Mortgage Expenses In The Spotlight

The Royal Commission into Financial Services Misconduct, yesterday spent time with ANZ, and examined their expenses validation and verification processes, especially when applications were made via the broker channel.

Astonishingly, it appears that the bank may ignore the expense data from the broker as submitted (so the Commission asked why they capture the data at all!). Household Expenditure Measure (HEMs) figured in the discussion, as a test which was used by the bank in the assessment process. It will be interesting to see if the Commission views this approach is compliant with their responsible lending obligations.

It begs the question more broadly, are mortgages held by the banks supported by appropriate expense calculations? Some are saying that up to 40% of loans on book may have issues.

We also note that the “mortgage power” type calculators available on bank web sites to give an indication of a borrowers ability to get a mortgage, on average now gives a mortgage figure some 20% lower than a couple of years back.

So, many borrowers would not now get the mortgage they did then. Think about the implications for existing borrowers seeking to refinance, or to move from interest only loans to principal and interest loans!

There was also more data on lower auction clearance rates. Plus predicted falls in home prices, from Moody’s.

When you overlay the Commission findings, with the sales trends (deep discounts are now a feature of current sales, see above), it seems to me home prices are set for more falls in the months ahead.

We discussed this in our latest video blog.

More broadly, the Commission shows the massive repair job the banks have to do on their reputations and culture. No wonder their share prices are down.  Of more significance are the structural risks to the economy, as households continue to struggle with over-committed budgets thanks to lax lending.  This is unlikely to end well.

The purpose of the Commission was to remove uncertainty from the banking sector, but as it goes about its business, in fact the levels of concern are rising. It has royally back-fired!

But there is a good chance that customer outcomes will be enhanced as the consequences  are digested. This would be an excellent outcome. But not an intended one.

NSW Property Prices To “Correct” ~10% – Moody’s

As reported in the Business Insider, Moody’s Investor Services thinks there will be further declines to come, suggesting that Sydney prices will suffer a “correction” in the year ahead.

“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values,” Moody’s says, pointing to the chart below. “However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”

The Property Cracks Widen

Sydney home price falls are now featuring in the main stream media.  Of course average price falls may not fully tell the story, as more expensive property is dropping faster, whilst demand for cheaper  options remains strong.

Nine News ran a segment last night.

The cracks are beginning to show in the Sydney property market, with the inflated prices from six months ago dissipating.

In some suburbs, prices have fallen as much as 30 percent, as the median house price copped its largest knock since August 2008.

In the three months to December, the harbour city’s median house price fell 1.3 percent, tumbling a further 2.5 percent in the following three months to March, CoreLogic data shows.

It’s the steepest drop in a decade, with the average price of a home now priced at $880,743.

CoreLogic’s Kevin Brogan said the tide was slowly turning.

“I don’t think there’s any cause for panic,” he said.

“At the moment it’s trending towards being a buyer’s market, but I think what we’re seeing is quite a gradual adjustment to the market.”

Experts say a crackdown on investor loans, increased stock and the curbing of tax benefits has contributed.

Over the past fortnight, the auction clearance rate dropped to just 56.1 percent.

Compare that to this time last year, when 78 percent of homes were selling.

Yesterdays Daily Telegraph newspapers also painted a picture of gloom:

Affordable housing policy failure still being fuelled by flawed analysis

From The Conversation.

Australia has a housing affordability problem. There’s no doubt about that. Unfortunately, one of the reasons the problem has become so entrenched is that the policy conversation appears increasingly confused. It’s time to debunk some policy clichés that keep re-emerging.

Is ‘zoning’ to blame?

It can be tempting to frame the housing affordability problem as all about inadequate new supply. According to this argument, the “demand side” drivers – such as low interest rates and tax incentives for property investment – have combined with population growth in the capital cities to fuel house prices, and new housing construction simply hasn’t kept up.

“Zoning” is often blamed. There is little hard evidence, though, to show systematic regulatory constraint.

Supply is at record highs, and in the right places

Australia’s new housing supply per capita is actually very strong by international standards. Over the past decade, supply of new units and apartments has been flowing in job-rich metropolitan areas with dense populations, which are also higher-value locations.

According to the cliché, this supply response should have cooled prices. Yet dwelling price inflation has surged even in metropolitan areas where new housing supply has exceeded population growth.

The fallacies of ‘filtering’

One of the great hopes underpinning the supply cliché is that new housing stock improves affordability even if these homes are not affordable for lower-income groups. This faith is based on a theory called “filtering” whereby older housing moves down to the affordable end of the market over time.

The empirical data on filtering are thin. Indeed, the academic literature has historically cast doubt on the theory. However, some commentators continue to claim that American rental housing markets provide evidence that “filtering” can occur in practice.

But whatever might happen in the US, in Australia there’s still no evidence to suggest new housing supply has filtered across the housing stock to expand affordable housing opportunities for low-income Australians, or that it will do so any time soon.

