Australia’s property market growth comes to a halt

From The New Daily.

Sydney’s deflating house prices have dragged the property market down across the entire country, in the most conclusive sign yet that the boom is over, figures from CoreLogic have revealed.

For the month of October – traditionally a bumper month for property sales – average house prices across Australia’s capital cities posted no growth at all.

Sydney house prices fell by 0.5 per cent, bringing quarterly losses to 0.6 per cent.

Prices in Canberra and Darwin also fell (by 0.1 per cent and 1.6 per cent respectively), while Adelaide and Perth each posted zero growth.

Of the capital cities, only Melbourne, Brisbane and Hobart saw property prices increase, at 0.5 per cent, 0.2 per cent and 0.9 per cent respectively.

Perth’s flat growth was also an improvement on a long period of falling prices.

The poor results will be a disappointment to sellers who assumed a spring sale would optimise the value of their property.

CoreLogic’s head of research Tim Lawless put the low growth down, primarily, to tighter restrictions on lending.

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” he said.

He added that more expensive rates on interest-only loans were acting as a disincentive for property investors, particularly those that offered low rental yield.

Commenting on the NSW capital’s poor results, Mr Lawless said: “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”

However, despite the recent depreciation, house prices in Sydney are still 7.7 per cent higher than they were a year ago.

Turning to Melbourne, Mr Lawless put the city’s continued growth down to “record-breaking migration rate”, which he said was creating “unprecedented housing demand”.

Units v Houses

In most capital cities, houses continued to see higher capital growth than units, due to overdevelopment of the latter. A notable exception to this was Sydney.

Over the year, unit values in Sydney grew by 7.9 per cent, compared to 7.7 per cent for houses.

“While Sydney is seeing a large number of new units added to the market, it seems that high levels of investment activity and strained affordability is helping to drive a better performance across this sector,” Mr Lawless.

The report found that rental yields, while they had grown 2.8 per cent over the year, were still extremely low when compared to house prices – which have on average risen 6.6 per cent over the year.

Sydney and Darwin were exceptions to this.

“If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be a slow process,” Mr Lawless said.

Chinese money dries up

While CoreLogic put the flat growth down to tougher mortgage lending restrictions, a report by Credit Suisse offered a different explanation.

According to the ABC, the report found Chinese capital flows into Australia had fallen in recent months, and this was having a pronounced effect on the domestic property market.

“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” ABC quoted Credit Suisse as saying.

“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.

“This fall foreshadows weakness in NSW housing demand in the year ahead.”

This, Credit Suisse argued, could see the Reserve Bank forced to cut interest rates even further. Currently the cash rate sits at a record low of 1.5 per cent.

Australia’s housing boom is ‘officially over’ – and that could have a big economic impact

From Business Insider.

Australian house price growth stalled in October, according to data from CoreLogic, thanks largely to a 0.5% decline in Sydney, the nation’s largest and priciest property market.

Prices in Australia’s largest city fell in the two months, leaving the decline since July at 0.6%, the largest over a comparable period since May 2016.

As a result of the weakness in Sydney, prices nationally have grown by just 0.3% since July in weighted terms, seeing the increase on a year earlier slow to 6.6%.

On the recent evidence, a Sydney-led national housing market slowdown is now underway.

Tim Lawless, Head of Research at CoreLogic, called it a “significant turn of events”, acknowledging that if historical patterns are repeated, there’s likely to be further declines to come.

He’s not alone on that front.

To George Tharenou, economist at UBS, the weakness in CoreLogic’s Home Value Index signals that Australia’s housing boom is now “officially over”.

“Australia’s world record housing boom is ‘officially’ over after a large ‘upswing’ of 6556% price growth in 55 years,” he says.

“After dwelling price growth was resilient at a booming 10% [plus annual] pace earlier this year, there is now a persistent and sharp slowdown unfolding.

“Indeed, the weakness in auction clearing rates, and the near flat growth in prices in the last 5 months, suggest the cooling may be happening a bit more quickly than even we expected.”

If the chart below from UBS is anything to go by, the decline in auction clearance rates in recent months points to the likelihood that annual price nationally will continue to decelerate into early 2018.

Source: UBS


“Price growth now seems likely to end 2017 around 5% year-on-year, below our expectation for 7%,” Tharenou says.

Like Lawless at CoreLogic, he says the Sydney-led slowdown is a lagged response to macroprudential tightening from Australia’s banking regulator, APRA, something that has led to out-of-cycle mortgage rate hikes as a result of tougher lending standards.

“This slowdown in house prices has coincided with a sharp slowing of investor housing credit growth to a 5.5% annualised pace in the last three months to September,” Tharenou says.

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth ahead via a fading household wealth effect.”

Source: UBS


Given his expectation that weaker house price growth will soften household consumption, the largest part of the Australian economy, Tharenou says it will prevent the Reserve Bank of Australia from lifting interest rates until the second half of next year.

Should house price growth weaken further in the months ahead, it must surely cloud the outlook for residential construction, another crucial part of the Australian economy and the third-largest employer in the country.

With new home sales and building approvals both rolling over from the record levels reported last year, a bout of price weakness may exacerbate that slowdown, creating negative second-round effects across the broader economy given the sheer size of the residential construction sector.

Asleep At The Wheel? – The Property Imperative Weekly 28 Oct 2017

Another big week of finance and property news, so we pick over the bones and try to make sense of what’s going on. And we ask were the Regulators asleep at the wheel?

Welcome to the Property Imperative weekly to 28th October 2017. Watch the video or read the transcript.

We start this week’s review with a look at the latest economic data. The latest GDP read from the US, at 3.1% annualised, in Q2 and 3.0% in Q3, provides more support to the view the FED will lift their benchmark rate again before the end of the year. This is likely to have a flow on effect by rising rates in the international capital markets, which will mean higher bank funding costs here, as well as putting downward pressure on the toppy stock market. To confirm this view, we saw the benchmark 10-year Treasury Bond Yield in the USA rose to its highest rate in several months.

