Households Budgets Under Pressure – The Property Imperative Weekly 17 June 2017

Household financial pressures continue to build as the costs of energy rise, under employment lifts to a record and interest rates climb. Welcome to the Property Imperative weekly to 17th June 2017.

Power bills will soar by hundreds of dollars next month in east coast states, and experts blame policy uncertainty in Canberra. Two major retailers, Energy Australia and AGL, have announced they will hike prices substantially from July 1. A third, Origin Energy, is expected to follow soon. Energy Australia will increase power bills by almost 20 per cent, roughly $300 more a year, for households in South Australia and New South Wales. Gas prices will go up 9.3 per cent in NSW and 6.6 per cent in SA, adding between $50 and $80 to annual bills.

In this week’s economic news, whilst the headline unemployment rate remained at 5.7%, there are significant state variations. Unemployment remains above 7% in South Australian, and below 3.5% in the Northern Territory.

The really important, yet under-reported data related to underemployment, which is at its highest level since records began in the 1970s. The trend estimate of underemployment worsened from 8.7 per cent in December-February to 8.8 per cent in March-May, which means around 1.1 million Australian workers are crying out for more hours.

Pressure on interest rates are likely to continue, with the FED lifting the benchmark rate, and analysts are suggesting the FED funds rate is likely to normalise at 3.5% by 2020, and U.S. 10-year bond yields will rise back above 4%. It seems they were prepared to look through weak first quarter consumption and GDP and underlines concerns about US unemployment falling too far below its equilibrium rate.

But there is a knock of effect, in that the T10 bond yield is directly linked to the price of money on the international capital markets, and as Australian banks, especially the larger ones are reliant on international funding, this will put upward pressure on mortgages rates here.

So, putting all this together, we expect pressure on household budgets will continue to grow. We expect the number of households in mortgage stress to pass 800,000 quite soon. That’s getting close to a quarter of households.

Analysis of the latest Westpac and Melbourne Institute’s consumer sentiment index, which reported at 96.2 in June 2017, shows the “time to buy a dwelling index” which is a subset of the consumer sentiment index was at 90.9 points and is hovering around the lowest levels seen since the financial crisis.  Whilst Australians tend to be bullish on housing and its prospects, this data shows that sentiment towards housing has been consistently negative since February of this year.

Several more banks made changes to mortgage interest rates and underwriting standards.  For example, Bank West reduced the maximum LVR on interest only loans to 80% and some loan rates will rise between 4 and 34 basis points for both existing owner occupied and investor loans. On the other hand, the bank will reinstate applications from non-Bankwest customers for standalone refinance of P&I investor purpose loans and dropped the rate for some new P&I investment lending.

CBA changed its serviceability buffers to fall in line with the other majors. For those taking out a new mortgage who already have an existing CBA home loan, line of credit or business loan, the bank will assess the ability to pay through an interest rate buffer of 7.25% p.a. or the current interest rate plus 2.25% p.a. minus any existing rate concessions (whichever is higher). For customers with an existing owner occupied/investment, line of credit or business loan with an external financial institution, CBA will apply a service loading of 30% to the current repayment amount.

Teachers Mutual Bank increased home loan variable and fixed interest rates by 10 basis points or 0.10%, for new business. It has 174,000 members and more than $5.3 billion in assets.

We are also seeing some banks tweak their mortgage origination strategy, as they power up owner occupied mortgage lending through their branch networks, whilst slowing the volume of loans written through the broker channel, and interest only loans to investors in particular. In a recent The Adviser survey, brokers who had experienced channel conflict were asked which type of loan their clients had been approached by their bank to refinance. Almost 74 per cent of brokers said clients with owner-occupier mortgages had been targeted.

The Senate Inquiry into the Bank Tax heard from industry participants this week. On one hand the Customer Owned Banking Association – COBA –  the industry association for Australia’s customer owned banking institutions – mutual banks, credit unions and building societies said they welcomed the tax as it would help to rebalance competition in the Industry. They claim that the implicit Government guarantee, which the major banks enjoy, stacks the deck in terms of pricing.

On the other hand, the majors said that whilst they accept the tax will be imposed, the costs cannot be absorbed and will be passed on the customers, shareholders and staff members. They said the levy should be temporary, and should be extended to include foreign banks operating in Australia to level the playing field.

So what started as a cash grab by the Treasurer has morphed into a significant discussion about banking competition and funding. But the bottom line is, bank customers will pay.

Research released this week suggested that far from being the ‘bad guys’, property investors actually keep the Australian economy afloat. They found that federal, state and local governments collect about $50 billion in property taxes every year – with property investors paying substantially higher rates than owner occupiers. Every year property investors pay $8 billion in stamp duty, $7 billion in land tax, $130 million in council taxes, as well as tax on $7.5 billion of net rental gains. Property investors also declared gross profits of $50 billion on property sales in 2015, according to estimates, which would have attracted billions more in taxation revenue.

Our latest survey data indicates that forward demand for property is easing, driven by concerns about future interest rate rises, tighter bank lending rules and rising costs of living. This is confirmed by lower clearance rates at auction over the long weekend, and further indications are emerging that home prices are easing.

The net effect of these changes will be to apply a drag anchor to economic growth. Just how severe this braking effect will be remains to be seen, but I think we can safely say we are on a falling trajectory. What property investors choose to do suddenly becomes very important.

That’s the Property Imperative for this week. Check back next time for the latest update. Thanks for watching.



Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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