Don’t Buy Now! – The Property Imperative Weekly 24 November 2018

Welcome to the Property Imperative weekly to 24th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.

More volatility on the markets this week, more home prices falls, and more revelations from the Royal Commission which put the spotlight on poor culture in the banks and regulators. It’s time to be very cautious in my view.

So let’s get started. Watch the video, listen to the podcast or read the transcript. Caveat Emptor! Note: this is NOT financial or property advice!!

Property listings are skyrocketing according to CoreLogic, with an 11.6% rise in total listings over the last year nationally, but with a 17.4% rise in Sydney and a massive 19.3% rise in Melbourne.  New listings are down, so property is sitting on the market for longer and longer, and vendor discounts are rising. Darwin units are seeing discounts of 14.64% and Perth units 10.5%. All signs of a stalling property market.

Sydney has been one of the strongest markets for value growth over recent years however, a big spike in listings and tighter credit conditions has made selling much more difficult. At one point in mid-2015 more than three quarters of properties sold for more than the original list price. Fast forward to the current market and 83.3% of properties are selling for less than the original list price compared to 13.3% selling above the list price. Sydney vendors are now discounting their asking prices by 7.3% on average in order to make a sale, compared with only 5.4% a year ago.

Melbourne is currently seeing 76.3% of properties selling below the original list price which is the highest share in at least 12 years. As recently as April last year, when values were rising at a double-digit annual rate, 34.4% of properties were selling for less than the original list price. By comparison today, only 18.7% of properties have sold over the past three months for more than the original list price and vendors are, on average, discounting their prices by 6.1% to make a sale.

And CoreLogic’s latest home price update revealed their 5-city daily dwelling price index, which covers the five major capital city markets, declined another 0.27% last week, which is the biggest weekly decline of the past year. Prices fell across all the major markets, with Melbourne leading the way down, as expected, with a drop of 0.38%, Sydney down 0.31%, Perth down 0.29%, Adelaide down 0.04% and Brisbane down 0.01%.  The falls in Sydney Melbourne and Perth this month are mounting, with Sydney down 0.91%, Melbourne 0.59% and Perth 0.63%.

Remember that Perth has been in the doldrums for years, and while many “property expects” claimed there were signs of a recovery in the West, this is just not true. Through Sydney and Melbourne prices are up compared with a couple of years back, the falls are likely to continue. The declines from the last peak are down 9% in Sydney, 5.4% in Melbourne and 14.7% in Perth.

ANZ said this week “The fall in Sydney housing prices is already the largest in many years. Prices are now 9% below the June 2017 peak, a larger correction than in 2010-11, 2008, 2004-05, 1994-95 and, by the end of this month, the fall will be larger than the 9% fall in 1988–91”. They now think housing prices in Sydney and Melbourne will fall around 15–20% from peak to trough.  They link the falls to tighter credit availability, plus additional risks from changes to negative gearing and higher mortgage rates.

And the combined capital city final auction clearance rate saw further weakening last week, with 42 per cent of homes successful at auction; the lowest weighted average result seen since June 2012.  The lower clearance rate was across a higher volume of auctions week-on-week with 2,745 capital city homes taken to market, increasing on the 2,386 held the week prior. Both volumes and clearance rates continue to trend lower each week this year relative to the same week’s last year.

Melbourne’s final clearance rate was recorded at 41.3 per cent last week, making it the weakest result the city has seen since June 2012. There were 1,401 homes taken to auction across Melbourne last week, increasing on the week prior when 1,127 auctions were held. One year ago, a much higher 1,732 auctions were held with 66.9 per cent selling.

Sydney’s final auction clearance rate was recorded at 42.8 per cent across 875 auctions last week, increasing slightly from 42.1 per cent across a lower 844 auctions over the previous week. Over the same week last year, 1,061 Sydney homes went to auction and a clearance rate of 54.8 per cent was recorded.

Across the smaller auction markets, Adelaide returned the highest clearance rate of 59 per cent, while Perth saw only 28 per cent of homes successful at auction

The combined capital cities are expected to see a slightly lower volume of auctions this week with CoreLogic currently tracking 2,571 auctions, down from the 2,745 auctions held last week.

Melbourne is the busiest city for auctions again this week, with 1,069 auctions being tracked so far. This week’s volumes are down from the 1,401 auctions held last week and significantly lower than the 1,736 Melbourne homes taken to auction this week one year ago.

Sydney has over 1,000 homes scheduled for auction this week. This is not only an increase on last week’s 875 auctions, but the highest number of auctions the city has seen since March this year. Last year there were a higher 1,215 auctions held across the city over the same week.

Adelaide and Canberra are both expecting a higher volume of auctions week-on-week, while the remaining auction markets have fewer scheduled auctions this week.

S&P Ratings said falling property prices triggered by tightened lending conditions are dominating Australian media headlines. The Australian residential mortgage-backed securities (RMBS) sector so far has been relatively resilient to pressure, with mortgage arrears remaining low and ratings performance stable. The RMBS sector is now facing more elevated risk than it was 12 months ago. Alongside high household debt and low wage growth are emerging risks such as lower seasoning levels in new transactions and increasing competition.

