“An unexpected tight squeeze on credit for home buyers is accelerating the slowdown in building activity,” said Mr Tim Reardon, HIA Principal Economist.
HIA released its quarterly economic and industry outlook report today. The State and National Outlook Reports include updated forecasts for new home building and renovations activity for Australia and each of the eight states and territories.
“The credit squeeze that has been impeding investors for the past 18 months has expanded and is now restricting building activity across the market,” added Mr Reardon.
“APRA’s restrictions were designed to curb high risk lending practices but we are now seeing ordinary home buyers experience delays and constraints in accessing finance.
“This disruption in the lending environment is impacting on the amount of residential building work entering the pipeline. The effect on actual building activity will become more evident in the first half of 2019.
“The credit squeeze is weighing on a market that had already started to cool from a significant and sustained boom.
“If these disruptions to the home lending environment prove to be long lasting then we could see building activity retreat from the recent highs more rapidly than we currently expect.
“The decline in housing finance data shows that something in the lending environment has changed. Lending to owner-occupiers building or purchasing new homes fell by 3.6 per cent in September and is down by 16.5 per cent over the year.
“The year 2017/18 saw over 120,000 detached house starts. This is one of the strongest results on record. We expect new home starts to decline by 11.4 per cent this year and then by a further 7.4 per cent next year in 2019.
“With the prospect for the release of the Hayne Royal Commission’s findings to trigger further upheaval in the banking system, we need the banks maintain stable lending practices for fear of a destabilising influence on the housing market,” concluded Mr Reardon.
Welcome to the Property Imperative weekly to 13th October 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
This week saw major ructions on the financial markets, which may be just a short-term issue, or a signal of more disruption ahead. And locally, the latest data reveals a slowing of lending to first time buyers and owner occupied borrowers, suggesting more home price weakness ahead. So let’s get stuck in.
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Let’s look at property first.
The IMF’s latest Global Financial Stability Report (FSR) says Australia is one of a number of advanced economies where rising home prices are a risk. “household leverage stands out as a key area of concern, with the ratio of household debt to GDP on an upward trajectory in a number of countries, especially those that have experienced increases in house prices (notably, Australia, Canada, and the Nordic countries). Housing market valuations are relatively high in several advanced economies. Valuations based on the price-to-income and price-to-rent ratios, as well as mortgage costs, have been on the upswing over the past six years across major advanced economies, with valuations relatively high in Australia, Canada, and the Nordic countries.
And they also warn that the effect of monetary policy tightening (lifting interest rates to more normal levels) – could reveal financial vulnerabilities. Indeed, it’s worth looking at expected central bank policy rates globally. Bloomberg has mapped the relative likelihood of increases and decreases across a number of major economies, and most advanced economies are on their way up. Worth thinking about when we look at the long term home prices trends across the globe. Guess where Australia sits? High debt, in a rising interest rate environment is not a good look, so expect more stress in the system.
Yet the latest RBA Financial Stability review, out last Friday seems, well, in a different world. They go out of their way to downplay the risks in the system, and claim that households are doing just fine, based on analysis driven by the rather old HILDA data – again.
But back in the real world, Corelogic’s auction results for last week returned an aggregated clearance rate of 49.5% an improvement on the week prior at 45.8 per cent of homes sold, which was the lowest weighted average result since 42 per cent in June 2012. There was a significantly higher volume of auctions with 1,817 held, rising from the 895 over the week prior.
Melbourne’s final clearance rate fell last week, to 51.8 per cent the lowest seen since 50.6 per cent in December 2012. There were 904 homes taken to auction across the city. Compared to one year ago, the Melbourne auction market was performing very differently, with both volumes and clearance rates significantly higher over the same week (1,119 auctions, 70.3 per cent).
Sydney’s final auction clearance rate increased last week, with 46.1 per cent of the 611 auctions held clearing, up from the 43.8 per cent the week prior when a similar volume of auctions was held. One year ago, Sydney’s clearance rate was 61.3 per cent across 818 auctions.
Across the smaller auction markets, Canberra returned the strongest final clearance rate of 64.6 per cent last week, followed by Adelaide where 62.3 per cent of homes sold, while only 11.1 per cent of Perth homes sold last week.
Looking at the non-capital city regions, the Geelong region was the most successful in terms of clearance rates with 48.5 per cent of the 41 auctions recording a successful result.
This week, CoreLogic is tracking 1,725 auctions across the combined capital cities, which is slightly lower than last week. Compared to one year ago, volumes are down over 30 per cent (2,525).
They also highlighted the growing settlement risk relating to off the plan high-rise sales. Prospective buyers may sign a contract to purchase from the plan, but when the unit is ready – perhaps a year or two later, a bank mortgage valuation may not cover the purchase price. Meaning the buyer may be unable to complete the transaction. CoreLogic says that in Sydney, 30% of off-the-plan unit valuations were lower than the contract price at the time of settlement in September, double the percentage from a year ago. In Melbourne, 28% of off-the-plan unit settlements received a valuation lower than the contract price. In Brisbane, where unit values remain 10.5% below their 2008 peak, the proportion was substantially higher, at 48%. And they also argue that loss making resales are rising, especially in the unit sector, although it does vary by location.
The latest housing finance figures from the ABS showed that lending flows for owner occupied buyers appear to be following the lead from the investment sector. Both were down. This is consistent with our household surveys. Looking at the original first time buyer data, the number of new loans fell from 9,614 in July to 9,534 in August, a fall by 80, or 0.8%. As a proportion of all loans written in the month, the share by first time buyers fell from 18% to 17.8%.
Looking at the trend lending flows, the only segment of the market which was higher was a small rise in refinanced owner occupied loans. These existing loans accounted for 20.5% of all loans written, up from 20.3%, and we see a rising trend since June 2017, from a low of 17.9%. Total lending was $6.3 billion dollars, up $31 million from last month. Investment loan flows fell 1.2% from last month accounting for $10 billion, down 120 million. Owner occupied loans fell 0.6% in trend terms, down $81 million to $14.5 billion. 41% of loans, excluding refinanced loans were for investment purposes, the lowest for year, from a high of 53% in January 2015.
On these trends, remembering that credit growth begats home price growth, the reverse is also true. Prices will fall further, the question remains how fast and how far? We will be revising our scenarios shortly.
The latest weekly indices from CoreLogic shows price falls in Sydney, down 0.16%, Melbourne down 0.18%, Brisbane down 0.08%, Adelaide down 0.09% and Perth down 0.38% giving a 5 cities average of down 0.18%.
Morgan Stanley revised their house prices forecasts, down. They say “We struggle to see improvement in any of our components over the next year. We now see a 10-15 per cent peak to trough decline in real house prices (from 5-10 per cent), which would mark the largest decline since the early 1980s. With households 2x more leveraged to housing than back then, the impact on housing equity would be larger again. This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue. However, an acceleration of declines is in our bear case, and we will continue to monitor stress points, including arrears trends. Strong employment growth and temporary migration has helped contain reported vacancy rates thus far, but we see a sustained overbuild into 2019 weighing on rentals”.
NABs latest quarterly property survey index fell sharply in Q3, to the lowest level in 7 years, Sentiment was dragged lower by big falls in NSW and VIC. NAB’s view is the orderly correction in house prices will continue over the next 18-24 months with Sydney falling around 10% peak to trough and Melbourne 8%. This reflects a bigger fall than previously expected but would still leave house prices well up on 2012 levels. Their central scenario does not include a credit crunch event leading to disorderly falls in house prices. They also say the boom in Australian real estate sales to foreign investors has run its course, with NAB’s latest survey results continuing to highlight a decline in foreign buying activity resulting from policy changes in China on foreign investment outflows and tighter restrictions on foreign property buyers in Australia. In Q3, there were fewer foreign buyers in the market for Australian property, with their market share falling to a 7-year low of 8.1% in new housing markets and a survey low 4.1% in established housing markets.
Expect the calls for an increase in migration, and a freeing of lending standards to reach fever pitch – both of which MUST be ignored. We have to get back to more realistic home price ratios, despite the pain. So it was interesting to note that the NSW State Government this week, suggested that migration needed to slow, to provide breathing space, and for infrastructure to catch up. Better late than never. Remember the 2016 Census revealed that Australia’s population increased by 1.9 million people (+8.8%) in the five years to 2016, driven by a 1.3 million increase in people born overseas (i.e. new migrants)!
