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 its significant exposure to this
section of the economy) anticipates that this will be an important issue 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 housing mortgages: CBA mortgage 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

Commonwealth Bank of Australia

ABN 48 123 123 124
Determined to be better than we‟ve ever been.

Australian residential housing and

mortgages

CBA mortgage book secure

9 September 2010 Commonwealth Bank of Australia ACN 123 123 124
Overview
 Concerns of a potential residential housing price bubble in Australia are often based on a
superficial/incomplete analysis of the Australian market.
 Taking into account geographic differences, the ratio of house prices to income in Australia
is not that much different to most other comparable countries.
 Population growth and excess demand relative to supply has been a key driver of Australian
house 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 debt
increases 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 the
housing 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 stressed
scenario, potential losses would be modest (~0.2% of total home loan balances).

2
Concerns of a housing bubble are often based on a
superficial/incomplete analysis of the Australian market

Commentary Our View

Morgan Stanley, August 2010  Australia‟s house-price-to-income ratio is 4.3,

“In my view, Australian house prices are expensive on similar to many other countries (slide 4)
every value metric, they are expensive relative to
history and expensive relative to houses in  Australia‟s capital city house price to income
comparable countries” ratio of 5.6 is comparable with coastal city
metrics globally (slide 4)
Jeremy Grantham, GMO, June 2010
He said that ….Australia had an unmistakable  Whilst this ratio has trended higher over time, a
housing bubble and that prices would need to come large component of the uplift is driven by
down by 42 per cent to return to the long-term trend. structural factors (slides 5, 6) and is unlikely to
"You cannot possibly miss it," he said. "The price of reverse
housing typically trades about 3.5 times of family
income and in bubble it goes to 6 or . . . 7.5 (times).
"Australia is having one now. You are at near 7.5
times family income . . . which suggests you are twice
the size that you should be.”

3
Taking into account geographic differences, Australian
house prices are similar to other countries
Ratio of house prices to income Coastal city comparison
Capital Cities: 5.6 House Price
(see table at right for major to Income
city comparison)
Australia Sydney 6.2
6
Australia Melbourne 5.7
Australia Brisbane 4.7
4 Capital Cities US San Francisco 7.0
US Los Angeles 5.7
US New York 7.0
Australia: 4.3
2 Australia-wide Canada: 4.1 Canada Vancouver 9.3
UK: 5.6 UK Bristol-Bath 6.1
US: 3.3
NZ Auckland 6.7
0
NZ Wellington 5.8
1993 1996 1999 2002 2005 2008
Source : RP Data/CBA/ABS; UBS Source : Demographia; 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.

4
Population growth has been a key driver of Australian
house price appreciation

Strong net migration Population growth vs dwelling starts

„000s „000s „000s
500 250 500
450
400 400
200
350
300 300
250 150
200 200
150
100
100 100
50
0 50 0
1981 1985 1989 1993 1997 2001 2005 2009 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
Dwelling starts (lhs) Population growth (rhs)
Natural Increase Net migration
Source : ABS. CBA Economics. Dwelling starts relates to physical construction activity
Source : ABS (all new housing)

 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.

5
Other drivers of house price appreciation are structural,
rather than cyclical in nature
Low inflationary environment Average dwelling size
% m2
10 250
Houses
Inflation (10 yr rolling average)
9
8
RBA target range
7
200
6
5
4 Other residential
3 150
2
1
0 100
1990 1994 1998 2002 2006 2010 1986 1991 1996 2001 2006
Source : ABS Source : ABS

 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 housing
market by 600,000 households. Absent a dramatic response from the supply side, a large part of the lift in
valuation 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.

6
The household debt ratio in Australia is similar to many
other developed countries
Household debt
(per cent of household disposable income)
%
200

180 UK
Australia
160
NZ
140 Canada
120 US
Japan
100
Germany
80

60

40

20
1988 2000 2009

 Australian household debt as a percentage of income similar to many other developed countries.