Prominent economists continue to produce data that suggest the potential impact of new supply on price is minimal. The shortage of affordable housing opportunities for low-income households in Australia remains persistent. And the evidence indicates that low-income working households in our cities consistently face housing costs well above accepted affordability levels regardless of the quality of the housing they live in.

Sustaining supply in a cooling market?

Some commentators cite cooling house prices as evidence that the supply response is taking effect. Whether or not that is so (above and beyond demand-side factors like higher interest rates for investor loans), expect the pipeline to start slowing down. Private sector development is driven by profit and risk and, as we have seen over many years, is characterised by speculative booms and busts.

Developers can turn off the new supply tap much more quickly than they can turn it on. Falling prices, weak consumer sentiment and economic uncertainty mean many developers will not follow through on building approvals until the market recovers.

This means that high levels of supply output are rarely sustained. Recent housing data in Western Australia provide a case in point. WA recorded rising completions in 2014, 2015 and 2016. But 2017 completion figures are expected to show a drop of around a third as prices have shaded off since the end of the mining boom.

Put simply, the market on its own will never solve Australia’s housing affordability problem. Expecting developers to keep building in order to reduce house prices is pure fantasy.

Planning reform is not an affordable housing strategy

We’ve written before about the political appeal of calling for planning reform instead of real solutions to housing affordability pressures. In fact, Australian states have embarked on more than a decade of planning reforms.

They have aimed to: standardise and simplify planning rules; promote mixed use and higher-density housing near train stations; and overcome local political opposition to development through the use of independent expert panels.

Housing targets for both urban infill and new greenfield areas have been a feature of metropolitan plans to drive dwelling approval rates since at least 2000.

These reforms have been effective in overcoming regulatory constraints. The scale of the recent supply response shows clearly that zoning and development assessment processes are not inhibiting residential development approvals in cities like Sydney and Melbourne.

But trying to accommodate Australia’s population growth in towers around railway stations will fail as an affordable housing strategy – even if “zoning” and height rules were completely scrapped.

Rather than narrow deregulation agendas, bigger picture reforms are needed. Aligning infrastructure funding with metropolitan and regional decentralisation is a critical long-term strategy. Reforms to deliver affordable housing in communities supported by new infrastructure are long overdue.

A bigger affordable housing sector is needed

Australia needs a more realistic assessment of the housing problem. We can clearly generate significant dwelling approvals and dwellings in the right economic circumstances. Yet there is little evidence this new supply improves affordability for lower-income households. Three years after the peak of the WA housing boom, these households are no better off in terms of affordability.

In part, this may reflect that fact that significant numbers of new homes appear not to house anyone at all. A recent CBA report estimated that 17% of dwellings built in the four years to 2016 remained unoccupied.

If we are serious about delivering greater affordability for lower-income Australians, then policy needs to deliver housing supply directly to such households. This will include more affordable supply in the private rental sector, ideally through investment driven by large institutions such as super funds. And for those who cannot afford to rent in this sector, investment in the community housing sector is needed.

In capital city markets, new housing built for sale to either home buyers or landlords is simply not going to deliver affordable housing options unless a portion is reserved for those on low or moderate incomes.

Authors: Nicole Gurran, Professor of Urban and Regional Planning, University of Sydney; Bill Randolph, Director, City Futures Research Centre, Faculty of the Built Environment, UNSW; Peter Phibbs, Director, Henry Halloran Trust, University of Sydney; Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University; Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University

Popping The Housing Affordability Myth

Home prices are horribly high in Australia. I think we can all agree on that point. But what is really driving this?  “Classic” economic theory is that supply and demand of property drives prices, so factors such a number of builds, population and migration, and planning controls are all to blame. Indeed, a recent paper from the RBA peddled the line, as does the property and real estate sector. State and Federal Governments also talk this up.

But, there is another factor which is, according to our simulations, is much more directly impacting home prices and affordability. That is availability of credit. And this  is contentious, because classic economists (including those residing in most central banks) tend to argue that credit growth is a zero sum gain, in that if there is a loan on one side of the ledger, there is a creditor on the other side of the fence, so the net impact is zero.

Worse still, classic theory suggests that banks are limited in what they can lend by the availability of deposits. Neither of these statements is true, and it fundamentally changes the banking and banking supervision game.

Back in 2014 I discussed this, based on an insight from the Bank of England.  Their Quarterly Bulletin (2014 Q1), was revolutionary and has the potential to rewrite economics. “Money Creation in the Modern Economy” turns things on their head, because rather than the normal assumption that money starts with deposits to banks, who lend them on at a turn, they argue that money is created mainly by commercial banks making loans; the demand for deposits follows. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

More recently the Bank of Norway confirmed this, and said “The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become.”.

And even the arch conservative German Bundesbank said in 2017 recently “this means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers“.

Therefore the only limit on the amount of credit is peoples ability to service the loans – eventually.

