Home Price Expectations Held Up By Hot Air!

In the final part of our October 2019 Household Survey we look at the results through the lens of our segmentation models. What is clear is there is a disconnect between future home price expectations (much more positive) and proposed activity (lower demand for credit, and intentions to transact). This is at the heart of the weirdness in the market at the moment, and it helps to explain the low levels of listings and transactions (and hence the high auction clearance rates on those low volumes). There is nothing in the latest results however which flags significant momentum increases ahead.

We start with the cross-segment trends. First there is a significant hike in those expecting home prices to be higher in the next 12 months. It reached a low around the election, and has been rising since the cash rate cuts. Portfolio Investors (those with multiple investor properties are the most bullish). But the expectations are there across the board.

However, this does not necessarily translate into intention to transact. First Time Buyers and Down Traders (around 900k) are most likely to be in the market, the former aided by the extra incentives available and the latter by the need to pull equity from existing properties. Property investors remain largely on the sidelines. There is also a slight downward inflection in the past quarter.

Another lens is demand for credit which shows stubborn resistance other than from First Time Buyers ~around 150k actively looking) and Up Traders (around 550k actively looking). Refinancing is tracking at levels we have seen for some time. This suggests that banks will have to compete hard for meager pickings, and refinancing and first time buyers will be the targets for special deals.

Those Wanting to Buy say that availability of finance (40%) and costs of living (30%) are the main barriers, although high home prices at 16% still registers. Interest rates and fear of unemployment are low relatively speaking.

First time buyers are being driven by a range of factors including the need for shelter and a place to live (28%), greater security (14%), tax advantage (17%) and to take advantage of the FHOG (12%). But that said there are significant barriers as well.

Barriers include home prices too high (26%), availability of finance (39%) and costs of living (24%). On the other hand finding a place to buy and rising interest rates hardly registered.

Household seeking to refinance are being driven by reducing monthly repayments (50%), for a better rate (22%) and extra capital withdrawal 20%.

Down Traders are driven by the desire to release capital for retirement (50%), increased convenience (30%) and illness or death of spouse (11%). Interest in investment property has faded to 6%.

Up Traders are being driven by the desire for more space (41%), job change (16%), property investment (22%) and life-style changes 20%).

Turning to investors 45% are driven by tax benefits, better returns than deposits (25%) and appreciating property values (14%).

On the other hand, investors face a number of barriers including cannot getting finance (49%), and they have already bought (13%).

And finally across the segments the prime selection point is price, although it varies, and loyalty is not seen as significant or rewarded.

Standing back, it appears that property sector momentum is likely to remain patchy at best, with more action at the more expensive end of the value spectrum, and first time buyers remaining as the primary “canon fodder” with regards to new transactions. It will be interesting to see how the Government scheme due in January changes the picture.

Household Financial Confidence Erodes Some More

The bad news keeps coming, with the latest DFA Household Financial Confidence Index for October at the lowest ever of 83.7.

This continues the trends of recent months, since dropping through the neutral 100 score in June 2017.

The falls were widespread across our property segments, with investors still way down, under the pressure from low net rental yields, the need to switch to principal and interest from interest only, and worries about construction defects. Owner occupied households were less negative, but those renting continue to struggle with higher levels of rental stress.

Across the states there were significant falls in NSW and VIC, whilst other states continued to track as in recent months. The main eastern states are now lower than WA and SA, which is a surprising new development.

Across the age bands, the falls are mainly among lower aged groups, while those aged 50-60 are feeling more positive thanks to recent stock market rises.

This is also reflected across our wealth segments, with those holding property mortgage free and other financial assets more positive (though still below neutral) compared with mortgage holders and those not holding property at all.

We can then turn to the moving parts within the index, based on our rolling 52,000 household surveys. Employment prospects continue to look shaky, both in terms of under-employment and job security. Jobs in retail and construction and also finance are under-pressure, and the impact of the drought is also hitting some areas. 8% of household felt more secure than a year ago, the lowest read ever in this part of the survey. More households have multiple part-time jobs.

Income remains under pressure, with 51% saying their real incomes have fallen in the past year, while 5% reported an increase, often thanks to switching jobs or employers.

Household budgets are under pressure as costs of living rise, with 91% reporting higher real costs that a year ago, this is a record in our survey. Expenses rose across the board, from child care, health care, school fees and rates. Food costs were higher partly thanks to the drought. There was a small fall in the costs of power, and fuel, but not enough to offset rises elsewhere. Mortgage interest rate falls were blotted up quickly, and the tax refunds where they were received were much lower than people had been expecting.

