada, ABS, Westpac Economics. -4 Mar 98 Mar 1 Mar 4 Mar 7 Mar 1 Mar 13 Mar 16-2 -4 6

The Big Issues Inflation and Central Bank policies; Australia s growth challenge; Australia s construction cycle; House prices in Australia; The Markets; China s Financial system. 7

Australian GDP growth outlook % yr 217 218 219 RBA, Aug 2.5 3.25 3.5 Westpac 3. 2.5 2.5 Source: ABS, RBA Statement on Monetary Policy, Westpac Economics 8

7 6 5 4 3 2 1 Wages growth at record lows %yr Sources: ABS, Westpac Economics WCI %yr average since 1998 WPI yr (lhs) %qtr Dec-4 Dec-6 Dec-8 Dec-1 Dec-12 Dec-14 Dec-16 Dec-18 7 6 5 4 3 2 1 9

Nonfarm unit labour costs nominal 18 17 16 15 14 13 12 11 1 9 8 Index Aus US Source: ABS, BLS, CEIC, Westpac Economics Index *Both indexes rebased to 1 at Mar 21 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 18 17 16 15 14 13 12 11 1 9 8 1

Aus consumer spending vs labour income 1 8 6 4 2-2 % ann labour income consumption Sources: ABS, Westpac Economics real LR avg: 3.3%yr % ann Consumption: 217 Q2:.7%qtr, 2.6%yr -4 Jun-97 Jun-1 Jun-5 Jun-9 Jun-13 Jun-17 1 8 6 4 2-2 -4 11

Household savings ratio 12 % income % income 12 9 9 6 6 3 3 Sources: ABS, Westpac Economics -3 Jun-89 Jun-93 Jun-97 Jun-1 Jun-5 Jun-9 Jun-13 Jun-17-3 12

6 5 4 3 2 1 Unemployment rate to rise nationally tty % Sources: ABS, Westpac Economics. employment (lhs) employ fcs unemployment rate (lhs) ur fcs 7 5 May-2 May-6 May-1 May-14 May-18 3 13

Newspoll: recent leads hold for multiple years 65 6 55 % LNP 87 seats ALP 83 seats ALP 72 seats LNP 9 seats LNP 76 seats % 65 6 55 5 5 45 45 4 Sources: Newspoll, Westpac Coalition Labor 35 Jan-3 Jan-7 Jan-11 Jan-15 4 35 14

The Big Issues Inflation and Central Bank policies; Australia s growth challenge; Australia s construction cycle; House prices in Australia; The Markets; China s Financial system. 15

Business conditions: by broad sectors 3 2 1 net bal. Goods related Consumer sectors Business services net bal. 3 month mov. avg. deviation from avg 3 2 1-1 -1-2 Sources: NAB survey, Westpac Economics Latest obs n: -3 Sep-5 Sep-7 Sep-9 Sep-11 Sep-13 Sep-15 Sep-17-2 -3 16

Dwelling approvals: houses, low-mid & high rise 14 12 1 8 6 4 2 ' detached houses 'high rise' units 'low-mid' rise units *3mth avg, dotted lines are monthly Sources: ABS, Westpac Economics ' Jul-5 Jul-8 Jul-11 Jul-14 Jul-17 14 12 1 8 6 4 2 17

Private approvals, non-residential building: detail 14 12 1 8 6 4 2 $bn May-5 Social Retail Offices +49%yr May-13 12 month sum May-5 updated: Jul 17 Peak: Feb 14 Total, private Sources: ABS, Westpac Economics May-13 $bn +14%yr, 2% above peak 35 3 25 2 15 1 5 18

Public transport project pipeline: by state 9 8 7 6 5 4 3 2 1 $bn 57 8 44 Possible Under consideration Definite 41 215 vs 217 NSW: Definite projects +$21bn to $55bn; Potential projects, +$2bn to $25bn. 25 3 NSW Vic Qld WA SA Tas 2 16 9 1 $bn Sources: Deloitte Access Economics, Westpac Economics 1 1 19