In Australia, the ABS said the CPI was 0.6 per cent in the September quarter 2017 following a rise of 0.2 per cent in June. The most significant price rises were electricity (+8.9%), tobacco (+4.1%), international holiday travel and accommodation (+4.1%) and new dwelling purchase by owner-occupiers (+0.8%). These rises were partially offset by falls in vegetables (-10.9%), automotive fuel (-2.3%) and telecommunication equipment and services (-1.5%). The CPI rose 1.8 per cent through the year to September quarter 2017 having increased to 1.9 per cent in the June quarter 2017, below the RBA’s 2-3% target band.

The RBA’s Guy Debelle spoke about some of the uncertainties in taking the economic temperature in Australia. He homed in on the CPI data from the ABS, making the point that our belated quarterly CPI reports are out of kilter with the monthly data now provided in many other western countries. In addition, the ABS will be revising their expenditure weightings in the CPI series, which means that CPI may currently be over stated by perhaps a quarter of a percent. These revisions are made every 5 or 6 years, although there are plans afoot to make them more frequently. The ABS is under tremendous funding pressure, and there are risks their critical data series may be compromised.

The National Accounts data from the ABS for the year 2016-17 really brought home how much of the growth in the economy was thanks to household consumption, as opposed on business or government investment. This helps to explain why the RBA was willing to let household debt escalate to their current astronomical levels, why rates are so low, and why the property sector is so important.  In summary, overall growth was 2%, the lowest since 2008-9; wages rose 2.1%, the weakest since 1991-2; growth in household expenditure as measured in current price terms was 3.0%, the lowest on record; the household saving ratio was at its lowest point (4.6%) in nine years and yet household consumption was the strongest growth driver at 1.22 percentage points.

This was because households borrowed an additional $990 billion over the 10 year period from 2006-07, mainly in mortgages. The value of land and dwellings owned by households increased by $2.9 trillion over the same period and increased by $621 billion through 2016-17 and despite slow wage growth, household gross disposable income plus other changes in real net wealth increased $456.6 billion, or 32.6%, in 2016-17, largely due to a $306.5 billion appreciation in the value of land held by households.

But of course, such high debt and high property prices are now creating fault lines in the property market and household finances.

We are seeing more risks in the property investment sector. Traditionally, in the Australian context, loans to property investors have tended to perform better than loans to owner occupiers. This is because investors receive rental income streams to help pay for the mortgage costs, they are willing to carry the costs of the property against future capital gains, and many will be able to offset costs against tax, especially when negatively geared. In addition, occupancy rates in most states have been stellar.

But things are changing, as the costs of borrowing for investment purposes have risen (thanks to the banks’ out of cycle rises), while rental returns are flat, or falling and the costs of managing the property are rising. In addition, the supply of investment property is rising, and occupancy rates are declining in a number of key markets. As a result, more investors are seeing net rental yields – after mortgage payments and other costs drifting into negative territory, especially in VIC and NSW.  Our Core Market Model, and recent data from ANZ suggests defaults from the property investment sector are now running at similar levels to owner occupied borrowers, and are set to rise further.

In fact, the ANZ full year result, which superficially looked strong – up 18% on the prior comparable period – contained a number of negative trends, as they focus more on the retail business in Australia and New Zealand.  Yes, they have a strong balance sheet, as capital is released from their assets sales, and provisions were down; but the underlying net interest margin fell, down 8 basis points on last year to 1.99%, with a fall of 2 basis points in 2H, despite the mortgage book repricing and loan switching. In addition, 90-Day mortgage defaults overall remained similar to last year, but with a spike in WA and a fall in VIC/TAS. Investment loan delinquencies are rising, whereas they have traditionally been lower than OO loans. They have recently tightened underwriting standards, but of course loans already on their books have looser standards. They warn “household debt and savings have both increased, however the ability for households to withstand economic shocks has diminished a little”. “In 2018 we expect the revenue growth environment for banking will continue to be constrained as a result of intense competition and the effect of regulation including a full year of impact of the Australian bank tax.”

Our own analysis of default probability, from our Core Market Model, now includes 90-day default risk modelling.  We measure mortgage stress on a cash flow basis – the October data will be out next week – and we also overlay economic data at a post code level to estimate the 30-day risk of default (PD30). But now we have added in 90-day default estimates (PD90) and the potential value which might be written off, measured in basis points against the mortgage portfolio. We also calibrated these measures against lender portfolios. Granular analysis can provide a rich understanding of the real risks in the portfolio. Risks though are not where you may expect them! If we look at the results by state, WA leads the way with the highest measurement, then followed by VIC, SA and QLD. The ACT is the least risky area. In WA, we estimate the 30-day probability of default in the next 12 months will be 2.5%, 90-day default will be 0.75% and the risk of loss will be around 4 basis points. This is about twice the current national portfolio loss, which is sitting circa 2 basis points.

Banks are cracking down on loans to borrowers buying into Brisbane’s over-supplied apartment market, with a number of risky postcodes identified, which require bigger deposits. The four major banks – Westpac, Suncorp, Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB) – are restricting lending for certain Brisbane postcodes, where apartment buyers will now be required to have a deposit of up to 20% to qualify for a home loan. Suncorp has blacklisted nearly 40 postcodes in the Queensland capital, including Inner Brisbane, Teneriffe, Fortitude Valley, Bowen Hills, and Herston. The banks are refusing to loan more than 80% of the cost of a unit due to “[weaknesses] in the investment market” as well as the current oversupply in inner-city apartments. Prices for apartments in Inner-Brisbane have dropped to their lowest level in three years.

QBE’s Housing Outlook, published this week, suggests home price growth will slow further in the years ahead. We continue to see appetite from property investors easing, as property price growth stalls or in some states reverse. Banks on the other hand are chasing new business with deep discounts on new loans. For example, Teachers Mutual cut their rate for new loans by 30 basis point, to 3.84%.  Westpac, St George, BankSA and Bank of Melbourne all introduced promotional discount rates, with rates down by up to 20 basis points. Bank West also offered discounts to both new owner occupied and investor borrowers. So, the war chests created by the back book repricing earlier in the year – especially investor and interest loans are being used to target new business. As a result, we expect to see a hike in refinancing, especially in the lower LVR owner-occupied sector, as borrowers seek to reduce their monthly outgoings.

