Commonwealth Bank of Australia ABN 48 123 123 124 Australian Residential Housing Sydney, 9 September 2010: Senior executives from the Commonwealth Bank of Australia (“the Group”) will soon be travelling overseas to meet with some of the Group’s offshore shareholders and other investors interested in Australia and the Australian banking sector. In the light of recent commentary from a number of sources on the robustness of the Australian residential housing market, the Group (given it s significant exposure to this section of the economy) anticipates that this will be an important i ssue for many of the investors it is scheduled to meet with. In anticipation of these discussions, the Group has produced a presentation entitled “Australian residential hous ing mortgages: CBA m ortgage book secure”. A copy of this document has been lodged with the ASX today. For more information contact: Warwick Bryan Bryan Fitzgerald Investor Relations Communications Commonwealth Bank Commonwealth Bank Tel: 0406 316 725 Tel: 0414 789 649
Transcript
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Australian Residential Housing
Sydney, 9 September 2010: Senior executives from the Commonwealth Bank ofAustralia (“the Group”) will soon be travelling overseas to meet with some of theGroup’s offshore shareholders and other investors interested in Australia and theAustralian banking sector.
In the light of recent commentary from a number of sources on the robustness of theAustralian residential housing market, the Group (given its significant exposure to thissection of the economy) anticipates that this will be an important issue for many of theinvestors it is scheduled to meet with.
In anticipation of these discussions, the Group has produced a presentation entitled“Australian residential housing mortgages: CBA mortgage book secure”. A copy of thisdocument has been lodged with the ASX today.
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Commonwealth Bank of Australia ACN 123 123 124
Australian residential housing andmortgages
9 September 2010
Determined to be better than we‟ve ever been.
CBA mortgage book secure
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Overview
Concerns of a potential residential housing price bubble in Australia are often based on asuperficial/incomplete analysis of the Australian market.
Taking into account geographic differences, the ratio of house prices to income in Australiais not that much different to most other comparable countries.
Population growth and excess demand relative to supply has been a key driver of Australianhouse price appreciation – these factors are unlikely to reverse in the near term.
Other factors driving house price appreciation are structural, rather than cyclical, in nature,including the broader accessibility of credit and larger average house sizes.
The household debt ratio in Australia is similar to many other developed countries, and debtincreases have largely been taken up by customers in the strongest position to service it.
The strong fundamentals of the Australian economy provide a firm underpinning to thehousing market, reducing the risk of a sudden and dramatic collapse in house prices.
Historically, home loan losses have been very low notwithstanding house price movements,reflecting strong portfolio credit quality.
Given the high quality of the CBA mortgage book, even under the most highly stressedscenario, potential losses would be modest (~0.2% of total home loan balances).
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Concerns of a housing bubble are often based on asuperficial/incomplete analysis of the Australian market
Commentary Our View
Morgan Stanley, August 2010“In my view, Australian house prices are expensive on
every value metric, they are expensive relative tohistory and expensive relative to houses incomparable countries”
Jeremy Grantham, GMO, June 2010He said that ….Australia had an unmistakablehousing bubble and that prices would need to comedown by 42 per cent to return to the long-term trend."You cannot possibly miss it," he said. "The price ofhousing typically trades about 3.5 times of familyincome and in bubble it goes to 6 or . . . 7.5 (times).
"Australia is having one now. You are at near 7.5times family income . . . which suggests you are twicethe size that you should be.”