With that in mind, we have built a scenario model, based on our core market model, which allows us to test the relationship between home prices, and a series of drivers, including population, migration, planning restrictions, the cash rate, income, tax incentives and credit. We are looking at national averages here, and we have smoothed the data from RBA and ABS to bring the trends out.

So first, lets walk through some of the relativity mapping. First we look at home prices relative to income growth. The blue area tracks changes in home prices since 2004, and the yellow line is the change in income.  Most striking is that income growth and home prices are running in opposite directions, and have been especially since 2013. So income growth is not correlated to home price growth.

Next we look at home prices relative to migration and once again there is little alignment between home price growth and migration rates, this despite up to two thirds of population growth being fed from migration in recent years.

The relationship between overall population growth and home prices is equally disconnected. For example the rate of growth slowed from 2012 onward when we have had a large run up in home prices.

We then turned to building approvals, and even adjusting for the delay between approvals and commencements, there is little correlation.

Up next is the RBA cash rate. Here we see an inverse linkage, in that as interest rates are cut, home prices expand. This also suggests that should rates rise, home prices will fall.

And here is the reason. The correlation between home prices and credit availability are clear to see. As credit rose from 2012 onward, home prices did too. It also suggests that if credit availability is tightened, we should expect prices to fall – take note, given the current tighter underwriting standards now in force. This is why I predict ongoing falls in property prices.

And more specifically, credit for property investment is even more strongly correlated. As we know investors are attracted by the capital growth, and also the capital gains and negative gearing tax breaks available.

So then, we rolled all these factors into our overall model, and examined the relative influence of each on home prices. The four most powerful levers in terms of home prices is first overall growth in personal credit, including mortgages and other loans at 27% of total impact. Investment lending contributed a further  18%, followed by tax policy for investment property at 17% and the cash rate at 14%. The other factors, the ones which are spoken about the most, property supply, population growth, planning restrictions and migration, together make up just 22% of total impact. Or in other words, without addressing the credit elephant in the room, tax policy and interest rates, the chances of taming prices is low.

So now I can quote the recent Grattan report again, but with renewed vigour. “…much of the debate has focused on policies that are unlikely to make a real difference. Unless governments own up to the real problems, and start explaining the policy changes that will make a real difference, Australia’s housing affordability woes are likely to get worse”.

And the greatest of these is credit policy, which has for years allowed banks to magic money from thin air, to lend to borrowers, to drive up home prices, to inflate the banks balance sheet, to lend more to drive prices higher  – repeat ad nauseam! Totally unproductive, and in fact it sucks the air out of the real economy and money directly out of punters wages, but make bankers and their shareholders richer.

One final point the GDP calculation we use in Australia is flattered by housing growth (triggered by credit growth). The second driver of GDP growth is population growth.  But in real terms neither of these are really creating true economic growth.

To solve the property equation, and the economic future of the country, we have to address credit. But then again, I refer to the fact that most economists still think credit is unimportant in macroeconomic terms!

The alternative is to continue to let credit grow well above wages, and lift the already heavy debt burden even higher. Current settings are doing just that, as more households have come to believe the only way is to borrow ever more. But, that is, ultimately unsustainable, and why there will be an economic correction in Australia, and quite soon.








The Impossible Property Equation – The Property Imperative Weekly – 10 Mar 2018

Today we discuss the Impossible Property Equation.

Welcome to the Property Imperative Weekly to 10th March 2018. Watch the video or read the transcript.

In this week’s review of property and finance news we start with CoreLogic who reported that last week, the combined capital cities returned a 63.6 per cent final auction clearance rate across 3,026 auctions, down from the 66.8 per cent across 3,313 auctions the week prior.  Last year the clearance rate last year was a significantly higher at 74.6 per cent. Last week, Melbourne returned a final auction clearance rate of 66.5 per cent across 1,524 auctions, down from the 70.6 per cent over the week prior.  In Sydney, both volumes and clearance rate also fell last week across the city, when 1,088 properties went to market and a 62.4 per cent success rate was recorded, down from 65.1 per cent across 1,259 auctions the week prior. Across the remaining auction markets clearance rates improved in Canberra and Perth, while Adelaide, Brisbane and Tasmania’s clearance rate fell over the week. Auction activity is expected to be somewhat sedate this week, with a long weekend in Melbourne, Canberra, Adelaide and Tasmania. Just 1,526 homes are scheduled for auction, down 50 per cent on last week’s final results.

In terms of prices, Sydney, Australia’s largest market is a bellwether. There, CoreLogic’s dwelling values index fell another 0.13% this week, so values are down 4.0% over the past 26-weeks.  Also, Sydney’s annual dwelling value is down 1.04%, the first annual negative number since August 2012. Within that, the monthly tiered index showed that the top third of properties by value in Sydney have fallen hardest – down 3.2% over the February quarter – whereas the lowest third of properties have held up relatively well (i.e. down 0.9% over the quarter), thanks to a 68% rise in first time buyers.  My theory is Melbourne is following, but 9-12 months behind.