We published our latest household survey data this week. Mortgage stress rose again, to cross the one million households for the first time ever. We discussed the results in full in our post “Mortgage Stress Breaks One Million Households” The latest RBA data on household debt to income to June reached a new high of 190.5. This high debt level helps to explain the fact that mortgage stress continues to rise. Across Australia, more than 1,003,000 households are estimated to be now in mortgage stress (last month 996,000). This equates to 30.6% of owner occupied borrowing households. In addition, more than 22,000 of these are in severe stress. We estimate that more than 61,000 households risk 30-day default in the next 12 months. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead.
Moodys released a report suggesting that Mortgage delinquencies and defaults are more likely to occur in outer suburbs of Australian cities than inner-city areas, because of the lower average incomes and weaker credit characteristics in these suburbs. “Delinquency rates are highest in outer suburban areas. On average across Australian cities, mortgage delinquency rates are lowest in areas within five kilometers of central business districts and highest in areas 30-40 kilometers from CBDs. In the residential mortgage-backed securities they rate, delinquency rates are in many cases higher in deals with relatively large exposures to mortgages in outer areas.
We agree there are higher loan to value and debt to income ratios in the outer areas, but the overall debt commitments are higher closer in and so we suspect that many more affluent households are going to get caught, because of multiple mortgages, including investment mortgages and their more affluent lifestyles. My thesis is the banks have been lending loosely to these perceived lower risk high income households, but it ain’t necessarily so…
We also published our Household Financial Confidence index. The latest read, to end September shows a further fall, and continues the trend which started to bite in 2017. The current score is 88.4, just a bit above the all-time low point of 87.69 which was back in 2015. Last month – August – it stood at 89.5. You can watch our video “Household Financial Confidence Drifts Lower Again” where we discuss the results. We expect to see the index continuing to track lower ahead, because the elements which drive the outcomes are unlikely to change. Home prices will continue to move lower, the stock markets are off their highs, wages are hardly growing and costs of living are rising. Household financial confidence is set to remain in the doldrums.
Finally, we also published our survey results in terms of forward intentions. So what is in store for the next few months? Well, in short it’s more of the same, only more so, with more households reporting difficulties in obtaining finance, fewer expecting to transact in the next year and to see home prices rise. You can watch our video “Decoding Property Buying Intentions” where we analyse the results. The single most startling observation is the fall in the number of property investors, including those who hold portfolios of investment properties intending to transact. 20% of portfolio investors are expecting to transact, and the bulk of these intend to sell a property, compared with a year ago when 50% said they would transact, and most were looking to add to their portfolios. Most solo property investors are now on the side lines, with around 10% expecting to transact, and most of these on the sell side. Demand for investment property will continue to fall, as rental yields and capital appreciation fall.
So to the markets.
Locally, the ASX 100 ended the week well down, although there was small rise on Friday, after the heavier falls earlier in the week. We ended at 4,849, up 0.20%. The local volatility index remains elevated, ending at 20.4 on Friday, though that 6.5% lower than the previous day. Expect more ahead.
The ASX Financials index however did less well, and ended at 5,744, up just 0.03% and below the June lows. The banking sector is under pressure, for example Macquarie ended at 115.5, up 0.03% on the day, but well down from its 125 range. And AMP continues to languish at 3.05. We heard from some of the major bank CEO’s this week, with Westpac and ANZ apologising for the issues revealed in the Royal Commission, but I also note that CBA has so far only addressed one of the many issues which APRA agreed with them in terms of behavioural remediation. The banks have a long way to go to regain trust, and we expect more weakness ahead. And the latest estimates are that the sector will be up for something like $2.4 billion dollars in remediation costs and other charges. And guess who will end up paying for their bad behaviour?
The Aussie ended the week at 71.10, having reached the 70.5 range in the week. This has more to do with the US dollar movements than changes in sentiment here.
There are debates about what caused the significant falls, after all the FED rate lift strategy, and the trade wars have been around for some time. But my guess is the market has finally understood the era of low-cost or no-cost money is over. Thus expect more volatility ahead. The US fear index fell back on Friday, down 13.8% to 21.31, but is still elevated.
In fact, Wall Street indexes rose on Friday after a week of significant losses as investors returned to technology and other growth sectors, but gains were hampered by ongoing worries about U.S.-China trade tensions and rising interest rates.
Energy and financial stocks continued to fall and bank stocks kicked off the third-quarter financial reporting season with a whimper, while investors fled insurance stocks after Hurricane Michael slammed into Florida.
The technology sector was the biggest gainer of the S&P’s 11 major industry indexes, with a 1.5 percent advance, but it was still on track for its biggest weekly drop since March. The Dow Jones ended up 1.15% to 25,340, but is well off its recent highs. The NASDAQ was up more, 2.29% to 7,497, as buyers came back into the sector. The S&P 500 ended up 1.37% to 2,765.
All three indexes were on track for their biggest weekly declines since late March.
The S&P Financial index was down 0.42% to 465.07, on mixed trading results which came out on Friday. The S&P 500 banks subsector slid 1.6 percent. The biggest drag on the subsector was JPMorgan Chase & Co which reversed early gains to trade down 2 percent despite its quarterly profit beating expectations. PNC Financial led the percentage losers among bank stocks, with a 6.5 percent drop after the regional bank reported disappointing quarterly loan growth and said it expected only a small improvement in lending this quarter. The only gainers among banks were Citigroup, which rose 0.6 percent, and Wells Fargo which eked out a 0.64 percent gain after upbeat results.
The bank results launch a quarterly reporting season that will give the clearest picture yet of the impact on profits from President Donald Trump’s trade war with China.
The short term 3-Month Treasury remained flat at 2.27 at the end of the week, while the 10-Year bond rose a little to 3.165, up 1.09%. The Treasury yield is now at a 7-year high. The suspicion is that perhaps rates have turned and will go higher still, as a longer term view shows. It is also interesting to compare the US 3-Month Bill Rate minus the same rates in Germany and the UK. Short term rates in the US are higher, in fact reaching the highest positive difference since September 1984. This highlights the different path now being taken by the US, but the fall-out will be global.
Gold, which had moved higher among the market ructions, slide a little, and was down 0.52% on Friday to end at 1,221. Bitcoin finished at 6,316 up 0.57%, and continues in its marrow range for now. And Oil which had fallen earlier in the week moved up 0.72% to 71.48.
Finally, it’s worth noting that the Reserve Bank Of New Zealand is now publishing a bank specific set of scorecards to help consumers weigh up the risks bank to bank. This is essential, given the now explicit Deposit Bail-In which exists there. We discussed this most recently in our Post “The Never Ending “Bail-In” Scandal, and in the Video that Economist John Adams and I released yesterday. In fact, the bank specific data which is available in Australia is derisible compared with the NZ stats, but I came across this slide from LF Economics which highlights how the ratio of Bank Loans To Bank Deposits compares across a number of Banks, including the big four. It’s fair to assume the higher the ratio, the greater the potential risk. Westpac, CBA, NAB and ANZ are all in the top half. I believe we need more specific disclosure from the sector, and I suggest that APRA continues to provide only a partial view of the banking system here. The fact is, Bail-In, or no, we need much more transparency. It would help to negate the spin presented in the RBA’s Financial Stability Review, which in my view is not effective. Oh, and look out for our joint video on Gold, coming up in the next few days, it will surprise you!
Finally, a reminder that on Tuesday 16th October at 20:00 Sydney we are running our next live stream Q&A event. The reminder is up on YouTube, and you can send me questions before hand, or join in the live chat. So mark your dairies.
The ABS data released today shows that the number of dwellings approved in Australia fell by 1.9 per cent in August 2018 in trend terms.
In seasonally adjusted terms, total dwellings fell by 9.4 per cent in August, driven by a 17.2 per cent decrease in private dwellings excluding houses. Private houses fell 1.9 per cent in seasonally adjusted terms.
We will continue to base our analysis on the trend data, but this will understate more recent falls…
The cause is simple, a significant fall in the number of new high-rise residential development applications, especially in Victoria. Recent falls in demand and prices suggests a significant reduction in momentum is on the cards there.
Justin Lokhorst, Director of Construction Statistics at the ABS said “The fall was mainly driven by private dwellings excluding houses, which decreased by 2.7 per cent in August, Private sector houses also fell, by 1.2 per cent.”