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Much of the increase in household debt has been taken
up by segments in the strongest position to service it

Households with owner-occupied debt Share of household debt by income

%
3.4% 6.4%
60
1997/98 2007/08
16.3%
40
49.2%

24.7%
20

0 First (bottom 20% of income earners) Second

<25 25-34 35-44 45-54 55-64 >65 Third Fourth
Fifth (top 20% of income earners)
Age of household reference person
Source : CBA Economics Source : HLDA Release 6.0; RBA

 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

8
Strong economic fundamentals minimise the downside
risk to Australian house prices

Unemployment GDP growth (pa)

%
True unemployment 10 Yr Forecast
9.7 closer to 15% Avg 2010-11
9.3
Full 8.4 Asia 8.0 7.8
employment 7.8 8.0
at approx 5% 7.6 Australia 3.1 3.4
US 1.9 2.8
5.3 Japan 0.7 1.9
UK 1.7 1.7
Euro Zone 1.4 1.3
Australia US UK Canada Germany France Italy Source : ABS, IMF, Consensus Economics.

 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

9
 Historically, home loan losses have been very low,
notwithstanding cyclical house price movements

House prices movements vs Home loans losses (CBA)

% %
0.30 50.0
Peak Home Loan
40.0
0.20 Losses of 5bpts
30.0
20.0
0.10
10.0
0.00 0.0
-10.0
-0.10
-20.0
-30.0
-0.20
-40.0
-0.30 -50.0
Mar-91

Mar-96

Mar-01

Mar-06
Mar-88

Mar-89

Mar-90

Mar-92

Mar-93

Mar-94

Mar-95

Mar-97

Mar-98

Mar-99

Mar-00

Mar-02

Mar-03

Mar-04

Mar-05

Mar-07

Mar-08

Mar-09

Mar-10
Home loan losses (LHS) House Price movements (annual % change) RHS
Source : CBA Economics.

 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

(RHS) (LHS) changes

10
Even under a high stress scenario, potential CBA home
loan losses would be modest ($740m or 0.2% of book)

High stress loss = $740m Factors Mitigating Against

(0.2% of book)* Potential Losses

Based on 6x probability of default eg:

 Portfolio average LVR 43%

Interest Unemployment Property  Loans >80% LVR mortgage insured*

Rates Values
14%  70% of customers paying in advance
10%
(avg 9 payments)

 Rate buffer of 150 bpts built into

serviceability tests

-30%  Full recourse to borrower

* Additional insured losses under high stress scenario of $1.5bn (~0.5% of book)
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Appendix: Typical drivers of a housing bubble

Typical Drivers Current Position

Increased housing stock leading to Strong population growth; Demand>Supply

excess supply

An influx of speculators/investors Investment lending steady at ~30%

Strong volume growth driven by Already stringent standards tightened through GFC
Relaxed lending standards

Housing affordability issues Ratio of house prices to income comparable to

other countries, once geographic issues taken into
account
Domestic economic shock – Australian economy well placed
trigger for price correction Close to full employment

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Appendix: Australia vs US

CBA/Australia United States

Unemployment ~5% ~10%

No-Recourse Lending No Yes

Variable vs Fixed 85%/15% 15%/85%

Adjustable Rate Loans Nil/minimal Widespread

1
Sub-Prime % (Mkt) 0% ~36%

Securitisation % ~2% ~55%

Account Ownership Retained by bank Extensively on-sold

1. At peak in 2006. Source UBS

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Appendix: Household Wealth & Leverage

Leverage to Housing Stock Household Wealth

HOUSING EQUITY WITHDRAWAL
$bn $bn
2400 2400
Cumulative increase
in dwelling wealth

1600 Cumulative 1600

rise in Cumulative
housing debt housing
equity withdrawal

800 800

0 0
Mar-01 Mar-03 Mar-05 Mar-07 Mar-09

Source : CBA Economics.

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Appendix: Population/Demographics

Projected population change Population living in Urban areas of

2009-2050 greater than 750,000 persons

61%

55%

43% 48% 47%

43%
27%
24% 24%

29% 29%

Australia United New Canada United Japan Australia Japan United Canada New United
States Zealand Kingdom States Zeland Kingdom

-25%

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 background

information about the Group‟s activities current at the date of the
presentation, 9 September 2010. It is information given in summary form
and does not purport to be complete. It is not intended to be relied upon
as advice to investors or potential investors and does not take into
account the investment objectives, financial situation or needs of any
particular investor. These should be considered, with or without
professional advice when deciding if an investment is appropriate.

17
Determined to be better than we‟ve ever been.

Australian residential housing and

mortgages

CBA mortgage book secure

9 September 2010 Commonwealth Bank of Australia ACN 123 123 124