Bubble, bubble –,toil and trouble?toil and trouble?

15 February 201115 February 2011

facilitating debate on the outlook for the markets

Chris JoyeC s JoyeManaging DirectorRismark InternationalRismark International

1. Portfolio Performance: Best Risk-Adjusted Returns Outside of Cash

● Assumes you can access an ‘index’ of RRE

L ibl l i d J 8● Longest possible sample period to compare: commences June 1982

● On risk-adjusted basis, outperformed:

– Australian equities

– International equities

– 10 year government bonds

– LPTs

Asset-Class Risk and Return (June 1982 to June 2010)

AustGlobal

10yr Aust RRERisk and Return

Aust. Equities Accum.

Equities Net

Accum.

10yr Govt

Bonds

90 Day Bills

Aust. LPTs

Accum.

RRE (Net

Return)

Arith Return (%) 13 3% 10 4% 11 7% 8 5% 10 0% 10 8%Arith. Return (%) 13.3% 10.4% 11.7% 8.5% 10.0% 10.8%

Standard Deviation (%) 19.7% 14.7% 8.7% 1.3% 12.8% 3.4%

Sharpe Ratio 0.25 0.13 0.37 0.00 0.12 0.67

Source: Rismark

4Source: Rismark

1. Portfolio Performance: Genuinely Uncorrelated

• 1987 Crash—Aussie RRE outperformed equities

R i A i RRE t f d iti• 1991 Recession—Aussie RRE outperformed equities

• 2001 Tech Wreck—Aussie RRE outperformed equities

• 2007-09 GFC—Aussie RRE outperformed equities

Correlation Coefficients (June 1982 to June 2010)

Aust. i i

Global10yr

90 Day Aust.RRE (Equities

Accum.

Global Equities

Govt Bonds

90 Day Bills

Aust.LPTs

(Net Return)

Aust. Equities Accum. 1.00

Gl b l E iti 0 64 1 00Global Equities 0.64 1.00

10yr Govt Bonds 0.01 -0.03 1.00

90 Day Bills 0.09 0.17 0.24 1.00

Aust. LPTs 0.68 0.50 0.16 0.09 1.00

RRE (Net Return) -0.19 0.05 -0.14 0.03 -0.06 1.00

Source: Rismark

5

1. Portfolio Performance: Strong Strategic Asset-Allocation Imperative

Minimum Variance Portfolio Allocations with RRE (Net)

90%

100%

S&P/ASX All Ords Global Equities LPT Bonds Bills RRE (Net)

70%

80%

90%

atio

n

40%

50%

60%

tfo

lio

All

oca

10%

20%

30%Po

rt

0%

8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5%

Target Portfolio Return

6Source: Rismark

Population Growth vs. Dwelling Completions

2. Fundamentals: Underlying Demand vs. Supply

450,000

500,000

Population Growth Dwelling Completions

300,000

350,000

400,000

200,000

250,000

50,000

100,000

150,000

0 Jun-8

5

Jun-8

6

Jun-8

7

Jun-8

8

Jun-8

9

Jun-90

Jun-91

Jun-92

Jun-93

Jun-94

Jun-95

Jun-96

Jun-97

Jun-9

8

Jun-9

9

Jun-0

0

Jun-0

1

Jun-0

2

Jun-0

3

Jun-0

4

Jun-0

5

Jun-0

6

Jun-0

7

Jun-0

8

Jun-0

9

Jun-10

7Source: Rismark; ANZ

Change in ABS Population Projections

2. Fundamentals: Population to Increase by 60%

50,000,000

Series B (2008) Series B (2004)

40,000,000

45,000,000

35,000,000 Treasury IGR: 36m

25,000,000

30,000,000

20,000,000 200

6

2010

2014

2018

2022

2026

2030

2034

2038

2042

204

6

2050

2054

2058

206

2

206

6

2070

2074

2078

2082

208

6

2090

209

4

2098

8Source: Rismark; ABS

National Housing Supply Council (2010): Gap between Underlying Housing Demand and Supply

