Bulletin

14 October 2011

Australian consumers uncertain on direction for house prices

Optimists still outnumber pessimists but only just, with the median view 'no change'
Price Expectations Index fell from 15.3 in July to 9.0 in October. The Index is at its lowest level since May 2009 although the pace at which price expectations are being marked down has moderated compared to Apr-Jul surveys. Consumers appear highly uncertain about the outlook for house prices. However, most still expect prices to either rise or stay the same over the next year. Just under 39% expect house prices to be higher, 32% expect prices to be unchanged and 26% expect prices to decline. In May 2009 the split was almost exactly a third each way, while a similar survey conducted in Nov 2008, in the immediate aftermath of the Lehman Brothers collapse, showed 55% expected house price declines at the time. Judged against this, the current reading is not too bad although price expectations have been cut dramatically from their Apr 2010 high when 84% expected house prices to rise. The median expectation in Oct is for no change in house prices over the next year. That is the same as Jul and compares to an implied median forecast price rise of +1.2% in Apr and +1.9% in Jan. Expectations for price gains may have evaporated but the mix is still a long way from implying a median forecast price decline that would take a further 11pt increase in the proportion of consumers expecting price falls. The state detail shows some notable divergences. Pessimists outnumber optimists in Qld, where housing markets have been considerably weaker (although even here the median forecast is still for no change). Consumers are more optimistic in WA, NSW and Vic, with these last two states having a significantly higher proportion of house price 'bulls' expecting 10%+ growth. Other detail showed price expectations were more positive for younger age-groups. Indeed, the age-group mix suggests potential first home buyers are significantly more optimistic about price prospects than potential investors. Current conditions appear to have a strong bearing on consumers' house price expectations. The downshift in price expectations over the last 18mths has coincided with, or lagged slightly behind, a similar turnaround in actual price growth. After hitting 14%yr in early 2010, price growth across all dwellings nationally dropped to be about flat in Mar 2011 and to 3.2% in Aug according to RP Data-Rismark figures. These latest readings are significantly weaker than the modest price growth consumers expected a year prior. Continued price weakness may see further mark downs in expectations. However, this will be balanced against the rising prospect of interest rate cuts from the RBA. The net effect will likely depend on how 'threatening' consumers see the situation in housing markets. It is notable that the weak read in May 2009 came despite mortgage rates being slashed to 40yr lows. Matthew Hassan, Senior Economist, ph (61-2) 8254 2100

The Westpac-Melbourne Institute Consumer House

Consumer house price expectations October 2011

% responses expecting: Rise Aus NSW Vic Qld SA WA 9.3 11.1 12.7 4.9 2.8 2.2 29.4 30.5 29.2 21.5 39.5 32.2 No 31.5 29.4 28.2 37.5 30.4 41.2 Fall 24.8 24.2 25.4 31.0 23.5 16.1 5.0 4.9 4.5 5.1 3.8 8.3 >10% 010% change 010% >10% House Price Expectation Index* Jul 15.3 23.7 20.1 -6.2 1.3 24.8 Oct 9.0 12.5 12.1 -9.8 15.0 10.1

*% expecting rise minus % expecting fall. Figures exclude those reporting "no opinion".
Source: WestpacMelbourne Institute

Consumer expectations for house prices

100 220 75 200 180 50 160 25 0 140 -25 120 100 -50 80 60 40 20 0 %responses
net percent expecting house prices to rise *Mortgage choice survey

%responses

Source: Westpac-Melbourne Institute, Mortgage Choice

fall

no change

rise

Nov- May- Jul-09 Oct- Jan- Apr- Jul-10 Oct- Jan- Apr- Jul-11 Oct08* 09 09 10 10 10 11 11 11

100 75 50 25 0 -25 -50 80 -75 60 -100 40 -125 20 -150 -175 0

House price expectations by state

100 80 60 40 20 0
*% reporting expected rise minus % reporting expected fall

net % NSW Vic SA Qld WA

net %

100 80 60 40 20 0

-20 Jan-09

Source: Westpac-Melbourne Institute

-20

Jan-10

Jan-11

Jan-09

Jan-10

Jan-11

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14 October 2011

House price expectations by age group

net % 100 80 60 40 20 0
*% expecting rise minus % expecting fall
Source: WestpacMelbourne Institute

House price expectations by buyer*

net % 100 100 80 60 40 20 0 -20 40 20 0 -20 May-09
Source: Westpac-Melbourne Institute

net %

net %
*composite based on weighted responses by age-group; % reporting expected rise minus % reporting expected fall

18-24 25-34

35-44 50-54

45-49

55-64 65+

100 80 60

80 60 FHBs upgraders investors

40 20 0 -20

-20 Jan-09

Jul-10

Apr-10

Oct-11

Jan-10

Jul-11

Nov-09

May-10

Nov-10

May-11

Nov-11

House prices, actual vs expected

150 125 100 75 50 25 0 -25
Source: RP Data-Rismark, Mortgage Choice, Westpac-Melbourne Institute

House prices: actual vs expected by state

140 120 100 80 60 40 20 0 -20
Aus
Source: Westpac, Melbourne Institute, RP Data-Rismark

net%* ann% 30 expectations, next 12mths (Westpac-MI survey, lhs) expectations, next 12mths (Mortgage Choice survey, lhs) 25 actual dwelling prices, previous 12mths (rhs) 20
*% expecting prices to rise minus % expecting prices to fall

ann %

ann% expectations next 12 months (lhs)* actual last 12 months (rhs)^

*net% expecting prices to rise, ^capital cities, all dwellings

30 25 20 15 10 5 0 -5 -10

15 10 5 0 -5

-50 -10 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

NSW

Vic

Qld

SA

WA

Consumer expectations for house prices

100 90 80 70 60 50 40 30 20 10 0 Nov-08* Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 %responses Fall No-change
Sources: WestpacMelbourne Institute, Mortgage Choice

Consumer sentiment: housing

100 90 80 70 60 50 40 30 20 10 0 100 80 60 40 20 0 -20 -40 -60 -80 -100 Oct-89 time to buy a dwelling (rhs) price expectations next 12mths (lhs) wisest place for savings: real estate (rhs) Oct-93 Oct-97 Oct-01 Oct-05 Oct-09 index
Sources: Melbourne Institute, Westpac Economics

%responses Rise
regular survey months are Jan, Apr, Jul, Oct *Nov-08 figures are from a similar survey conducted by Mortgage Choice

index
*deviation from long run avg, price measure is net % expecting prices to rise price outlook subdued mixed on time to buy ... ... and not keen on investing

25 20 15 10 5 0 -5 -10 -15 -20 -25

Finance by borrower
12 10 8 6 4
3.4%

Auction clearance rates sub-50%

AUDbn/mth
Sources: ABS, Westpac Economics

AUDbn/mth

Value of housing finance

12 10

90 80 70 60 50 40 30 20 10

%
period average

90 80 70 60 50 40

Upgraders, ex-refinancing Investor finance FHBs

7.0%

8 6 4 2

6.5%

2
2011, to date

Sydney Melbourne

latest 3 weekends *seasonally adjusted by Westpac

Sources: APM, RP Data Rismark, Westpac Economics

30 20 10 0

0 Aug-01

0 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11

0 Jul-88 Jul-91 Jul-94 Jul-97 Jul-00 Jul-03 Jul-06 Jul-09

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.