Australia‟s house-price-to-income ratio is 4.3,similar to many other countries (slide 4)
Australia‟s capital city house price to income
ratio of 5.6 is comparable with coastal city
metrics globally (slide 4)
Whilst this ratio has trended higher over time, alarge component of the uplift is driven bystructural factors (slides 5, 6) and is unlikely toreverse
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Taking into account geographic differences, Australianhouse prices are similar to other countries
House Priceto Income
Australia Sydney 6.2
Australia Melbourne 5.7
Australia Brisbane 4.7
US San Francisco 7.0
US Los Angeles 5.7
US New York 7.0Canada Vancouver 9.3
UK Bristol-Bath 6.1
NZ Auckland 6.7
NZ Wellington 5.8
Ratio of house prices to income Coastal city comparison
0
2
4
6
1993 1996 1999 2002 2005 2008
Source : RP Data/CBA/ABS; UBS
Australia the 4th least densely settled country in the world – 83% live within 50 kms of the coast. Coastal locations demand a premium – Australia‟s population concentration in capital/coastal cities distorts
comparisons to other , more densely settled countries. Australia‟s capital city house price to income ratio of 5.6 is consistent with coastal city metrics globally
On a nation-wide basis, Australia‟s house price to income ratio of 4.3 is “not that different to most other
countries” RBA Deputy Governor Battellino, June 2010.
Source : Demographia; UBS
Australia: 4.3Canada: 4.1UK: 5.6US: 3.3
Capital Cities: 5.6(see table at right for majorcity comparison)
Capital Cities
Australia-wide
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Population growth has been a key driver of Australianhouse price appreciation
Strong net migration Population growth vs dwelling starts
Australian population growth is running at ~2% pa, providing a firm underpinning to housing demand.
Over recent years, net migration has trended in a range of between 150,000 and 300,000 pa.
Structural under-supply of housing is reflected in gap between new dwelling starts and population growth.
Source : ABS. CBA Economics. Dwelling starts relates to physical construction activity(all new housing)Source : ABS
0
100
200
300
400
500
50
100
150
200
250
Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
Dwelling starts (lhs) Population growth (rhs)
„000s „000s
0
50
100
150
200
250
300
350
400
450
500
1981 1985 1989 1993 1997 2001 2005 2009
Natural Increase Net migration
„000s
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100
150
200
250
1986 1991 1996 2001 2006
m2
0
12
3
4
5
6
7
8
9
10
1990 1994 1998 2002 2006 2010
%
Other drivers of house price appreciation are structural,rather than cyclical in nature
Australia‟s low inflation/low interest rate environment has dramatically increased the demand for, and
accessibility of credit.
On RBA estimates, the reduction in mortgage rates during the 1990‟s expanded the potential housingmarket by 600,000 households. Absent a dramatic response from the supply side, a large part of the lift invaluation ratios is a permanent structural shift.
Australia‟s propensity for larger sized homes has also contributed to valuation growth, with the average
floor area for a new home now ~50% larger than in 1986.
Low inflationary environment
Inflation (10 yr rolling average)
Average dwelling size
Houses
Other residential
RBA target range
Source : ABS Source : ABS
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The household debt ratio in Australia is similar to manyother developed countries
%
Australian household debt as a percentage of income similar to many other developed countries.
Household debt(per cent of household disposable income)
UKAustraliaNZCanadaUS
1988 2000 2009
20
40
60
80
100
120
140
160
180
200
Japan
Germany
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3.4%6.4%
16.3%
24.7%
49.2%
First (bottom 20% of income earners) Second
Third Fourth
Fifth (top 20% of income earners)
Source : HLDA Release 6.0; RBA
Much of the increase in household debt has been takenup by segments in the strongest position to service it
Home ownership has been steady at ~70% for decades
Owner-occupied debt increasingly in older age brackets
Home ownership amongst <35 years trending lower (now <40%)
50% of household debt held by top 20% of income earners
75% of household debt held by top 40% of income earners
Households with owner-occupied debt Share of household debt by income
0
20
40
60
<25 25-34 35-44 45-54 55-64 >65
1997/98 2007/08
Age of household reference person
%
Source : CBA Economics
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Strong economic fundamentals minimise the downsiderisk to Australian house prices
Low inflationary, low interest rate environment
Supportive labour market – low unemployment
Strong GDP growth + favourable growth outlook (including strong links to Asia)
Strong banking sector + sound regulatory regime
GDP growth (pa)
Source : ABS, IMF, Consensus Economics.