Some households are deleveraging (paying down debt) , while others are more concerned about the amount they owe from mortgages to credit cards and on other forms of credit. 48% of households are less comfortable than a year ago. Lower interest rates are only helping at the margin.

Savings are under pressure from several fronts. Some households are tapping into savings to keep the household budget in check – but that will not be sustainable. Others are seeing returns on term deposits falling away, yet are unwilling to move into higher-risk investment assets. Those in the share markets are enjoying the current bounce, but many expressed concerns about its sustainability. 49% of households are less comfortable than a year ago, while 47% are about the same. Significantly around 27% of households have no savings at all and would have difficulty in pulling $500 together in an emergency. Around half of these households also hold a mortgage. Worth reflecting on this with 32.2% of households in mortgage stress as we also reported today!

And finally, we consider net worth (assets less liabilities). Here the news is mixed as some households are now convinced their property is worth more citing the recently if narrowly sourced data on rises in Sydney and Melbourne. However other households reported net falls. 24% of households said their net financial position was better than a year ago (up 1.3%), while 45% said they were worse off (down 1.6%). There are also significant regional differences with households in Western Australia and Queensland significantly worse off, while some in inner city areas of Sydney and Melbourne claimed significant advances.

So, overall the status of household confidence continues to weaken, which is consistent with reduced retail activity, and a focus on repaying debt. Unemployment is lurking, but underemployment is real. We also see weaker demand for mortgages ahead, and we will discuss this in more detail in our upcoming household survey release. Without significant economic change, these trends are likely to continue for some time. If the RBA and Government is relying on households to start spending, they will need a very different strategy – including a significant fiscal element. Lower interest rates alone will not cut the mustard.

Hold Your Horses! RBA Does Too…

The RBA held rates today, as expected, but their explanation is turning pretty sour as reality bites. Expect more downgrades and rate cuts ahead, just a matter of time.

I also find it amazing that unlike UK, USA, and NZ there is no streamed press conference nor questions from the media after the announcement. The RBA continues to be more covert than its peers and less exposed to questions about its policy.

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.

Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back over the past month and financial market sentiment has improved a little. Even so, long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at the lower end of its range over recent times.

The outlook for the Australian economy is little changed from three months ago. After a soft patch in the second half of last year, a gentle turning point appears to have been reached. The central scenario is for the Australian economy to grow by around 2¼ per cent this year and then for growth gradually to pick up to around 3 per cent in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.

Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high. The unemployment rate has remained steady at around 5¼ per cent over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth remains subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected, with headline inflation at 1.7 per cent over the year to the September quarter. The central scenario remains for inflation to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Mortgage Stress Tracks Higher Yet Again

After talking a breather last month, thanks to rate cuts and tax refunds (minimal those these were in practice), the results from our surveys for October shows a further 7,000 household fell into stress taking the total to more than 1.07 million households or 32.2%

Household debt is at record highs, and while costs are still rising, incomes are not in real terms. There was a spate of refinancing which helped some households but the bulk of these were NOT in stress in the first place. The rejection rates for those in mortgage stress are and remain consistently higher.

Mortgage stress is assessed on a cash flow basis, where, based on our 52,000 household rolling annual survey we measure income and outgoings for households, including mortgage repayments. Where the cash flow is net negative, households are in stress. They are required to draw down on savings, put more on credit cards or hunker down – one reason the retail sales data yesterday at o.2% in September was so weak. Stress is based on current circumstances.

We also model the probability of default ahead over the next 12 months, which is a predictive estimate and we expect defaults to continue to rise – we are seeing worrying signs in both New South Wales and Victoria now as economic conditions in these states weaken. Job losses in retail and construction are leading the downturn. But underemployment is widespread. On the other hand, Canberra, with higher public sector wages, is more insulated from the reality elsewhere.

Across our household segments more than half (56.5%) of Young Growing Families are in stress, accounting for more than 166,000 households; followed by Battling Urban at 48.9% or 76,000 households and Disadvantaged Fringe at 48%, with nearly 300,000 household. Rural households are under pressure thanks also to the drought, with 25.6% in mortgage stress, or 78,500 households and even the most affluent segment – Exclusive Professionals are 24% in stress with 54,600 households. In other words mortgage stress is appearing in every sector of society.

Across the states the highest proportion of households in stress are located in Tasmania (39%) and Northern Territories (36.9%), although the number of households is relatively low. New South Wales now has nearly 300,000 households in difficulty or 28.3% of households, and Victoria has 296,000 households in stress or 33.1%. We have been tracking the spike in Victoria in recent months. However, Western Australia has 34.3% of households in stress, or 145,000 households and conditions continue to deteriorate there with more foreclosures in train, as banks speed up their resolution processes.

