Welcome to the Property Imperative weekly to the eighth of December 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
The financial markets continue to spin lower, as the property sector here weakens, and the RBA confirms it is quite willing to cut the cash rate if needs be, or even consider quantitative easing to “support the economy”. So today we look at the latest tranche of data, which continues to point towards a weaker economy, whilst in a parallel world, Canberra continues to celebrate the strength of economy, thanks to their careful management.
Which raises the question – are we there yet? Watch the video or read the transcript.
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We start with the national accounts data. The RBA was forecasting an annual GDP results of 3.5% to December 2018, based on the recent Statement on Monetary Policy. With the first three quarters of the year reaching just 2.2%, it would require a December quarter of 1.3%, which seems unlikely. So they will need to adjust their forecasts down. All this looks to signal RBA cash rate cuts ahead. In addition, the per-capita data went negative in September at – 0.1 % meaning that it is population growth alone which is responsible for lifting the GDP. The per capita income and savings ratios also were negative, with the savings ratio back to lows not seen since 2007, as people dip into reserves to maintain lifestyle and pay the bills – as expected given our household financial confidence index. And net disposable income per capita fell 0.3% in the last quarter. Had it not been for strong commodity prices and big public spending on infrastructure, the story would have been worse still. You can see more in our post “Households Break The GDP”. In fact, the RBA is positioning to cut rates and even apply quantitative easing if needed, as outlined in a speech on Thursday by Deputy Governor Guy Debelle. This would inflate the debt balloon further, and economist John Adams and I discussed this in a show we released yesterday: “Unbounded Recklessness! The RBA Has Lost The Plot”. The RBA also said that what constituted too much debt was yet to be determined!
As you know, we think that current levels are already too high. In fact the killer was the rise in our net foreign debt liability which rose $12.6 billion $1,044 billion in Sept 2018, another record. And remember some of this, say one third is short term, meaning it needs to continually refreshed. This is where our exposure is to rising interest rates (and we know already the US will continue to hike rates). The 1 Year LIBOR rate, for example, is rising still. As is the BBSW, and this foreshadows real issues ahead. The debt bomb is alive and well….
The RBA held the cash rate again this month again this month, and there was little to report other than they seem to be a little more cautious suggesting that growth in China has slowed a little, and credit spreads are higher. They say that “one continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector”.
Retail turnover was pretty anaemic according to the ABS. The trend estimate rose 0.2% in October 2018. This follows a rise of 0.2% in September 2018, and a rise of 0.2% in August 2018. The following states and territories rose in trend terms in October 2018: Victoria (0.4%), Queensland (0.5%), South Australia (0.3%), Tasmania (0.3%), and the Australian Capital Territory (0.2%). Western Australia was relatively unchanged (0.0%). New South Wales (-0.1%), and the Northern Territory (-0.8%) fell in trend terms in October 2018. Online retail turnover contributed 5.9 per cent to total retail turnover in original terms in October 2018, a rise from 5.6 per cent in September 2018 and the highest level recorded in the series
Then we got the dwelling approvals, which fell by 1.1 per cent in October 2018 in trend terms, according to data released by the ABS. And the value of new residential building approved fell 1.5% in October and has fallen for ten months. More signs of pressure on the residential construction sector. Among the states and territories, dwelling approvals fell in October in the Northern Territory (12.5 per cent), South Australia (5.0 per cent), Western Australia (4.4 per cent), Queensland (2.9 per cent) and New South Wales (2.3 per cent) in trend terms. Victoria (2.4 per cent) and the Australian Capital Territory (0.8 per cent) were the only states to record an increase in dwelling approvals in trend terms, while Tasmania was flat.
Our surveys revealed that in November, there was a rise in mortgage stress, again. See our post “Mortgage Stress Goes To The Moon”, for a list of worst hit post codes. Across Australia, more than 1 million and fifteen thousand households are estimated to be now in mortgage stress (last month 1 million and eight thousand). This equates to 30.9% of owner occupied borrowing households. In addition, more than 22,500 of these are in severe stress. We estimate that more than 61,000 households risk 30-day default in the next 12 months. Continued rises in living costs – notably child care, electricity, school fees and food – whilst real incomes continue to fall and underemployment is causing significant pain. Many are dipping into savings to support their finances.
