Economic and Property update

1. Economic and Property update Paul Braddick ANZ Banking Group Limited Perth

2. Summary Markets ruled by fear but global backdrop supportive • Extreme volatility/weak growth from Europe, Japan & US • Asset markets priced for Armageddon • Asian region to drive growth (structural uplift) • Solid commodity demand Australia will out-perform • Exposure to Asia, mining profits and investment boom • Growth at trend or above, low unemployment? • Unrivalled policy ammunition (incl. currency) • Housing - sentiment shaky, but fundamentals solid • Weak sentiment, job security • Solid economic backdrop/ltd forced sales, tightening fundamentals • Commercial property well placed • Low vacancy, restricted supply • Rents to rise, yields to firm • Office & industrial to outperform

3. Debt overhang a key structural constraint for many key developed economies for years to come Fiscal & Debt position

4. The next ‘I’ in PIIGS Italian debt scenarios Italy 10-year bond yields

5. China growth story is structural and ongoing From today to 2025… • 350 million more people will move to the cities – 103 million have moved since 1990. • 221 Chinese cities will have 1 million+ people living in them – the whole of Europe has 35 today. • 1 million kilometres of new road and 28,000 kilometres of metro rail will be laid. • 170 mass-transit systems will be built - twice the number that all of Europe has today. • 40 billion square metres of floor space will be built to construct five million buildings • 50,000 skyscraper will be built (+30 stories) – the equivalent of building 2 Chicago's every year. • 97 new airports will be built • 1 in 7 planes assembled by Boeing and Airbus will be delivered to China. • 1,000 MW of coal-fired power capacity will be commissioned every week - equivalent to 4 million tonnes of new coal demand • 1 wind farm turbine will be built every hour and a half.

6. Don’t forget India (steel production and coal demand set to rise sharply) India & China Coal/Port Map Source: ANZ, AME, Wood Mackenzie

7. Mining investment boom has not (yet) been interrupted by global events Private business capital expenditure New projects advanced since September include the $29bn Wheatstone LNG project and the $27bn Olympic Dam expansion Source: ABS

8. Australia heading towards above trend growth but near-term labour market outlook uncertain Unemployment rate GDP growth Sources: ABS, ANZ Research

9. ‘Underlying’ inflation back in target range but growth expected to accelerate and capacity tight Consumer price inflation Sources: ABS, RBA, ANZ Research

10. RBA forced off the fence by deepening European crisis and soft domestic activity ‘Market pricing’ of cash rate changes RBA cash rate ANZ Current market pricing Sources: Bloomberg, RBA, ANZ Research

11. Two speed economy re-emerging – driven by surging business investment and wages Average compensation of employees Business investment Sources: ABS, ANZ Research

12. Net overseas migration rebounding… Net overseas migration ANZ forecast Access Economics forecast Sources: ABS, ANZ Research

13. …but the number of Australians travelling overseas has accelerated sharply Short term arrivals and departures Net overseas tourist flow departures arrivals Source: ABS, ANZResearch

14. Housing market shaky, but fundamentals supportive • Down, down, prices are down • Housing finance, auction clearance rates, house priceshave fallen • Brisbane, Gold Coast, Perth & Melb. markets have been hardest hit • November 2010 rate hikes hurt affordability and sentiment • Rising household costs and a softening labour market present substantial risks and weak sentiment could drive further price falls • Supply to pressure inner-Melbourne apartments • Nonetheless, market fundamentals supportive • The market is tight, evidenced by record negative market balance & near record low vacancy rates – will boost rents • A rebound in net overseas arrivals will lift demand • Building momentum weak - supply well below underlying demand • Resource boom and tight labour market conditions will boost incomes and maintain forced selling at low levels • Two speed economy will favour/support Qld, WA, SA & NT • Interest rates now falling, affordability improving

15. Recent housing data and market sentiment weak Auction clearance rates (LHS) and auction sales (RHS) Mortgage delinquencies House prices (LHS) and Finance approvals (RHS) Days on market Sources: ANZ, ABS

16. Are Australian house prices ‘overvalued’? Most ‘analysis’ based on simple metrics • i.e. House price to income ratio, rental yields • Rising incomes & reduced interest rates fully account for ALL price growth since 1985 • (rising purchasing power has matched price gains) • Prices also underpinned by structural changes including: • Financial deregulation & product innovation • Capital gains tax relief • FHOG • Increased size/quality of dwellings • Structural dwelling shortage • Real question is: will house prices fall significantly? • Economic backdrop supportive (wage gains, low unemployment) • Housing shortage entrenched – vacancies will tighten, rents to rise Sentiment may win battle, but fundamentals will win the war

