Welcome to the Property Imperative weekly to 3rd November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
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The latest data reinforces the downward momentum in property, and the blowback more broadly across the economy and the finance sector. Those arguing for just a small adjustment, before a spring bounce are sadly plain wrong. In fact, the falls are likely to accelerate from here
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The first piece of data relates to the number of properties listed for sale. It is rising very fast, a point made in our recent post with property insider Edwin Almeida. “More From The Property Market Front Line – What’s Up With Auctions?”
The latest data shows that sales listings are surging in the Sydney region, with 27,265 showing on Domain, and even more if you include hidden listings. And in one day 230 additional new listings were added. This is being driven by more property investors seeking to exit, either because of the extra costs of switching from an interest only mortgage to a principal and interest mortgage, or simply to crystallise gains before they dissipate. This is consistent with our survey data on transaction intentions, which also shows that the number of prospective purchasers is falling. You can watch our post “Decoding Property Buying Intentions – “You Ain’t Seen Nothing Yet” where we discuss the results in more detail.
The auction results last week, which were delayed from some sources, but showed lower results, many withdrawn properties, and more properties where the final sale price was not disclosed, all signs of a distressed market.
CoreLogic says there were 2,928 capital city homes taken to auction last week, making it the fifth busiest week for auctions so far this year, but more than half of the homes taken to auction failed to sell giving a final auction clearance rate of 47 per cent; the fifth consecutive week where the combined capital cities have seen less than 50 per cent of homes sold. Last year, there were 3,713 homes taken to auction over the same week, when a much higher 64.5 per cent sold.
Melbourne’s final auction clearance rate came in higher week-on-week. The improved clearance rate last week was across the second highest volume of auctions seen across the city this year. There were 1,709 auctions held, returning a clearance rate of 48.6 per cent, having increased on the 45.7 per cent over the week prior when 1,087 auctions were held.
In Sydney, 798 auctions took place last week with 45.3 per cent successful, up from the 44.6 per cent over the week prior when fewer auctions were held (675). Although the clearance rate was higher over the week, it remained much lower than the 58.3 per cent of homes successful at auction over the same week last year when a significantly higher 1,215 auctions took place.
Across the smaller auction markets, Adelaide was the best performing in terms of clearance rate with 57.6 per cent of homes selling at auction last week, although this was lower than the previous week.
This week, there are fewer auctions scheduled to take place across the combined capital cities, with 1,438 currently being tracked by CoreLogic, which is half the volume of auctions recorded last week when the combined capital cities saw 2,928 homes taken to auction.
Across Melbourne, the number of auctions to be held is expected to fall this week, with only 234 Melbourne homes scheduled to go to auction. The lower volumes are likely due to the upcoming Melbourne Cup festivities and coming off the back of the second busiest week for auctions this year (1,709).
Activity across Sydney is set to remain relatively steady week-on-week, with 764 homes scheduled for auction this week, decreasing by 4.3 per cent on last week’s final figures which saw 798 auctions held across the city.
Across the smaller auction markets, activity across Adelaide and Brisbane is virtually unchanged week-on-week, while Canberra, Perth and Tasmania are all expected to see a higher volume of auctions this week.
The most recent price results for October from CoreLogic takes the annual decline across the national index to 3.5%, signalling the weakest macro-housing market conditions since February 2012, with their hedonic home value index reporting a 0.5% fall in dwelling values nationally in October.
On a rolling quarterly basis, dwelling values are now trending lower across both the combined capital city regions (-1.6%) as well as the combined regional areas of Australia (-0.7%).
The weakest conditions continue to be felt across Australia’s two largest cities where investment buyers have been the most concentrated, supply additions have been the highest and where housing affordability is the most stretched. Sydney values are down 7.4% over the past twelve months and Melbourne values are 4.7% lower over the same period. Values also declined in Perth and Darwin however, the downturn in these two cities has been ongoing since mid-2014, with values falling 3.3% and 2.9% respectively over the past twelve months. Although dwelling values are rising on an annual basis across the remaining cities, the pace of growth has eased. Of course the averages do not tell the true story, there are places where prices have fallen more than 22% in the past year, and CoreLogic revised their index a little, but the trends are clearly down. The funniest thing I saw this week were the property spruikers trying to argue the rate of fall was slowing. That is just not really true!
Also it is worth noting that the higher end of the market continues to fall further and faster. The disparity of performance between the upper and lower quartiles is clear at lower geographic aggregations as well. In Melbourne, the top 25% of the market by value has seen values fall by almost 9% over the past twelve months; a slightly weaker performance than Sydney’s upper quartile market where values are down by 8.6%. At the same time, more affordable housing markets have seen a 2.9% rise in values across Melbourne over the past year, while Sydney’s lower quartile has recorded a fall that is almost half that of the upper quartile.
Finally on property, economist John Adams and I debunked Nine’s The Block in our post “Adams/North: “Block Mania” Will Literally Kill Innocent Australians” We looked at why people cannot see the upcoming property correction and we got deep and dirty into philosophy, TV villains, cash for comment and the KGB. What could possibly go wrong? Is reality on the blink?