Among the states and territories, dwelling approvals fell in August in Victoria (5.1 per cent), South Australia (3.6 per cent) and New South Wales (1.6 per cent) in trend terms.
Dwelling approvals rose in trend terms in Western Australia (2.7 per cent), Tasmania (2.3 per cent), Northern Territory (1.5 per cent) and Australian Capital Territory (0.1 per cent). Dwelling approvals were flat in Queensland. But the significant falls in the two most populated states swamps any better news elsewhere.
In trend terms, approvals for private sector houses fell 1.2 per cent in August. Private sector house approvals fell in Queensland (3.3 per cent), Victoria (1.4 per cent), New South Wales (1.1 per cent) and South Australia (0.7 per cent), but rose in Western Australia (1.4 per cent).
The value of total building approved fell 1.3 per cent in August, in trend terms, and has fallen for nine months. The value of residential building fell 0.8 per cent while non-residential building fell 2.3 per cent.
Now, its worth comparing this approvals data with the latest RLB Crane Index, an interesting measure of construction activity (especially high-rise development).
Their Q3 2018 data – the 13th edition of the RLB Crane Index has seen
Australia reach a new record high of 173. Nationally, the number of cranes rose 7%, to 735, the highest count. Melbourne and Newcastle saw a strong crane increases, overtaking the record levels reached six months earlier. Sydney continues to decline from the peak reached in Q4 2017, falling 6%.
They say that the residential index pick up from its fall in Q2 2018, increasing 8%, to 170. Additionally, the non-residential index continued its rise, increasing 7%, recording a new high of 180. Recent construction statistics released by the Australian Bureau of Statistics highlight the ongoing strength of the construction industry. For FY 2018,total construction in Australia reached $221 billion.
Strong increases were seen in the non-residential and engineering construction sectors of 11.1% and 20.7% respectively, while the residential building sector remained constant at $74 billion.
They say that Melbourne’s crane numbers rose, increasing by 35 cranes. Driving this rise is the civil sector with the introduction of 13 new cranes. All
other sectors remained strong, either maintaining or increasing cranes from the count six months ago.
Since its peak in Q3 2017, Sydney’s crane count has been falling, driven by a declining residential sector. The residential crane count has fallen by 55 cranes from its peak in Q4 2017, while the non-residential sector recorded an increase of 26 cranes.
Brisbane has bounced back from its dip in the last edition, driven by a rise in mixed-use projects. While the residential sector remained stable, 11 new cranes were added to the mixed use sector.
The Residential Crane Index at 170 is just below the peak in late 2017 of 177. Note this is NOT the number of cranes. However, we suspect construction momentum is easing, so the number is likely to fall in the months ahead, and the index will decline – Melbourne looks likely to be worst hit in the months ahead.
Welcome to the Property Imperative weekly to 29th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Another mega week, with the Royal Commission interim report out, the FED lifting rates, APRA releasing their banking stress tests, more class actions launched and Banks lifting their provisions to cover the costs of remediation, so let’s get stuck in…
Watch the video or read the transcript.
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The Royal Commission Interim Report came out on Friday and turned the spotlight on the Greed driving Financial Services to sell at all costs, take fees from dead people, and reward anti-customer behaviour. The report also called into question the role of the regulators, saying they were weak, and did not do their job. In fact, it’s not the lack of appropriate law, but it is noncompliance, without consequence which is the issue. They also raised the question of the STRUCTURE of industry. We discussed this in an ABC Radio National Programme, alongside Journalist Adele Ferguson and Ex. ACCC boss Graeme Samuel, and also in our show “Inside The Royal Commission Interim Report”.
The Royal Commission has touched on the critical issues which need to be considered. But now we have to take the thinking further. In terms of structure, we should be thinking about how to break up the financial services sector into smaller more manageable entities that are not too big to fail. We should separate insurance from wealth management from core banking, and separate advice from product selling and manufacturing. There is a clear opportunity to implement Glass Steagall, which separates risky speculative activity from core meat and potatoes banking services we need. There is a big job to be done in terms of cultural change, within the organisations, as they shift to customer centricity – building their businesses around their customers. This requires different thinking from the top. Also Regulators have clearly not been effective because they were too close and too captured. This must be addressed. The industry has played them, being prepared to pay small penalties if they get caught as just a cost of doing business. No real consequences.
Poor culture is rife across the industry and regulators. For example, LF Economics Lyndsay David tried under a FOI request to get APRA to release details of its targeted reviews into the mortgage sector from 2016. Specifically whether Treasury were aware of the results. They were not.
The review was never intended to made public but was revealed during the Hayne Royal Commission. It found that at Westpac only one in 10 of banks’ lending controls were operating effectively. In fact, APRA had ordered these “targeted review” in October 2016 and were conducted by PWC for WBC and CBA. On 12 October 2016, APRA issued a letter to the Bank and 4 other large banks requesting that they undertake a Review into the risks of potential misrepresentation of mortgage borrower financial information used in loan serviceability assessments. In its letter, APRA referenced assertions made by commentators that “fraud and manipulation of ADI residential mortgage origination practices are relatively commonplace”. Frankly the fact that these were buried, and the APRA still refuses to release they tells us more about APRA than anything else. After all we know mortgage fraud was widespread.
In this light, the APRA stress tests results, is on the same theme, high level, and vague, compared with the bank by bank data the FED releases, it’s VERY high level! In APRA’s view, the results of the 2017 exercise provide a degree of reassurance: ADIs remained above regulatory minimum levels in what was a very severe stress scenario. John Adams and I discussed this recently in our post “The Great Airbrush Scandal” APRA is not convincing.
ASIC revealed this week that it has identified serious, unacceptable delays in the time taken to identify, report and correct significant breaches of the law among Australia’s most important financial institutions. It can they say take over 4.5 years to identify that a breach incident has occurred! ASIC chair said “Many of the delays in breach reporting and compensating consumers were due to the financial institutions’ inadequate systems, procedures and governance processes, as well as a lack of a consumer orientated culture of escalation”.
So now there is a growing sense of panic as according to the Australian, for example, from APRA who says a horde of Australia’s biggest financial institutions and superannuation funds have been forced by the prudential regulator to ram through an in-depth review of their culture and governance before the royal commission ends next year. After copping heavy criticism over the course of Kenneth Hayne’s royal commission over a lack of enforcement in the financial sector, the Australian Prudential Regulation Authority has demanded Westpac, ANZ and National Australia Bank mimic the landmark cultural investigation of Commonwealth Bank the regulator launched late last year. Along with the major banks, some of the nation’s biggest union and employer-backed super funds — such as the $40 billion Hostplus, $35bn fund Cbus and $50bn REST super fund — have also been asked by APRA to review their culture.
And from the industry, for example the AFR reported that Westpac hauled each of its 40,000 bankers into urgent briefings by chief executive Brian Hartzer this week, before the Royal Commission Report came out, who warned them to bring forward customer problems.
Westpac also announced that Cash earnings in Full Year 2018 will be reduced by an estimated $235 million following continued work on addressing customer issues and from provisions related to recent litigation. This included increased provisions for customer refunds associated with certain advice fees charged by the Group’s salaried financial planners due to more detailed analysis going back to 2008. These include where advice services were not provided, as well as where we have not been able to sufficiently verify that advice services were provided; Increased provisions for refunds to customers who may have received inadequate financial advice from Westpac planners; Additional provisions to resolve legacy issues as part of the Group’s detailed product reviews; Provisions for costs of implementing the three remediation processes above; and Estimated provisions for recent litigation, including costs and penalties associated with the already disclosed responsible lending and BBSW cases. Costs associated with responding to the Royal Commission are not included in these amounts.
Across the industry more than $1 billion has been put aside, so far and more to come. And guess who will ultimately pick up the tab for these expenses – yes we the customers will pay!
Another class action was announced this week as Law firm Slater and Gordon said it had filed class action proceedings in the Federal Court against National Australia Bank and MLC on behalf of customers sold worthless credit card insurance. Most were existing NAB customers and the bank should have known the insurance was likely to be of little or no benefit to them. Despite knowing this, NAB have continued to push the insurance widely, reaping millions in premiums while doing so. most people were sold the insurance over the phone and were not given a reasonable opportunity to understand the terms and conditions of the policy.
We continued to debate the trajectory of home price falls, as Media Watch discussed the 60 Minutes segment we were featured in. Once again somewhat myopic views were expressed by host Paul Barry, as we discussed on our recent post. You can also watch the 60 Minutes segment on YouTube which covers my views more comprehensively. Prices are set to fall further. Period.