.4.3.2.1. -.1 -.2 -.3 -.4 -.5 Non- Mining Construction: GDP impact ppts yr Housing Non-mining private Public works ppts yr Sources: ABS, Westpac Economics updated: Sep 17 Dec-16 Dec-17 Dec-18.4.3.2.1. -.1 -.2 -.3 -.4 -.5 2

High rise completions: by capital city 3 25 s Sydney projected Melbourne projected Brisbane s Sources: ABS, Westpac projected 3 25 2 2 15 15 1 1 5 5 214 216 218 214 216 218 214 216 218 21

45 4 35 3 25 2 15 1 5 - Number of foreign real estate approvals s s Source: FIRB, Scott Morrison, Treasurer (April 27, 217) Actual Expected (Morrison) 29-1 21-11 211-12 212-13 213-14 214-15 215-16 216-17 45 4 35 3 25 2 15 1 5-22

Apartment risks causing slowdown Late settlement (5% average);+++ Failed settlement (1% average);+++ Valuation below contract;+++ Shadow banking system (6-8, now 2+) Poorest in Brisbane; Melbourne; then Sydney. 23

The Big Issues Inflation and Central Bank policies; Australia s growth challenge; Australia s construction cycle; House prices in Australia; The Markets; China s Financial system. 24

Capital city dwelling prices: slowing 3 2 1 % 6mth growth rates, annualised * all dwellings, annualised, seasonally adjusted % 3 2 1-1 -2 Sydney Melbourne Brisbane Perth Sources: ABS, CoreLogic, Westpac Economics Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17-1 -2 25

Prices can fall in response to rate hikes 4 35 3 25 2 15 1 5-5 -1-15 % +155bps 6mth growth rates, annualised +25bps Melbourne Sydney * all dwellings, composite of all measures, annualised, seasonally adjusted rate rises (mortgage rate) Sources: CoreLogic, Westpac Economics Nov-6 Nov-9 Nov-12 Nov-15 % +27bps +28bps 4 35 3 25 2 15 1 5-5 -1-15 26

Mortgage rate tiering tightening cycles 1 8 bps Owner-occupier - P+I Investor - P+I Book average Owner-occupier - IO Investor - IO bps Source: WBC, CBA, NAB, ANZ, RBA Westpac Economics 1 8 6 *Weighted average of the four major banks Owner occupier P+I is -3bps in Dec 16 today 6 4 4 2 2 Jul 15 - Dec 15 Dec 16 - today 27

Sydney dwelling prices vs rest of Australia 1.9 1.7 1.5 1.3 1.1 % ratio of weighted medians avg % 1.9 1.7 1.5 1.3 1.1 Sources: ABS, CoreLogic RP Data, APM, Residex, Westpac Economics.9 Sep-8 Sep-85 Sep-9 Sep-95 Sep- Sep-5 Sep-1 Sep-15.9 28

Melbourne dwelling prices vs rest of Australia 1.3 1.2 % ratio of weighted medians Melbourne ratio to other major capital cities % 1.3 1.2 1.1 1.1 1. 1..9.9.8 Sources: ABS, CoreLogic, APM, Residex, Westpac Economics.7 Mar-8 Mar-85 Mar-9 Mar-95 Mar- Mar-5 Mar-1 Mar-15.8.7 29

Population growth: south-east, ann NSW 16 Overseas 14 Total 12 1 8 6 4 2-2 -4 Dec- Dec-6 Dec-12 Interstate Victoria Sources: ABS, Westpac Economics Overseas Total Interstate Dec- Dec-6 Dec-12, ann 16 14 12 1 8 6 4 2-2 -4 3

14 12 1 8 6 4 2-2 Housing stock balance estimates* 's Sources: ABS, Westpac Economics NSW Victoria Queensland WA ` *as at Dec 218 indicative estimates, +ve is deficiency -ve is oversupply s 14 12 1 8 6 4 2-2 31

Canada home prices drop after rate rise 4 %mth %mth 4 3 2 1-1 MLS home price index 3 2 1-1 Sources: CREA, Westpac Economics. -2 Jan 7 Jan 9 Jan 11 Jan 13 Jan 15 Jan 17-2 32