2. Fundamentals: National Housing Supply Council Shortage Estimates

Demand and Supply

700,000

500,000

600,000

lin

gs

300,000

400,000

be

r o

f D

we

ll

100 000

200,000Nu

mb

0

100,000

2009 2010 2011 2012 2013 2014 2019 2024 2029

9Source: NHSC

2. Fundamentals: Rental Vacancy Rates Very Low

Residential Vacancy Rate

Long Term Average Sydney Melbourne

5%

6%

Long-Term Average Sydney Melbourne

4%

5

2%

3%

1%

0% Mar-8

6

Mar-8

7

Mar-8

8

Mar-8

9

Mar-90

Mar-91

Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-9

7

Mar-9

8

Mar-9

9

Mar-0

0

Mar-0

1

Mar-0

2

Mar-0

3

Mar-0

4

Mar-0

5

Mar-0

6

Mar-0

7

Mar-0

8

Mar-0

9

Mar-10

10Source: REIA, ANZ

Relationship between National Median Dwelling Prices andNational Disposable Household Incomes (per household): March 1993 to

3. Valuation: Incomes Determine Dwelling Prices

National Disposable Household Incomes (per household): March 1993 to September 2010

y = 5.8322x - 151283R2 = 0 9569

$450,000

g R = 0.9569

$350,000

$400,000

dia

n D

wel

ling

$250,000

$300,000

Nat

ion

al M

edP

rice

$150,000

$200,000

All

Reg

ions

N

$100,000$40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000

National Disposable Household Income

11Source: Rismark

i k A li All i lli i i bl

3. Valuation: Dwelling Price-to-Disposable Income Ratio is Just 4.4x

• RBA: “the ratio of house prices to income is not that different from most other countries”

Rismark Australian All Regions Dwelling Price-to-DisposableHousehold Income Index

8x

Rismark All Regions Trimmed Mean Dwelling Price-to-Income RatioRismark All Regions Median Dwelling Price-to-Income Ratio

Jeremy Grantham (GMO)

6x

7x

Jeremy Grantham (GMO)

4x

5x

1x

2x

3x

0x Mar-93

Sep

-93M

ar-94S

ep-94

Mar-95

Sep

-95M

ar-96S

ep-96

Mar-97

Sep

-97M

ar-98S

ep-98

Mar-99

Sep

-99M

ar-00

Sep

-00

Mar-0

1S

ep-0

1M

ar-02

Sep

-02

Mar-0

3S

ep-0

3M

ar-04

Sep

-04

Mar-0

5S

ep-0

5M

ar-06

Sep-06

Mar-0

7S

ep-0

7M

ar-08

Sep

-08

Mar-0

9S

ep-0

9M

ar-10S

ep-10

12

3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0

Source: Rismark; ABS; HIA

3. Valuation: Inflation-Targeting Drove Downward Shift in Nominal Rates

Australian Headline Mortgage Ratesg g

16%

18%

RBA formally agrees 2 3%

12%

14%

12.6%

RBA formally agrees 2-3% inflation target

6%

8%

10%

7.3%

2%

4%

6%

0% Jan-80

Jan-8

1

Jan-82

Jan-8

3

Jan-8

4

Jan-85

Jan-8

6

Jan-87

Jan-8

8

Jan-89

Jan-90

Jan-9

1

Jan-92

Jan-9

3

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-0

0

Jan-01

Jan-0

2

Jan-03

Jan-0

4

Jan-0

5

Jan-06

Jan-0

7

Jan-08

Jan-0

9

Jan-10

13Source: Rismark; RBA

3. Valuation: Incomes Outpace Prices Since 2003

Disposable Household Incomes vs. Aussie Dwelling Values

ABS Disposable Household Incomes (per Household)

160

ABS Disposable Household Incomes (per Household)

RP Data-Rismark Capital Cities Hedonic

100

120

140

60

80

100

20

40

0 Dec-0

3

Ap

r-04

Au

g-04

Dec-0

4

Ap

r-05

Au

g-05

Dec-0

5

Apr-0

6

Aug-0

6

Dec-0

6

Apr-0

7

Aug-0

7

Dec-0

7

Apr-0

8

Aug-0

8

Dec-0

8

Apr-0

9

Aug-0

9

Dec-0

9

Apr-10

Aug-10

Dec-10

14Source: RP Data-Rismark

3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 9 9 0 0 0

3. Valuation: Incomes Outpace Prices Since 2003

Disposable Household Incomes vs. Aussie Dwelling Values

ABS Disposable Household Incomes (per Household)

160

ABS Disposable Household Incomes (per Household)