We analyse stress to post code level, and can identify those postcodes with the largest count of stressed households. Post code 2560 – the area around Campbelltown has the highest count, with 7,300 in stress or 63% of households. Next is Melbourne post code 3805, including Fountain Gate and Narre Warren with 6,600 stressed households representing 57.8% of households. Third is Toowoomba in Queensland with 6,500 households, representing 44% of households in the district, and fourth is 2170 around Liverpool in New South Wales with 6,300 in stress or 44.8% of households. A common characteristic are areas of high urban expansion on the fringe, with many new builds competing with existing property, and many recently purchased. That said, stress can take several years to emerge, and there are pockets of pain from purchases made several years ago.

Finally, we also examined the expense drivers of stress from our surveys. These vary across the segments with power prices, school fees and child care, all significant, as well as housing costs overall.

This is likely to drive stress higher unless real wages start to improve, but given the current economic outlook that appears unlikely for now.

Westpac 2019 Profit Down 16%

What ever way you look at the 2019 results, out today, Westpac had a bad year in a low growth, low interest rate, high customer remediation environment. Their statutory net profit was $6,784 million, down 16%, while cash earnings were $6,849 million, down 15%.

In FY19 and FY18, the Group raised provisions called “notable items” of $1,130m which relate to Customer remediation Provisions of $958 million (after tax) in FY19, $281 million in FY18.

The majority of the provisions relate to remediation programs for:

  • Ongoing advice service fees associated with the Group’s salaried financial planners and authorised representatives
  • Refunds for certain customers that had interest only loans that did not automatically switch, when required, to principal and interest loans
  • Refunds to certain business customers who were provided with business loans where they should have been provided with loans covered by the National Consumer Credit Protection Act
  • Other items as part of our get it right, put it right initiative Wealth reset In March 2019, the Group announced its decision to reset its Wealth business. In FY19, provisions for restructuring and transition costs were $241 million (after tax $172 million)

Cash earnings per share was 198.2 cents, down 16%. Westpac’s return on equity (ROE) was 10.75%, down 225 bps. The Final fully franked dividend is 80 cents per share, down 15% from 94 cents per share.

Their net interest margin was 2.12%, down 10 bps

Their common equity Tier 1 (CET1) capital ratio was 10.7%, still above APRA’s unquestionably strong benchmark.

Even if you exclude the “one-offs”, cash earnings were $7,979 million, down 4% and the ROE at 12.52%, is down 94 bps.

Westpac said credit quality remains sound and impairment charges remain low at 11 basis points of loans. Nevertheless, they have seen a rise in 90 day mortgage delinquencies over the year, in part due to low wage growth and slowing economic activity. A number of factors are evident:

  • Existing 90+ day borrowers remaining in collections for longer due mainly to weak housing market activity in most of FY19 –
  • A greater proportion of P&I loans in the portfolio (70% of portfolio at 30 September 2019)
  • NSW/ACT delinquencies rose 6bps in 2H19 (16bps higher over FY19) to 69bps at 30 September 2019 (NSW/ACT represents 41% of the portfolio)–
  • Seasoning of the RAMS portfolio, as this portfolio has a higher delinquency profile

70% of Australian home loan customers are ahead on their repayments including offset accounts. Australian properties in possession increased over the year by 162 to 558. Properties in possession continue to be mostly in WA and Qld. Loss rates are 3 basis points. In their “stressed” scenarios losses would rise to ~57 basis points.

They say negative equity remains low based on dynamic calculations using Australian Property Monitors data. Not clear at what level data is applied.

Looking at the segments:

Consumer cash earnings were $3,288, 4% lower due to a decline in non-interest income and increased impairment charges. Mortgage lending increased 1% and deposits rose 2%. Net interest margin was down 3bps due to lower mortgage spreads from increased competition and lower interest only lending.

Business cash earnings were $2,431 and performance was impacted by notable items ($270 million after tax). Excluding these items, cash earnings were $60 million or 2% lower from a reduction in non-interest income and higher regulatory related costs. Deposits rose by 3% over the year. Non-interest income was down 11%, mainly due to provisions as well as lower wealth income from new platform pricing and product mix changes.

Westpac Institutional Bank cash earnings was $1,014. Lower cash earnings were primarily due to a $78 million movement in derivative valuation adjustments, no contribution from Hastings and a $62 million turnaround in impairment charges. (2019 impairment charge of $46 million). In FY18, Hastings contributed $203 million to non-interest income, $158 million to expenses and $29 million to tax.

