1. New Housing and Renovations Outlook The Outlook for the Housing Industry Ben Phillips HIA Senior Economist Sydney – Plumbing Sector Forum June 1, 2010

2. New Housing and Renovations Outlook Where are we heading? Housing Recovery Background 1 st round drivers 2 nd round drivers Constraints Home prices and the renovations sector The future

3. New Housing and Renovations Outlook Australian Economy 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

4. New Housing and Renovations Outlook The China boost will be a big part of that growth

5. New Housing and Renovations Outlook Unemployment rate has now peaked Australia’s unemployment = 5.4% - well down on the dire forecasts (8.5%) of one year ago.

6. New Housing and Renovations Outlook Interest rate hiking cycle well under way The RBA lifted the cash rate by 25bps in May, the sixth hike in the last seven meetings. More to come, but uncertainty as to how many. Housing affordability will gradually worsen.

7. New Housing and Renovations Outlook Federal Budget 2010/11 Costs of living and taxation 50% discount on up to $1,000 on interest income Standard deduction to simplify the tax system Skills and infrastructure $661 million for the Skills for Sustainable Growth strategy $5.6 billion for a new infrastructure fund and $1 billion to renew rail networks Renewable and energy efficiency $652 million Renewable Energy Future Fund Growing the economy Resource Super Profits Tax from 1 July 2012 Company tax rate cut to 29% in 2013-14 and 28% from 2014-15 Company tax rate cut to 28% from 2012-13 for small businesses From 1 July 2012, instant asset write off for small business assets <$5,000 Superannuation Increasing the super guarantee to 12% National Health and Hospitals Network Additional $2.2 billion to meet the needs of the “modern health system”

8. New Housing and Renovations Outlook Resources Super Profits Tax & Housing The Government will place a 40% tax on super profits from resource projects. The tax will be placed on profits after allowing for extraction costs, recouping capital investment and after providing shareholders with a normal return on their investment. The new tax will be phased in over five years from 1 July 2012. The existing state royalties regime (whereby resources firms paid tax to the State Government on the level of production) will be retained, but the Federal Government will refund these payments back to the mining companies Main reasoning behind the implementation of the RSPT is that taxes from the mining sector have more than halved as a proportion of profits over the last decade Impact on housing Because the tax will apply to any non-renewable resources extracted from the ground, it will affect a range of raw materials used in residential building Companies mining key resources for residential building, such as sand and gypsum, will be affected The flow on impact could be higher prices for raw materials as mining companies potentially try and restore returns to previous levels In some instances there will be a world price and the ability of firms to charge beyond that price may be difficult Some building products that may be impacted: steel, concrete, bricks, glass and plasterboard

9. New Housing and Renovations Outlook New Housing

10. New Housing and Renovations Outlook The starting point Back into trend territory but population growth has doubled in the past 5 years!

11. New Housing and Renovations Outlook What happened in 2009 was poor … National housing starts fell 4% in 2008 and by 7% in 2009

12. New Housing and Renovations Outlook Sustainable recovery? Land Land sales were 0.8% lower than in the Dec 2008 quarter Median land price was 13.1% higher than in the Dec 08 quarter

13. New Housing and Renovations Outlook Sustainable recovery? Housing finance New home lending fell by 15% in the March 2010 quarter. Obvious tapering off since the withdrawal of the FHOB (from October 2009 onwards)

14. New Housing and Renovations Outlook Sustainable recovery? Housing finance After the withdrawal of FHB’s, the housing recovery now depends on upgrade buyers and investors Non-FHB segment down 44%, compared with a decline of 8% nationally

15. New Housing and Renovations Outlook Sustainable recovery? Building Approvals Detached house approvals were up 1% in the March 2010 quarter Multi-unit approvals were up 12% in the March 2010 quarter Overall up 4% over the March quarter

16. New Housing and Renovations Outlook Not building enough houses

17. New Housing and Renovations Outlook Housing starts forecast brighter but not bullish

18. New Housing and Renovations Outlook Housing starts forecast

19. New Housing and Renovations Outlook First Home Buyer Affordability is a big issue The affordability index for Australia fell by 4% in the March 2010 qtr and 28.7% over 12 months. Capital cities fell by more than regional areas on account of higher house prices.

20. New Housing and Renovations Outlook The rental market – a dire lack of new stock The real casualty of the current housing squeeze Vacancy rates are at crucially ‘tight’ levels … … and rents keep creeping up

21. New Housing and Renovations Outlook Investor lending – Australia Lending for construction was down 23% in March 2010 on the same month a year ago on a quarterly basis.

22. New Housing and Renovations Outlook Renovations

23. Home values recovered strongly in 2009 House prices haven’t crashed despite the early-2009 ocean of commentary predicting they would crash.

24. New Housing and Renovations Outlook Home prices are on the up almost across the board

25. New Housing and Renovations Outlook Renovations – a sustainable recovery? Renovations activity has been buoyed by strong house price growth and positive news on the outlook for the labour market

26. New Housing and Renovations Outlook Major Alterations & Additions Indicators of major alts and adds are trending higher

27. New Housing and Renovations Outlook The outlook for renovations

28. New Housing and Renovations Outlook Other Matters

29. New Housing and Renovations Outlook Trade prices and availability Shortage of trades people will intensify due to increased building activity and a second round mining boom

30. New Housing and Renovations Outlook The built form – types of dwellings

31. New Housing and Renovations Outlook Key challenges ahead An ageing population and growing population poses enormous challenges and opportunities for both new housing and renovations. Sustainability of new home building recovery now depends on the return of upgrade buyers and investors to the residential property market. Affordable land supply, inequitable taxation on new housing, increased regulation (e.g. higher ‘star’ rating) pushing people towards existing housing stock, planning delays, and skilled labour shortages; are short, medium, and long term challenges. These issues have a recognition they haven’t had before and that is an encouraging start, but the clock is ticking …

32. New Housing and Renovations Outlook THANK YOU FOR YOUR TIME THIS MORNING Ben Phillips HIA Senior Economist June 2010 http://economics.hia.com.au