Realestate.com.au says that according to a survey of property experts and economists further falls in housing prices across Australia’s cities are expected. They suggest an 8.2% fall in house prices in Sydney, a 8.1% fall in Melbourne and a 7% fall in Brisbane. In fact all centres are expected to see a fall. Finder.com.au insights manager Graham Cooke was quoted as saying that the cooling market conditions made it harder for existing homeowners to build up equity. But they could be good news for first-home buyers with a deposit in hand. “If you’re thinking of getting into the market over the next few years, hold out until prices have dropped further and use this time to save for your upfront costs,” he said. “Right now, there’s no need to jump on the first suitable property you see. Waiting a few years could potentially save you thousands of dollars.”
Damien Boey at Credit Suisse said this week that by the start of 2020, Sydney house prices could have dropped by 15-20% from their 2017 peak. The market is heavily oversupplied, even before we consider the risk of higher insolvency activity and foreclosure sales. He argues that demand is the problem – not credit supply. We could ease lending standards from here, and still not cause housing demand to bounce back. Investors cannot sustain capital growth by themselves. They need a “greater fool” to on sell their houses too. But foreign demand is weak, and first home buyers are priced out of the market. Specifically, Chinese demand for property is weak, as evidenced by low levels of outward direct investment, and the failure of the AUD to rise in response to CNH weakness. Promised relaxation of capital controls has not eventuated, and CNY devaluation pressure has had a negative impact on credit conditions, as well as the ability of Chinese residents to export capital abroad. Finally, dwelling completions are still rising in response to high levels of building approvals from more than a year ago – the building lead time has lengthened significantly. As for the RBA, any rate cuts from here are unlikely to be passed on in full to end borrowers, given counterparty credit risk concerns in the interbank market.
UBS Global Housing Bubble Index came out and showed that Sydney had slipped from 4th to 11th in a year. They noted that Prices peaked last summer and have slid moderately as tighter lending conditions reduced affordability. Particularly since the land tax surcharge more than doubled and a vacancy fee was introduced, the high end of the market has suffered most. The vacancy rate on the rental market has also climbed. Nevertheless, inflation-adjusted prices are still 50% higher than five years ago, while rents and incomes have grown at only single-digit rates.
Corelogic reported further prices falls this week in Sydney, down 0.57%, Melbourne down 0.79%, Adelaide, down 0.15%, Perth down 0.73%, while Brisbane rose a little up 0.06%. Melbourne looks to be the weakest centre currently, and we continue to expect to see further falls.
CoreLogic says that last week 2,404 homes went to auction across the combined capital cities, returning a final auction clearance rate of 52.4 per cent, slightly higher than the 51.8 per cent the previous week which was the lowest seen since Dec-12. Over the same week last year, 2,782 homes went to auction and a clearance rate of 66.2 per cent was recorded.
Melbourne’s final clearance rate was recorded at 53.8 per cent across 1,161 auctions last week, compared to 54.1 per cent across a lower 988 auctions over the previous week. This time last year a higher 1,361 homes were taken to auction across the city and a much stronger clearance rate was recorded (70.6 per cent).
Sydney’s final auction clearance rate came in at 51.1 per cent across 851 auctions last week, up from 48.6 per cent across 669 auctions over the previous week. Over the same week last year, 1,033 Sydney homes went to auction returning a final clearance rate of 65.9 per cent.
Across the smaller auction markets, clearance rates improved across Adelaide and Tasmania, while Brisbane, Canberra and Perth saw clearance rates fall week-on-week.
Of the non-capital city auction markets, the Geelong region was the best performing in terms of clearance rate (61.1 per cent), followed by the Hunter region where 58.8 per cent of homes sold.
The combined capital cities are expecting 65 per cent fewer homes taken to market this week, with half the nation host to an upcoming public holiday, combined with both the NRL and AFL grand finals being held over the weekend, it looks to be a quiet week for the auction markets.
There are 846 capital city auctions currently being tracked by CoreLogic this week, down from the 2,404 held last week and lower than the 969 auctions held over the same week last year.
Finally, the latest RBA and APRA lending statistics, plus the June quarter household ratios, shows that credit growth is still too strong, with the 12-month growth by category shows that owner occupied lending is still growing at 7.5% annualised, while investment home loans have fallen to 1.5% on an annual basis. Overall housing lending is growing at 5.4% (compared with APRA growth of 4.5% over the same period, so the non-banks are clearly taking up some of the slack). Still above wages and inflation. Household debt continues to rise.
The non-bank sector (derived from subtracting the ADI credit from the RBA data) shows a significant rise up 5% last month in terms of owner occupied loans. APRA needs to look at the non-banks. And quickly. This was confirmed looking at the rising household debt to income ratios, where in short the debt to income is up again to 190.5, the ratio of interest payments to income is up, meaning that households are paying more of their income to service their debts, and the ratio of debt to home values are falling. All three are warnings. The policy settings are not right. You can watch our show “What Does The Latest Data Tell Us? But for now it is worth highlighting that despite all the grizzles from the property spruikers, mortgage lending is STILL growing…. and faster than inflation. We have not tamed the debt beast so far, despite failing home prices. No justification to ease lending standards – none.
So to a quick look at the markets. The ASX 200 Financial Sector Index was up 1.20% on Friday to close at 6,127 – in a relief rally that the Royal Commission report was not worse (and the prospect of less regulation was mooted). We think this will reverse as the full implications of the report are digested, but of course the market profits from volatility. CBA, the biggest owner occupied mortgage lender was up 1.9% to close at 71.41, despite some analysts now suggesting a fair price closer to 65.00. Both are a long way from the 81.00 it reached in January. It will not return there anytime soon.
Westpac rose 1.16% to close at 27.93, still well off its November 2017 highs of 33.50, National Australia Bank rose 1.76% to 27.81 and ANZ closed at 28.10 up 1.4%. AMP, who has already been hit hard by the Royal Commission rose 1.59% to 3.19, still way down on its March highs before the revelations came out. Macquarie Group fell 1.34% and ended at 126.04. Suncorp ended at 14.46, up 0.84% and Bendigo Adelaide Bank rose 1.22% to 10.75. The Aussie ended up a little to 72.22, 0.19% higher on Friday, but with still more falls expected ahead, we think it could test 71.00 quite soon.
In the US markets, the Dow Jones Industrial ended at 26,458, up 0.07%, but off its recent highs, the NASDAQ ended up 0.05% to 8,046, while the S&P 500 was flat at 2,913. The Volatility index was lower, at 12.12, down 2.34%. The bulls are, in the short term at least, firmly in control.
Gold was up 0.74% to 1,196, but still in lower regions than last year, reacting to the strength of the US Dollar. Oil was higher again, up 1.41% to 73.53. In fact, until sizable supply is offered up by OPEC some are suggesting we could see prices above the $100 per barrel market, but $100 seems an overreach on the current charts.
On the currencies, the Yuan USD was up 0.31% to 14.56, as China continues to manage the rate lower. Of course the trade wars are in full play.
President Trump has announced a 10% tariff on $200 billion in Chinese imports. That tariff is currently 10%, but at the end of 2018, that’s expected to rise to 25%. This is the third round of tariffs, and it’s the largest round of tariffs. Back in July, we had $34 billion worth of Chinese goods tariffed. Then, in August, we had a follow-on of $16 billion in tariffs. So, this is really a huge jump up of $200 billion. This is affecting all kinds of goods. The U.S. brings in a little over $500 billion worth of goods from China. The $250 billion so far this year is roughly half, but Trump has said that if China were to take retaliatory action on these tariffs, which they have, in fact, then he’s going to put in place another $267 billion worth of imports. For all intents and purposes, that would put a tariff in place on 100% of U.S.-China trade.
China also announced some tariffs on $60 billion worth of goods that also went into effect on September 24th. This is in addition to, China had also had previously announced tariffs of $50 billion. The total U.S.-China trade is about $130 billion dollars of imports of United States goods into China. This second round of Chinese tariffs is going to now cover $110 billion dollars of the $130 billion of U.S.-China trade — again, almost 100% of the entire trading relationship.
So, this is pretty significant in that almost all the cards have been played here. If all the threats and allegations with regard to tariffs are followed through upon, all of U.S.-China trade is set to be under some kind of tariff barrier in 2018. This will be a big deal.