10 YrAvg
Forecast2010-11
Asia 8.0 7.8
Australia 3.1 3.4
US 1.9 2.8
Japan 0.7 1.9
UK 1.7 1.7
Euro Zone 1.4 1.3
Unemployment
%
5.3
9.7
7.8 8.07.6
9.3
8.4
Australia US UK Canada Germany France Italy
Fullemploymentat approx 5%
True unemploymentcloser to 15%
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House prices movements vs Home loans losses (CBA)
(RHS) (LHS)
Historically, home loan losses have been very low,notwithstanding cyclical house price movements
Historical home loan losses have been very low, despite cyclical house price movements
Strong portfolio credit quality a key driver of low loss rates
Effective interest rate settings provide a natural dampening effect to cyclical changes
%
Source : CBA Economics.
%
-50.0
-40.0
-30.0-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
M a r - 8 8
M a r - 8 9
M a r - 9 0
M a r - 9 1
M a r - 9 2
M a r - 9 3
M a r - 9 4
M a r - 9 5
M a r - 9 6
M a r - 9 7
M a r - 9 8
M a r - 9 9
M a r - 0 0
M a r - 0 1
M a r - 0 2
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
Home loan losses (LHS) House Price movements (annual % change) RHS
Peak Home LoanLosses of 5bpts
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Even under a high stress scenario, potential CBA homeloan losses would be modest ($740m or 0.2% of book)
* Additional insured losses under high stress scenario of $1.5bn (~0.5% of book)
14%10%
-30%
InterestRates Unemployment PropertyValues
High stress loss = $740m(0.2% of book)*
Factors Mitigating AgainstPotential Losses
Portfolio average LVR 43%
Loans >80% LVR mortgage insured*
70% of customers paying in advance
(avg 9 payments)
Rate buffer of 150 bpts built into
serviceability tests
Full recourse to borrower
Based on 6x probability of default eg:
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Appendix: Typical drivers of a housing bubble
Typical Drivers Current Position
Increased housing stock leading toexcess supply
Strong population growth; Demand>Supply
An influx of speculators/investors Investment lending steady at ~30%
Housing affordability issues Ratio of house prices to income comparable toother countries, once geographic issues taken into
accountDomestic economic shock –
trigger for price correctionAustralian economy well placedClose to full employment
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United States
Unemployment ~5% ~10%
No-Recourse Lending No Yes
Variable vs Fixed 85%/15% 15%/85%
Adjustable Rate Loans Nil/minimal Widespread
Sub-Prime % (Mkt) 0% ~36%
Securitisation % ~2% ~55%
Account Ownership Retained by bank Extensively on-sold
Appendix: Australia vs US
CBA/Australia
1
1. At peak in 2006. Source UBS
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Appendix: Household Wealth & Leverage
0
800
1600
2400
0
800
1600
2400
Mar-01 Mar-03 Mar-05 Mar-07 Mar-09
$bn $bn
Cumulativehousing
equity withdrawal
Cumulative increasein dwelling wealth
Cumulative
rise inhousing debt
Leverage to Housing Stock Household Wealth
Source : CBA Economics.
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Appendix: Population/Demographics
55%
43%
27%24% 24%
-25%
Australia UnitedStates
NewZealand
Canada UnitedKingdom
Japan
Projected population change2009-2050
Population living in Urban areas ofgreater than 750,000 persons
61%
48% 47%
43%
29% 29%
Australia Japan UnitedStates Canada NewZeland UnitedKingdom
Source : PRB, Rismark
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Appendix: Genworth Financial
APRA regulated
AA- Credit Rating (S&P)
Strong capital position:
APRA require domestic insurers to hold twice as much capital as
offshore regulators
requirements met under even the most “extreme” stress scenarios
(over-and-above CBA stress tests)
high quality liquid investments
“Ring-fenced” from US parent
Regular CBA review
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Disclaimer
The material that follows is a presentation of general backgroundinformation about the Group‟s activities current at the date of thepresentation, 9 September 2010. It is information given in summary formand does not purport to be complete. It is not intended to be relied uponas advice to investors or potential investors and does not take into
account the investment objectives, financial situation or needs of anyparticular investor. These should be considered, with or withoutprofessional advice when deciding if an investment is appropriate.
