The Outlook for the Economy & Housing

The Outlook for the Economy & Housing Matthew King HIA Economist Bulky Goods Retailers Assoc VIC Forum August 2010

Where are we heading? The Economic Backdrop Additional Factors Retail Trade Housing Outlook Home Prices and the Renovations Sector The New Home Building Market Hotspots and Housing 100 Top 20 for Victoria

% change Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Australian Economy Gross Domestic Product Source: ABS 5206 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0 Qtrly Annual RBA is forecasting a return to trend economic growth in 2010, with an upside risk RBA is forecasting growth of 3.75% in both 2010/11 and 2011/12

Per cent Jun.1991 Jun.1992 Jun.1993 Jun.1994 Jun.1995 Jun.1996 Jun.1997 Jun.1998 Jun.1999 Jun.2000 Jun.2001 Jun.2002 Jun.2003 Jun.2004 Jun.2005 Jun.2006 Jun.2007 Jun.2008 Jun.2009 Jun.2010 Jun.2011 Jun.2012 Victoria s Economy an impressive recovery Gross State Product - Victoria Source: ABS 5220.0; Access Economics 7.0 6.0 5.0 4.0 3.0 2.0 Long term average Forecast 1.0 0.0-1.0-2.0-3.0-4.0 Year ended June Access Economics is forecasting growth of 2.3% for 2009/10. Access is forecasting a further recovery in 2010/11 with growth of 3.4% and 3.2% for the year after that.

Per cent Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Unemployment rate has now peaked Victoria's Unemployment Rate Source: ABS Labour Force 13.0 12.0 11.0 10.0 9.0 8.0 7.0 20 Year Average Unemployment Rate 6.0 5.0 5 Year Average Unemployment Rate 4.0 The Victorian labour market recovered solidly in the latter months of 2009, however has flat-lined since then. Unemployment rate reached a promising low of 5.2% in Dec 2009, but has trended up slightly since.

State unemployment rates Unemployment Rate by State - July 2010 Source: ABS Labour Force 7.0 6.5 6.5 National Unemployment Rate 6.0 5.6 5.5 5.6 5.5 5.1 5.0 4.5 4.4 4.0 3.5 3.0 2.5 NSW VIC QLD SA WA TAS NT ACT 2.6 3.4

% Interest Rate New Housing New and Housing Renovations and Renovations Outlook Outlook Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Interest rate hiking cycle on hold for now Interest Rates, Australia, Source: RBA 10.00 9.00 8.00 The RBA last lifted the cash rate by 25bps in May, the sixth hike in seven meetings. 7.00 6.00 5.00 4.00 3.00 2.00 At this stage, interest rates will remain on hold for the rest of 2010. However, housing affordability has deteriorated to nearrecord lows. Discounted Variable Mortgage Rate RBA Cash Rate

% change Jun.2000 Jun.2001 Jun.2002 Jun.2003 Jun.2004 Jun.2005 Jun.2006 Jun.2007 June.2008 Jun.2009 Jun.2010 Retail trade - Australia Retail Sales Volumes - Australia Source: ABS 8501 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Qtrly % change (LHS) Annual % change (RHS)

% change Jun.2000 Jun.2001 Jun.2002 Jun.2003 Jun.2004 Jun.2005 Jun.2006 Jun.2007 June.2008 Jun.2009 Jun.2010 Retail trade - Victoria Retail Sales Volumes - Victoria Source: ABS 8501 6.0 12.0% 4.0 2.0 0.0-2.0-4.0-6.0-8.0 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Qtrly % change (LHS) Annual % change (RHS)

New Housing

% Change Victoria outperformed in 2009 Change in the Number of Housing Starts, 2009 Source: ABS 8752; HIA 15 10 10 5 3 0-5 -10-15 -20-12 -13-4 -7-25 -30-27 New South Wales Victoria Queensland South Australia Western Australia Tasmania Australia National housing starts fell 4% in 2008 and by 7% in 2009. However, Victoria out-performed.