We also showed that more households seeking a mortgage are generating multiple applications, sometimes direct to a bank, and sometimes via mortgage brokers, as they seek to find the best deals. More applications are made via online systems, which make the process easier, but the net result of all this is that mortgage conversation rates have fallen from around 80% to 50%, creating more noise, and costs in the system. We think this is a direct results of the banks’ so called omni-channel approach to distribution, which will turn out to be quite costly.

Following the concerns expressed recently by RBA and ASIC on the risks to household finances, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income. Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?

The Treasury added their voice this week, when John Fraser, Secretary to the Treasury, gave an update on household finances and housing as part of his opening statement to the October 2017 Senate Estimates.  He expressed the view that debt is born by those with the greater capacity to repay but this belies the leverage effect of larger loans in a rising interest rate environment. He said that “while banks’ progress against these measures has been positive, regulators will need to think carefully about whether future efforts to maintain financial stability should lean against cyclical excesses or address structural risks within the financial system”.

So, we have the full Monty, with all four members of the shadowy “Council of Financial Regulators” expressing concerns about household debt and home price risks. A completed change of tune from the declarations of 2015 when everything was said to be just dandy!

Now those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all-time low.  We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.

All members of the “Council of Financial Regulators” which is chaired by the RBA are culpable.  This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey! The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability. But too little has been done, too late.  And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth. Even now, lending for housing is growing three time faster than incomes or cpi. Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. It’s time to review the regulatory structure and remember that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government! That could prove to be a costly mistake.

And that’s the Property Imperative Weekly to 28th October 2017. If you found this useful, do leave a comment below, subscribe to receive future updates and check back next week for the next installment.

QBE Housing Outlook Forecasts Slowing Price Growth

The annual report produced by BIS Oxford Economics for QBE Lenders’ Mortgage Insurance says that the outlook for house and unit prices is likely to become more subdued over the next year or two. Many markets are now building too much stock, particularly units, after new dwelling starts peaked at a record 233,600 dwellings in 2015/16.

Restrictions on bank lending to investors are expected to be an increasingly prominent feature of the outlook for the market over 2017/18. This will most likely reduce investor purchaser activity and slow price growth. Owner occupier demand is also expected to weaken, as the emerging downturn in new dwelling commencements translates into lower building activity over 2017/18 and 2018/19 and negatively affects the economy.

Low affordability in Sydney and Melbourne should begin to impact on the potential for purchasers to take on a larger mortgages.

Demand and supply

Population growth has been strong. Net overseas migration inflows rose from 178,600 in 2014/15, to an estimated 215,000 in 2016/17. Slowing economic growth is expected to cause net overseas migration to ease to 175,000 by 2019/20. While lower than recent cycles, this figure is up compared to the long-term, 20-year trend of 171,100 per annum and is higher than most years through the 1990s and early 2000s. This will continue to fuel underlying demand for dwellings. New dwelling commencements rose to record levels in 2014/15 and 2015/16, and are still well above underlying demand. Only New South Wales, Victoria and Tasmania are expected to be in dwelling deficiency over the next three years. However, the excess stock in markets is more likely to be for units, which have accounted for the larger share of the upturn in new dwelling supply.

Lending environment

Low interest rates have helped drive up prices and investors have been a key source of demand. Successive initiatives by the financial regulators to dampen speculative investment has resulted in banks lowering loan-to-value ratios to investors, as well as charging higher interest rates to investors and for interest only lending. The latest restrictions on interest only loans are expected to cause a slowdown in investor lending over 2017/18. This is likely to have a negative effect on dwelling prices, with price falls expected in some cities.

Median prices

Median house price growth in Sydney and Melbourne is expected to weaken in 2017/18 due to lower investor activity in the market. This is expected to have a greater affect in Sydney, given its greater recent influence from investors. The emerging momentum in house price growth in Canberra and Hobart is forecast to continue in 2017/18. Modest house price rises are expected in Brisbane and Adelaide; with these markets being dampened by weak local economic conditions. The downturns
in Perth and Darwin are forecast to bottom out in 2017/18 although any recovery is likely to be drawn out. Unit price growth is forecast to underperform house price growth. A disproportionately higher number of units being built in most markets will result in an excess supply in units. Restrictions on investor lending will also have a negative effect, given units are more favoured by investors.


While the demand and supply balance is important in determining pressure on prices and whether rents rise or fall, there is an upper limit on how much of a household’s income can be spent on mortgage repayments. As it becomes more difficult to service a mortgage on a property, further price growth becomes less possible unless incomes rise or interest rates reduce by a sufficient enough margin to make purchasing more affordable.

Affordability has deteriorated considerably in Sydney and Melbourne since 2012/13 due to strong house price growth. The ratio of mortgage repayments on a median priced house to average household disposable income is 39.7% in Sydney and 36.2% in Melbourne at June 2017. This is close to each city’s previous highs, indicating limited scope for continuing solid price growth.

Affordability has also become more difficult in Adelaide, Hobart and Canberra over the past 12 months, again due to rising prices.

Nevertheless, affordability is at levels similar to that seen in the early 2000s. In contrast, price reductions in Perth and Darwin have made purchasing a dwelling more affordable. Brisbane has remained at around the mid‑point of its historical range.Low affordability in Sydney and Melbourne should begin to impact on the potential for purchasers to take on a larger mortgage and bid up prices too much further. Moreover, it makes these markets vulnerable to rises in interest rates, as the most recent purchasers may have stretched themselves to buy their dwelling.