Indeed, the fact that significant numbers of households have had their potential borrowing power crimped by lending standards belatedly being tightened, and are therefore mortgage prisoners, is significant. More than 49% of those seeking to refinance are now having difficulty. This is strongly aligned to those who are registering as stressed. These are households urgently trying to reduce their monthly outgoings”.
In addition, negative equity is now rearing its head. See our post where we discuss this in detail. Data from APRA, the Property Exposures figures – showed that banks wrote nearly 26,000 new mortgages with a loan to value ratio of more than 90%, and a further 51,000 with an LVR of between 80 and 90 percent in the past year. That is 20% of all loans written in the same period. I would expect these numbers to fall significantly, as lenders tighten their standards further. But it’s also worth remembering that in some cases existing borrowers have pulled more equity out to allow them to pass funds to their kids – the so called bank of Mum and Dad, and in the case of a forced sale, the market value may well overstate the true recovery value of the property. Using a property as an ATM does not work in a falling market. Last month, a Roy Morgan survey of 10,000 borrowers found 8.9 per cent were slipping into negative equity — up from 8 per cent 12 months prior — which would work out to around 386,000 Australians. We have run our own analysis with data to the end of November and on my modelling currently there are around 400,000 households across the country in negative equity, both owner-occupiers and investors. There are about 3.25 million owner-occupier borrowers and at least 1.25 million investors, so around 10 per cent of properties are currently underwater. And it will get worse.
The property market news continues to highlight the cracks, as prices continue to ease. Last week, Corelogic says 2,749 homes were taken to auction across the combined capital cities, slightly higher than the week prior when 2,701 auctions took place. But the higher volumes saw the final clearance rate weaken further with only 41.3 per cent of homes selling at auction; making it the lowest result seen since Oct 2011. In comparison, this time last year, 3,291 homes went to auction and a clearance rate of 60.3 per cent was recorded.
Melbourne’s final clearance rate was recorded at 42.7 per cent across 1,378 auctions last week, improving on the 41.4 per cent final clearance rate the previous week across a lower 1,132 auctions. Over the corresponding week last year 1,647 Melbourne homes were auctioned and a stronger clearance rate was recorded (65.4 per cent).
Sydney’s final auction clearance rate came in at 41.6 per cent across 937 auctions last week, falling from the 44.8 per cent across a higher 1,035 auctions over the previous week. Over the same week last year, 1,143 homes went to auction returning a clearance rate of 56.2 per cent. Across the smaller auction markets, clearance rates improved in Perth and Tasmania, while Adelaide, Brisbane and Canberra saw clearance rates fall week-on-week. The combined capital cities are expected to see a lower volume of auctions this week with CoreLogic currently tracking 2,498 auctions, significantly lower than the 3,371 over the same week last year.
Melbourne is set to see volumes fall over the week, with 1,205 auctions being tracked so far, in Sydney, 840 homes are currently scheduled for auction this week and across the smaller auction markets, Brisbane is expected to be the only city to see a rise in volumes week-on-week, with fewer auctions scheduled in Adelaide, Canberra, Perth and Tasmania. Of the non-capital city auction markets, Geelong was the best performing in terms of clearance rate (46.4 per cent).
And more economists are predicting bigger falls. For example, AMP’s Shayne Oliver believes there is still plenty of room for property prices to head south as homes weaken to GFC levels. “The decline in property prices is being driven by a perfect storm of tighter credit conditions, poor affordability, rising unit supply, reduced foreign demand, the switch from interest only to principle and interest mortgages for a significant number of borrowers, fears that negative gearing and capital gains tax concessions will be made less favourable if there is a change of government, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors”.