We had full year results from NAB and ANZ this past week. In NAB’s cash earnings were down 14%. They included restructuring costs of $530m and customer related remediation of $261m, leading to a cash earnings figure before these of $6,493m down 2.2% on FY17. Their net interest fell 4 basis points from 1.88% in 2017 to 1.84% in 2018. This included 2 basis point falls in lending margin, and liquidity/funding plus 2 basis points from markets, offset by clawing back margin from depositors of 2 basis points. NAB was down 0.55% on Friday to 25.21.
ANZ’s Cash Profit on a continuing basis was $6.49 billion, down 5%, or flat on a statutory profit basis. Their approach to simplify the business and reduce costs have bolstered their capital position, but also left them potentially more exposed to a mortgage and construction sector downturn. They included charges of $377 million after tax for refunds to customers and related remediation costs, plus accelerated amortisation expense of $206 million predominantly relating to its International business and a restructuring charge of $104 million, largely relating to the previously announced move of the Australia and Technology Divisions to agile ways of working. Their net interest margin was significantly lower, thanks to the change in business mix, funding and customer remediation charges. Shane Elliot their CEO said he expected mortgage credit growth would probably halve, to 2 to 3 per cent, in the coming years, and that credit growth from investor borrowers has already “ground to a halt”. “I wouldn’t be surprised if the house price correction had further to run …” He also made the point ANZ is still using HEM for some mortgage lending, but that borrowing power has reduced. The average household average on income of $110,000 three years ago could have borrowed $550,000 for a mortgage but “that same family today with exactly the same income – $110,000 – today could probably only borrow about $440,000,”. ANZ was down 1.24% on Friday to 25.53.
Westpac, which reports next week, also advised the market on Friday it had upped its provisions for customer payments by $46 million to $281 million and its exit of infrastructure funds management business Hastings Funds Management, with also have a negative impact. More putting out the trash! It ended at 26.50 on Friday down 0.64%.
They are all being hit by the slowing mortgage sector, one off costs for customer remediation and business restructuring. Selling off businesses may generate additional capital, but it also puts more reliance on the fading property sector. CBA was also down on Friday dropping 0.86% to 68.35. And remember the Royal Commission is still running.
In contrast, Macquarie who reported their 1H19 results this week rose 3.86% on Friday to 122.42. They announced a net profit after tax of $A1,310 million for the half-year ended 30 September 2018 up five per cent on the half-year ended 30 September 2017. The bank continues a strong run, benefiting from its international business portfolio. International income accounted for 67 per cent of the Group’s total income. The Capital Markets business performed strongly. Their Australian mortgage portfolio of $A36.1 billion increased 10 per cent on 31 March 2018, representing approximately two per cent of the Australian mortgage market. Their shares rose on the results, with analysts revising up future earnings, up 3.86% on the day to 122.42.
And we got data from Lenders Mortgage Insurer Genworth. Their 3Q18 earnings today with a statutory net profit after tax (NPAT) of $19.6 million and underlying NPAT of $20.4 million for the third quarter ended 30 September 2018 (3Q18). It is an important bellwether for the mortgage industry, and confirms recent softening. Whilst they have a strong capital position, their net investment returns were also down a little.
They said that the Delinquency Rate increased from 0.50% in 3Q17 to 0.55% in 3Q18. This was driven by two factors. Firstly, there was a decrease in policies in force. The second factor was the increase in delinquency rates year-on-year across all States (in particular Western Australia, New South Wales and to a lesser extent South Australia). In terms of number of delinquencies, Western Australia and New South Wales experienced the largest increase with Queensland and Victoria experiencing a decrease in number of delinquencies. Their shares were up 1.34% on Friday to 2.27, still near to recent lows.
The latest Credit Aggregates from the RBA to September 2018 continues to show an easing of credit growth. Total credit, across all categories rose seasonally adjusted by $14.41 billion or 0.5%, to $2.8 trillion. Within that owner occupied lending rose 0.5% or $5.5 billion to $1.19 trillion while investment lending rose 0.1% or $0.52 billion to $593 billion. Other personal lending was flat, and business lending rose 0.9% to $943 billion, up $8.4 billion.
The 12 month ended data shows how investor lending continues to slow, owner occupied lending growth is easing, and overall lending for housing growth is slowing to 5.2%. This is a problem for the banks in that to maintain profitability as assets grow, they need the rate of growth of housing loans to RISE not slow down. Even at these levels (with some growth) household debt will rise relative to loans, so again it highlights the fundamental problem we have in the system at the moment. Lending in the less regulated Non-bank sector still appears to be growing more strongly than ADI lending.
APRA released their monthly banking statistics for September 2018. This includes the total balances by ADI broken by investor and owner occupied lending. Total lending grew by 0.21% in the month to a total of $1.65 trillion, or 2.5% annualised. Within that lending for owner occupation rose by 0.36% to $1.09 trillion and investor loans fell 0.03% to $557.4 billion. Investment loans now comprise 33.72% or the portfolio. Looking at the individual major players, we see that only NAB grew their investment loan portfolio in the month, among the big four. Macquarie and Bendigo are lifting investor loans the most by value. ANZ dropped their balances the most.