Notably, the better affordability in other cities is having a limited impact on prices. Weaker economic conditions and little growth in household incomes has made buyers more reluctant to overcommit on a loan. The better relative affordability should mitigate some of the downward pressure on prices in oversupplied markets and in resource‑sector exposed markets such as Perth, Darwin and to a lesser extent Brisbane.


Pulling In Two Directions – The Property Imperative Weekly 21 Oct 2017

The latest economic and finance data appears to be pulling in two directions, so we discuss the trends.

Welcome to the Property Imperative Weekly to 21st October 2017. Watch the video, or read the transcript!

In this week’s review of the latest finance and property news, we start with data from the Australian Institute of Health and Welfare in their newly released report Australian Welfare 2017. This is a distillation of data from various public sources, rather than offering new research.

In the housing chapter, they reinforce the well-known fact that home ownership is falling in Australia, while rates have been rising in a number of other comparable countries. Contributing to this trend overseas, at least in part, they say, are changes in the characteristics of households (including population ageing, household structure, and income and education) and policy influences, such as mortgage market innovations (including the relaxation of deposit constraints, increasing home ownership rates among lower income households, and tax reliefs on mortgage debt financing). In Australia, the steepest decline in home ownership rates across the 25 years to 2013–14 has been for people aged 25–34. This is typically the age at which first transitions into home ownership are made. But, fewer and fewer people in this age group are entering home ownership, with a 21 percentage point decline to just 39% in 2013–14 (compared with 60% in 1988–89). Home ownership rates for people aged 35–44 also fell, but not so much (12 percentage points).

Also, the proportion of home owners without a mortgage has continued to fall, while the proportion of renters has increased. Now more home owners have a mortgage, compared with those who own their property outright. Another fact is the startling gap between the rise in home prices, relative to disposable incomes, creating a barrier to home ownership for many. This gap has been fuelled by rapid house price growth (up 250% since the 1990’s), after the financial system was deregulated, with the total value of Australian housing estimated to be more than $6.5 trillion. Of course, the impact of higher house prices has been partially offset by lower mortgage interest rates, increased credit availability and changes in financial agency practices. These favourable lending conditions and low interest rates have encouraged buyers into the market, despite the growth in house prices themselves. This could all got wrong should mortgage rates rise.

The final piece of data shows that households are getting a mortgage later in life, and holding it longer, often well into retirement. In 2013, 71% of people born between 1957 and 1966 (mainly baby boomers), were financing a mortgage when aged 45–54. This trend is of particular concern as these households’ approach retirement without their home and asset base being paid off. For people looking to retire in the next 10 years, 45% of 55–64-year-olds in 2013 were still servicing a mortgage, compared with just 26% in 1982.

As the recent Citi report emphasises, and using our Core Market Data, the large level of debt outstanding by borrowers aged in their 50s and 60s means many investors will need to sell property to discharge their debts, especially those holding interest only loans. Given that the average age of wealthy seniors is 63 and the average IO debt is $236,400, Citi expressed concern that this cohort will not have enough time to repay the principal “without a significant hit to household cash flows”.

We still think the mortgage underwriting standards are too lose in Australia, as regulators try to balance slowing the market, but not killing the goose which is laying the golden economic egg.  So we found the Canadian regulators intervention in their mortgage market this week significant. There the index of house prices to disposable income has increased 25%, from 2000,  raising the prospect that real estate overvaluation is driving up overall household debt and overextending borrowers. So they tightened serviceability requirements and imposed loan to value limits on lenders.

Good news on housing affordability this week from the HIA, at least for some. Their Housing Affordability index for Australia improved by 0.5 per cent in the September 2017 quarter but still remains 4.4 per cent below the level recorded a year ago. It also showed that while some owner occupied borrowers had seen their mortgage rates drop, many property investors, has seen their rates rise. Sydney remains the least affordable market they say.

Our friends at Mozo wrote a blog post for us on the impact of the APRA changes to mortgage rates, which underscored the movements by type of loan.

More good news from the ABS. The monthly trend unemployment rate decreased by 0.2 per cent over the past year to 5.5 per cent in September, the lowest rate seen since March 2013. The participation rate remained steady at 65.2 per cent, within that male participation rate was 70.8 per cent, while the female participation rate reached a record high of 59.9 per cent. Over the past year, the states with the strongest annual growth in employment were Queensland (4.1 per cent), Tasmania (3.9 per cent), Victoria (3.1 per cent) and Western Australia (2.9 per cent). However, the underemployment trend rate still does not look that flash, especially in TAS, SA and WA, and we have a very high unemployment rate among younger workers as well as a rise in more casual, part-time work. All of this translates to lower wages.

The latest data from S&P showed a small decline in mortgage defaults in August. S&P said arrears decreased in all states and territories except the Australian Capital Territory (ACT) over the month, with noticeable improvements in Australia’s mining states and territories. The Northern Territory recorded the largest improvement, with arrears declining to 1.63% from 1.98% a month earlier. In Western Australia, arrears fell to 2.22% in August from a historic high of 2.38% in July. They still warned of potential risks in the system, especially from higher LVR IO loans written before 2015. And of course, this is looking a selection of securitised loans which may not be typical, and in any case, in most places home price rises mean struggling borrowers should have the capacity to sell and repay the bank. That would change if prices started to fall seriously.

Talking of risks, there were interesting comments from ASIC this week, suggesting that whilst brokers may be having appropriate conversations with their interest only mortgage customers, there was evidence of poor record keeping. This follows the regulator’s announcement they would commence a loan file review, to ensure that consumers are not paying for more expensive products that are unsuitable. Without good documentation brokers and lenders leave themselves open to the charge of making unsuitable loans, which can have significant consequences.

Another indicator of potential risks in the system is the rise in the number of households seeking short term loans from pay day lenders and other providers. Our surveys show that more than 1.4 million of the 9.5 million households in Australia are looking for finance (and it is rising fast as cash flows are stressed). Not all will successfully obtain a loan. We think more than $1 billion in loans are out there, and our research shows that such short term loans really do not solve household financial issues. However, when people are desperate, they will tend to grasp at any straw in the wind, regardless of cost or consequences. We also find these households are within certain household segments, who tend to be less affluent, and less well educated.