The 10 Year Bond rate was up 0.29% to 3.065 after the Fed rate hike this week. The Fed moved as expected, and continues to highlight more upward movements in the months ahead – in fact their language is arguably more bullish now. The target range for the federal funds rate is now 2 to 2-1/4 percent. In their projection release, they see GDP sliding from 2019…. while inflation is expected to rise. The 3-month rate was up 0.35% on Friday to 2.207., still signalling a recession risk down the track. We discussed the impact of the US Rated move in our show “The FED Lifts, More Ahead And What Are The Consequences?”
Finally, turning to Crypto, Bitcoin ended down 1.43% to 6,617. Little signs of new directions here in the short term.
So in summary a week dominated by the Royal Commission locally, against a back cloth of higher international interest rates, and risks. We are, as they say, set for interesting times ahead.
The ACCC has issued a draft determination proposing to authorise SA Housing Authority and Renewal SA to enter into arrangements with land and property developers to increase the supply of affordable housing in the greater metropolitan region of Adelaide.
The government of South Australia has set a goal that 15 per cent of all new significant developments should be available as affordable housing.
Affordable housing is to be made available to people in the low to moderate income category, who are often employed in the health care, social services and administrative support occupations.
Under the proposed arrangements, SA Housing Authority and Renewal SA may ask developers to agree to cap prices for properties in some developments, agree to rent or sell to specified tenants or purchasers and agree not to compete for the rental or sale of property.
“The ACCC considers that the arrangements are likely to contribute to an increase in the supply of affordable housing in the greater metropolitan region of Adelaide. People who may otherwise find themselves excluded from both the general housing market and social housing, are likely to benefit from an increase in affordable housing,” ACCC Commissioner Mr Roger Featherston said.
“The arrangements are unlikely to result in public detriment. Housing affordability criteria are set and published by the government of South Australia and developers have a wide range of land and property developments from which to choose.”
The ACCC proposes to grant authorisation for 10 years and expects to make a final determination in November 2018.
Further information about the application for authorisation, including copies of the ACCC’s draft determination and public submissions, is available at SA Housing Authority and Renewal SA.
Authorisation provides statutory protection from court action for conduct that might otherwise raise concerns under the competition provisions of the Competition and Consumer Act 2010. Broadly, the ACCC may grant an authorisation when it is satisfied that the public benefit from the conduct outweighs any public detriment.
Authorisation is sought as the proposed conduct may contain a cartel provision.
Background
SA Housing Authority and Renewal SA, and land and property developers may be considered competitors for the supply of affordable housing.
Therefore, by arranging to cap prices and not compete for the supply of rentals and the sale of properties, they risk breaching competition laws unless they have ACCC authorisation.
The ABS data on migration shows a 9% fall since visa changes made in April 2017. No surprise then the HIA bemoans the fall, pointing to slowing demand for new property.
Of course this is another reason why home prices are likely to go lower.
ABS data released today shows that Australia’s annualised population growth rate slowed for the fourth consecutive quarter.
Over the year to March 2018, Victoria saw the strongest growth in population (+2.2 per cent), followed by the ACT (+2.1 per cent) and Queensland (+1.7 per cent). New South Wales was fourth fastest (+1.6 per cent) with Tasmania fifth (+1.0 per cent), Western Australia sixth (+0.8 per cent) and South Australia seventh (+0.7 per cent). The population of the Northern Territory has actually declined over the last two quarters and the annual rate of growth has slowed to 0.1 per cent.
“Australia’s overseas migration fell by 9 per cent since changes to visa requirements came into force in April 2017, slowing the population growth rate to 1.6 per cent,” Mr Murray added.
“In April 2017, Australia introduced a range of visa changes which have been successful in reducing the number of skilled migrants arriving in Australia.
“The current phase of Australia’s 28 years of continuous economic growth is built upon the arrival of skilled migrants. Skilled migration is necessary to offset the impact of our aging population.
“Looking domestically, states such as New South Wales and Victoria that have benefitted the most from overseas migration over recent years are now seeing population growth rates slowing.
“The slowing rate of population growth, while it remains high for a developed economy, will contribute to slower growth of household consumption.
“This means slower growth in sectors such as retail and residential building. Given that these two sectors are amongst the nation’s largest employers the risks presented a decline in population growth should not be underestimated,” concluded Mr Murray.
Welcome to the Property Imperative weekly to 15th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, listen to the podcast or read the transcript.
On the 10th Anniversary of the failure of Lehman Brothers, the consensus seems to be that the financial system is still stressed, under the impact of sky high global debt, artificially low interest rates and asset bubbles. The shadow is long, and the risks high. I discussed this on ABC Radio Sydney, and also in a Video Post with Robbie Barwick from the CEC. Perhaps of most concern is the lack of acceptance that we have a problem, with the RBA this week recognising that household debt is high, but declaring it manageable and the Housing Industry Association calling for a relaxation of lending standards to support housing construction. That is in my view the last thing we need. The truth is, pressures on households, and tighter lending standards mean more price falls will follow. Those who follow my analysis will know I run four scenarios, including the one, the worst case, where prices could drop 40-45% from their highs over the next few years. This is the angle which the upcoming 60 Minutes programme, to be aired tomorrow, Sunday is driving at.
Just remember this is one of four scenarios! But its rated a 20% probability now.
There was more evidence this week as to the issues under the hood. For example, Domain says that whilst housing affordability has improved in all capitals where property prices have started to decline, the median multiple is still well above affordable housing thresholds in several capital city markets. They said that drawing on Domain price data and adjusted census income data, the change in price and the median multiple across capital city markets, since the respective peaks, was analysed.
While the house price to income ratio is a simple, standard indicator for understanding affordability — particularly across countries — it is far from comprehensive. Other affordability metrics still spell out tough times ahead for homeowners. Rental affordability, mortgage serviceability and the deposit hurdle are also vital considerations. But Domain says that as of June 2018, data shows the median income household in Sydney would require 59.8 per cent of weekly income to service an owner-occupied mortgage (assuming a 5.2 per cent variable rate on a loan-to-value ratio of 80 per cent). This is down from 64.4 per cent at the peak of the latest cycle
Another angle is credit scoring, as Banking Day called out, as the remaining three Big Four banks are reportedly getting ready to join NAB as participants in the new Comprehensive Credit Reporting regime. This means a massive database will share their customers’ full credit history with each other for the first time from the end of this month, at which point comprehensive credit reporting will be a foregone conclusion with the remaining major banks. The new data-sharing regime will allow lenders to better verify loan applications and assess credit risk by accessing the full repayment history of a potential customer, including their total debts. The major lenders have pushed ahead with the changes following pressure from the prudential regulator, The Australian reported, noting that ANZ said it had been testing positive data reporting since the end of June, although the data was not shared with the public at this stage. The big banks’ embrace of the new regime would put pressure on others to sign up, since only lenders who supplied comprehensive reporting to the credit bureaus would have access to the data, Australian Retail Credit Association chairman Mike Laing told The Australian. “If they don’t join then the people who intend to borrow money but not pay it back will quickly find out which ones are not in the system and they’ll go to the lenders who don’t have access to verifiable data. So it’s risky for a lender not to take part once most of the data is in there”.
And yet another angle. Between 2008 and 2012, the number of self-managed super funds grew by 27 per cent to nearly half a million. That was more than 40 per cent of the growth of the whole superannuation system. The global financial crisis coincided with the Howard government lifting the ban on superannuation funds borrowing money. As a result, self-managed super funds have rushed to take advantage and racked up $32 billion in debt in little more than a decade. The Financial System Inquiry in 2014 recommended that borrowing by superannuation funds be banned. It’s a view shared by Saul Eslake, the former ANZ Bank chief economist, who describes the decision to allow super funds to borrow as “the dumbest tax policy of the last two decades.” “The last thing Australians really needed in the last 20 years is yet another vehicle or incentive for Australians to borrow more money in order to speculate on property prices continuing to rise,” Mr Eslake said.
Overlaying that is the perennial problem of property spruikers trying to persuade people to borrow big to buy, and tip their newly acquired, heavily leveraged, property into a self-managed super fund. Super fund borrowing is known as “limited recourse” — which means if the fund can’t pay off the loan, the bank can’t go after any other assets — just the property in question. Remember this was at the heart of the sub-prime mortgage fiasco 10 years ago, which morphed into the global financial crisis. Whilst not wanting to be alarmist, Saul Eslake is concerned with what he’s seeing now in self-managed super funds with their limited recourse borrowing. “You might have thought that someone would have heard the term ‘limited-recourse borrowing’ and recognised that there were some significant risks associated with it that we could have done without in the Australian context.”
