The Deadly Grip Of Property Depression In The Mining Belt

Important analysis from CoreLogic showing the impact of the property downturn on the mining belt.

As commodity prices and mining investment has sunk, demand for housing in mining areas has also slowed. This week we take a look at the performance of some of the major mining towns.

Mining towns and regions across the country have been hard hit as investment and commodity prices have slumped.  This week we’re looking at how the housing market has performed in terms of the volume and median price of sales across these regions.  The results indicate that not all mining towns have recorded an equivalent slowdown.  The following analysis looks at annual median prices and annual sales volumes

Port Hedland – median prices peaked at $925,000 in June 2013 and sales volumes peaked at 402 in July 2006.  Current median prices are $390,000 (-58% lower than peak) and current sales are 128 (-68% below peak).  In what may be a positive sign for the market, annual sales are once again trending higher, although the median prices trend is yet to bottom out.

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Isaac – median prices peaked at $620,000 in November 2012 and sales volumes peaked at 661 in March 2012.  Current median prices are $138,390 (-78% lower than peak) and current sales are 117 (-28% below peak).  Transaction numbers have recently started to rise, however median price trends remain negative.

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Karratha – median prices peaked at $815,000 in October 2010 and sales volumes peaked at 511 in March 2005.  Current median prices are $362,980 (-55% lower than peak) and current sales are 235 (-54% below peak).  Transaction numbers have been trending higher since xxx but the median sale price is still falling, albeit at a more moderate pace.

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Gladstone – median prices peaked at $475,000 in September 2012 and sales volumes peaked at 1,823 in July 2007.  Current median prices are $350,000 (-26% lower than peak) and current sales are 572 (-69% below peak).  Dwelling turnover is continuing along a downwards trend with no sign of an improvement in buyer demand just yet.

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Kalgoorlie-Boulder – median prices peaked at $351,250 in June 2015 and sales volumes peaked at 1,656 in September 2006.  Current median prices are $312,000 (-11% lower than peak) and current sales are 345 (-79% below peak).  Transaction numbers appear to be levelling, however there is no sign of any upwards pressure on prices or turnover.

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Mackay – median prices peaked at $435,000 in June 2013 and sales volumes peaked at 3,264 in April 2004.  Current median prices are $345,000 (-21% lower than peak) and current sales are 1,045 (-68% below peak).  Transaction numbers have recently levelled across the Mackay housing market but are yet to improve.

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Roxby Downs – median prices peaked at $500,016 in November 2013 and sales volumes peaked at 187 in February 2004.  Current median prices are $250,000 (-50% lower than peak) and current sales are 23 (-88% below peak).  Transaction numbers have recently increased slightly across Roxby Downs.

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The smaller mining townships which don’t act as major service centres have tended to see a much sharper fall in median selling prices than the larger townships.  The decline in sales and prices from the market peaks has been substantial across all of these regions, however the regions that have seen the most significant downturn were those that also recorded a significant upswing in prices and turnover rates prior to the peak in commodity prices.

Recently, most of these mining towns have experienced a stabilisation in sales with some regions having seen an increase in sales volumes.  Although sales may have broken the declining trend in a number of areas, median selling prices are generally continuing to trend lower across each of the regions highlighted. The improvement in transactional activity could potentially be due to larger numbers of distressed sales moving through these markets, but may also be attributable to a cautious return of buyers seeking out a bargain.

The challenge for many of these regions remains that despite a recent uptick in commodity prices, investment in large infrastructure projects (new mines, processing facilities, transport etc) has dried up and subsequently few additional jobs are being created.  Although commodity prices have recently surged, particular iron ore, coking coal and thermal coal, it is not yet leading to a substantial increase in exploration activity or employment, subsequently housing demand remains weak and continues to have a dampening effect on housing prices.