The RBA published a paper on the Effects of Zoning on Housing Prices. Based on detailed analysis they suggest that development restrictions (interacting with increasing demand) have contributed materially to the significant rise in housing prices in Australia’s largest cities since the late 1990s, pushing prices substantially above the supply costs of their physical inputs. They estimate that zoning restrictions raise detached house prices by 73 per cent of marginal costs in Sydney, 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth. There is also a large gap opening up between apartment sale prices and construction costs over recent years, especially in Sydney. This suggests that zoning constraints are also important in the market for high-density dwellings. They say that policy changes that make zoning restrictions less binding, whether directly (e.g. increasing building height limits) or indirectly, via reducing underlying demand for land in areas where restrictions are binding (e.g. improving transport infrastructure), could reduce this upward pressure on housing prices.

At its February meeting, the RBA Board decided to leave the cash rate unchanged at 1.50 per cent. Their statement was quite positive on employment, but not on wages growth. They are expecting inflation to rise a little ahead, above 2%. They said that the housing markets in Sydney and Melbourne have slowed and that in the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.

The RBA quietly revised down the household debt to income ratio stats contained in E2 statistical releases and their chart pack. It has dropped by 6% from 199.7 down to 188.4, attributing the change to revised data from the ABS. But it is still very high. By the way, Norway, one of the countries mirroring the Australian mortgage debt bubble, at 223 has just taken steps to tighten mortgage lending further. This includes a limit of 5x gross annual income and a 5% interest rate buffer.

We released our February Mortgage Stress data, which showed across Australia, more than 924,500 households are estimated to be now in mortgage stress, up 500 from last month. This equates to 29.8% of households. In addition, more than 21,000 of these are in severe stress, up 1,000 from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months, up 5,000 from last month. You can watch our separate video on this.  Our surveys showed significant refinancing is in train, to try to reduce monthly repayments. We publish our Financial Confidence Indices next week.

The retail sector is still under pressure, as shown in the ABS trend estimates for Australian retail turnover which rose just 0.3 per cent in January 2018 following a similar rise in December. Many households just do not have money to spend.  Separately, the number of dwellings approved rose 0.1 per cent in January, driven by a lift in approvals for apartments.  Dwelling approvals increased in Victoria, Tasmania, Queensland and Western Australia, but decreased in the Australian Capital Territory, the Northern Territory, South Australia and importantly New South Wales.

The ABS also released the account aggregates to December 2017.  Overall the trend data is still pretty weak. GDP has moved up just a tad, but GDP per capita is growing at just 0.9% per annum, and continues to fall. Much of the upside is to do just with population growth. But net per capita disposable income rose at just 0.4% over the past year. Housing business investment and trade were all brakes on the economy. Real remuneration is still growing at below inflation, so incomes remains stalled. More than two in three households have seen no increase. It rose by 0.3% in the December quarter and was up just 1.3% over the year to December 2017, compared with inflation of 1.9%. In fact, households continue to raid their savings to support a small increase in consumption, but this is not sustainable.  The household savings ratio recovered slightly to 2.7% from 2.5% in seasonally adjusted terms. Debt remains very high. These are not indicators of an economy in prime health!

Another crack appeared in the property market wall this week when Deposit Power, which provided interim finance to property buyers, closed its doors leaving an estimated 10,000 residential, commercial and property investors in the lurch about the fate of nearly $300 million worth of deposits. This is after the collapse of New Zealand’s CBL’s insurance, which was an issuer and guarantor of deposit bonds. You can watch my separate video on this important and concerning event.

The public hearings which the Productivity Commission has been running in relationship to Competition in Financial Services covered a wide range of issues. One which has surfaced is the Lenders Mortgage Insurance (LMI) sector. With 20% of borrowing households required to take LMI, and just two external providers (Genworth and QBE LMI), the Commission has explored the dynamics of the industry. They called it “an unusual market”, where there is little competitive pricing  nor competition in its traditional form.  Is the market for LMI functioning they asked?  Could consumers effectively be paying twice? On one hand, potential borrowers are required to pay a premium for insurance which protects the bank above a certain loan to value hurdle. That cost is often added to the loan taken, and the prospective borrower has no ability to seek alternatives from a pricing point of view. Banks who use external LMI’s appear not to tender competitively. On the other hand, ANZ, for example has an internal LMI equivalent, and said it would be concerned about the concentration risk of placing insurance with just one of the two external players, as the bank has more ability to spread the risks. The Commission probed into whether pricing of loans might be better in this case, but the bank said there were many other factors driving pricing. All highly relevant given the recent APRA suggestion that IRB banks might get benefit from lower capital for LMI’s loans, whereas today there is little capital benefit. This will be an interesting discussion to watch as it develops towards the release of the final report. They had already noted that consumers should expect to receive a refund on their LMI premium if they repay the loan.