And CoreLogic Reported that the combined capital cities returned a final auction clearance rate of 55.3 per cent last week, a slight improvement on the 55 per cent over the week prior when volumes were lower. There were 1,916 homes taken to auction last week, up on the 1,748 held the previous week. While one year ago, a higher 2,258 auctions were held with a 66.9 per cent success rate.
Melbourne returned a final auction clearance rate of 60 per cent this week; an improvement not only over the week but the highest seen since May, with clearance rates for the city remaining within the mid-high 50 per cent range up until this week. The improved clearance rate was across a higher volume of auctions week-on-week, with 891 auctions held, increasing on the 805 held the week prior when 57 per cent sold.
Sydney’s final auction clearance rate came in at 50.6 per cent last week across 656 auctions, falling on the week prior when a 53.8 per cent clearance rate was returned and auction volumes were a similar 664.
As usual the performance across the smaller auction markets was mixed last week, with clearance rates improving in Adelaide, Brisbane and Canberra, while Perth’s final clearance rate fell.
The Gold Coast region was the busiest non-capital city region last week with 56 homes taken to auction, although only 26.4 per cent sold. Geelong was the best performing in terms of clearance rate with 88 per cent of the 34 auctions successful.
And this week, CoreLogic is tracking 1,882 capital city auctions this week. If we compare activity to the same week last year volumes are down 25 per cent on the 2,510 auctions held one year ago.
And finally, APRA released their quarterly property exposure data to June this past week. APRA release their quarterly property exposure lending stats for ADI’s today. There are some interesting data points, and some concerning trends and loosening of standards recently. I will focus on the new loan flows here. First the rise in loans outside serviceability continues to rise, now 6% of major banks are in this category a record, reflecting first tightening of lending standards, but second also their willingness to break their own rules! This should be ringing alarms bells. APRA?
Foreign Banks are writing the greater share (relative percentage) of 80-90% LVR loans. Other lenders tracking lower.
Foreign Banks are lending more 90+ LVR loans in relative percentage terms.
New investor loans are moving a little higher for Credit Unions and Major Banks, suggesting a growth in volumes.
The share of interest only loans dropped below 20% but is now rising a little, as lenders seek to grow their books.
All warning signs, especially when as APRA reports ADIs’ residential term loans to households were $1.62 trillion as at 30 June 2018. This is an increase of $86.6 billion (5.6 per cent) on 30 June 2017. Of these: owner-occupied loans were $1,076.4 billion (66.4 per cent), an increase of $76.7 billion (7.7 per cent) from 30 June 2017; and investor loans were $544.0 billion (33.6 per cent), an increase of $9.9 billion (1.9 per cent) from 30 June 2017. Debt is sky high, the grow rate must be slowed substantially – there are rumours of more tightening to come, we will see.
Looking at the local markets, the ASX 100 was down at the end of the week, ended up at 5,065.90, up 29.8 on the day, and it continues to underperform compared with the US markets. In the banking sector, NAB ended the week at 27.35, after they announced they would not follow the lead of Westpac, CBA and ANZ for now by not lifting their variable mortgage rates, for now. NAB closed up 0.18% on the day. ANZ, who it was announced with be subject to civil proceedings from ASIC for an alleged continuous disclosure breach in relation to a $2.5 billion institutional share placement undertaken by the ANZ in 2015. Their shares rose 0.32% on Friday to 28.15. CBA who took some further knocks this week thanks to further evidence of poor practice in CommInsure in the Banking Royal Commission, among others in the industry. They ended the week at 71.50, and up 0.45% today. And Westpac ended the week at 27.76 up 0.69% on Friday. Despite the relatively benign employment figures out this week, still at 5.3%, the Aussie ended the week at 71.54 and down 0.57% on Friday. The downward trajectory is clearly in play. This risks importing inflation into the local economy.
Looking across to the USA, many investors may be inclined to dismiss yet another headline on global trade and focus on the more granular aspect of the markets. But make no mistake, the markets were gyrating with the twists in the saga between the U.S. and its trading partners. The latest salvo came Friday, when Bloomberg reported that Trump instructed aides the day before to proceed with tariffs on about $200 billion more in Chinese products, but that the announcement has been delayed as the administration considers revisions based on concerns raised in public comments.
Earlier in the week, China had welcomed an invitation by the United States to hold a new round of trade talks. The Trump administration had invited Chinese officials to restart trade talks, the White House’s top economic adviser said on Wednesday. In addition to those tariffs, Trump has said he’s ready to add an additional $267 billion in tariffs “on short notice if I want.”
Earlier in the week, Beijing indicated it will ask the World Trade Organization for permission to impose sanctions on the U.S. as part of a dispute over U.S. dumping duties that China started in 2013.
And there’s still the revamp of NAFTA to consider. The U.S. and Canada have been in talks to bring Canada into a new agreement between the U.S. and Mexico, but there have been on announcements to far. Talks are expected to continue through Monday.
Beyond the US manufacturing sector – for example Boeing is still pretty strong, at 359.80, while Caterpillar ended down 0.44% to 144.90; the potential spill over into the consumer sector impacted a range of stocks, with Whirlpool down 1.68% to 123.21, Walmart down 0.56% to 94.59 and Mattel was up 1.49% to 16.35. Among the financials, Morgan Stanley was at 48.19, a little higher on the day, but still well down on March highs. The S&P 500 ended up 0.03% to 2904.98, as did the Dow Jones Industrial Average to 26,154, while the NASDAQ was down just a little to 8,010.
Apple got the type of promotional attention some companies can only dream of when the eyes of tech lovers and investors alike were glued to its keynote event for details on its new products, especially phones. Apple announced Wednesday its new iPhone product line. Shares of Apple rose the day before the event in anticipation of the kind of surprise announcement for which former CEO Steve Jobs was famous. The stock sold off as details about the new iPhones arrived and shares ended the day lower. But shares bounced back on Thursday, leading the overall tech sector higher, despite negative analyst commentary about the price of the iPhone XR. Apple ended the week down 1.14% to 223.84.
Bucking the recent trend that’s made investors nervous about price pressure, the latest data showed inflation cooling. First, figures showed wholesale prices fell unexpectedly. Producer price index decreased 0.1% last month. In the 12 months through August, the PPI rose 2.8%. Economists had forecast the PPI rising 0.2% last month and increasing 3.2% from a year ago. The core PPI decreased by 0.1% from a month earlier and rose 2.3% in the 12 months through August. Analysts had predicted core PPI to increase 0.2% month on month and 2.7% on an annualized basis.
Next, retail inflation rose less than anticipated. The consumer price index advanced 0.2%, missing expectations for a gain of 0.3%. In the 12 months through July, the CPI increased 2.7%, below forecasts for a reading of 2.8% and down from 2.9% in July. The core CPI increased by 0.1% from a month earlier, below forecasts for a gain of 0.2%. The annual increase in the so-called core CPI was 2.2%. Economists were looking for it to hold steady at July’s 2.4% advance. But despite these softer inflation numbers, traders ended the week still predicting a more-than-80% chance of the Federal Reserve hiking rates at its December meeting on top of the expected boost this month.
Bond yields rose sharply this week, owing to confidence that the Federal Reserve will lift rates for a total four times this year. The rise was particularly strong Friday, when the United States 10-Year yield topped 3% briefly. A big reason for that was Friday’s retail sales numbers.
The August retail sales numbers were disappointing at first blush, rising 0.1%, compared with expectations for 0.4%. But July’s gain was revised up to 0.7% from 0.5%. That revision gave market watchers some more confidence that the U.S. could see GDP growth of 4% in the third quarter, which would all but guarantee another rise in rates in December.
Gold ended the week lower at 1,198, down 0.82%, with preference for the US Dollar as a safe haven. And Copper fell 2.61%, well down on the start of the year, with demand slowing. Oil prices were higher to 69.00, up 0.60% on Friday, reflecting concerns about supply thanks to Hurricane Florence, and trade concerns. Of course, with the lower Aussie, this means fuel prices will rise further ahead.