RP Data-Rismark Rest of State Hedonic

100

120

140

60

80

100

20

40

0 Dec-0

3

Ap

r-04

Au

g-04

Dec-0

4

Ap

r-05

Au

g-05

Dec-0

5

Apr-0

6

Aug-0

6

Dec-0

6

Apr-0

7

Aug-0

7

Dec-0

7

Apr-0

8

Aug-0

8

Dec-0

8

Apr-0

9

Aug-0

9

Dec-0

9

Apr-10

Aug-10

Dec-10

15Source: RP Data-Rismark

3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 9 9 0 0 0

Dwelling Price Growth since January 2000

A li NZ UK US C d

4. Comparisons: Australia Underperformed Between 2003 and 2006

250

300Australia NZ UK US Canada

CAGRs

200

2508.9%

7.8%

7.4%

6 %

100

150

6.9%

3.4%

50

100

0 Jan-0

0

Jul-00

Jan-0

1

Jul-0

1

Jan-0

2

Jul-02

Jan-0

3

Jul-0

3

Jan-04

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-0

6

Jan-07

Jul-07

Jan-0

8

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

16

0 2 3 4 5 6 7 8 9 0

Source: RP Data-Rismark; NZ REI; Case-Shiller; Acadametrics; Teranet

4. Comparisons: Australia has Much Higher Urban Concentrations

Population Living in Urban Areas of Greater than 750,000 Persons

61%

60%

65%

48%47%

50%

55%

47%

43%

40%

45%

29% 29%30%

35%

9 9

25%

30%

Australia Japan United States Canada New Zealand UnitedKingdom

17Kingdom

Source: PRB

4. Comparisons: Australia has Much Higher Projected Population Growth Rate

Projected Population Change 2009-2050

6 % 55%

43%50%

60%

27%24% 24%

30%

40%

10%

20%

Japan-10%

0%Australia United States New Zealand Canada United

KingdomJapanJapan

-25%-30%

-20%

18

3

Source: PRB

Household Savings Rate

Seasonally-Adjusted Trend

5. Households: Deleveraging Well and Truly Under Way

12%

14%Seasonally Adjusted Trend

8%

10%

4%

6%

0%

2%

M M M M M M M M M M M M M M M M M M

-4%

-2%

Mar-9

3

Mar-94

Mar-9

5

Mar-96

Mar-97

Mar-98

Mar-99

Mar-0

0

Mar-0

1

Mar-0

2

Mar-0

3

Mar-0

4

Mar-0

5

Mar-0

6

Mar-0

7

Mar-0

8

Mar-0

9

Mar-10

19Source: RBA

5. Households: Australian Housing Leverage Less than Half US Levels

Source: RBA

20

5. Households: Change in Debt-to-Assets Ratios Function of Inflation-Targeting

Long-Term Australian Debt to Assets Ratios

Household Debt to Household Assets (LHS)

60%

18%

20%

Household Debt to Household Assets (LHS)Housing Debt (Only) to Housing Assets (LHS)Variable Mortgage Rates (RHS)

