Commonwealth Bank of Australia July 2004 Global Investor Update on the Australian Housing Market Marten Touw Michael Blythe Group Treasurer Chief Economist Commonwealth Bank of Australia Commonwealth Bank of Australia + 612 9378 3783 + 612 9312 4135
Important Information As this advice has been prepared without considering your objectives, financial situation, or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. 2
Our View The housing boom � – part of a global trend; – a rational response to background economic conditions; – households left with more debt and riskier asset mix; – households now net payers of interest and less savings. � The outlook – ongoing housing market slowdown not assured; – construction activity likely to remain at high levels. � The house price threat – generalised house price falls unlikely; – the first-home buyer segment is a significant deadweight - but State governments are providing assistance; – dominance of investor activity has distorted the market - but most investors well placed to withstand any negatives. 3
Background Drivers From 33-1/3 to 78rpm GROWTH & INFLATION UNEMPLOYMENT & RATES % % %pa %pa (10-yr averages) 1 8 1 8 9 6 GDP M ortgage growth rate (rhs) 1 2 1 2 6 4 3 2 6 6 Inflation Unemployment (lhs) rate 0 0 0 0 Sep-90 Sep-93 Sep-96 Sep-99 Sep-02 Sep-90 Sep-93 Sep-96 Sep-99 Sep-02 � Growth stepped up and inflation stepped down. � Falls in unemployment and interest rates followed. 4
Balance Sheet & Cashflow Changes More debt HOUSEHOLD LIABILITIES NET INTEREST RECEIPTS % % (% of disposable income) % (% of after-tax income) % 1 60 1 60 6 6 Japan UK Germany 1 20 1 20 3 3 Canada US 80 80 France Australia 0 0 40 40 Italy Source: OECD 0 0 -3 -3 1 988 1 990 1 992 1 994 1 996 1 998 2000 2002 2004 Jun-60 Jun-68 Jun-76 Jun-84 Jun-92 Jun-00 � Household debt has risen sharply. � Households now net payers of interest. 5
Offsets Padding up PRINCIPAL REPAYMENTS � Household debt repayment % $ bn 30 1 6 practices have changed. P rincipal (% o f mo rtgage payment) (lhs) � Constant dollar repayments have accelerated payoff of 20 1 1 principal. 2/3 of CBA customers paying � 1 0 5 faster than necessary. Cumulative o verpayment o f principal* � A sizeable buffer exists. (rhs) 0 0 Sep-97 Sep-99 Sep-01 Sep-03 � Effective mortgage rate 7%. *assumes prinipal repayment ratio fixed at 1 995-98 level 6
Housing One-way bet - but which way? FIXED RATE LENDING CBA LENDING INDICATORS Index Index % % (% of total) (Jun'01=100) 250 1 20 40 40 Investor Investor (value, lhs) (lh ) 30 30 200 1 05 20 20 1 50 90 1 0 1 0 1 00 75 Owner-occupiers Owner- (new, no., rhs) occupier 0 0 50 60 Jan-01 Jan-02 Jan-03 Jan-04 Jan-01 Jan-02 Jan-03 Jan-04 Lending has stabilised after earlier large falls. � � Unemployment low, confidence high, buyers market, sentiment turning - could housing bounce? 7
Construction Risks Excess supply or excess demand? NET MIGRATION UNDERLYING DEMAND '000 '000 '000 '000 200 200 1 80 1 80 Underlying demand QII (f) 1 00 1 00 1 20 1 20 Dwelling Pent-up commencements demand 60 60 0 0 Excess supply 0 0 -1 00 -1 00 1 949/50 1 961 /62 1 973/74 1 985/86 1 997/98 Sep-78 Sep-83 Sep-88 Sep-93 Sep-98 Sep-03 Commencements running only a little above underlying demand. � � Relative price shifts favour alts & adds. 8
House Prices: The First Home Owner Deadweight Sidelined RESIDENTIAL LENDING* FIRST HOME OWNERS % % (change in relative position, NSW vs ROA) (% of total lending) 40 40 9 * 3wks prior vs 1 3 wks since tax changes 6 30 30 3 20 20 0 -3 1 0 1 0 Home Loans Investment Loans Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 � Absence of first-home buyers putting downward pressure on prices? � State Government now providing significant assistance. � Pent-up demand? 9