Number Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 New home starts are surging ahead Total Dwelling Starts Victoria Source: ABS 8752.0 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 s.a. Trend Boost to first home buyers, aggressive interest rate cuts, and the Social Housing Initiative helped to boost activity. State Government FHB s top up has helped to sustain activity

$ Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Number Sustainable level of building activity? Residential Land Residential Land - Melbourne Source: RP Data 200000 180000 160000 140000 120000 100000 80000 6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 No. of sales Value Median residential land value in Melbourne in the March 2010 quarter was $182,000, 14.1% higher than the March quarter of 2009. Disappointing to see land sales were down a staggering 71.1% in the March 2010 quarter compared with the same quarter in 2009.

Residential land sales - Victoria Residential Lot Sales Source: RP Data, HIA Economics Group East Gippsland 33% Ovens-Murray -30% Gippsland -32% Barwon -33% Goulburn -42% Loddon -45% Mallee -46% Western District -49% Central Highlands -52% Melbourne -71% -80% -60% -40% -20% 0% 20% 40% Annual % change

Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sustainable level of building activity? Housing finance Victoria New Home Lending - Number of Loans Source: ABS Housing Finance 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Total New Loans Construction of dwellings Purchase of new dwellings New home lending in the June quarter at the same level it was a year ago Retainment of the First Home Buyer Bonus in Victoria has helped sustain activity

Number of loans Sustainable level of building activity? Housing finance First Home Buyer versus Non-First Home Buyer Loans - Victoria Source: ABS Housing Finance 35,000 30,000 32,370 % change: -2% 31,703 25,000 20,000 15,000 10,000 5,000 13,136 % change: -46% 7,126 0 FHB Non-FHB 3mths to Jun 09 3mths to Jun 10 After the withdrawal of FHB s, housing activity now dependent on upgrade buyers and investors Non-FHB segment down 2%, compared with a decline of 15% nationally

Value $m (moving annual total) Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Investor lending is growing in Victoria Lending for Rental Properties - Victoria Source: ABS Lending Finance 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000 5,000 2,500 2,000 1,500 1,000 500 0 Existing (lhs) Construction (rhs) Value of lending for construction of dwellings for rent or resale up 26% in the year to June 2010

Sustainable housing recovery for Australia? Australia - Monthly Dwelling Approvals Source: ABS Building Approvals 17,500 15,500 13,500 11,500 9,500 7,500 5,500 3,500 1,500 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Total Detached Houses Multi-Units Detached house approvals were up 6.5% in the June 2010 quarter on same period a year ago. Multi-unit approvals were up 70.8% in the June 2010 quarter on same period a year ago.

Sustainable level of building activity? Building Approvals Victoria Monthly Dwelling Approvals Source: ABS Building Approvals 6000 5000 4000 3000 2000 1000 0 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Total Detached Houses Multi-Units Detached house approvals were up 7.6% in the June 2010 quarter on same period a year ago Multi-unit approvals were up 93.3% in the June 2010 quarter on same period a year ago

Population and Building Hotpots Victoria is no. 1 VIC Building and Population Hotspots** **SLAs with in excess of $100 million in residential building work approved in 2008/09 and with an annual population growth rate in excess of the national average Statistical Local Area Statistical Divison Residential Building Approved, 2008/09, ($'000) Annual Population Growth Rate (%) 1 Whittlesea (C) - North Melbourne 484,029 18.3 2 Wyndham (C) - South Melbourne 283,717 12.8 3 Cardinia (S) - Pakenham Melbourne 241,553 10.0 4 Melton (S) - East Melbourne 285,195 9.5 5 Wyndham (C) - West Melbourne 112,474 7.9 6 Wyndham (C) - North Melbourne 368,605 6.9 7 Casey (C) - Cranbourne Melbourne 333,762 6.4 8 Melton (S) Bal Melbourne 161,328 6.1 9 Hume (C) - Craigieburn Melbourne 187,488 5.9 10 Melbourne (C) - S'bank-D'lands Melbourne 335,165 5.3 11 Brimbank (C) - Sunshine Melbourne 253,447 4.2 12 Melbourne (C) - Remainder Melbourne 239,569 3.1 13 Port Phillip (C) - West Melbourne 111,657 3.0 14 Baw Baw (S) - Pt B West Gippsland 105,355 2.8 15 Greater Geelong (C) - Pt B Barwon 133,120 2.4 16 Maribyrnong (C) Melbourne 159,281 2.2 17 Kingston (C) - North Melbourne 148,425 2.2