ASIC told the Productivity Commission that there is now “an industry of referrers” who are often being paid the same amount as mortgage brokers despite doing less work. They said – in our work on [broker] commissions, there were a separate category of people who are paid commission who don’t arrange the loan but just refer the borrower to the lender. It seems to be that professionals — lawyers, accountants, financial advisers — are reasonably prominent among people who are acting as referrers and that strangely  the commissions they were paid for just a referral was almost as large as that [for a] mortgage broker doing all the extra [work]. More evidence of the complexity of the market, and of the multiple parties clipping the ticket.

The role of mortgage brokers remains in the spotlight, with both the Productivity Commission sessions this week, and the Royal Commission next week focussing in on this area. In draft recommendation 8.1 of its report, the Productivity Commission called for the ASIC to impose a “clear legal duty” on lender-owned aggregators, which should also “apply to mortgage brokers working under them”.  ANZ CEO Shayne Elliott said applying best interest obligations to brokers could help preserve the integrity of the third-party channel and that despite the absence of a legal duty of care, consumers may be under the impression that such obligations already exist. He also said there was merit in considering a fixed fee model as opposed to a volume-based commission paid to brokers. The ANZ chief said that there is “absolute merit” in exploring such a model, and he pointed to the use of a fixed fee structure in Europe.

Industry insiders on the other hand argue that a push to argue a switch from mortgage broker commission payments, which normally includes an upfront fee and a trailing payment for the life of the loan paid by the lender to the broker, to a fixed fee for advice would be “anti-competitive. The discussion of trailing commissions centered on whether there was downstream value being added to mortgage broker clients, for example, annual financial reviews, or being the first port of call when the borrower has a mortgage related question. The interesting question is how many broker transactions truly include these services, or is the loan a set and forget, whilst the commissions keep flowing?  There is very little data on this. In the UK, mortgage brokers work within a range of payment models. Many mortgage brokers are paid a commission by lenders of around 0.38% of the total transaction and some mortgage brokers also charge a fee to their customers.

Still on, Mortgage Brokers they say they expect to write more non-conforming loans over the next 12 months according to non-Bank Pepper Money. They commissioned a survey of 948 mortgage brokers which showed that 70 per cent expect to write more non-conforming loans in the coming year, while 66 per cent predict a decline in the number of prime loans written. Surveyed respondents expect the demand for non-conforming loans to rise as a result of tighter prime lending criteria (22 per cent), changing customer needs (21 per cent) and changing legislation/regulations (13 per cent). The survey also found that the number of brokers who have yet to write a non-conforming loan has also reduced, falling by 6 per cent from 18 per cent in 2016 to 12 per cent in 2018.

Another non-Bank, Bluestone Mortgages cut its interest rates by 75 to 105 basis points across its Crystal Blue products. The Crystal Blue portfolio includes a range of full and alt doc products that provide lending solutions to established self-employed borrowers (with greater than 24 months trading history), and PAYG borrowers with a clear credit history. The lender expects the rate reduction, coupled with the 85% low doc option, to drive the uptake of the portfolio. The rate cuts come shortly after the company was acquired by private equity firm Cerberus Capital Management. Parent company Bluestone Group UK is fully divesting its interest in Bluestone Mortgages Asia Pacific as part of the acquisition deal.

The ABS released their latest data on the Assets and Liabilities of Australian Securitisers. At 31 December 2017, total assets of Australian securitisers were $132.5b, up $7.3b (5.9%) on 30 September 2017. During the December quarter 2017, the rise in total assets was primarily due to an increase in residential mortgage assets (up $6.0b, 6.0%) and by an increase in other loans assets (up $0.9b, 6.1%). You can see the annual growth rates accelerating towards 13%. This is explained by a rise in securitisation from both the non-bank sector, which is going gangbusters at the moment, and also some mainstream lenders returning to the securitised funding channels, as costs have fallen. There is also a shift towards longer term funding, and a growth is securitised assets held by Australian investors.  Asset backed securities issued overseas as a proportion of total liabilities decreased to 2.6%. Finally, at 31 December 2017, asset backed securities issued in Australia as a proportion of total liabilities increased to 89.8%. The non-banks are loosely being supervised by APRA (under their new powers), but are much freer to lend compared with ADI’s.  A significant proportion of business will be investment loans.

It’s not just the non-banks cutting mortgage rates to attract new business.  The story so far. Banks were lending up to 40%+ of mortgages with interest only loans, some even more. The regulator eventually put a 30% cap on these loans and the volume has fallen well below the limit. Some banks almost stopped writing IO loans. They also repriced their IO book by up to 100 basis points, so creating a windfall profit. This is subject to an ACCC investigation to report soon. The RBA and APRA both warn of the higher risks on IO loans, especially on investment properties, in a down turn. APRA has confirmed the “temporary” 30% cap will stay for now, although the 10% growth cap in investment loans is now redundant, thanks to better underwriting standards. Banks have now started to ramp up their selling of new IO loans, to customers who fit within current underwriting standards and are offering significant discounts.  Borrowers will be encouraged to churn to this lower rate.  For example, CBA will cut fixed interest rates for property investors across one-, two-, three-, and four-year terms. The cuts, which range from 5 basis points to 50 basis points, apply to both interest-only investor loans and principal-and-interest investor loans. CBA is also cutting some of its fixed rates for owner-occupiers, including a reduction on owner-occupied principal-and-interest fixed-rate loans by 10 basis points over terms of one to two years, landing at 3.89% for borrowers on package deals. Key rival Westpac also unveiled a suite of fixed-rate changes, including some cuts to fixed-rate interest-only mortgages, another area where banks have been forced to apply the brakes. They also hiked rates across various fixed terms for owner-occupiers. So the chase is on for investor loans now, with a focus on acquiring good credit customers from other banks. Other smaller lenders, such as ING, Mortgage House, and Virgin Money have also dropped some interest-only rates.