The RBA minutes, release this week, did not tell us much more, but contained this morsel. “Members noted that housing loans as a share of banks’ domestic credit had increased markedly over the preceding two decades. APRA intended to publish a discussion paper later in 2017 addressing the concentration of banks’ exposures to housing.  Members also noted that APRA had intensified its focus on Australian banks strengthening their risk culture”.  We can barely contain our excitement at the prospect! A discussion paper later in the year!

CoreLogic’s latest auction clearance results showed there is still demand for property, with a preliminary clearance rate of 70.6 per cent, and increase from last week when the final clearance rate slipped to 64.4 per cent, the lowest clearance rate since January 2016.

Finally, we released our latest flagship report – The Property Imperative, Volume 9. This is available free on request from our web site and is a distillation of our research into the finance and property market, using data from our household surveys and other public data. Whilst we provide these weekly updates via our blog, twice a year we publish a full report. Volume 9 offers, in one place, a unique summary of the finance and property markets, from a household perspective, over more than 70 pages.

What really struck us as we wrote the report was the amount of change in the property and finance sector, with significant regulatory tightening, changes in mortgage pricing and a rotation in mortgage lending. But the underlying facts of high prices, mortgage stress and rising risks in the system appear unchanged. The number of reports highlighting the risks have risen substantially.

Standing back, sure the data is pulling to two directions, with employment higher, auction clearance rates firm and affordability for some manageable. But the bigger picture contains a number of risks, stemming from the divergence of incomes and home prices, the lose lending standards over the past few years, and the risks from the more recent tightening of the rules, at a time when interest rates are more likely to rise than fall. Without a significant rise in incomes in real terms – and we cannot see where this will come from – the risks to growth and financial stability are still not fully understood.

And that’s the Property Imperative to 21st October 2017. Follow this link to request the Volume 9 Property Imperative Report.

345,000 Aussie mortgage holders have no real equity in their homes

From Roy Morgan Research.

Overall some 8% (345,000) of mortgage holders in Australia in the year to August 2017 have been identified as having little or no real equity in their home, an increase from 7.1% twelve months ago. This is based on the fact that the value of their home is only equal to or less than the amount they still owe, placing them at considerable risk if they have to sell or prices decline.

These are the latest findings from Roy Morgan’s Single Source Survey which is based on over 50,000 interviews per annum, including more than 10,000 with owner occupied mortgage holders.

Apart from the ability to keep up with mortgage repayments, another critical factor in assessing financial risk for mortgage holders is to compare the value of their property with the amount outstanding on their loan. The purpose of this is to establish the level of equity (if any) they have, as this is a major component of most households’ financial position and potential risk.

Mortgage holders in WA most at risk

On average, the value of properties in Australia subject to a mortgage is well in excess of the amount outstanding but there are problem areas. The state at highest risk is WA where 14% (71,000) of mortgage customers’ have no real equity in their home.

Value of home is less or equal to amount owing

Source: Roy Morgan Single Source (Australia). 12 months ended August 2016, n= 10,746; 12 months ended August 2017, n= 10,251. Base: Australians 14+ with owner occupied home loan.

Over the last 12 months there has been an increase of 3.3% points in the proportion of mortgage holders in WA with little or no equity in their home. Tasmania has the lowest proportion of mortgage holders with little or no equity in their home, with only 4.9% (4,000). NSW is the second-best performer with 5.6% (81,000) of mortgage holders facing equity risk, followed by VIC with 6.1% (62,000), SA with 7.6% (26,000) and QLD with 10.3% (89,000). The strong performance in VIC and NSW is due mainly to the rapid rise in Sydney and Melbourne prices which has generally outpaced the amount owing on mortgages.

Lower-value homes face more equity risk

The mortgage holders with little or no equity in their homes have much lower average house values ($501,000) compared to all mortgage holders ($761,000).

Mortgage holders with home value less or equal to amount owing vs all mortgage holders

Source: Roy Morgan Single Source (Australia). 12 months ended August 2017, n= 10,251. Base: Australians 14+ with owner occupied home loan.

Across all states, the value of the homes overall with a mortgage is much higher than the value of homes owned by mortgage holders who have no real equity in their home. In NSW for example, the average value of homes with a mortgage is $975,000, compared to the much lower average of $623,000 for mortgage holders where the value of their home is less or equal to the amount they owe. In VIC the figures are $804,000 for the average home value with a mortgage, well above the $549,000 for mortgage holders with no equity in their home.

Too Little Too Late? – The Property Imperative Weekly 14th October 2017

Another massive week of finance and property news, much of it centred on households and their finances, as the regulators home in on the risks in the mortgage market. But is it too little too late?

Welcome to the Property Imperative weekly to the 14th October 2017. Watch the video, or read the transcript.

We start our review of this week’s finance and property news with the RBA’s Financial Stability report.  This quarterly report, which ran to 62 pages said that International economic conditions, and local business confidence are on the improve while banks now hold more capital, have tightened lending standards, and shadow banking is under control. But, they say, Australian household balance sheets and the housing market remain a core area of interest, and from a financial stability perspective, this is the key risk. They showed that one third of mortgage holders have less than one months’ buffer, and their key concern is the negative impact on future growth as households hunker down;  so nothing new really, apart from some new “Top Down” stress testing.

And nothing to answer the IMF’s downgraded Australian growth forecast. Given the first half result in 2017 was 1.2% a second half forecast at circa 1% is hardly stellar; and the sudden rebound to 3% next year, some might say, appears courageous. The IMF also revised up the unemployment rate, suggesting it will remain at 5.6%, rather than falling to 5.3% as estimated last time. This plus slow wage growth highlights the issues underlying the economy. They also warned about risks from high debt saying growth in household debt relative to GDP is associated with a greater probability of a banking crisis. And Australia is right up there!