Finally, Bitcoin is still making lower highs, even though the cryptocurrency has seen slightly higher lows. The key is going to be when bitcoin trades back above $7,000. There is a trend line connecting all the recent highs going back to early 2018. If BTC can bust above that level, it will likely take out the high at $7,350 and make a higher high. Once that happens, institutions may start buying heavily and upside could be back above $10,000 within months. That said, it ended the week down 1.15% to 6,488.
According to Bloomberg, Morgan Stanley plans to offer trading in complex derivatives tied to the largest cryptocurrency, according to a person familiar with the matter, joining other Wall Street firms in creating ways for clients to play the digital currency market. The U.S. bank will deal in contracts that give investors synthetic exposure to the performance of Bitcoin, said the person, who asked not to be identified because the information is private. Investors will be able to go long or short using the so-called price return swaps, and Morgan Stanley will charge a spread for each transaction, the person said. Citigroup is developing a new mechanism for trading cryptocurrencies known as digital asset receipts, a person with knowledge of the plans said earlier this month. Goldman Sachs is exploring derivatives on Bitcoin called non-deliverable forwards, and is considering a plan to offer custody for crypto funds.
Finally, today a couple of quick reminders, first the 60 Minutes programme tomorrow evening and our live stream event on Tuesday at 20:00 Sydney, where you can discuss with me the latest on the outlook for home prices, as well as all our other analysis. You can bookmark the event by using this link. I look forward to your questions in the live chat.
If you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
Welcome to the Property Imperative weekly to 8th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
And by the way, if you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
Watch the video, listen to the podcast, or read the transcript.
The big news this week was that after Westpac blinked last week, ANZ then CBA both lifted their standard variable mortgage rates for existing borrowers by 16 and 15 basis points (or 0.16% and 0.15% respectively). This was exactly as I had predicted. They both blamed the rising interbank funding rates, claimed that mortgage rates were still lower than three years ago, and that though it was regrettable, the impact would be minimal.
Let’s be clear, existing borrowers are being caned, and whilst some may be able to shop around for a new loan at those attractive teaser rates, many cannot so they are being milked. And there are more rises to come in my opinion.
To put this in perspective, on a typical mortgage this represents an extra $35 a month, but if you are sitting on a big Sydney or Melbourne mortgage it could be much more. We discussed the shift in rates on our posts this week, including “More Bank’s Follow Suit”, and our discussions with people on the industry front line, including Sally Tindal from RateCity and Mandeep Sodhi from HashChing.
NAB of course has not followed the herd so far, so it will be interesting to see whether they will. But the main point to make is this is just another burden on borrowing households at a time when according to our surveys, household finances remain under pressure.
On Tuesday, leaving the cash rate unchanged, the RBA said” One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high”; and last week “the main risks to financial stability will most likely continue to relate to credit quality. Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue”.
Our analysis of household finance confirms this and the latest responsible lending determinations, where Westpac agreed to pay a very small $35m civil penalty also highlight the issues. Their mortgage hikes will more than cover the penalty.
So no surprise to see mortgage stress continuing to rise. Across Australia, more than 996,000 households are estimated to be now in mortgage stress (last month 990,000). This equates to 30.5% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 59,000 households risk 30-day default in the next 12 months. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead. You can watch our show “August 2018 Mortgage Stress Update” for more details. We also did a number of radio interviews on this.
And have no doubt the credit crunch continues to intensify. The latest ABS lending data for July showed a fall in investor mortgages, and a slowing of first time buyers and owner occupied lending. In fact, apart from a small rise in construction finance, all indicators were down. We discussed this in our post “More Negative Lending Indicators”.
Pile on the reduction of borrowing power of households by as much as 40%, the number of refinanced applications being rejected, still running at 40%, so creating mortgage prisoners now that the banks are finally obeying the lending law, plus property investors now seeing capital being eroded, all this combined means lending will be compressed, and this in turn will drive home prices lower. The latest data shows both home prices and auction clearances are still failing.
One other observation worth making. Though hardly reported, the ABS released their June 2018 data relating the securitised loans in Australia “Assets and Liabilities of Australian Securitisers“. It showed that in the past year residential mortgages securitised rose by 8.9% to $108.8 billion. Overall securitised assets rose by 8.2%, which shows mortgage assets grew stronger than system.
This reflects what we have seen in the market with non-bank and some bank lenders using this funding channel. The rise of non-bank securitisation is a significant element in the structure of the market. As major lenders throttle back their lending standards, higher risk loans are moving into the non-bank and securitised sectors. Of course a decade ago it was the securitised loans which took lenders down in the US and Europe.
The growth we are seeing here is in our view concerning, bearing in mind the more limited regulatory oversight. Plus. on the liabilities side of the balance sheet, around 90% of the securities are held by Australian investors, a record.
This includes a range of sophisticated investors, including super funds, wealth managers, banks, and high-net worth individuals. But the point to make is that if home price falls continue, the risks in the securitised pools will grow, and this risk is fed back to the investor pools.
This is yet another risk-laden feedback loop linked to the housing sector, and one which is not fully disclosed nor widely understood. The fact that the securitised pools are rated by the agencies does not fill me with great confidence either!
Even the broader economic data, which showed that Australian economy grew 0.9 per cent in seasonally adjusted chain volume terms in the June quarter 2018, showed that new dwelling investment continued to prop up the numbers, along with government and domestic consumption.
But the two key, and concerning trends are a significant fall in the households’ savings ratio (as they dip into them to support their spending), and the slower GDP per capita growth, which shows that much of the GDP momentum is simply population related. This is based in trend data.
Plus, real national disposable income per capita fell by 0.2% over the quarter though it was up 2.1% over the year. Worse, the real average compensation per employee fell another 0.4% in the year to June 2018 to be 4.2% lower since March 2012. And average remuneration per employee rose by only 1.7% in the year to June, so remains underwater after adjusting for inflation (2.1%). Households remain under the gun. Economist John Adams and I discussed this in our show “A Disastrous Set of Results”.
Of course GDP is a really poor set of measures by which to assess the economy in any case….
One emerging question is the real risks in the banks’ mortgage portfolios as home values fall, and poor lending practices are revealed.
UBS said this week in their latest Australian Banking Sector Update, which involved an anonymous survey of 1,008 consumers, there was a “sharp fall” in the number of “misstatements” reported in mortgage applications over the fourth quarter of 2018 (4Q18). The survey revealed that 76 per cent of respondents reported that the mortgage applications were “completely factual and accurate”, up from 65 per cent throughout the first three quarters of 2018. According to UBS, the improvement in lending standards was largely driven by the scrutiny placed on the industry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and not off the back of regulatory intervention.
Despite the improvement, UBS claimed that it’s concerned about the 10 per cent of respondents that reported that their broker-originated applications were “partially factual and accurate”, which it considers a “low benchmark”. Moreover, UBS stated that it continues to find that a “substantial number of applicant’s state that their mortgage consultant suggested that they misrepresent on their mortgage applications”. According to the figures, of those who misstated their broker-originated loan applications, 40 per cent said that their broker suggested that they misrepresent their application, which UBS claimed implies that 15 per cent of all mortgages secured via the broker channel were “factually inaccurate following the suggestion of their broker”.
“This is concerning given the heightened scrutiny on the industry, in particular following findings of broker misconduct and broker fraud in the royal commission,” UBS added.
There was an important video out this week, courtesy of the CEC in which Denise Brailey of the Banking and Finance Consumers Support Association (BFCSA), a real consumers champion, discussed mortgage fraud in the system. To cut to the chase, she says that many lenders deliberately built systems and processes to trick customers into loans they should never had got. The central issue is the way the Loan Application Form (LAF) was used. But she also touches on the cultural issues and fake statistics endemic in the system. You can watch the whole story. It is frankly disturbing.
Add to the substantial “liar loans” issue, the fact home price values continue to fall, and funding costs are rising, and we conclude the risks to the banking system are significant. Yet the regulators and bank auditors are not in our view doing their job. As more of this is exposed, expect bank share prices to slide further.
The ASX 200 was down 0.27% on Friday, to 6,144, having reacted to the latest GDP numbers and the bank mortgage repricing. CBA ended the week at 70.5 up 0.53% but was down on recent numbers. Westpac ended at 27.80 down 0.14% and only slightly above the low of 27.30. ANZ was also lower at 28.40, down 0.46%. Expect more downside, as the Royal Commission reports, and more mortgage related issues emerge.