Finally, The Grattan Institute released some important research on the migration and housing affordability saying Australia’s migration policy is its de-facto population policy. The population is growing by about 350,000 a year. More than half of this is due to immigration. The pick-up in immigration coincides with Australia’s most recent housing price boom. Sydney and Melbourne are taking more migrants than ever. Australian house prices have increased 50% in the past five years, and by 70% in Sydney. Housing demand from immigration shouldn’t lead to higher prices if enough dwellings are built quickly and at low cost. In post-war Australia, record rates of home building matched rapid population growth. House prices barely moved. But over the last decade, home building did not keep pace with increases in demand, and prices rose. Through the 1990s, Australian cities built about 800 new homes for every extra 1,000 people. They built half as many over the past eight years. So there is no point denying that housing affordability is worse because of a combination of rapid immigration and poor planning policy. Rather than tackling these issues, much of the debate has focused on policies that are unlikely to make a real difference. Unless governments own up to the real problems, and start explaining the policy changes that will make a real difference, Australia’s housing affordability woes are likely to get worse.

So the complex equation of supply and demand, loan availability and home prices, will remain unsolved until the focus moves from tactical near term issues to strategy. Meantime, my expectation is that prices will continue south for some time yet, despite all the industry hype.

Planning Zones Cause Property Prices To Rise – RBA

An interesting  research paper from the Economic Research Department RBA “The Effect of Zoning on Housing Prices” is worth reading.

Overall, they suggest that development restrictions (interacting with increasing demand) have contributed materially to the significant rise in housing prices in Australia’s largest cities since the late 1990s, pushing prices substantially above the supply costs of their physical inputs.

Although differences in the value of dwelling structures and the physical value of land account for some of the variation in average housing prices across the four cities, zoning effect estimates account for the majority of the differences.

There is also a large gap opening up between apartment sale prices and construction costs over recent years, especially in Sydney. This suggests that zoning constraints are also important in the market for high-density dwellings.

They estimate that zoning restrictions raise detached house prices by 73 per cent of marginal costs in Sydney, 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth.

This is not the amount that house prices would fall in the absence of zoning. Physical land costs are higher in Australian cities (particularly Sydney) than overseas. So even if zoning restrictions were relaxed, housing in Australia would remain expensive relative to cities where zoning is permissive and land is less physically scarce.

Using data from CoreLogic and some supply/dremand modelling they track the difference between the average (or market) price and the marginal (or physical) value of land.  Some government policies, – “zoning”, restrict the supply of housing.

Examples include minimum lot sizes, maximum building heights and planning approval processes. Although these restrictions may confer benefits, they also raise the price of housing. This paper attempts to quantify the effect of zoning on housing prices in Australia’s four largest cities.

Anecdotal evidence suggests that zoning can have a huge effect on land values. For example, a 363 hectare site in Wyndam Vale (40 km west of Melbourne) increased in value from $120 million to $400 million following its rezoning from rural to residential (Schlesinger and Tan 2017). Examples like this are common – Appendix A provides more. Such large increases in values as a result of zoning changes are inconsistent with the view that a physical shortage of land itself is the main cause of high land values and housing prices – and instead point towards a high ‘shadow price’ of government permission to build dwellings as a likely explanation. It is difficult, however, to gauge how representative these anecdotes are, or to analyse how they change over time or place.

To estimate the effect of zoning, we consider the cost of a marginal increase in the number and density of dwellings for a given area and given population (hence a reduction in average household size). This means that we do not include the costs involved in increasing the footprint or size of a city, such as provision of extra roads and utilities, as a cost of supplying housing.

Figure 2 shows a decomposition of property prices back to 1999. To extend our estimates of structure value back in time, we adjust the estimates from Table 1 by movements in the producer price index (PPI) – output of house construction series for each city’s corresponding state, and by movements in the average floor area of houses sold in each city. To estimate the value of physical land over time, we estimate separate regressions for each year back to 1999.