RBA Still Sanguine On Housing

The latest RBA Statement of Monetary Policy, released today includes a range of comments on housing, and mortgage lending. Clearly the RBA wants to continue to show there is nothing to see here. High absolute household debt and rising defaults hardly gets a mention! They also choose to use the APM home price data rather than CoreLogic’s indices (which would show higher growth). They say the average outstanding housing interest rate has fallen by around 35 basis points this year.

However, they do warn that if growth in housing demand does not continue to keep pace with the scheduled large increases in supply, it would place downward pressure on housing prices and rents and increase the risk of off-the-plan apartment purchases failing to settle.

They also warn that if the broader housing market was to weaken substantially, consumption growth may be lower than currently expected in response to wealth and income effects. Consumer price inflation would also be affected as housing costs comprise a significant share of household expenditure.

rba-housing-nov-2016As expected, private dwelling investment was strong over the year to the June quarter. The value of residential building approvals has reached record levels as a share of GDP and the amount of work in the pipeline has edged higher. Accordingly, dwelling investment is likely to contribute to growth for some time yet. However, the large amount of work in the pipeline raises concerns that some locations could become oversupplied, particularly in inner-city areas where a lot of highdensity housing is planned. This could lead to settlement failures by off-the-plan purchasers and a general reduction in rents and prices.

rba-nov-16-house-prices Conditions in the established housing market have eased relative to a year ago, although some indicators suggest that conditions may have strengthened over recent months. In particular, housing price growth has picked up noticeably in Sydney and Melbourne, where auction clearance rates have also increased to high levels.

rba-nov16-housing-indHowever, the number of auctions and housing market turnover more generally are lower than they were last year and  properties are, on average, taking longer to sell. While housing credit growth has also declined over the past year, loan approvals data suggest that lending to investors has increased a little over recent months. Housing market conditions remain weak in Perth, where prices of both apartments and detached dwellings have declined further over the past year.

rba-nov16-rentalsHousing credit growth has eased to an annualised pace of around 6 per cent. Growth in net housing debt is about 1 percentage point below growth in housing credit due to ongoing strong growth in deposits in mortgage offset accounts.

While the slowing in housing credit growth and loan approvals has been reasonably broad based, there remains some divergence in the pace of growth across states (Graph 4.11). The slowing in loan approvals has been particularly pronounced in Western Australia; while loan approvals in NSW have also eased over the past year, they continue at a pace noticeably above the national average.

rba-nov16-lendingGrowth in credit advanced to investors has increased a little in recent months, consistent with a pick-up in investor housing loan approvals. In contrast, growth in credit advanced to owner-occupiers has eased a little recently. The current level of approvals is consistent with housing credit growth continuing at around its current pace.

The slowing in housing loan approvals over the past year is consistent with the decline in turnover in the housing market. It also reflects slower growth in average dwelling prices and a decrease in the average loan-to-valuation ratio. The latter follows the introduction of measures by the Australian Prudential Regulation Authority (APRA) to strengthen lending standards. Another factor that  may be contributing to the easing in housing credit growth over the past year is an increase in the share of off-the-plan purchases, which are yet to flow through to the demand for credit. These transactions do not involve a mortgage at the time the dwelling is purchased off the plan, but add to the stock of housing credit when a mortgage is provided to the purchaser upon completion of the dwelling.

Around half of the August cash rate reduction was passed through to most advertised housing lending rates. The average outstanding housing interest rate has fallen by around 35 basis points this year and is likely to decline a little further as maturing loans are replaced with loans on lower The lowest available variable interest rates are more than 50 basis points below the average outstanding interest rate and, reflecting the lower rates on offer, the level of refinancing activity remains relatively high. One bank has recently introduced a loan product with the interest rate margin fixed at 249 basis points above the cash rate.

Recent strength in dwelling investment, particularly the construction of higher-density dwellings, has played a role in supporting the rebalancing of economic activity away from the resources sector.

Low interest rates and increases in housing prices have encouraged a substantial increase in the supply of apartments and the pipeline of residential work yet to be done has increased to historically high levels. While this pipeline should support growth in dwelling investment over the next year or so, the outlook for dwelling investment beyond this period is uncertain.