The Aussie fell against the US Dollar, down 1.29% to 71.05 A New Low. While AUD/USD’s descent was not as potent as last week, the pair breached under the December and May 2016 lows below 71.452. Technically, its now cleared to descend to the January 2016 lows at 68.274.
Indeed, not only broken through 71.452, but it also fell under a descending range of support which helped control its decline since May. However, the pair stopped just short of the 61.80% Fibonacci extension at 70.888 which might as well stand as immediate support going forward.
The push through range support also marked the pair’s single largest decline in a day since August 23rd which was over two weeks ago. If the dominant downtrend in AUD/USD once again resumes, a push under 70.888 exposes the 78.6% Fibonacci extension at 70.092.
Meanwhile, near-term resistance is a combination of the December/May 2016 lows and the descending range. Pushing above 71.60 then opens the door to testing the 38.2% extension at 72.007 followed by the 23.6% level at 72.699. With that in mind, the descent through key support levels prolongs the bearish AUD/USD technical outlook.
Moody’s said this week The U.S. economy and financial markets have been pulling away from the rest of the world. Of special importance is the lagging performance of emerging market economies, which, not too long ago, had been the primary driver of world economic growth. The combination of higher U.S. interest rates and the relatively stronger performance of the U.S. economy has triggered a notable and potentially destabilizing appreciation of the dollar versus a host of emerging market currencies.
Excluding the collapse of Venezuela’s currency, other noteworthy appreciations by the dollar since yearend 2008 include the dollar’s 102% surge against Argentina’s peso, the 74% advance in terms of Turkish lira, the 25% climb versus Brazil’s real, the 24% ascent against South Africa’s rand, the 15% increase versus India’s rupee, the 10% climb in terms of Indonesia’s rupiah, and the 11% increase vis-à-vis Pakistan’s rupee.
Emerging market countries having especially large current account deficits relative to GDP are vulnerable to dollar exchange rate appreciation. The funding of large current account deficits requires large amounts of foreign-currency debt that is often denominated in U.S. dollars. As the dollar appreciates vis-à-vis emerging market currencies, it becomes costlier to service dollar-denominated debt in terms of emerging market currencies.
So to the US markets, where the Dow Jones Industrial Average fell 0.31%, to 25,917 while the S&P 500 ended at 2,871, down 0.22%. On the corporate news front, Tesla stock dropped 6.3% after Chief Accounting Officer Dave Morton resigned as the “the level of public attention placed on the company,” prompted him to rethink his future. It ended at 263.24
Gripped by fear the United States and China are heading further down the path toward a full-blown trade war, investors reined in their bets on riskier assets like stocks, pressuring the broader averages. With the administration already expected to impose tariffs on $200 billion worth of goods from China, Trump upped the ante on trade, threatening levies on another $267 billion of goods. The levies on the list of goods could reportedly cover a wide range of products from popular tech companies, including Apple, according to Bloomberg. Apple later confirmed in a letter that the tariffs would affect the Apple Watch, AirPods and Apple Pencil.
“It is difficult to see how tariffs that hurt U.S. companies and U.S. consumers will advance the Government’s objectives with respect to China’s technology policies,” Apple said in the letter.
Apple Inc. fell 0.81% to 221.30 fell on the news, exerting further pressure on the beaten-up tech sector. The NASDAQ slide further, down 0.25% to 7.903 and twitter continued its fall, down 1.04% to 30.49 as a number of the big social media tech stocks were hit after testaments to congress on election interference and moderating content, including charges of censorship.
There were also no new developments as Canada negotiated with the U.S. about a revamp of NAFTA.
The U.S. employment report for August augured strong economic growth. But markets were spooked by an acceleration in wage inflation, which boosted expectations for the Federal Reserve to hike rates twice more this year. Beyond the creation of 201,000 jobs in August and a jobless rate holding near 18-year lows, at 3.9% the focus was on the 2.9% increase in wage inflation, its fastest since April 2009. Although a quarter-point rate hike was already fully priced in for the Sept. 25-26 Fed meeting, odds for an additional increase in December rose to about 76% compared to 70% ahead of the report.
Energy, meanwhile, did little to stem losses in the broader market after ending the day roughly unchanged, as oil prices were pressured by a rising dollar and concerns about oil-demand growth, amid rising trade tensions. On the New York Mercantile Exchange crude futures for October delivery settled at $67.84 a barrel, towards the top the price range. Gold was down 0.21% to 1,202, driven by strength of the US dollar, despite rumours of buying by a number of central banks, including China.
Bitcoin dropped on Friday down 1.31% to 6,420, having plunged from 7385 to 6830, or 7.5%, on Wednesday in reaction to a Business Insider report that Goldman Sachs as decided to drop a year-ago decision to create a crypto-currency trading desk. Apparently Goldman is “uncertain” about the regulatory environment.
Before I go, a couple of reminders, first is that next Sunday 16th September Nine’s 60 Minutes will be running a segment on the outlook for the Property Market. You may recall I was in Sydney a couple of weeks back for a recording. A couple of days ago they came back to get some additional material, as the market is evolving so quickly. It will be interesting to see how they tell the story.
Next we will be launching our new series on the capital markets next week, where we will look at the concepts of the time value of money, bonds and derivatives. Given the size of these markets, and the risks embedded within them, this will be an important series.
And finally, our next live stream Q&A event is scheduled for Tuesday 18th September at 20:00 Sydney, you can set a reminder and also send me questions ahead of time. We will be looking in detail at the property market in the session. I look forward to your questions in the live chat.
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In their latest release, HIA is essentially calling for an easing of lending practices, suggesting that investors need encouragement to come back into the market.
“A growing list of disincentives are deterring investors from Australia’s housing market,” stated HIA economist, Diwa Hopkins.
Today the ABS released data on housing finance for the month of July 2018. These figures show the value of lending to investors declined by a further 1.3 per cent in the month. The value of lending in July 2018 is now 15.7 per cent lower than in July 2017.
“Investors played a significant role in the record levels of new home building that occurred in recent years. By the same token their retreat from the market will weigh on activity over the near to medium term,” said Ms Hopkins.
“The exiting of investors from the housing market can be traced back to well-documented APRA interventions at the end of 2014 and then again in early 2017.
“In addition, state and federal governments have acted to deter foreign investors by levying additional taxes and charges on their investments in the domestic market.
“More recently the Banking Royal Commission has seen lenders further tighten their practices beyond APRA’s initial requirements and yesterday two of the other major banks joined Westpac in raising their variable mortgage rates.
“Add to this, a situation of falling dwelling prices in the key Sydney and Melbourne markets as well as the prospect of increased taxes on investment housing through negative gearing restrictions and increased capital gains tax, and the list of deterrents to investors in the housing market is comprehensive.
“Overall, most of these factors are having the effect of limiting credit availability.
“The concern now is APRA’s interventions appear to have run beyond their usefulness,” said Ms. Hopkins.
The ABS has released their data to July 2018 for Housing Finance. Investors continue to fee the market, and even first time buyers are getting twitchy, while refinancing transactions props up the numbers a little. All as expected, and this underscore more falls in lending flow, and home prices ahead. The rate of decline is increasing. Loan stock grew 0.26% in the month, but that was in the owner occupied segment. Investor loan stock fell.
The trend estimate for the total value of dwelling finance commitments excluding alterations and additions fell 0.6%. Owner occupied housing commitments was flat, while investment housing commitments fell 1.7%.
As a result the proportion of loan flows for investment property purposes continues to drift lower to 32.7%, the lowest in recent years, while there was no change in owner occupied lending and refinance rose just a little to 20%.
In trend terms, the number of commitments for the purchase of new dwellings fell 1.8%, the number of commitments for the purchase of established dwellings fell 0.2%, while the number of commitments for the construction of dwellings rose 0.2%. In fact that was the only positive indicator!
In trend terms, overall, the number of commitments for owner occupied housing finance fell 0.2% in July 2018.
In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 18.0% in July 2018 from 18.1% in June 2018.
The number of FTB loans for owner occupied borrowers rose by around 50. There was a small rise in the number of fixed loans, and the average FTB loan fell by $4,000 perhaps indicating tighter borrowing terms.
The number of FTB investors continues to fall away in line with the broader trends in the investor sector.
All this points to a continued tightening of lending standards and a likley continued decline in loan volumes – which is also a leading indicator of more home price falls ahead.