Figures 3–4 show estimates of the zoning effect for the average property in local government areas (LGAs). We split property prices into structure values and land values in each LGA, using the CoreLogic data on property prices and the valuer general estimates for land values for each LGA (as this allows structure value to vary across LGAs for reasons other than just floor area).19 We then estimate physical land values by running separate hedonic regressions for each LGA of the form of our large regression in Section 4.20 Our estimate of the zoning effect by LGA is then the remaining portion of land value not accounted for by the physical value.


If housing demand continues to grow, as seems likely, then existing zoning restrictions will bind more tightly and place continuing upward pressure on housing prices. Policy changes that make zoning restrictions less binding, whether directly (e.g. increasing building height limits) or indirectly, via reducing underlying demand for land in areas where restrictions are binding (e.g. improving transport infrastructure), could reduce this upward pressure on housing prices.

Migration and Housing Affordability

From The Conversation.

So much of Australia’s history and success is built on immigration. Migrants have benefited incumbent Australians by raising incomes, increasing innovation, contributing to government budgets, smoothing over population ageing and diversifying our social fabric. But it is also true that immigration is affecting house prices and rents.

Australian governments are squandering the gains from migration with poor housing and infrastructure policies. Our new report, Housing affordability: re-imagining the Australian dream, shows what’s at stake. Unless the states reform their planning systems to allow more housing to be built, the Commonwealth should consider tapping the brakes on Australia’s migrant intake.

Immigration has increased housing demand

Australia’s migration policy is its de-facto population policy. The population is growing by about 350,000 a year. More than half of this is due to immigration.

Since 2005, net overseas migration – which includes the increase in temporary migrants – has averaged 200,000 people per year, up from 100,000 in the previous decade. It is predicted to be around 240,000 per year over the next few years.

Immigrants are more likely to move to Australia’s big cities than existing residents, which increases demand for scarce urban housing. In 2011, 86% of immigrants lived in major cities, compared to 65% of the Australian-born population.

Chart 1. Migration has jumped, and so have capital city populations

Grattan Institute, Author provided

Not surprisingly, several studies have found that migration increases house prices, especially when there are constraints on building enough new homes.

The pick-up in immigration coincides with Australia’s most recent housing price boom. Sydney and Melbourne are taking more migrants than ever. Australian house prices have increased 50% in the past five years, and by 70% in Sydney.

Chart 2: Net overseas migration into NSW and Victoria is at record levels

Grattan Institute (Data source: ABS 3101.0 – Australian Demographic Statistics), Author provided

Of course immigration isn’t the only factor driving up house prices and rents. Housing also costs more because incomes rose, interest rates fell and banks made it easier to get a loan. But adding 2 million migrants in the past decade has clearly increased how many new homes are needed.

We haven’t built enough homes

Housing demand from immigration shouldn’t lead to higher prices if enough dwellings are built quickly and at low cost. In post-war Australia, record rates of home building matched rapid population growth. House prices barely moved.

But over the last decade, home building did not keep pace with increases in demand, and prices rose. Through the 1990s, Australian cities built about 800 new homes for every extra 1,000 people. They built half as many over the past eight years.

We estimate somewhere between 450 and 550 new homes are needed for each 1,000 new residents, after accounting for demolitions. And because more families are breaking up and the population is ageing, more homes are needed to accommodate households with fewer members.

The imbalance between demand and supply has consequences. Younger and poorer households are paying more for housing, and owning a home depends more on who your parents are, a big change from the early 1980s.

Chart 3: Housing construction lagged population in the last decade, but has picked up

Grattan Institute, Author provided

Only in the past couple of years has construction started to match population growth, especially in Sydney. It’s no coincidence that Sydney house prices have finally moderated in the past six months.

But the backlog of a decade of undersupply remains. Development at today’s record rates is the bare minimum needed to meet record population growth built into Sydney’s and Melbourne’s housing supply targets over the next 40 years.

Chart 4: Strong housing construction will need to be maintained to meet city plan housing targets

Grattan Institute

So what should governments do?

Building more housing will improve affordability the most – but slowly. Even at current record construction rates, new housing increases the stock of dwellings by only 2% each year. But building an extra 50,000 homes a year nationwide for a decade would lead to national house prices between 5% and 20% lower than otherwise. Do it for longer and prices will fall even further.

State governments need to fix planning rules to allow more housing to be built in inner and middle-ring suburbs. More small-scale urban infill projects should be allowed without council planning approval. And state governments should allow denser development “as of right” along key transport corridors. The Commonwealth can help with financial incentives for these reforms.

But the politics of planning in our major cities is fraught. Most people in established middle suburbs already own their houses. Prospective residents who don’t already live there can’t vote in council elections, and their interests are largely unrepresented.

If we want to maintain current migration levels, along with their economic, social and budgetary benefits, we need to do better at planning to allow more housing to be built.

What does this mean for the migrant intake?

The Australian government should develop a population policy, as the Productivity Commission recommended. It should articulate the appropriate level of migration given its economic, budgetary and social benefits and costs. This should include how it affects the Australian community living with the reality of land use planning policy – and contrasting this with the effect of optimal planning policy.