There is concern about the risk of an oversupply of apartments in specific geographical areas, such as inner-city areas of Melbourne and Brisbane. Outside Western Australia, the supply of housing has to date largely been absorbed by population growth. However, if growth in housing demand does not continue to keep pace with the scheduled large increases in supply, it would place downward pressure on housing prices and rents and increase the risk of off-the-plan apartment purchases failing to settle. If the broader housing market was to weaken substantially, consumption growth may be lower than currently expected in response to wealth and income effects. Consumer price inflation would also be affected as housing costs comprise a significant share of household expenditure.

A Recipe To Tackle Housing Affordability

KPMG has released a brief report “Housing Affordability: What can be done about the Great Australian Dream? They exhibit greater joined up thinking than recent Government outings, because they include tax reform, supply of affordable housing and shared equity options as part of a reform package. It also shows how complex the issues are.  They say it should be a focus of public policy.

The missing piece of the puzzle though for me is property price sentiment. In a rising market, expectations of future price rises drive prices higher, and when two thirds of voters have direct interests in property and the wealth effect these price rises create, it would be a courageous politician who rocks the “magic pudding” boat! Rather they will tinker ineffectively at the margins.

There is no doubt that Australia is experiencing a worsening problem regarding housing affordability, a fact highlighted this week (24 October 2016) by the Federal Treasurer in a speech to the Urban Development Institute of Australia.

kpmgThe driver of reduced affordability has clearly been the rapid increase in the price of housing, relative to a more benign adjustment in household incomes.

Many of the drivers of house price increases and affordability pressures on some households are occurring globally, are largely macroeconomic and are the product of a complex interaction of demand and supply side factors, and no single policy intervention will address the entire issue.

About a decade ago KPMG Economics completed a detailed review into housing affordability in Australia. At the time we found that the change in median house prices were mostly influenced by the underlying strength of the economy, the performance of the share market, and the proportion of housing being purchased by investors relative to owner occupiers.

We have just re-investigated the relationship of median housing prices in Australia to the key drivers identified a decade ago and found GDP and investor activity remain key influences, but the share market no longer had such an influential role. However, wages, interest rates and housing supply are factors whose influence on house prices have strengthened over the past decade.

Average access to intergenerational equity – being the average amount of time a generation has access to potential wealth via inheritance from the immediately preceding generation – is anticipated to be greatest for ‘Baby Boomers’, and least for ‘Generation X’.

We are now seeing a change in behavior by current generations regarding home purchasing which is new compared to previous generations. That is, some young people are now collaborating to buy, some are assisted by parents, while others are simply choosing not to buy because they don’t want to be committed to a location for 30 years of a mortgage.

Low income households are only able to afford housing stock that is located on the fringe of cities, and even then this has become more difficult. However, this outwards push of the urban fringe also creates broader issues for society around provision of infrastructure into these ‘greenfield locations’, and the false economies associated with cheaper housing but more expensive private and public transport.

KPMG recognises the challenges associated with resolving the problem of housing affordability are complex and they involve a range of both supply and demand side factors. We have offered a number of solutions that provide a way forward for housing affordability to be improved on a permanent basis.

These include:

1. CGT reduction: reducing the capital gains tax discount from 50% to 25%, thereby making property investment marginally less attractive
2. Aggregate property tax: abolish stamp duty on the transfer of residential property and conflate rates, land tax, insurance taxes and emergency service levies into a new Property Services Tax
3. Systemic reforms aimed at maintaining the supply and diversity of land and housing in established and growth areas, through:
a) Set targets: a stronger role for target setting for “net additions to stock” to drive Local and State Government planning schemes;
b) Affordable product: target setting would also focus on encouraging greater diversity of housing stock and deliberately encouraging smaller, well designed affordable products;
c) Streamline planning: making further improvements to the planning system to capitalise on the Government’s planned use of structure plans as a means of reducing the holding costs associated with planning delays – and providing developers in both the private and public sector with greater capacity and incentives to bolster supply at times when the market is under substantial demand pressure;
d) Empower public supply: supporting a stronger role for government land authorities to focus on housing affordability for middle income households within the context of a broader sustainability agenda.
4. Targeted Reforms aimed at improving access to those groups who are the most excluded from affordable home ownership. This package would focus on:
a) More low cost housing: the production of a greater volume of more sustainable, well-designed, lower cost house and land packages;
b) Improve assistance: better targeting of existing State first home owner assistance to increase the overall value and impact of that assistance;
c) Promote shared equity: the introduction of a shared equity program with a percentage of that equity exempt from rental interest charges for the life of the loan or a part of it to be provided by Government and/or the private sector.

KPMG also believes that the solution for Australia must involve all levels of Government working together, given the factors driving the problems are not under the remit of any one level of government. It should be a priority area of public policy.

Home Prices Higher In Most States – CoreLogic

CoreLogic says that capital city dwelling values shift half a percent higher in October 2016 based on their Home Value Index. They have reached a new record high for the month, with values rising across six of the eight capitals.

Apart from Adelaide (-1.3%), Hobart (-2.8%) and Perth (-1.5%), every capital city recorded a rise in dwelling values over the past three months, with the Canberra housing market recording the largest increase in values after a 5.6% quarterly rise.

corelogic-october-2016-1Sydney continued as the stand out based on annual capital gains, recording the largest year-on-year increase; dwelling values are now 10.6% higher over the past 12 months. Detached houses (+10.9%) are showing only a slightly higher rate of capital gain compared with units (+9.1%) across Sydney, highlighting the healthier supply/demand dynamic that exists across the Sydney region for higher density housing.

The divergence in performance between houses and units is most clearly evident in Melbourne and Brisbane. The annual rate of capital gains in Melbourne remains strong at 9.1%, however there is a substantial difference in growth rates between houses and units, with house values up 9.6% compared with a 5.2% increase in unit values over the past year. Brisbane’s housing market has shown a larger capital gain spread, with house values up 4.7% compared with a 1.4% fall in unit values over the year.

According to CoreLogic, another sign of market strength can be seen in auction results. In fact, over the past two months, clearance rates across Sydney have dipped below 80% only once. A year ago auction clearance rates were consistently trending around the mid 60% range, albeit on volumes that were about 20% lower than last year.

While dwelling values have broadly risen during October, rental yields in Sydney and Melbourne remain depressed, with gross yields at record lows. The typical Sydney and Melbourne house is now providing a gross rental return of just 2.8%. Taking into consideration holdings costs, expenses and vacancy, the net rental yield for houses is likely to be closer to 2% in these markets. Markets where value growth hasn’t been as strong are seeing healthier yield profiles, with Hobart demonstrating the highest gross rental yields of any capital city.

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Another Strong Auction Result Today

Domain has released their preliminary analysis of auction clearance rates today.  Nationally, 78.3% of the 1,585 listed cleared, with Sydney hitting 81.4% and Melbourne 78.3%. Volumes are down on last year somewhat, but clearance rates remain much higher.

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Brisbane cleared 58% of 131 listings, Adelaide 77% of 105 listed, and Canberra 70% of 74 listed. So we continue to see momentum in the Sydney and Melbourne markets.  No surprise this meshes with recent home price rises.

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Real Home Value Growth Varies Significantly

Talking about average home price growth is rarely helpful, it is important to get granular. So CoreLogic’s post on real home price growth by major centres is very helpful because it corrects growth for inflation.  Their analysis shows that real home values are now more than 20% lower than their peak in Perth and Darwin, but well up in Sydney. Over the longer term, Sydney and Melbourne are the only two capital cities in which real home values are now back above their previous peaks.  We have a multi-speed market.