On the same day, the ABS released their latest Housing and Occupancy Costs data. The average household with an owner occupied mortgage is paying around $450 a week, slightly lower than the peak a couple of years ago.  This equates to around 16% of gross household income. But of course, the true story is interest rates have fallen to all-time lows, allowing people to borrow more, as prices rise. As a result, should interest rates start to bite, this will cause real pain. Plus, we have recent flat wage growth, in real terms, in the past couple of years. Finally, households have a bigger mortgage held for longer, which is great for the banks, but not helpful from a household perspective, as it erodes savings into retirement and means that more older Australians are still borrowing as they transition from the work force.

Earlier in the week, the ABS also released their latest housing finance data which showed that ADI lending rose 0.6% in trend terms in August, or 2.1% seasonally adjusted. Within that, lending for owner occupied housing rose 0.9%, or 2.1% seasonally adjusted and investor loans rose 0.2% in trend terms, or a massive 4.3% in seasonally adjusted terms. So lending growth is apparent, and signals more household debt ahead. First time buyers continue to extend their reach, despite the fact we are seeing “Peak Price” for property at the moment. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 17.2% in August 2017 from 16.6% in July.

AFG’s latest mortgage index, shows that property investor appetite is falling, while first time buyers, and property upgraders are more active. First time buyers are reacting to the recent incentives put in place in VIC and NSW, they said.

Citi published a 54-page report on the highly topical subject of interest only (IO) loans, and we provided data from our Core Market Model to assist their research. Even after recent regulatory tightening, they say that underwriting standards in Australia are still more generous than some other countries, at 5.3 times income, compared with 3.7 times in the UK, 4.4 times in Canada and 4.9 times in New Zealand. They conclude that there are vulnerabilities in the IO sector, both from property investors and owner occupied IO loan holders. Overall this is, we estimate, more than $680 billion of the $1.6 trillion mortgage book. They say that tighter lending criteria and rising house prices has meant investors increasingly face net negative cash flows and investors face a growing household cash flow gap and reducing capital gains expectations. The large levels of debt outstanding by borrowers aged in their 50’s and 60’s means many investors will need to sell property to discharge their debts. Owner Occupied IO borrowers are more susceptible to interest rate rises given higher average borrowing levels and higher average loan to value ratios. They concluded “Given the widespread use of IO finance and the reduced prospects of discharging debt via means other than liquidation of portfolio holdings, banks must face an increased risk of mis-selling claims in future years. Mining towns serve as a microcosm of this threat”.

ASIC updated their work on IO loans finding that Australia’s major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending. They say that borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender and borrowers approaching retirement age continue to be provided with a significant number of interest-only owner-occupier loans. Now ASIC will examine individual loan files to ensure that lenders are providing interest-only home loans in appropriate circumstances, to ensure that consumers are not paying for more expensive products that are unsuitable, under the responsible lending provisions.

In this light, it was interesting to listen to some of the Big Bank’s CEO’s in front of the House of Representatives Standing Committee on Economics. Westpac CEO said half of his $400 billion mortgage portfolio was interest only. The other banks were closer to 40%. While both Westpac and ANZ said “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so”, the underwriting standards are, we think, way too lose, as the recent regulatory tightening highlights, but it’s probably too late, especially for IO loans which now would fail even the current still generous standards. In an excellent The Conversation article, Richard Holden, Professor of Economics, UNSW rightly highlighted the “Spooky” parallels between our current situation, and the US mortgage market prior to the GFC.  “Australia’s large proportion of five-year interest-only loans – turbocharged by an out-of-control negative-gearing regime – looks spookily similar. It’s one thing for borrowers to do silly things. When it becomes dangerous is when lenders not only facilitate that stupidity, but encourage it. That seems to be what has happened in Australia”.

Smaller lenders are still feeling the pressure, as illustrated by the Bank of Queensland results, which came out this week. While the headline profit was up, underlying growth was lower, and mortgage lending was the key. Net interest margin fell to 1.87%, but was better in 2H. Interest only loans were 40% in 2H16, and 39% in 1H17, but trending down, they say! 8% of loans are higher than 90% LVR on a portfolio basis, and 19% in the 81-90% band.

During their hearing, the big banks also confirmed they had repriced their mortgage back book, especially for interest only and investment loans, but weirdly denied this was to increase profitability.  The quote of the week for me was one CEO saying that people should switch from IO loans to P&I loans “because they were cheaper” – which may be true from a headline interest rate perspective, but the monthly repayments when switching are significantly higher, so in reality, it is not cheaper in cash flow terms!

There was conflicting data relating to Foreign Property Investors, especially from China, with Credit Suisse saying they estimate, based on stamp duty records, that foreign buyers are acquiring the equivalent of 25% of new housing supply in NSW, 17% in Victoria and 8% in Queensland.  If they are correct, this may put a floor on home prices, and they suggest that crackdowns on capital outflows by Chinese authorities appear not have slowed China’s appetite for Australian property.

On the other hand, while the NAB Residential Property Index rose 6 points in Q3, they highlighted lower foreign buying activity in new property markets, VIC saw the share fall to 14.4% (from 20.8% in Q2) and NSW down to 7.8% from 12% in Q2. In contrast, QLD saw a rise to 11.4%, up from 8.6% last quarter. NAB also revised its national house price forecasts, predicting an increase of 3.4% in 2018 (previously 4.3%) and easing to 2.5% in 2019. Unit prices are forecast to rise 0.5% in 2018 (-0.3% previously), with a modest fall expected in 2019.

Our data suggests that Chinese buyers are indeed still active, with a focus on certain postcodes where high-rise units are being built, and often offered direct to overseas buyers. We also see evidence of some high rollers buying larger houses. But overall this is not enough to support home prices into next year.

We published the September update of the Digital Finance Analytics Household Finance Security Index, which underscored the growing gap between employment, which remains relatively strong, and the Financial Security of households. The Index fell from 98.6 in August to 97.5 in September. The state by state view highlights a fall in NSW, while VIC holds higher, and there was a rise in WA from February 2017 lows. This highlights the fact the households across the national are under different levels of pressure. Tracking by age bands we find younger households are significantly less confident, compared with those aged 50-60 years.  But across the board, the general trend is lower.