He believes the decline in Sydney and Melbourne property prices has much further to go as Comprehensive Credit Reporting kicks in, making it even harder to get multiple mortgages. Many homebuyers will be watching out for changes to negative gearing and capital gains tax, which could become the new reality after a change of government at the coming federal election. “In these cities we expect to see a top to bottom fall in prices of around 20 per cent spread out to 2020,” Mr Oliver said. “However, the plunge in clearance rates and the uncertainty around credit tightening and tax concessions indicate that the risks are on the downside. So there is more to go yet.
Yet still the bulls are roaring – this as reported in new.com.au: Buyer’s agent Nick Viner believes now is the time to buy in Sydney and Melbourne, with many discounted premium properties available with minimal competition. “This environment is the absolute perfect time to buy because you’ve got more time to consider your options and there’s more choice in terms of available homes,” Mr Viner, principal of Buyers Domain Australia, said. “You also have the ability to focus on really blue chip properties in your budget. You can bag a more superior property that you can really only get for cheaper in markets like this.” Most economists believe the total property price falls in Sydney will be within the vicinity of 15 per cent, which means some prime suburbs have already bottomed out. Oh Yeh?
And Domain continues to hype up the first time buyer opportunity, as the Western Australian Government announced that it would expand its Keystart loan book by more than $420 million to help stimulate demand in the housing market, saying it’s evident APRA’s credit control measures of the past three to four years, and further tightening to come from the Banking Royal Commission, has dampened activity across the nation. “To respond to this situation … Western Australia will be expanding its Keystart loan … to stimulate demand, and allow more first homebuyers the ability to enter the market”. More unnatural acts. My message to first time buyers is simple, hold your fire, prices have further to drop, and next year you could spend less and get more.
And Jonathon Mott from UBS said this week that “the banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years. The risk of the current credit squeeze turning into a credit crunch is real and rising, with the housing market now falling sharply. Mott added, If the use of the household expenditure measure benchmark is deemed to not meet the requirements of responsible lending this further increases the risk that the banks face mortgage mis-selling actions. We see this as a large and significant tail-risk which appears to becoming increasingly likely as house prices fall.
RBA’s Debelle addressed home prices in his Q&A session on Thursday, saying they are watching home prices. “From what I can tell what we haven’t seen anywhere in the world is a decent fall in house prices in two capital cities at the same time unemployment is going down and the economy is growing at a reasonable pace. This is uncharted territory. Credit is still flowing but at a much slower rate and it’s something we are watching – but that is as much a function of banks willingness to lend and not so much the price. No, RBA, it’s simply the reduction in the credit impulse – the rate of credit growth is sufficient to explain the falls, and no, it’s not time to loosen credit standards again!
Turning to the local markets, the banks were weaker though the week, though with a small upward tick on Friday. The local volatility – or fear index – was still in risk on territory, if down 0.23% to 16.73. CBA closed at 70.37, up 1%, NAB was at 24.00, up 0.25%, ANZ was up 0.16% to 25.71 and Westpac was up 0.23% to 25.73. They are all way down on a year ago. Macquarie closed at 113.32 up 1.13%, having been driven lower by the poor global finance news. Regionals fared less well, with Bank of Queensland down 0.31% to 9.74, as they announced a search for a new CEO, as Jon Sutton resigns. Suncorp was down 0.45% to 13.31 on Friday, and Bendigo and Adelaide Bank slide a little, down 0.09% to 10.61. AMP, continues lower, down 3.32% to 2.33, and Mortgage Insurer Genworth was down0.85% to 2.34, having moved a little higher earlier in the week. The ASX Financials index is sitting near recent lows, if up 0.09% on Friday to 5,621.70, and the ASX 100 ended at 4,676.50, up 0.47%, but below the earlier April 2018 dip. Expect more weakness ahead. The Aussie slide 0.48% to 71.99, having been as high as 73.00 in the week, but the weaker local economic news will likely drive it lower, and we think mid 60’s is possible in the new year. Aussie Gold cross was up 1.31% to 1,733.31 and the Aussie Bitcoin cross was down 6.59% to 4,708.4. We will discuss cryptos more in a moment.