The Australian Bureau of Statistics (ABS) released consumer price index (CPI) data for the September 2016 quarter earlier this week.  According to the data, headline inflation increased by 0.7% over the quarter to be 1.3% higher over the year.  Meanwhile, underlying inflation was recorded at 0.3% over the quarter and 1.5% higher over the past 12 months.  Both headline and underlying inflation have increased at a rate below the RBAs target range of 2% to 3%.  This would usually see the RBA cut interest rates to try and lift inflation however, the previous cuts in May and August, which had the same intent, have not successfully lifted inflation.  What those cuts did manage to do was re-energise growth in housing, particularly in Sydney and Melbourne.  For this reason there is some speculation as to whether the RBA will risk cutting interest rates again given concerns that a lower cash rate will fail to push the dollar lower and lift inflation but add further heat to an already strong housing market.

With the CPI data released, we can pair it with the CoreLogic home value index data to September 2016, in order to obtain an understanding of real growth in values.  Although headline value growth is lower than it was a year ago, so too is headline inflation which mean that real value growth, particularly in Sydney and Melbourne remains strong.

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The above chart highlights the real and nominal changes in home values across each capital city over the 12 months to September 2016.  In both real and nominal terms values have fallen over the past year in both Perth and Darwin while they have increased across each of the remaining capital cities.  There’s also been evidence that along with Sydney and Melbourne, where growth has been strong for almost four years now, value growth has also picked up in other cities such as Adelaide, Hobart and Canberra.

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If you look at the compound annual change in real home values over the past five, ten and 15 years, the 15 year time-frame in most capital city provides the strongest performance.  The clear exception is in Sydney where the last five years have resulted in the strongest annual returns.  In contrast, across all other capital cities except for Perth and Hobart the past five years have recorded the weakest annual growth across each of the three time-frame.  This result really highlights the strength of the Sydney market over the past five years and its relative weakness over the 10 years preceding.

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Since the end of 2008 (ie post GFC), growth in home values has significantly skewed towards the Sydney and Melbourne housing markets.  As highlighted in the above chart, when adjusted for inflation values are lower that they were at the end of 2008 in Brisbane, Adelaide, Perth, Hobart and Darwin.  Sydney and Melbourne have also seen a substantially greater increase in values relative to Canberra which was the only other capital city to have seen an increase in real home values.

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Sydney and Melbourne are the only two capital cities in which real home values are now back above their previous peaks.  After peaking all the way back in the March 2004 quarter, real home values in Sydney are now 35.3% higher in Sydney and in Melbourne they are 17.2% higher than their September 2010 peak.  All other capital cities are still recording real home values below their previous peaks.  The magnitude of these declines are recorded at: -10.2% in Brisbane, -5.3% in Adelaide, -20.2% in Perth, -15.6% in Hobart, -23.8% in Darwin and -1.0% in Canberra.  In some of these cities, values peaked many years ago, as far back as 2007 in Perth and Hobart and 2008 in Brisbane.

Although interest rates are low and in real terms homes have been becoming more affordable outside of Sydney and Melbourne it still hasn’t proved to be enough to lure substantial demand and subsequent growth across the other capital cities.  What this highlights is the importance of employment, what sets Sydney and Melbourne apart, outside of more expensive housing prices, is the fact that they both have strong economies which are creating jobs.  Housing affordability alone is no longer enough to attract an increasing level of housing demand, you need a strong economy and the jobs that go along with those strong economic conditions.

Perth and Darwin in particular are well into a fairly substantial value decline phase which is appears set to continue.  Since their respective market peaks in September 2007 and September 2010, real home values are now -20.2% and -23.8% lower respectively.

Home Prices Rise Again (In Places)

From Domain.com.au

Despite efforts to cool the property market, Sydney house prices have run away yet again, growing at their strongest rate in over a year.

The harbour city’s median house price is now at a record $1,068,303, after a 2.7 per cent jump over the September quarter, Domain Group data released on Thursday found.

This has seen some property owners make hundreds of thousands of dollars by flipping properties purchased in the past few years.