If planning and infrastructure policies don’t improve, the government should consider cutting the migration intake. This would reduce demand for housing, but would also reduce the incomes of existing residents.

The best policy is probably to continue with Australia’s demand-driven, relatively high-skill migration and to build enough homes for the growing population. But Australia is in a world of third-best policy: rapid migration and restricted housing supply are imposing big costs on people who don’t already own their homes. If the states are not going to reform planning rules to increase the number of homes built, then the Australian government should consider whether reducing migration is the lesser evil.

Any reduction should be modest and targeted at the parts of the migration program that provide the smallest benefit to Australian residents and migrants themselves. Balancing these interests is difficult, because each part of the program has different economic, social and budgetary costs and benefits.

Cutting back family reunion visas would have substantial social costs. Limiting skilled migration would hurt the economy and many businesses. Restricting growth in international students would reduce universities’ incomes.

There are also broader costs to cutting the migrant intake. It would hit the Commonwealth budget in the short term. Most migrants are of working age and pay full rates of personal income tax. And many temporary migrants, such as 457 visa holders, can’t draw on a range of government services and benefits, including welfare and Medicare. More importantly, cutting back on younger, skilled migrants is likely to hurt the budget and the economy in the long term.

But there is no point denying that housing affordability is worse because of a combination of rapid immigration and poor planning policy. Rather than tackling these issues, much of the debate has focused on policies that are unlikely to make a real difference. Unless governments own up to the real problems, and start explaining the policy changes that will make a real difference, Australia’s housing affordability woes are likely to get worse.

Authors; John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; Trent Wiltshire, Associate, Grattan Institute

Home Prices Drift Lower In February – CoreLogic

According to the CoreLogic Home Value Index results out today, dwelling values edged lower across most capital cities over the month, with broad based falls weighing down dwelling values nationally for the fifth consecutive month.

The 0.1% decline in national dwelling values in February 2018 was more moderate than the 0.3% declines recorded over each of the previous two months, however, it marked the first time national values had fallen for five consecutive months since March 2016.  There continues to be a divergence between capital city and regional markets, with the combined capital city index falling by -0.3% over the month, compared to a 0.4% increase in combined regional values.

Month-on-month falls were generally mild but broad based  Over the month, values fell across every capital city except Hobart (+0.7%) and Adelaide (steady), with the largest monthly decline recorded across Darwin (-0.9%) and Sydney (-0.6%).  Values were lower in Melbourne (-0.1%), Brisbane (-0.1%), Perth (-0.2%), and Canberra (-0.3%).

The rate of decline eased over the second half of February although values have fallen in most capital cities during February, the CoreLogic daily index indicates that the rate of decline eased late in the month, in line with improving auction clearance rates.  Sydney, Melbourne and Perth all recorded more moderate falls in values throughout February than they did in January.

CoreLogic head of research, Tim Lawless, said, “The overall softening in the market becomes more evident when looking at the change in values over the past three months.”

Over the three months to February 2018, Adelaide (0.1%) and Hobart (3.2%) were the only capital cities in which values rose.  Sydney, which has been the strongest market for value growth over recent years, saw the largest fall in values over the three month period, down -2.4%. Sydney was followed by Darwin, which has been persistently weak over recent years, and saw values fall by a further -2.0% over the quarter.

Regional markets outperforming the capitals  While most individual capital cities recorded declines in values over the past three months, in the regional areas of the country the results were very different; regional dwelling values increased by 0.9% over the three months and values were higher in the regional areas of all states except for Western Australia.

Real Estate Bubbles: These 8 Global Cities Are At Risk

From Zero Hedge.

If you had $1 billion to spend on safe real estate assets, where would you look to buy?

For many funds, financial institutions, and wealthy individuals, the perception is that the world’s financial centers are the places to be. After all, world-class cities like New York, London, and Hong Kong will never go out of style, and their extremely robust and high-density city centers limit the supply of quality assets to buy.

But, as Visual Capitalist’s Jeff Desjardins asks, what happens when too many people pile into a “safe” asset?

According to UBS, certain cities have seen prices rise at rates that are potentially not sustainable – and eight of these financial centers are at risk of having real estate bubbles that could eventually deflate.

Global Real Estate Bubble Index

Every year, UBS publishes the Global Real Estate Bubble Index, and the most recent edition shows several key markets in bubble territory.

The bank highlights Toronto as the biggest potential bubble risk, noting that real prices have doubled over 13 years, while real rents and real income have only increased 5% and 10% respectively.

However, the largest city in Canada was certainly not the only global financial center with real estate appreciating at rapid rates in the last year.

In Munich, Toronto, Amsterdam, Sydney and Hong Kong, prices rose more than 10% in the last year alone.

Annual increases at a 10% clip would lead to the doubling of prices every seven years, something the bank says is unsustainable.

In the last year, there were three key markets where prices did not rise: London, Milan, and Singapore.

London is particularly notable, since it holds more millionaires than any other city in the world and is rated as the #1 financial center globally.