Across to the US, where the Dow erased its gains for the year after plunging Friday on a weak jobs report and concerns over U.S-China trade tensions. In addition, the session was soured by a U.S. labour market report showing the US economy created fewer jobs than expected, and wage growth fell short of forecasts. The fear index was higher, up 9.63% to 23.23, indicating significant concerns and higher volatility. The Dow Jones Industrial Average fell 2.24% to end at 24,389 and is down 1.34% year-to-date. The S&P 500 fell 2.33% to 2,633.08, while the Nasdaq Composite fell 3.05% to 6,969.25. The S&P 100 was also lower down 2.39% to 1,167.57.
U.S.-China trade tensions were thrown into further turmoil after President Donald Trump’s trade adviser Peter Navarro said if issues with China are not resolved during the 90-day ceasefire, the administration would raise existing tariffs on $200 billion worth of Chinese goods.
Tech also contributed meaningfully to the selloff on Wall Street, led by Apple which was down3.57% to 168.49 after Morgan Stanley cut its price target on the tech giant’s shares on fears over a slowing smartphone market in China. That was the third Apple price cut this week following cuts by both Rosenblatt and HSBC, sending Apple’s share price more than 3% lower. Other tech stocks also fell, with Intel down 4.40% to 46.24, Alphabet (Google) down 2.92% to 1,046.58 and Amazon down 4.12% to 1,629.13.
The financials index was 1.84% to 415.44, well down over the year now, with Goldman Sachs Group down another 2.40% to 179.67.
Energy, meanwhile, struggled to take advantage of the rally in oil prices, which had followed an agreement by OPEC and its allies to cut production by 1.2 million barrels a day for the first six months of 2019. The oil price was up 1.51% to 52.27.
We need to look in more detail at Cryptos. Bitcoin continued to fall and close to 90% from record highs. Virtual currencies have fallen dramatically in recent weeks, with news of regulatory scrutiny and a hard fork in Bitcoin cash cited as major headwinds for the crypto industry. Cryptocurrencies overall were lower, with the total coin market capitalization at $107 billion, compared to $120 billion on Thursday. Bitcoin was down 7.13%, having traded near a session low of $3,377.40, to end at 3,430.8. Meanwhile the creation of a Bitcoin exchange traded fund is unlikely anytime soon, said SEC Commissioner Hester Peirce, who dissented with the authority’s decision to reject a Bitcoin ETF.
I recorded an interview with local Crypto expert Alex Saunders from Nuggets News, in which we discuss current trends.
The U.S. dollar was lower on Friday amid worry that the Federal Reserve could pause its hike rate increases due to concerns of slowing global growth. The Wall Street Journal reported on Thursday that the Fed is likely to consider a wait-and-see approach after hiking rate increases at its next meeting in December. The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, inched up 0.10% to 96.85. However, on a weekly basis, the dollar was set for its biggest drop in more than two months against a basket of its rivals.
Falling U.S. yields have also weighed on the dollar, with the benchmark 10-year Treasury yield at 2.854, down 0.74% after dipping overnight to its lowest level since late August. The 3 month was down 0.57% to 2.396, and the inverted yield curve between the 2 year and 10 year suggests more trouble ahead. Gold was stronger reacting to the market uncertainty, up 0.85% to 1,254,15.
With Brexit still in the mix, the Euro US Dollar ended up 0.27% to 1.1409, and the British Pound US Dollar was down 0.31% to 1.2744. Deutsche Bank ended at 7.719, having broken below 8.000 this week, and was up 0.77% in Friday. Many have said if the bank dropped below 8.000 this would be a significant event – well now it has happened, so risk is on.
So we can conclude that market weakness will continue up to the end of the year, and locally home prices will continue to fall. So to answer my own question, no we are not there yet, in fact I suspect we are still in the early stages of the correction which is coming. And 2019 looks like being THE year!