Meantime, looking in the rear-view mirror, Fitch Ratings said that their RMBS index 30+ days’ arrears fell by 4bp quarter on quarter to 1.04% during 3Q18. Fitch Ratings has observed a drop in third-quarter arrears for the previous decade. They say national dwelling prices continued to decline in 3Q18, led by falls in Melbourne, which dropped by 2.33% from the previous quarter, and Sydney, down by 2.11%. The price falls followed tighter lending standards, which restricted new loans and made refinancing more difficult, reducing demand in Australia’s property market. The peak-to-trough decline in Sydney is now 8.2%, which is the second-largest fall in the past 35 years. The largest fall was seen during the last recession in the early 1990s when prices fell by 9.2%.

RMBS transactions rated by Fitch continued to experience extremely low levels of realised losses and a rising lenders’ mortgage insurance (LMI) payment ratio since 4Q12. Excess spread was sufficient to cover principal shortfalls on all transactions during 3Q18.

This is starting to hit the broader economy now, as expected. Home price falls often lead broader economic falls by 12-18 months.

ANZ said momentum slowed further in the September quarter across most of Australia.  All states and territories except Tasmania and the Northern Territory decelerated and recorded growth at below their trend rates. The loss of momentum demonstrated by the Stateometer is consistent with their forecast that the Australian economy will grow at a year-ended pace of 2.9% by the June quarter 2019, down from 3.4% in June this year. The slowing, brings into doubt the 3.25% year-ended growth rate forecast by the Reserve Bank for June 2019. Every state, except Tasmania, experienced a drag to momentum from the housing component of the index in the September quarter. The labour market also became less positive for all states and territories except Victoria and the Northern Territory. Trade was a highlight with the mining states of Western Australia and Queensland recording stronger positive contributions as resource prices, export volumes and the AUD/USD exchange rate moved in their favour. In New South Wales and Victoria, which are less commodity intensive but have large service sectors, trade momentum also picked up, suggesting a further boost to tourism and education exports. They concluded that tightening of credit market conditions remains a negative factor that together with a poorer outlook for house prices is pulling back demand in this important sector, especially in New South Wales and Victoria.

And the six-month annualised growth rate in the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 0.41% in September to +0.08% in October. With this latest slowdown, the Index growth rate continues to point to slowing momentum into the new year. Over the seven months from October last year to April this year the growth rate averaged 0.89%. In the six months since April the growth rate has averaged only 0.19% – a clear step down.

So to the Royal Commission. In Sydney this week, with most time spent on CBA (CEO and Chairperson) and ASIC (Chairperson). A few key areas came into focus including Broker remuneration, where CBA advocated a fix fee model, Front line staff and senior executive remuneration; how the boards looked at risk related issues (often seemingly myopically); the question of vertical integration – especially relating to the question of advice versus sales in wealth management, and oversight and enforcement by regulators.

The core issue was the question of misaligned incentives, which has led to the misconduct thrown into sharp relief in the inquiry. As a result, we would expect to see reform in the areas of broker commissions, front line remuneration, and vertical integration. All significant, and likely to crimp bank performance further.

On brokers, CBA estimated that the average remuneration for a broker writing an average loan would fall from $6,627 to just $2,310. And that CBA would save $197m on a cumulative basis over 5 years. So some would say they are talking their own book!  At very least we expect trail commissions to go, and a best interest obligation introduced.

ASIC rightly copped flack, and as a result, we would expect them to be more proactive, demanding larger penalties, perhaps naming and shaming, and more litigation through the courts.  Frankly ASIC was too close to the big banks, and has not met its regulatory obligations, and insufficient funding is not a valid excuse. The inquiry also questioned why ASIC needs to discuss the terms of “infringement notices” with banks before they are finalised. “The parking inspector doesn’t seek an indication from the person he’s giving a parking fine to as to whether they will accept and pay it. He just does it. Why don’t you just do that?” Ms Orr asked. “My understanding from the team is that if there is an unwillingness to accept an infringement notice we would just go straight to court,” Mr Shipton said rather weakly.

We will see more next week, when the Melbourne Banks and APRA are up.

As the AFR put it “Kenneth Hayne looks like reshaping the governance of Australia’s leading public companies judging from the line of questioning directed at Commonwealth Bank of Australia chairman Catherine Livingstone and chief executive Matt Comyn. Based on the lines of inquiry pursued by counsel assisting, Rowena Orr, QC, the Hayne governance era looks something like this: verbatim records of conversations held by board and sub-committee members, longer board meetings, more extensive board room information packs, intensive director induction programs, more robust challenging of management, and increased employment of lawyers and accountants as non-executive directors. This would go hand-in-hand with the increased rules and regulations such as those already pushed through parliament covering bank remuneration. The new laws have given greater intervention powers to the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, both of which will need significantly expanded budgets.

There was nothing here that suggested the lending tightening we have seen will be reversed, which then puts the acid back on the RBA, APRA and Treasury. As we discussed this week, Governor Lowe went public at CEDA with his concern that banks were becoming too risk adverse.  See our post “The People’s Gold Will Not Be Kept Among the People”, which also covered the Governors comments on Australia’s gold.  All the more reason for effective banking separation in my book!