Similar findings were contained in the latest AlphaWise survey conducted by Morgan Stanley. Income growth has not recovered, ‘cost of living’ inflation is re-accelerating and ‘macro-prudential’-related tightening of credit conditions is extending from housing into consumer finance. They say Australian households are in a vulnerable financial position, especially those who have taken out a mortgage. And in an era of weak incomes growth, soaring energy prices and high levels of indebtedness, with the prospect of higher interest rates on the way, many intend to cut discretionary spending in anticipation of even tighter household budgets. That’s bad news, not only Australia’s retail sector, but also the broader economy. They forecast discretionary consumption volumes will slow to just 0.2% in 2018, dragging overall consumption growth down to 1.1% and well below consensus of 2.5%.

So, in summary the evidence is building that we are entering a concerning episode where growth is likely to be lower, households will remain under pressure, and risks in the system are considerably higher than the RBA is willing to concede. The mystery though is why the regulators are still allowing mortgage lending to grow way faster than inflation, and wages. This surely must be slowed, and soon. Once again, too little too late.

So that’s the Property Imperative Weekly to 14th October. If you found this useful, do leave a comment below, subscribe to receive future updates and check back next week.

Rising US Rates Will Clip Home Prices Here

Interesting research is contained in a BIS Working Paper “Interest rates and house prices in the United States and around the world“.

They show that home prices are indeed connected to interest rates, and changes in rates do have a flow on effect to prices, and that there are spillover effects, especially relating to interest rates in the USA.

This means that as the FED lifts rates, as is now well signalled, we should expect prices to fall here and in other countries. There may be some delay, the modelling is complex, and the relationships are not straight forward. But it is is worth remembering that in the US real house prices fell by as much as 31% over the course of 2007–09!

This paper estimates the response of house prices in 47 advanced and emerging market economies (EMEs) to changes in short- and long-term interest rates. Our study has four novel aspects. First, we analyse in some detail the impact of short-term interest rates on house prices. Second, we look at the responsiveness of house prices around the world to US interest rates. Third, we use a unique data set on house prices compiled by the BIS in cooperation with national statistical and monetary authorities. And fourth, our empirical framework tries to capture the important role of inertia in house prices.

One striking feature of house price growth is its persistence. With the exception of Germany, Portugal and Switzerland, advanced economies have seen real house prices growing by an average of at least 6% per year for 40 years or longer. In the United States, for instance, this resulted in a 13-fold increase in real house prices over a period of 47 years; in Norway, in a 77-fold increase over 66 years. And in South Africa, real house prices increased nearly 150 times over half a century.

Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The upswings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century. By contrast, downswings accounted for only 8% of the advanced economy sample; they lasted on average five years, and the longest one, in Japan, lasted 13 years. In EMEs, upswings accounted for two thirds of the sample. They lasted on average eight years, and the downswings four years.

The surge in house prices has been particularly pronounced since the turn of the millennium. Between 2000 and 2015, real house prices increased by 100% or more in half the economies in our sample.  Most countries experienced a housing boom before 2007 (light bar segments). But many have also seen very rapid house price growth since 2007 (dark bar segments). These included Australia, Austria, Canada, the Netherlands, Norway, Sweden and Switzerland among advanced economies; and Brazil, Hong Kong SAR, Israel, Malaysia and Peru among EMEs.

Our focus on short-term interest rates is motivated by their link to monetary policy. As a house is a long-lived asset, the interest rate appropriate for relating the service flow from a house to its price is arguably a long-term rate. However, house prices also depend importantly on ease of access to credit, which is in turn significantly affected by the monetary policy stance. Bernanke and Blinder (1992), for instance, showed that changes in the US federal funds rate were associated with changes in lending by US banks, an effect that has become known as the bank lending channel of monetary policy. Short-term interest rates, which are more closely related to the stance of monetary policy, might therefore be just as important a “fundamental” for house prices as longer-term rates. Indeed, we find a surprisingly important role for short-term interest rates as drivers of house prices, especially outside the United States. Our interpretation is that this reflects an important role for the bank lending channel of monetary policy, especially in countries where securitisation of home mortgages is less prevalent.

The motivation for looking at the responsiveness of house prices around the world to not only domestic but also US interest rates is that the latter have become a key measure of the global cost of financing. We do find spillover effects from US interest rates, both short and long ones, on house prices outside the United States.

Our study draws on the BIS residential property price statistics and, in particular, the “preferred” house price series as identified by national statistical offices or central banks. We compiled over 1,000 annual observations on house prices for the non-US countries in our sample from these series and about a half century of quarterly house prices for the United States. We use these data to estimate the dynamic impact of changes in interest rates and other explanatory variables on real house prices around the world.

Most empirical studies assume that short-term interest rates do not influence house price growth other than through the domestic cost of borrowing, ie by their influence on long-term interest rates. The findings in this paper suggest that this view might be mistaken: changes in short-term interest rates seem to have a strong and persistent impact on house price growth.

Moreover, global, ie US short-term interest rates – not just domestic ones – seem to matter, both in advanced economies and EMEs. We interpret the relative importance of short-term interest rates in driving house prices as indicating an important role for the bank lending channel of monetary policy in determining housing financing conditions, especially outside the United States, where securitisation of home mortgages is less prevalent.

The larger effect of interest rates on house prices we find reflects in part the use in our regressions of a long distributed lag of interest rate changes. For the United States, our estimates for the period from 1970 to the end of 1999 suggest that a 100 basis-point fall in the nominal short-term rate, accompanied by an equivalent fall in the real short-term rate, generated a 5 percentage point rise in real house prices, relative to baseline, after three years. We find an even larger effect if we include the data through end-2015. For other advanced economies and EMEs, we estimate that a 100 basis-point fall in domestic short-term interest rates, combined with an equivalent fall in the US real rate, generates an increase in house prices of up to 3½ percentage points, relative to baseline, after three years. Another reason we find larger interest rate effects is by allowing for inertia in house price movements. We find strong evidence against the random walk hypothesis: real house prices around the world tend to move in the same direction for about a year after being hit by a disturbance, then exhibit a modest reversal.