The Big Issues Inflation and Central Bank policies; Australia s growth challenge; Australia s construction cycle; House prices in Australia; The Markets; China s Financial system. 33

Current forecasts October 216 Latest Sep-16 Dec-16 Jun-17 Dec-17 RBA Cash 1.5 1.5 1.5 1.5 1.5 Aus 1yr 1.89 1.95 2.15 2.3 2.65 3yr swap 1.68 1.7 1.8 2.1 2.25 US 1yr 1.49 1.5 1.7 2. 2.25 AUD/USD.77.75.76.71.68 Source: Westpac Economics. 34

FOMC normalization: a long, slow process 3.5 3. 2.5 2. 1.5 1..5 % year-end fed funds rate level % Sources: Westpac Economics Market 12/7/216 Westpac 1.625 1.125.625.72.59.49 3.5 3. 2.5 2. 1.5 1..5. 216 217 218. 35

Current forecasts October 217 Latest Dec-17 Jun-18 Sept-18 Dec 18 RBA Cash 1.5 1.5 1.5 1.5 1.5 Aus 1yr 2.81 2.85 2.9 2.95 3. 3yr swap 2.2 2.3 2.5 2.4 2.6 Fed Funds 1.125 1.375 1.375 1.625 1.875 US 1yr 2.36 2.5 2.75 2.85 3. AUD/USD.78.76.74.72.7 Source: Westpac Economics. 36

3.5 3. 2.5 2. 1.5 1..5. FOMC normalisation: a long, slow process % 1.26 Market Westpac 1.375 Fed Funds rate mid level % Sources: Bloomberg, Westpac Economics *market prices implied as at 21/7/217 1.34 1.625 1.45 Dec 17 Jun 18 Dec 18 1.875 3.5 3. 2.5 2. 1.5 1..5. 37

Westpac: RBA on hold in 218 2.5 % expected cash rate level Sources: Westpac Economics *market prices implied rates as at 21/7/17 % 2.5 2. 1.5 Market Westpac 1.8 1.54 1.6 1.5 1.5 1.5 2. 1.5 1. 1..5.5. Dec 17 Jun 18 Dec 18. 38

Westpac: rate differential negative.5.25 % Market Westpac.28.3.13 expected cash rate level %.35.5.25.. -.25 -.13 -.25 -.5 Sources: Westpac Economics *market prices implied rates as at 21/7/17 Dec 17 Jun 18 Dec 18 -.38 -.5 39

Australian-US O/N spreads and AUD 6 % Aust/ US overnight rate spread (lhs) $ 1.2 4 AUD/USD (rhs) forecasts.95 2.7.45 Sources: DX Time, Bloomberg, Westpac Economics -2 1993 1996 1999 22 25 28 211 214 217.2 4

The Big Issues Inflation and Central Bank policies; Australia s growth challenge; Australia s construction cycle; House prices in Australia; The Markets; China s Financial system. 41

China real GDP to decelerate slowly 16 %yr %yr 16 14 14 12 12 1 8 6 WBC 217 & 218 year-avg f casts 1 8 6 Sources: Westpac Economics, CEIC. 4 Jun-94 Jun-98 Jun-2 Jun-6 Jun-1 Jun-14 Jun-18 4 42

14 12 1 8 6 4 2 China credit provision 43 RMB trn Banks on balance sheet loans Large banks Small banks Banks shadow credit RMB trn Source: CEIC, RBA, FSR, Moody s *Based on FSR/ Moody s estimates of total shadow credit in 216. NBFI shadow credit* 14 12 1 8 6 4 2

Conclusion Structural weakness in wages to see central banks focus on asset markets. Australia s growth rate to slow; incomes; savings; debt; energy; politics. Residential construction to slow; partly offset by non residential and govt. Sydney/Melbourne house prices to flat line; overregulation and rate hikes. RBA on hold; FED to continue raising rates; fixed rates to go higher. US to see surprise progress on taxes; and reform; support USD. Negative spread; sliding commodities ; positive USD AUD to USD.7. China to further tighten credit but no collapse (6.7% to 6.2% in 218). Risks in financial system in China abound but authorities can control. 44

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