Housing 100 2009 an update VICTORIA - 2009 STARTS = 45,790 Rank Company Starts 2009 2009 2008 1 Metricon Homes 2,153 1,667 2 Simonds Group 1,940 1,430 3 Porter Davis Homes 1,576 1,342 4 Dennis Family Homes 1,178 818 5 Henley Properties 1,168 991 6 Burbank Homes 906 869 7 JG King Pty Ltd 868 828 8 Devine Group 474 340 9 Carlisle Homes Pty Ltd 467 356 10 Hotondo Homes** 372-11 Glenvill* 292 104 12 Orbit Homes Group 286 243 13 Frenken Homes 282 192 14 GJ Gardner Homes** 277-15 Australand 233 208 16 Hamlan Homes 233 185 17 Zuccala Homes P/L 230-18 Hometec Industries 201-19 Clarendon Residential Group 159 2 20 Snowdon Developments 157 - Total 13,452 9,575 Largest 20 market share comparison 29% * Some dw ellings built under franchise ** All dw ellings built under franchise

Number Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Housing starts forecast Total Dwelling Starts Victoria Source: ABS 8752.0 15,000 HIA forecasts 14,000 13,000 12,000 11,000 10,000 9,000 s.a. Trend

('000) Housing Completions vs Underlying Demand Underlying Requirement for Housing vs Dwelling Completions - VIC Source: ABS, HIA 60.0 55.0 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 37.5 49.0 44.0 54.3 54.9 48.5 45.4 45.7 2008 (a) 2009 (a) 2010 2011 Completions UR

Housing shortages - Victoria Housing Shortage 2009 Rank LGA 2009 Housing Shortage 1 Melbourne (C) 2,121 2 Port Phillip (C) 1,577 3 Yarra (C) 999 4 Glen Eira (C) 928 5 Greater Dandenong (C) 910 6 Maribyrnong (C) 770 7 Stonnington (C) 637 8 Casey (C) 602 9 Whitehorse (C) 439 10 Maroondah (C) 417

Housing demand vs current trend in building VIC Housing Demand and Supply 2011-2020 LGA's Rank LGA Demand Current Trend Shortfall 1 Melbourne (C) 34,288 18,231 16,058 2 Wyndham (C) 29,141 30,358-1,217 3 Casey (C) 25,706 24,107 1,598 4 Melton (S) 22,688 19,782 2,906 5 Whittlesea (C) 17,895 21,247-3,352 6 Mornington Peninsula (S) 16,491 13,342 3,149 7 Cardinia (S) 15,896 12,277 3,618 8 Hume (C) 15,270 12,719 2,551 9 Greater Geelong (C) 12,868 14,561-1,693 10 Port Phillip (C) 12,689 6,147 6,542 * Subtraction sy mbol denotes a surplus in that particular region.

Housing demand vs current trend in building Australia's Housing Demand and Supply 2011-2020 LGA's Rank LGA State Demand Current Trend Shortfall 1 Gold Coast (C) QLD 76,500 65,723 10,777 2 Brisbane (C) QLD 70,549 67,613 2,936 3 Ipswich (C) QLD 40,564 22,286 18,278 4 Wanneroo (C) WA 37,896 26,602 11,294 5 Melbourne (C) VIC 34,288 18,231 16,058 6 Wyndham (C) VIC 29,141 30,358-1,217 7 Sydney (C) NSW 26,693 13,653 13,040 8 Casey (C) VIC 25,706 24,107 1,598 9 Maroochy (S) QLD 24,092 15,118 8,975 10 ACT ACT 23,900 24,478-578 11 Blacktown (C) NSW 23,830 14,569 9,262 12 Melton (S) VIC 22,688 19,782 2,906 13 Caboolture (S) QLD 20,577 16,733 3,844 14 Pine Rivers (S) QLD 20,264 19,229 1,034 15 Rockingham (C) WA 19,198 10,157 9,041 16 Cairns (C) QLD 18,608 17,732 876 17 Whittlesea (C) VIC 17,895 21,247-3,352 18 Caloundra (C) QLD 17,051 13,446 3,605 19 Wyong (A) NSW 16,652 5,304 11,348 20 Mornington Peninsula (S) VIC 16,491 13,342 3,149 * Subtraction sy mbol denotes a surplus in that particular region.