40%

50%

ati

o 14%

16%

M

30%

t to

Ass

ets

Ra

8%

10%

12%

Mo

rtga

ge R

at

10%

20%

Deb

t

4%

6%

tes

0% Jun

-7

Jun-7

Jun

-7

Jun- 8

Jun

-8

Jun-8

Jun-8

Jun

-8

Jun-8

Jun

-8

Jun-8

Jun

-8

Jun-8

Jun

-9

Jun

-9

Jun

-9

Jun

-9

Jun-9

Jun

-9

Jun-9

Jun

-9

Jun-9

Jun

-9

Jun-0

Jun-0

Jun

- 0

Jun-0

Jun

-0

Jun-0

Jun

-0

Jun-0

Jun

-0

Jun

- 0

0%

2%

21

7 8 9 80

81

82

83

84

85

86

87

88

89 0 1 2 3 4 5 6 7 8 9

00 1

02

03

04

05

06

07 8

09

Source: Rismark; RBA

Comparisons of Official Interest Rates

5. Households: Australia has High Interest Rates (c. 85% Resi. Borrowers Variable)

7%

8%

US Japan Euro Area UK Canada Australia

5%

6%

7%

3%

4%

5%

1%

2%

3%

0% Jan-0

0

Jul-00

Jan-01

Jul-01

Jan-02

Jul-0

2

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-06

Jul-06

Jan-07

Jul-0

7

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-10

Jul-10

22

0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0

Source: Rismark; RBA

RBA Estimates of Non-Performing Housing Loans

5. Households: But Consistently Very Low Mortgage Default Rates

8%

9%

Australia** US** UK+ Spain Canada**+

8.7%

6%

7%

an

s

4%

5%

r ce

nt

of

Lo

a

1%

2%

3%

Per 2.9%

2.4%

68%

0%

1%

Jan-9

Jan-9

Jan-9

Jan-9

Jan-9

Jan-9

Jan-9

Jan-9

Jan-9

Jan-9

Jan-0

Jan-0

Jan-0

Jan-0

Jan-0

Jan-0

Jan-0

Jan-0

Jan-0

Jan-0

Jan-1

0.68%0.45%

23

90 91

92

93 94 95 96

97 98 99

00

01

02 03

04

05

06 07

08

09 0

Source: Rismark; RBA

5. Households: System-Wide Household DSCR is Strong

Household Interest Repayments to Disposable Income

Total Interest Repayments to Disposable Household Income (LHS)

%

40%

om

e

18%

20%

p y p ( )Mortgage Interest Repayments to Disposable Household Income (LHS)Variable Mortgage Rates (RHS)

25%

30%

35%

spo

sab

le I

nco

14%

16%

18%

Mo

15%

20%

25%

men

ts t

o D

isR

ati

o

8%

10%

12%

ortga

ge R

ate

s

5%

10%

5

ere

st R

ep

aym

2%

4%

6%

s

0% Jun

-77

Jun-79

Jun-8

1

Jun-8

3

Jun-8

5

Jun-8

7

Jun-8

9

Jun-91

Jun-93

Jun-95

Jun-97

Jun-9

9

Jun-0

1

Jun-0

3

Jun-0

5

Jun-0

7

Jun-0

9

Inte

0%

2%

24

9 3 5 7 9 3 5 7 9 3 5 7 9

Source: Rismark; RBA

• RBA: Only ~2.5% of borrowers have LVR ≥ 90% AND repayments ≥ 50% disposable income

5. Households: Only Small Share of High Risk Borrowers

• RBA: Only ~3.5% have LVR ≥ 80% AND repayments ≥ 50% disposable income

25Source: RBA

5. Households: c. 83% of Borrowers Paying Away < 40% of Disposable Income

Source: RBA

26Source: RBA

5. Households: Not Experienced Debt-Fuelled Property Boom since 2007

Change in the Value of Housing Credit Outstanding

3 Month MA 6 Month MA

21%

23%

25%

17%

19%

21%

13%

15%

7%

9%

11%

5%

7%

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r-9

Ap

r- 0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-0

Ap

r-10

27Source: Rismark; RBA

0 1 2 3 4 5 6 7 8 9

00

01

02

03

04

05

06

07

08

09 0

5. Households: CBA’s Loss Rates during the 1991 Recession

28Source: CBA

5. Households: c. $22.5bn of Impaired Business vs. < $2.5bn of Resi

Source: RBA

29Source: RBA

6. Rismark Forecasting Track-Record (Out-of-Sample)

1512 Month Sydney House Returns: Forecast and Actual

10

5

5

actual

forecast

0

-5

2003 2004 2005 2006 2007 2008 2009 2010-10

Forecast date

30Source: RP Data-Rismark

6. Rismark Forecasts

S Ri k31

Source: Rismark

7. Holding Steve Keen to Account

What did Steve Keen Say? What Happened?What did Steve Keen Say? What Happened?

House prices “going to fall by 40 per cent or so in the next few years”

House prices 80% above Keen forecast

A depression is “almost a certainty…best case scenario is recession more severe than 1990 and lasting 1.5 times as long”

Australia did not experience a depression, or even a recession

Australia would have “most serious downturn we’ve ever had”

Since 1959 (alone) quarterly GDP growth has been worse than Dec 2008 result on 11 occasions

Australia’s unemployment rate will rise to “doubleAustralia s unemployment rate will rise to double digits”

Unemployment rate peaked at 5.8%; today = 5.0%

Expects to see an “an accelerating rate of decline in [Australian] house prices now”

House prices have flat-lined[Australian] house prices now

Forecasting rate is “pretty close to 100%” Forecasting track-record poor

32

7. Holding Steve Keen to Account: Two Key Questions…

Does Keen Stand Behind his 2008 40% House Price Fall Forecast?

Does Keen Stand by Mid 2010 Claim that House Price Declines would Accelerate?

33

Bubble, bubble –,toil and trouble?toil and trouble?

15 February 201115 February 2011

facilitating debate on the outlook for the markets