Three-bedroom 4 Milton Street, Chatswood sold for $3.3 million in August - up $1.75 million in three years.Three-bedroom 4 Milton Street, Chatswood sold for $3.3 million in August – up $1.75 million in three years. Photo: Richardson & Wrench Chatswood

It has also pushed home ownership further out of reach of first-time buyers. And experts say this is likely to get even tougher with more price growth on the horizon, despite Treasurer Scott Morrison warning the state governments they need to tackle housing affordability.

Some of the growth in the September quarter was thanks to a surge in Investor activity, which increased 9.2 per cent in the year to August 2016, Domain Group chief economist Andrew Wilson said.

“The growth is raging back into Sydney … we have auction clearance rates in the mid-80 per cent range, and there were two interest cuts in August and May this year,” Dr Wilson said.

The strongest region over the past 12 months was the lower north shore – up 12 per cent in a year. Over the quarter, house prices in the area increased 6 per cent.

But apartment owners weren’t as lucky, with prices up just 1.1 per cent over the quarter to a median of $685,865.

Among house sellers making substantial profits in the lower north were the former owners of three-bedroom 4 Milton Street, Chatswood. It sold for $3.3 million in August – up $1.75 million in three years.

This was a street record and more than $500,000 above expectations, Richardson & Wrench Chatswood principal Warren Levitan said.

There were 14 interested buyers, but the home sold to an offshore purchaser with plans to knock it down and rebuild prior to moving in. In the meantime, it has been rented for $900 a week.

“A lot of the [price growth] is due to the local Asian market, where there are still buyers willing to pay top price … there’s also not a lot of stock,” Mr Levitan said.

They weren’t the only sellers making an enviable profit. Three years ago, 2 Cabramatta Road, Mosman sold for $1,873,000. In September, it sold again for $2.95 million. The sellers of 28 Devonshire Street, Crows Nest also saw their home jump $750,000 in three years.

This “revival” in the Sydney market will “likely be on the RBA’s minds next week,” HSBC chief economist Paul Bloxham said.

But while there’s likely to be more price increases over the next few months, it will be “single digit rather than double-digit growth” on an annualised basis, he said.

He pointed to an increase in supply and a tightening in the guidelines for lenders as what will see property prices grow at lower levels than those seen in 2014 and 2015.

New guidelines from the Australian Prudential Regulation Authority released on Monday require lenders to ensure borrowers are able to afford repayments on a 7 per cent interest rate when assessing whether they’re eligible for a loan.

This means someone buying a median priced house would need to be able to pay $6040 a month on a 25 year loan. Assuming they had a 20 per cent deposit.

This is about the same amount as the entire take-home pay packet on a $100,000 salary.

BIS Shrapnel residential researcher Angie Zigomanis agreed price growth was likely to continue, as “investor numbers are looking better and it looks as if the banks are loosening some of their criteria for lending”.

Strong migration into NSW and fewer homes available for sale would also put pressure on property prices, he said.

Century 21 chairman Charles Tarbey also had “bullish prospects” for the market in the lead-up to Christmas, but warned prices may start to moderate in 2017.

NAB Group chief economist Alan Oster was also not convinced there would be any huge increases in house prices in the near future, as there had been a slowdown in business conditions across NSW.

Already, the apartment market has shown signs of slowing in some areas. Canterbury Bankstown, the south, the west and the upper north shore all recorded modest price declines for units in the three months to September.

Over the year, the biggest drop in apartment prices was seen in Canterbury Bankstown, with a decline of 4.7 per cent to a median of $505,000.

The median apartments across Sydney increased 0.9 per cent in the 12 months to September.

Banks offering ‘significant discounts’ to property investors

From Smart Property Investment

New research has revealed that property investors are negotiating significant price discounts on home loans, despite measures to cool investor lending.