Westpac New Zealand was the brighter spot, with cash earnings ($NZ) of
1,042 3 (12) Cash earnings growth was supported by a gain on the sale of Paymark and a $10 million impairment benefit. Loans increased 5% with growth evenly spread across mortgage and business lending, while deposits
also grew 4%. RBNZ gaave their NZ IRB model the tick today, after 18 months remediation!

The CEO Brian Hartzer said:

We expect system credit growth in the year to September 2020 to lift from 2.7% this year to 3%. That will be largely driven by housing where we expect a lift from 3.1% to 3.5%, although business credit growth is expected to slow somewhat from 3.3% to 3%.

By my calculations, that would not be sufficient to reverse Westpac’s decline.

Westpac successfully completes RBNZ remediation process

Westpac New Zealand Limited (Westpac) has retained its accreditation as an internal models bank following completion of an extensive remediation process required by the Reserve Bank.

In 2017 the Reserve Bank required Westpac to undertake an independent review of its compliance with internal models obligations. The review found that Westpac was using a number of unapproved models and that it had materially failed to meet requirements around model governance, processes, and documentation.

The Reserve Bank imposed a precautionary capital overlay in light of the regulatory breaches, and gave Westpac 18 months to remedy the failures or risk losing its accreditation as an internal models bank.

Deputy Governor Geoff Bascand says that following the remediation process, Westpac is now operating with peer-leading processes, capabilities and risk models in a number of areas.

“Westpac has taken the findings of the independent review as an opportunity to make meaningful improvements to its risk management, and we commend it for its co-operative and constructive engagement in working with Reserve Bank over the remediation period.

“The changes that Westpac has made to its internal processes, governance and resourcing, as well as a suite of new credit risk models for which it has sought approval, have given us confidence in its capital modelling and compliance and satisfied us that it now meets the internal models bank standard.

“Looking forward, we will continue to hold all internal model banks to the same high standards.”

Internal models banks are accredited by the Reserve Bank to use approved models to calculate their regulatory capital requirements. Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank’s directors and management.

Banks are required to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses.

The Reserve Bank will amend Westpac’s conditions of registration from 31 December to remove the two percentage point overlay applying to its minimum capital requirements.

As a condition of retaining its accreditation Westpac will need to satisfy several ongoing requirements, which it has committed to resolving, Mr Bascand says.

The Pushmi-pullyu Economy – The Property Imperative Weekly 02 Nov 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents:

0:25 Introduction
1:15 US Economy
2:20 Fed Cuts
06:40 China/trade
9:10 US Markets
12:10 China GDP

14:00 Australian Section
14:00 ANZ/Credit/Remediation
15:50 Building Approvals
17:07 Auction Results
17:30 Property Prices
20:00 Rental Yields
20:40 Hot Spots
24:40 Wealth Inequality
26:40 First Time Buyer Incentives
27:15 Australian Markets

Action Stations On The Cash Ban!

I discuss the latest with CEC’s Robbie Barwick.

With 2 weeks left to make a Senate submission, we explore some of issues people may want to touch on, to assist.

Final date is 15th November 2019.

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

There is still time to make a submission, and stop this from becoming law. Our civil liberties depend on it.

Here’s how you make a submission: email economics.sen@aph.gov.au

Address to: Senate Standing Committees on Economics, PO Box 6100, Parliament House, Canberra ACT 2600

Some points to consider:

Civil liberties – cash is legal tender and you have the right to privacy and to not use a bank; you don’t want government and banks to “monitor and measure” everything you do.

Practical benefits of cash – power supplies and communications technology not always reliable; instant settlement of payments so can be better for commerce, good for discounts etc; whatever else.

Excuses for the law are false. Eliminating the black economy is a lie and won’t work: Australia’s black economy is small and shrinking, and cash restrictions have not reduced black economies in Europe, in fact the opposite.

Restricting cash won’t stop tax evasion, because the majority of evasion is done by large corporations and bank, assisted by the Big Four accounting firms – who want this ban. As Andrew Wilkie said, the government has enough laws to crack down on money laundering and the black economy – use them.

Real reason is to trap Australians in banks. This is explicit from the IMF: Cashing In: How to Make Negative Interest Rates Work. Won’t be able to escape negative interest rates, or bail-in.

Finally, government’s reassurances are fake, not guarantees. Treasury issued a fact sheet, which Melissa Harrison quickly refuted: exemptions aren’t contained in the legislation, just in the regulation that is easily changed.