17. All of the growth in house prices since mid-1980s explained by rising incomes & lower interest rates Median house price vs. purchasing power Actual house prices Purchasing power - income growth and interest rates* * Represents the average households purchasing power over the median priced home Sources: ABS, RBA, ANZ Research

18. All of the growth in house prices since mid-1980s explained by rising incomes & lower interest rates Perth median house price vs. purchasing power Actual house prices Purchasing power - income growth and interest rates* * Represents the average households purchasing power over the median priced home Sources: ABS, RBA, ANZ Research

19. New home building will remain well below underlying demand in the years ahead Population growth vs. dwelling completions ‘000 ‘000 Annual population gain (lhs) Annual dwelling completions (rhs) Sources: ABS, ANZ Research

20. Unprecedented housing shortage – will continue to deteriorate Housing market balance ‘000 Underlying demand Completions Shortage Surplus Sources: ABS, ANZ Research

21. The housing shortage has already reached unprecedented levels – and will get much worse! WA housing market balance ‘000 Underlying demand Completions Shortage Surplus Sources: ABS, ANZ Economics and Markets Research

22. Vacancies tight and will tighten further Residential vacancy rate Long-term average Perth Melb. Syd. Adel Source: REIA, ANZResearch

23. Movements in real rents reflect a widening structural shortage of rental properties CPI: Rents vs. total Sources: RP Data-Rismark, Residex & ABS

24. Perth rents re-accelerating Rents: average vs. marginal Sources: Residex, ABS, ANZ Research

25. House prices have eased lower in most capital cities Median house prices Sources: RP Data-Rismark, ANZ Research

26. Commercial property outlook: valuations attractive Office market - very well placed • Fundamentals solid – strong demand, weak supply, tight vacancy • Early stages of multi-year cyclical upswing – rents will rise • Uncertainty weighing on valuations but cap rates should firm Retail – solid fundamentals, but demand uncertain • Tight vacancies, weak supply • Healthy labour market, rising household incomes • But household caution, rising savings rate • HH costs rising – utilities, fuel, insurance and debt service • Spending should rebound, but will RBA allow? • Industrial – well placed • Vacancy tight, weak supply • Above trend GDP growth, investment boom • Import penetration rising – strong A$ - warehouse/logistics Hotels – business demand booming, tourism slow

27. New non-res. building activity has slumped - supply additions will be limited Non-res. building approvals* Retail Office Industrial Hotel etc * Annualised Trend Source: ABS

28. Retail property has consistently outperformed office and industrial markets but… Capital return index Total returns year to Sept 11 Office (-17.2%)* Retail (-10.9%)* Hotel (-17.1%)* Industrial (-19.8%)* * Peak to trough Source: IPD

29. …questions over strength of future retail demand Retail turnover Internet sales leakage • long-run implications for high margin/generic retail Increased tourist $ offshore & slow inbound tourist $ • strong A$ (may get stronger!) • Slowdown in net o/s migration • temporary (tight labour market, skilled labour shortages) • Increased household caution • GFC related fear/wealth declines • return to more ‘normal’ savings • deposit war/special rates Sales should grow with income • Solid income growth… • …but sentiment soft and RBA… Household savings rate

30. Office vacancies improving (even Bris. & Perth) CBD office vacancy rates Source: Property Council of Australia, ANZ Research forecasts

31. Incentives remain unusually high relative to vacancy – will correct at some point Sydney CBD office: incentives vs. vacancy Source: Jones Lang LaSalle, ANZ Research

32. Office rents appear to have bottomed (ex Canberra) Prime CBD office rents (net effective) Source: Jones Lang LaSalle, ANZ Research

33. Yields should tighten as sell off was ‘overdone’ relative to fundamentals Office Sources: Property Council/IPD, ANZ Economics and Markets Research, RBA

34. Summary Global risks high and markets priced for Armageddon • Asset market opportunities? • Incentives high to avoid meltdown Australia will out-perform • Resource/infrastructure investment boom • Growth at trend or above, low unemployment? • Two speed Housing sentiment soft but fundamentals strong • Sentiment toxic but affordability has improved • Housing shortage will become critical – rents will rise • Investors & first homebuyers will return to market • Commercial property very well placed • Tight vacancy, solid demand, restricted supply • Rents to rise, yields compress • Retail will under-perform

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