The CPI number was weak, thanks to some one offs, below the RBA target for inflation. And the retail turnover for September was also pretty low, The ABS released their latest statistics today for September 2018. Households remain under pressure judging by the weak results. In trend terms, overall retail turnover grew by 0.2% in the month. Within the segments, Other Retailing rose 0.6%, Cafes, Restaurants and Take Away Food rose 0.5%, Food Retailing 0.2%, Clothing, Footwear and Personal services was flat, while Household Goods fell 0.2% and Department stores fell 0.1%.
Across the states, TAS rose 0.5%, QLD and VIC both rose 0.3%, NSW rose 0.2% along with SA, ACT was flat, WA fell 0.1% and NT fell 0.9%. Online retail turnover contributed 5.6 per cent to total retail turnover in original terms in September 2018, an unchanged result from August 2018. In September 2017 online retail turnover contributed 4.4 per cent to total retail.
The ASX 100 was up 0.13% on Friday to, 4,817, while the ASX Financials 200 was down 0.38% to 5,748. The Aussie recovered a little against the US Dollar during the week, but ended down 0.18% to 71.93. Given the prospect of the RBA cutting rather than lifting rates, we expect it to go lower. Hexavest, a $14.5 billion fund, said Australia’s dollar may drop to a nine-year low of 67 U.S. cents as the central bank is set to become even more dovish and lean more toward cutting interest rates. A number of other major central banks are trying to catch up with the Fed, “if the RBA’s not playing that same game, bad news near term is you get a weaker currency,”.
AMP is till languishing, as they tried to explain the sale of chunks of the business to the market. It ended at 2.69, up 1.89% on Friday. The problem is, the business is impossible to value at the moment, given the Royal Commission, remediation and management changes. Perhaps someone will make a cheeky bid eventually.
The Gold Spot Aussie Dollar was up 0.11% to 1,713 and the Aussie Bitcoin was up 0.34% to 8,758. Market volatility in Australia is still extended, with the local VIX ending the week at 15.86, down 4.44%.
Volatility also continued in overseas markets, with the US VIX still elevated at 19.51, and up 0.88% on Friday.
The US labour data, released on Friday provided another reason to confirm the FED will continue to hike rates, the unemployment rate was steady at 3.7% with 250,000 additional jobs added. And over the year, average hourly earnings have increased by 83 cents, or 3.1 percent.
The benchmark United States 10-Year yield traded around 3.22% while the United States 2-Year climbed to 2.92%, its highest level in a decade. The 3-month rate though slide just a little to 2.33. You can watch our post Interest Rates WILL Rise
Wall Street closed lower Friday as uncertainty on trade dominated direction after President Donald Trump’s upbeat comments on U.S.-China trade relations appeared to contradict earlier comments from his chief economic advisor. The Dow Jones Industrial Average fell about 0.43% to 25,271. The S&P 100 fell 0.74% to 1.211, while the Nasdaq Composite fell 1.04% to 7,357. The S&P 500 Financials was flat on Friday having recovered during the week, to stand at 438.
“President Xi and I have agreed to meet at the G20 summit,” Trump told reporters on Friday. Trump added that “a lot of progress” had been made toward reaching a deal that would be “very fair for everybody.”
Trump’s comments seemingly contradicted earlier remarks from White House economic advisor Larry Kudlow, who indicated little progress had been made with China, denying reports that the president had asked his Cabinet to put together a trade deal with the country.
Bloomberg reported earlier Friday that Trump had asked officials to prepare a draft for a U.S.-China trade deal.
Beyond trade, tech stocks wreaked havoc on the broader market, led by a slump in shares of Apple. Apple fell 6.63% after its above-forecast earnings and revenue was overshadowed by soft guidance and weaker-than-expected iPhone shipments in the last quarter, ending at 207.48. The S&P 500 technology sector fell about 2%.
Gold was down on Friday by 0.11% to 1,235, but was higher across the week, reflecting the risk on sentiment across the market. Crude Oil fell 1.3% to 62.87, as the Trump Administration seems to be achieving its tri-fold agenda of punishing Iran while balancing the world’s energy needs and keeping oil prices low. Crude markets posted their largest weekly loss since February.
Bitcoin was down a little, at 6,426, down 0.38%, and is still going sideways. According to Agustín Carstens, the General Manager of Bank of International Settlements (BIS), the organization of more than sixty central banks from around the globe, Digital currencies are not real money, but an asset with an aesthetic importance to cryptographic connoisseurs. Cartens made those remarks on Thursday during the Finance and Global Economics Forum of the Americas in Miami. He presented his “Money and payment systems in the digital age” report with virtual coin part of it, dubbed “Cryptocurrencies: fake money.” “No discussion of money and payments in the digital age would be complete without addressing cryptocurrencies. But are cryptocurrencies money? No. The use of “currencies” is misleading,” Carstens told the attendees.
So all in all, locally the property news continues negative and globally the US rate hikes are set to create further pain across the markets. Blowback City in more ways than one!