We think that this inertia in house prices reflects the large search and transaction costs associated with trading residential real estate and shifting between owner-occupied and rental housing. These costs are ignored in the user cost model, which predicts a fairly high interest rate sensitivity for house prices.

Our findings also suggest a potentially important role for monetary policy in countering financial instability. While higher short-term interest rates alone cannot significantly dampen the demand for housing, slower house price growth can give supervisors more time to implement measures to strengthen the financial system. At the same time, the finding that house prices adjust to interest rate changes gradually over time suggests that modest cuts in policy rates are not likely to rapidly fuel house
price bubbles.





Note: BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS.

Households Spending Less On Housing…But

Data from the ABS today – Housing Occupancy and Costs – highlights the average household with an owner occupied mortgage is paying around $450 a week, slightly lower than the peak a couple of years ago.  This equates to around 16% of gross household income, on average.

This does not include repayments on investment properties of course (and many households have multiple properties as investing in property rises).

But of course, the true story is interest rates have fallen to all time lows, allowing people to borrow more, as prices rise. As a result, should interest rates start to bite, this will cause real pain. Then of course we have recent flat wage growth, in real terms, in the past couple of years.

Also, households have a bigger mortgage for longer, which is great for the banks, but not helpful from a household perspective, as it erodes savings into retirement and more older Australians are still borrowing. And of course the current high home prices show a paper profit, but that could be eroded if prices slide.

Thus, the ABS data should not be interpreted as everything is fine, it is not! In fact, underwriting standards should be much tighter now, as we highlighted this morning, Australian Banks are willing to go up to around 6 times income, higher than many other countries, with similar home price bubbles.

The proportion of income mortgagees are using for housing has declined over the last decade, according to new figures released today by the Australian Bureau of Statistics (ABS).

“In 2005-06, owners with a mortgage paid 19 per cent of their total household income on housing costs. By 2015-16 this had fallen to 16 per cent. This is likely driven by lower interest rates coupled with growth in household incomes over the last decade, ” Dean Adams, Director of Household Characteristics and Social Reporting, said.

In 2005-06, owners with a mortgage paid $434 per week in housing costs, similar to the $452 paid in 2015-16 in real terms. But over the same period, average total household incomes for mortgagees rose from $2,272 to $2,759 per week.

“Mortgage and property values have also increased in the last decade. Ten years ago, the real median mortgage value was $171,000 which rose to $230,000 in 2015-16. Meanwhile, the real median dwelling value increased from $449,000 to $520,000,” Mr Adams explained.

Going back another decade, the results also reveal that households are entering into a mortgage at older ages. The proportion of younger households (with a reference person aged under 35 years) represented 69 per cent of first home buyers in 1995-96 which dropped to 63 per cent by 2015-16.

“Having a mortgage is now the most common form of ownership for households whose reference person was aged between 35 and 54 years. Among this group, ownership with a mortgage increased by 15 percentage points over the last two decades, from 41 per cent to 56 per cent. Meanwhile, the rate of outright ownership in 2015-16 (12 per cent) was one-third the 1995-96 rate (36 per cent),” Mr Adams said.

The rate of older households (with a reference person aged 55 years and over) who were still paying off a mortgage has tripled between 1995-96 and 2015-16 (from 7 per cent to 21 per cent). Older households are spending more of their income on housing costs than two decades ago, increasing from 8 per cent to 14 per cent for those aged between 55 and 64, and from 5 per cent to 9 per cent for those aged 65 and over.

UK Government Plans to Increase Social Housing Grants

From Moody’s

Last Wednesday, UK Prime Minister Theresa May announced that housing associations and local authorities will receive an additional £2 billion in grants for social (i.e., public) housing, including social rented homes. She also announced that rent increases will be set at CPI plus 1% starting in fiscal 2021 (which starts 1 April 2020) for five years. These announcements are credit positive for English housing associations because they signal greater support for the social rented sector.

Increased grant funding will reduce external financing needs and provide incentives to focus on social renting activities, which provide more stable cash flow than markets sales. The rent-setting regime provides clarity about housing associations’ operating environment and signals a shift from the previous government policy, which had negative financial effects on the sector.

The amount of grant funding available under the Affordable Homes programme for housing associations and local authorities will increase by £2 billion to £9.1 billion over the length of the program. Housing associations historically have relied on government grants to finance the production of new social homes, but such grants have significantly dwindled since the financial crisis.

The new grant programme aims to fund the construction of an additional 25,000 homes, and we expect the average subsidy per home to more than double to £80,000 from £32,600 in the last allocation round of the programme in 2016 and from £23,500 in the 2014 round. Although the distribution of the grants will depend on yet-to-be-defined criteria that determines which areas are most in need, we expect the 39 English housing associations that we rate to receive £650-£900 million of new grant funding, which would contribute to financing 8,000-11,250 homes.

The additional grants will reduce housing associations’ external financing needs, and should reduce future borrowing, which we currently expect will reach nearly £4 billion during fiscal 2018-20. However, some housing associations may choose to use the freed-up financial capacity to further increase their production of homes for open market sale rather than to stabilise indebtedness.

The grant programme signals a rebalancing of the government’s position in favour of rented social housing. The social letting business provides more stable cash flows for housing authorities than low-cost home ownership programmes, which had been at the centre of the previous housing policy. The lack of grants for building social rented homes and political pressure had encouraged housing associations to subsidise social homes by building units for open market sale that expose housing associations to the cyclicality of the housing market. The share of such sales to turnover has steadily increased over the past five years, reaching 15% in fiscal 2016 for our rated issuers and more than 40% for a small number of housing associations. Hence, this shift in the availability of funding and the direction of policy is credit positive.