Speaking to Smart Property Investment’s sister publication Mortgage Business following the release of the JP Morgan Australian Mortgage Industry Report last week, Digital Finance Analytics (DFA) principal Martin North, who co-authored the report, said “there is strong evidence that investors are becoming able to secure significant discounts” on their home loans.

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“We are seeing competition swinging back more into the investor loan space. Some of the discounts we are seeing are even better than what is available to FHBs or even owner-occupiers with a higher LVR,” he said.

Rate discounts for investors all but disappeared when regulatory measures saw banks introduce differential pricing last year. Lenders then started to offer attractive headline rates under 4 per cent in an effort to secure investor business, particularly as the growth rate of their books fell below APRA’s 10 per cent speed limit.

According to Mr North, before differential pricing you could get up to 120 basis point discounts on investor loans. Now, he says, those discounts are returning as fresh momentum gathers in the investor lending market.

“Property investors seem convinced that capital growth is still available,” he explained.

“The banks are recognising this. So what they have done is take away some of those great headlines rates, those good deals, and started to offer heavier discounting for investors.

“I’ve noticed that some investors who have been transacting over the last few months have been able to get a very significant discount off their investment loan.”

However, Mr North said banks are “picky” and that discounts are heavily dependent on the type of deal. Investor home loans that are principle and interest (P&I) with an LVR of 80 per cent or less are attracting the biggest discounts, he said.

“My view is that these discounts are now back in the market. But you have to know where to look for them and you have to ask. It’s not just a case of flicking through the comparison websites.

“That’s why there is a very significant correlation between these discounts and mortgage brokers. They know where to find these discounts.”

The revelation comes as new data from major mortgage aggregator AFG shows lending to property investors remains strong, falling by just two percentage points over the September quarter.

Comparethemarket.com.au analysed AFG’s September quarter data to find that borrowing by real estate investors declined marginally from 34 per cent to 32 per cent for the first quarter of the 2016/17 financial year.

Back in May APRA announced the big four banks and Macquarie would be required to hold additional regulatory capital against their loan books as protection against any increase in defaults.

Banks have also tightened their lending requirements. For example, Commonwealth Bank no longer lends to self-employed foreign property investors.

“Tighter regulations designed to cool the property market, and lending to it, hasn’t deterred investors,” Comparethemarket.com.au spokesperson Abigail Koch said.

The latest ABS housing finance data shows that the $31.4 billion worth of commitments in August was split between $19.5 billion worth of commitments by owner-occupiers and $11.9 billion in commitments to investors. The value of lending to owner-occupiers has fallen over two consecutive months while lending to investors has risen for the fourth consecutive month.

Unit Prices Growing Slower Than Houses

In an interesting post from CoreLogic, Cameron Kusher discusses the supply on units, and concludes there are more coming on stream relatively in Brisbane and Melbourne, than Sydney, so risks are lower, here. But I found his observation about relative home price growth even more interesting.  Unit prices are moving more slowly than houses.

We suggest the rising supply of units appears to be having a depressive impact on price growth and given the continued supply ahead, unit prices are unlikely to defy gravity in the major centres.  Investors beware!

In the recently released Financial Stability Review (FSR) the Reserve Bank (RBA) talked about the supply risks surrounding the inner city apartment markets however, they did point to the fact that they see more potential risk in Melbourne and Brisbane.  In this blog we explore the differences in pending apartment supply across the key capital cities.

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The above chart highlights the change in house and unit values across the individual capital cities since the market entered its current growth phase in June 2012.  The first thing to note is that in all cities except for Hobart, house values have risen by a greater amount than units.  In fact, in all of the remaining capital cities except for Sydney unit values have increased by less than half the rate of houses.  This highlights that despite the shift to more unit living, particularly in inner-city areas, ultimately there appears to be a healthier relationship between supply and demand for houses compared with units and as a result, house values have increased at a faster rate than units.

Morrison targets state planning regulations as problem for housing affordability

From The Conversation.

