The Economic and Housing Outlook November 2008 Ben Phillips Assistant Director – Industry

1. The Economic and Housing Outlook November 2008 Ben Phillips Assistant Director – Industry

2. “The only constants in world politics these days are change, uncertainty and fear.” Canberra Correspondent, October 28 2008

3. The global economy and Australia • Thank you America for one enormous mess! • Equity markets tanking + • Credit rationing because international markets are effectively shut + • The U.S. in recession and the U.K., Europe, Japan, and NZ there also or almost there + • Confidence is shot and buyers are nowhere to be seen + • Bank failures and more to come = • The largest financial meltdown since the Great Depression

4. The global economy and Australia • Let’s not forget the starting point for Australia

5. Australia – a strong starting point • Australia enters this difficult time as one of the strongest economies in the Western world. • Australia’s four major banks are in the top tier of global rankings and are in extremely healthy shape by international standards. • Australia can take interest rates lower than they currently are. The U.S. can’t do this. • The Federal Government’s $10.4 billion fiscal package announced in October is a well designed, short term package. • The Government has tripled the FHOG for new housing.

6. Australia’s Economy is still slowing sharply

7. The Fiscal Stimulus Package • $10.4bn ‘Financial Security’ package. • That’s half the Budget surplus, but we’ve had tax cut packages in recent years worth almost as much dosh. • Key measures:- • $1.5bn for first home buyers with $21k for a new home. • $4.8bn for 4mn pensioners, retirees, and carers. • $3.9bn for 2mn families. • $187m for 56,000 training places. • Accelerated implementation of infrastructure spending.

8. Interest rates are falling … • The Official Cash Rate (OCR) has been lowered by 200 basis points in three hits (25,100,75). • Banks have passed on most of the cuts. • The RBA will cut rates as much as it thinks it needs to. • Continued rate cuts if poor economic data continues to flow, unemployment will be watched most closely.

9. The key risks are: • Not enough funds to lend • Confidence so low that business/households not prepared to spend. • Funding costs could blow out again. • Inflation still high, 5% over the last 12 months is well beyond the ‘comfort zone’. • Early indicators show this is easing.

10. Interest rates are falling … • 200 basis points – now we’re talking!

11. Consumer confidence has been hammered … • First we had high petrol prices, rising interest rates, higher food bills, rising rents, and poor housing affordability. • Now we have falling interest rates but the credit crisis continues to spook the markets – the barrage of media commentary telling us Armageddon is upon us doesn’t help either!

12. … as has home buying sentiment

13. Unemployment is the key to everything • So far the story looks very, very good!

14. New Home Building

15. Housing Starts – a claytons recovery • The duration of the down cycle is a big problem, especially on the Eastern seaboard

16. Building Approvals – mixed bag

17. The State of the Economy

18. Victoria • Still the goldilocks state – not too hot and not too cold • The economy is slowing and will be relatively hard hit. • New housing has greater potential than NSW, WA, and Qld because … • … house and land packages are relatively affordable • Housing Affordability is the best of the four largest states • New South Wales • Who stole my wallet?! • Somewhere has to be the below average growth student and NSW is it. • New home building is still extremely weak largely thanks to Sydney ... • … but don’t forget 2007H2 • Economic growth in 2007/08 was the fastest since 1999/00

19. South Australia • The “10,000” state • Favourable affordability and a boost to population growth through migration • Land is readily available although it’s been rising in price • The kick from resources will be very large and … • … this is already reflected in high confidence for the future but ... • … a dire lack of water is a massive constraint • Queensland • A huge infrastructure spend is well underway and that is positive for the state. • Housing conditions have deteriorated markedly in the southeast corner of the state over 2008. • Cracks have appeared in parts of North Queensland. • Population growth will always be strong … • … and the short term weakness will pass.

20. Western Australia • And the winner is! • Australian voters don’t like early elections! • With growth comes growing pains – no land, no labour, no housing, and no gas. • Very sharp fall in new home building. • Very strong economy and … • … the housing potential is very high • Tasmania • Along with SA, Tasmania is the over-achieving state • A relatively affordable housing market together with deeper economic integration with the mainland … • … has seen Tasmania among the most consistent and strongest economies and housing markets this decade. • Ill economic headwinds of late will not by-pass the Apple Isle.

21. The Bottom Line

22. There is a big shortage of new homes

23. The outlook for housing starts

24. House Prices and the Renovations Sector

25. House Prices – reversing in late 2008

26. The Renovations Sector

27. The Renovations Sector

28. HIA Forecasts – Renovations

29. Finally …. 1. Housing policy update • National Rental Affordability Scheme • Housing Affordability Fund • Home Super Saver Accounts • National Housing Supply Council • Investment in training facilities

30. 2. So, where to over the next 12 months? A mixed bag • The ‘Financial Security’ package will be a help but not a solution. • Tripling of the FHOG for new homes is an important boost. • Beware of:- • A shortage of credit. • The possibility of further blow outs in bank funding costs. • A rising unemployment rate. • Falls in commodity prices (watch iron ore and coal). • Interest rate cuts are a big positive for the industry but ... • …we still have to deal with a shortage of skilled labour and problematic state and local governments.

31. Thank You for your time this morning Ben Phillips Assistant Director – Industry Policy November 2008 http://economics.hia.asn.au