Housing starts forecast HOUSING STARTS: by state and territory thousand dwellings commenced Starts NSW Vic Qld SA WA Tas NT ACT Aust 2003/04 (a) 45.72 45.33 44.22 10.39 22.55 2.85 1.04 2.89 174.99 2004/05 (a) 39.40 40.97 39.31 11.01 22.90 2.83 1.33 2.46 160.20 2005/06 (a) 32.92 39.35 37.72 10.78 25.90 2.56 1.35 1.87 152.45 2006/07 (a) 29.75 38.61 41.20 11.19 24.73 2.86 1.41 2.31 152.06 2007/08 (a) 31.55 41.73 44.84 11.88 22.48 2.90 1.05 2.25 158.66 2008/09 (a) 23.63 41.92 28.81 11.92 18.44 2.91 1.11 2.68 131.43 2009/10 31.12 53.25 32.24 11.65 23.27 3.15 1.31 3.71 159.69 2010/11 34.57 53.00 33.55 12.26 22.17 2.89 1.30 2.85 162.60 2011/12 35.97 48.80 38.25 12.25 20.04 2.80 1.33 2.99 162.43 % change: 2004/05 (a) -14-10 -11 6 2-1 28-15 -8 2005/06 (a) -16-4 -4-2 13-9 2-24 -5 2006/07 (a) -10-2 9 4-4 12 4 23 0 2007/08 (a) 6 8 9 6-9 1-26 -2 4 2008/09 (a) -25 0-36 0-18 0 6 19-17 2009/10 32 27 12-2 26 8 18 39 22 2010/11 11 0 4 5-5 -8-1 -23 2 2011/12 4-8 14 0-10 -3 2 5 0 Updated June 2010

Renovations

Annual % growth House price growth in 2009 was staggering Capital Growth in Australian Cities in 2009 Source: RP Data/Rismark National Capital Cities Hedonic Index 17 15 16.6 15.6 14.7 13 11 11.4 11.1 9 7 7.3 7.1 6.2 5 Darwin Melbourne Canberra Sydney Australia Brisbane Perth Adelaide

House prices starting to slow Quarterly change in home values - June 2010 Quarter Source: RP Data, Rismark International 3.0% 2.0% 1.9% 2.0% 1.0% 0.0% 0.5% 0.5% 0.4% 0.9% 0.3% 0.2% -1.0% -0.5% -0.6% -0.3% -2.0% -1.9% -1.4% -1.2% -1.8% -3.0% -2.8% Sydney Melbourne Brisbane Adelaide Perth Darwin Canberra Australian Capitals Houses Units

$ million Mar.1993 Mar.1994 Mar.1995 Mar.1996 Mar.1997 Mar.1998 Mar.1999 Mar.2000 Mar.2001 Mar.2002 Mar.2003 Mar.2004 Mar.2005 Mar.2006 Mar.2007 Mar.2008 Mar.2009 Mar.2010 Renovations activity still on an upward trend Renovations investment in Victoria - Moving annual total Source: ABS State Final Demand 2000 1750 1500 1250 1000 750 Renovations activity has been buoyed by rampant house price growth and positive news on the outlook for the economy and labour market.

May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Major Alterations & Additions The VIC Renovations and Additions Market Monthly Lending and Monthly Council Approvals ($000) 300,000 250,000 200,000 150,000 100,000 50,000 0 Lending for Alts and Adds Value of Council Approved Alts and Adds Indicators of major alts and adds are trending higher. Local government approvals for major alts and adds increased 9.2% over the 3 months to May 2010.