The government will push states to remove unnecessary residential land use planning regulations that are impeding the supply of housing, Treasurer Scott Morrison will say in a major speech acknowledging the pressing issue of housing affordability.

Addressing the Urban Development Institute of Australia on Monday Morrison will say that improving affordability “right across the housing spectrum must … be a key policy goal for governments at all levels”.

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Developing a sensible policy requires separation of the forces that have caused prices to increase, he will argue. “Of all the determinants of house prices in Australia, whether cyclical or structural, the most important factor behind rising prices has been the long running impediments to the supply side of the market.

“This not only relates to the volume of supply but also the responsiveness, flexibility, diversity and composition of that supply, as housing needs becomes more complex.

“A period of weak residential construction in the mid to late 2000s left many markets undersupplied, especially in NSW.”

While a large volume of construction is now coming through and much more is anticipated, not all is in the right place or of the right type, Morrison will say.

“Whilst Sydney, Melbourne and Brisbane have record supply, most of this is in the inner city apartment market … Unfortunately, we are still seeing a muted supply of detached housing in other parts of our cities.”

Morrison will list supply side constraints as including “complex land planning and development regulation; insufficient land release; the planning, cost and availability of infrastructure provision; transaction and betterment taxes; public attitudes towards urban infill; and, for Sydney in particular, physical geographic constraints.”

State governments could do a lot to improve planning processes and the provision of infrastructure, he will say.

He will instance developers telling Treasury about increasing development times including one case on Melbourne’s outskirts where it took 12 years for a project to go from land acquisition to a new suburb.

“This is how long it took for the land to be rezoned and for the developer to meet the onerous hurdles required in construction.

“While some construction standards are important for maintaining the safety and quality of newly constructed dwellings, some of these hurdles sounded almost farcical. For example the Melbourne developer wasn’t permitted to design the shopping precinct of the new suburb they had built because the Victorian government required that their own architects did the work (and at their own pace).

“So even though there have been some signs of a supply response in recent years, particularly in inner-city apartments, more needs to be done to ensure that supply increases more broadly – both in terms of location and type of dwelling – and that the roadblocks to this increased supply are removed.”

This will be a focus of Morrison’s discussions at the next Council on Federal Financial Relations in early December.

The proportion of Australian households owning or paying off their home has fallen from 71% to 67% over the past 20 years.

The proportion of home owners aged over 45 with a mortgage has increased significantly in that time.

“It’s taking longer for people to own their own home and be free of their mortgage. This trend has the potential to undermine retirement incomes, with superannuation cashed in on retirement to clear the mortgage or having mortgage costs eating into retirement income or undermining their ability to save more as they approach retirement,” Morrison will say. Housing un-affordabilty thus has a “cascading impact”.

Morrison will point to the “real pinch point” – being able to get into the market in the first place.

“As house prices have risen relative to incomes, this is making it more difficult for first home buyers to keep up and save an adequate deposit,” he will say.

“The proportion of home loans that are being provided to first home buyers was 13.4% in August 2016, the lowest point since February 2004 and well below its long term average of 19.4%.

“In aggregate, across the country, a 20% deposit on the nationwide median home loan is more than 100% of annual household disposable income. This is slightly above the decade average, but well above the 60% levels that were the norm prior to 2000,” Morrison will say.

“The market is getting away from people. No matter how hard they work or save or even earn, they are finding it harder and harder to get into the market.”

But “the key to addressing housing affordability is not to crash the housing market. Rather the objective is to have housing policies that mitigate the artificial inflation of asset prices, ensure that supply is not restricted from responding to genuine demand and that enable homebuyers, through their own efforts, to make more rapid progress to being able to enter the market”.

On the issue of the looming glut in inner city apartments, Morrison will say that “notwithstanding some regional risks, the current construction cycle would likely have to run-up faster and continue for longer before over-supply became a nationwide macroeconomic risk.

“That is not to say that the size and length of the current construction boom won’t warrant attention in the coming months and years. Policy makers are very cognisant of the risks and have been doing something about it.”