House Prices: The Investor Threat Inner city & other hotspots � The hotspots: – Inner Sydney (inc Homebush, INNER CITY & OTHER HOTSPOTS Dee Why, Arncliffe); (lending to investors) % % – Inner Melbourne; 1 .2 1 .2 – Inner Brisbane (inc Surfers A s a share o f Paradise, Cairns). ho using po rtfo lio S tre s s T e s t (re nts do wn 5 0 %, 0.8 0.8 � Share of investor lending: pric e s do wn 4 0 %) – <1% of home loan portfolio. � The stress test: % o f ho using po rtfo lio 0.4 0.4 failing co mmitment level test – gross rents drop 50%; – prices drop 40%. 0 0 � The result: – 0.1% of portfolio fail commitment level test. 10
UNIT PRICES (% change between Oct'03 and Jun'04) House Prices: Investor Threat NSW Sydney City Ultimo Darlington Hotspots not so hot Darling Island Darlinghurst Elizabeth Bay Alexandra � Unit prices largely unchanged over Redfern October-June period at national level. Waterloo Roseberry M ascot n.a. Forest Lodge (Glebe) n.a. Glebe Island � Prices in “hotspot” areas of Sydney Camperdown Dee Why and Melbourne have fallen. Homebush Arncliffe (Wolli Creek) Queensland Brisbane City Newstead � Qld still rising. West End Dutton Park Labrador Anglers Paradise et al M ain Beach � No obvious economic fallout. Broadbeach Cairns Buchan Point Victoria M elbourne City Southbank Docklands -45 -30 -15 0 15 30 11
Housing: The RBA Roadmap Are we heading in the right direction? � RBA’s “preferred scenario” has housing credit slowing to a RBA HOUSING FINANCE SCENARIOS sustainable pace of 9%pa. Index Index (peak=100) 1 1 0 1 1 0 0% � Initial slowdown faster than CBA consistent with preferred path: 90 90 M ay/Jun (e) – collapse scenario? Actual -2% 70 70 – So RBA on sidelines. RBA's "preferred" -4% scenario 50 50 � Latest ABS data shows we were Outside the range back on track in April. -8% of previous experience 30 30 Jan-03 Sep-03 M ay-04 Jan-05 Sep-05 � CBA data suggests now off track on the upside. 12
Housing: The RBA Roadmap Engineering the desired scenario RATES & HOUSE PRICES RATES & HOUSING CREDIT % % % % (annual % change) (annual % change) 60 40 28 40 20% rise in 20% rise in mortgage rate mortgage rate 40 20 21 20 20 0 1 4 0 0 -20 7 -20 Housing House M ortgage M ortgage credit prices rate rate (lhs) (lhs) (rhs) (rhs) -20 -40 0 -40 Sep-82 Sep-86 Sep-90 Sep-94 Sep-98 Sep-02 Sep-82 Sep-86 Sep-90 Sep-94 Sep-98 Sep-02 � Past cycles show a 20% rise in mortgage rate needed to slow credit to desired pace and kill house price rises. � Implied cash rate: 5½-5¾%. 13
Housing: Mortgage Write-offs CBA Mortgage Write-offs v Australian Residential Property Index 5 250 CBA Mortgage Write-offs 4 200 (LHS) oints 3 1 50 Index asis P CBA Average Write-off Level (LHS) 2 1 00 B Housing Price Index (RHS) 1 50 0 0 92 93 94 95 96 97 98 99 00 01 02 03 Years CBA Mortgage Write-offs v Unemployment rate CBA Mortgage Write-offs v Change in CBA Mortgage Write-offs v Advanced Interest rates Unemployment rate 5 1 1 .0 5 3 5 1 8.0 CBA Mortgage 4 Unemplo yment R ate 9.6 CBA Mortgage Write- 4 Write-offs 2 4 1 5.2 (R H S) offs (LHS) Basis Points (LHS) Basis Points Basis Points 3 8.2 3 1 3 1 2.4 % % % 2 9.6 2 6.8 2 0 Mortgage rate advanced C B A M o rtgage Write-o ffs 1 5.4 1 -1 1 6.8 3 yrs (RHS) Change in Unemployment (LH S) rate (RHS) 0 4.0 0 -2 0 4.0 92 93 94 95 96 97 98 99 00 01 02 03 92 93 94 95 96 97 98 99 00 01 02 03 92 93 94 95 96 97 98 99 00 01 02 03 Years Years Years 14
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