The outlook for renovations HOUSING RENOVATIONS FORECAST: by state and territory Value of investment, $ million, Chain Volume Measure NSW Vic Qld SA WA Tas NT ACT Aust 2003/04 (a) 10,496 7,032 6,885 2,077 3,432 745 218 406 31,491 2004/05 (a) 10,306 6,757 7,236 2,097 3,611 723 314 360 31,506 2005/06 (a) 9,516 6,303 7,637 2,070 3,574 746 339 377 30,600 2006/07 (a) 8,967 6,701 8,532 2,297 3,935 777 282 356 31,826 2007/08 (a) 8,885 7,253 8,174 1,960 4,719 836 215 395 32,437 2008/09 (a) 8,476 7,138 7,657 2,135 4,357 853 223 322 31,164 2009/10 9,050 7,383 8,333 2,185 5,251 861 277 441 33,781 2010/11 9,321 7,678 8,666 2,229 5,461 878 291 450 34,977 2011/12 9,601 7,909 9,099 2,273 5,734 887 306 463 36,376 % change 2004/05-2 -4 5 1 5-3 44-11 0 2005/06-8 -7 6-1 -1 3 8 5-3 2006/07-6 6 12 11 10 4-17 -6 4 2007/08-1 8-4 -15 20 8-24 11 2 2008/09-5 -2-6 9-8 2 4-18 -4 2009/10 7 3 9 2 21 1 24 37 8 2010/11 3 4 4 2 4 2 5 2 4 2011/12 3 3 5 2 5 1 5 3 4 (a) = actual

Other Matters

Jun-88 Jun-89 Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Housing affordability deteriorating Housing Affordability in Victoria Source: HIA-CBA Affordability Report 375.0 350.0 325.0 300.0 275.0 250.0 225.0 200.0 175.0 150.0 125.0 100.0 75.0 50.0 Australia Melbourne Rest of VIC Melbourne s affordability dropped by 6.7% in the June 2010 quarter and was down by 39.8% on the same quarter a year ago. Affordability fell by 9% in Regional Vic, and the index was 32% lower than in the June 2009 quarter

Index Melbourne s affordability starting to look like Sydney s HIA-CBA Affordability Index - Sydney vs. Melbourne Source: HIA Economics, Commonwealth Bank of Australia 250.0 225.0 200.0 175.0 150.0 125.0 100.0 75.0 Sydney Melbourne

The rental market a dire lack of new stock Capital City Vacancy Rates, June 2010 Source: SQM Research Vacancy rates are still at very tight levels Hobart Darwin 0.7% 0.9% and rental growth is beginning to pick up again. Canberra Perth 0.5% 1.2% A better profile for Melbourne is consistent with home building levels and investor interest. Adelaide Brisbane Melbourne Sydney 0.8% 1.3% 1.8% 2.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Per cent

Trades in Oversupply Trades in Short Supply Trade prices and availability - Melbourne Trade Prices and Availability - Melbourne Source: HIA-Austral Bricks Trade Report Index 0.50 0.40 0.30 0.20 0.10 0.00-0.10-0.20-0.30-0.40-0.50 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Trade Availability (LHS) Trade Prices (RHS Index 150 140 130 120 110 100 90 80 70 60 50 40 30

Trade prices and availability Regional Victoria Trade Prices and Availability - Regional VIC Source: HIA-Austral Bricks Trade Report Index 0.15 0.10 0.05 0.00-0.05-0.10-0.15-0.20-0.25 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Index 122.0 120.0 118.0 116.0 114.0 112.0 110.0 108.0 106.0 104.0 102.0 Trade Availability (LHS) Trade Prices (RHS

Henry Review & the Supply of Housing The Final Report noted the following: Access to affordable housing is a key policy issue for the Australian community that is likely to grow in importance. The taxation of investment housing should be reformed to ensure a more neutral treatment of rental property investment. Housing supply can be restricted through a range of policies, such as planning and zoning regulations, as well as the approvals processes that govern them. However, such policies are designed to achieve a range of policy objectives, against which their impact on the price of housing should be assessed. Where they are not set appropriately, infrastructure charges can reduce the supply of housing, and increase overall house prices. COAG should review zoning, planning and development approval policies and infrastructure charges to ensure they do not unnecessarily reduce housing supply.

Concluding remarks... New home building activity in Victoria remains the strongest in the country. This is not surprising given Victoria s relative new home affordability and the clear success of targeted assistance to new homes. The key is to maintain the advantage and the GAIC s of this world succeed spectacularly in taking us in precisely the wrong direction...... and we must also ensure a timely supply of affordable land for residential development.

THANK YOU Matthew King HIA Economist August 2010 http://economics.hia.com.au