But the more immediate point is the fact that home prices are tightly locked to accelerating rates of credit growth, – we call this the credit impulse. Even a slowing of the rate of credit growth is more than sufficient to lower home prices, precisely as we see now – so a fall to 5.2% or thereabouts as reported by the RBA is sufficient to drive prices lower. Most Central Bankers just do not understand this critical linkage, preferring to believe that as credit creates assets, increasing debt is a zero sum game – this is just plain wrong!

We updated our scenarios, and you can watch the replay of our recent live stream where we discussed our thinking – the probability of more significant home price falls is rising. Even in the smaller markets. Have no doubt this will have a significant impact on the broader economy. GDP will fall.

Locally, the markets, were all over the place this week, in volatile trading. The S&P ASX 100 rose 0.51% to 4,711, still reflecting recent lows on Friday. The ASX VIX eased a little on Friday down 2.41%, but at 16.55 is still in “fear” territory.    The banks did better on Friday, with the S&P ASX 200 Financials up 1.08% to 5,731. AMP was up 1.65% to 2.46, still near the bottom, ANZ was up 2.29% to 26.34, Bank of Queensland was up 0.62% to 9.79, Bendigo was up 1.17% to 10.40, CBA rose 0.95% on Friday, to 71.30,   NAB was up 1.03% to 24.48, Suncorp was up 0.67% to 13.49, Westpac was up 1.4% to 26.04, Mortgage Insurer Genworth was up 0.91% to 2.21 and continues in the doldrums.  Macquarie Group was up 0.29% to 114.53.

The Australian Dollar US Dollar slid 0.25% to 72.36, still in its trading range, while the bitcoin Aussie fell 10.38% to 5,297 and the Aussie Spot Gold rate fell 0.11% to 1,691.

Stocks on Wall Street ended lower as another tumble in oil prices weighed on energy stocks. The Dow fell 0.73% ending at 24,286, while the broader S&P 500 index lost 0.66% to 2,632. The tech-heavy Nasdaq composite was down 0.48% to 6,939. The volatility index rose 2.74% to 21.37 as the gyrations continue.  Trading was light after the Thanksgiving break.  The S&P 100 was down 0.84% to 1,161.

The S&P 500 Financials was down 0.91% to 430.5 signalling more weakness in the financial sector, while Goldman Sachs fell 1.86% to 189.02.

Crude oil prices fell more than 7.7% as concerns persisted about a supply glut, down to 50.42. Dow components Exxon Mobil fell 2.7% and Chevron slumped 3.3%.

Helping the sinking sentiment, of course, was the notion that President Donald Trump would successfully prevent OPEC from slashing production when the cartel meets in Vienna on Dec. 6, by using his “no-sanctions trump card” for Saudi Arabia, which has admitted a premeditated murder of journalist Jamal Khashoggi, but denies any involvement by Crown Prince Mohammed bin Salman.

The energy sector has lost 16.5% since the beginning of October, making it the worst performing S&P sector during the period and putting it on pace for its biggest two-month drop since September 2011.

“If we get clarity on any of these – oil prices, trade war with China and the Federal Reserve’s rate of monetary policy tightening – we could go a long way towards making investors comfortable in investing in the market,” one analyst said.

Meanwhile, retail stocks were in focus with Black Friday sales underway. Discounts will continue through to Cyber Monday as investors will look to see if the companies can overcome an underwhelming retail earnings season.   Walmart was up more than 1%, but Amazon.com dropped 0.96% to 1,502. Apple fell 2.54% to 172.20 and Intel fell 1.04% to 46.54. Google was also down 1.28% to 1.030.

Cryptocurrency prices slumped on Friday, with Bitcoin falling to a new 14-month low down 6.59% to $4,342, The digital currency is down more than 75% from its peak of $20,000 in 2017. Meanwhile, UK regulators warned investors against digital coin derivatives earlier this week. The Financial Conduct Authority (FCA) could ban some crypto-based derivatives, Christopher Woolard, executive director of strategy and competition at the FCA, said at a crypto event in London. “We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens … Given this, the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities,” Woolard warned.

The US Dollar index was up 0.26% to 96.96.  The Euro USD was down 0.61% to 1.13 and the British Pound US Dollar was down 0.47% to 1.28, on more Brexit weakness.  Deutsche Bank was down 0.84% to 8.18.  Gold was down 0.37% to 1,223.

All this may slow the FED’s drove towards higher rates, with the 3-month rate down 0.02% to 2.41% and the 10-Year rate down 0.48% to 3.05.  That said, I expect another couple of hikes, which will put the cat among the pigeons in terms of corporate debt, and funding costs more generally.

We believe there will be further market volatility in the run up to Christmas, and more home price falls locally. Thus we cannot think of any good reason why you would consider buying property in the current climate – best to ignore the spruikers, and so call great mortgage offers, and bide your time. Those with a current mortgage should check to see if better refinanced rates are available, but that will depend on your risk profile. But for some, there are savings to be made (though the Banks may like to hope you are not smart enough to find them!).

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