Category: Building & Construction

Poles Apart – The Property Imperative Weekly 01 Sept 2018

Welcome to the Property Imperative Weekly to 1st September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.    Locally the bad news keeps coming, while US markets remain on the boil.

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.

Listen to the podcast, read the transcript, or watch the video show.

NineNews published an article this week, claiming that Sydney and Melbourne dwelling values “may soon rise again” because of a decline in dwelling construction, citing a report saying that the rate of construction is expected to slow down, with the number of new homes built set to fall by up to 50,000 each year.  So they said, that would mean 20,000 fewer homes built across the country each year than the 195,000 needed to meet future demand.

Indeed, the ABS reported this week that building approvals in July were 5.6 per cent lower than in the same month last year.  Total seasonally adjusted dwelling approvals in July fell in New South Wales (-5.2 per cent), Victoria (-4.6 per cent), Queensland (-6.0 per cent), South Australia (-26.5 per cent) and Western Australia (-14.7 per cent). Seasonally adjusted approvals increased in Tasmania by 13.6 per cent. In trend terms, total dwelling approvals in July increased by 4.5 per cent in the Northern Territory and in the Australian Capital Territory (12.2 per cent).

The data shows its high rise apartments which are slowing the fastest (in response to slowing demand from investors) but it is worth noting that the volume of approvals for new detached houses have been tracking around their strongest levels in 15 years. The HIA said that weaker conditions in a number of states have typically been overshadowed by strong activity in Victoria. With Victorian home approvals now showing signs of weakness they expect the national trend – of declining building approvals – will continue throughout 2018.

The HIA also reported on new home sales for July, saying that consistent with the trend for much of 2018, July saw sales fall by 3.1 per cent compared to the previous month. Sales in 2018 thus far are 6.1 per cent lower than in the corresponding time in 2017. The noticeable new trend is that new home sales in Victoria are weakening. Victoria has experienced exceptionally strong conditions, which have been sustained over a number of years, obscuring weaker conditions in a number of other states. With Victorian new home sales now showing signs of weakness we expect the national trend – of declining sales – will continue throughout 2018.

The Sydney market has also been cooling throughout the year particularly in the new growth areas. The high volume of new apartments in metropolitan cities are competing for first home buyers and resulting in a slowdown in new detached home sales. Other regions in New South Wales, such as the Hunter, around the ACT and South and North Coasts, are continuing to see strong growth. They say the market for new home sales across the country is cooling for a number of reasons including a slowdown in inward migration since July 2017, constraints on investor finance imposed by state and federal governments and falling house prices. They expect that it will continue to slow over the next two years due to the adverse factors now starting to take effect the market.

Specifically, they say that finance has become increasingly difficult to access for home purchasers. Restrictions on lending to investors and rising borrowing costs have seen credit growth squeezed. Falling house prices in metropolitan areas have also contributed to banks tightening their lending conditions which have further constrained the availability of finance. An increase in interest rates charged by banks, which had been anticipated, will accelerate the slowdown in sales and ultimately new home building activity.

The latest data from the RBA and APRA confirm the fall in credit, with the monthly RBA credit aggregates for July showing total credit for housing up 0.2% in the month, to $1.77 trillion, with owner occupied credit up 0.5% to $1.18 trillion and investment lending down 0.1% to $593 billion. Investment housing credit fell to 33.4% of the portfolio, and business credit was 32.5%. APRA’s data showed that investor loan balances at Westpac, CBA and ANZ all falling, while NAB grew just a tad. Macquarie, HSBC. Bendigo Bank and Bank of Queensland grew their books, highlighting a shift towards some of the smaller lenders. Suncorp balances fell a little too. You can watch our separate video “Rates Up, Lending Down”, for more on this.

And of course we saw more out of cycle rates hikes from Westpac, who lifted variable rates for owner occupies and investors holding loans with them by 14 basis points – see out video “Westpac Blinks” for more on this – where we discuss the margin compression the experienced, thanks to rising international funding rates (see the BBSW) and the switch from interest only to principal and interest loans.  Then on Friday, Suncorp and Adelaide Bank, both of whom had already lifted a couple of months back, lifted again.  As I said yesterday, what is happening here is that funding costs are indeed rising. But the real story is that they are also running deep discounted rates to attract new borrowers, (especially low risk, low LVR loans) and are funding these by repricing the back book. This is partly a story of mortgage prisoners, and partly a desperate quest for any mortgage book growth they are capture. Without it, bank profits are cactus.  Once again customer loyalty is being penalised, not rewarded.  Those who can shop around may save, but those who cannot (thanks to tighter lending standards, or time, or both) will be forced to pay more

Damien Boey at Credit Suisse, writing before Suncorp And Adelaide Bank moved again said Westpac was the latest of the banks to hike variable rates across new and existing customers, following similar moves from BOQ, BEN, MQG and SUN over the past few months. Not only are out of cycle rate hikes broadening out across the system – we think that they will continue to broaden out across the majors, and become a recurring theme. This is because:

  1. Money market rates are a significant driver of the marginal cost of funds. Arguably, the banks that have hiked out of cycle to date have been more exposed to money markets than the banks that have not. Therefore, money market stress has had a bigger impact of their profitability, putting more pressure on them to hike rates. However, if there are question marks about why certain systemically important banks are facing liquidity or credit problems, then funding costs must inevitably rise for everyone, even if we are only talking about small, but fat tail risks. Also, RBA research suggests that as rates approach the zero bound, the relative cost of no/low fixed rate deposits increases to the point that perversely, margin pressures can emerge.
  2. Interbank spreads should be negligible unless … If a central bank targets a cash rate like the RBA does, it must be willing to provide any and all reserves that the banking system needs. In other words, it must be the lender of last resort. And if it is possible to obtain reserves from the RBA in almost any situation, there should be no need to borrow them from other banks. In turn, the spread of bank bill swap rates (BBSW) to overnight indexed swap rates (OIS, the risk free rate), should be negligible. Unless of course, there is counterparty credit risk over and above liquidity risk. Interestingly, the RBA has gone out of its way recently to remind the market that it is indeed the lender of last resort. But the BBSW-OIS spread remains elevated at European crisis highs, around 45bps.
  3. Wide interbank spreads are hard to explain using conventional factors. For as long as there is a pricing premium mystery, there is no visible end to the cycle of out of cycle rate hikes. Interestingly, in its August Statement on Monetary Policy the RBA provided some alternative explanations for wide interbank spreads, after witnessing the USD liquidity narrative break down in recent months. But even Bank officials do not find these explanations convincing. Therefore, the mystery remains unresolved.
  4. The marginal funding cost drives the change in the average funding cost. Therefore, we do not need to forecast further increases in the BBSW-OIS spread to have conviction that banks will continue hiking rates out of cycle. We only need to know that the BBSW-OIS spread will persist at wide levels. Again, for as long as there is uncertainty about why the spread is so wide to begin with, it is hard to argue with conviction that spreads ought to narrow and normalize.

Even after some banks have hiked rates out of cycle, we still think that in aggregate there are more than 50bps of variable rate mortgage hikes in the pipeline based on already known developments in the money market. But the RBA only has 1.5% worth of rate cut ammunition left in its bag of tricks.

This means that the RBA has lost some autonomy over the monetary transmission mechanism, because effective borrowing rates can rise independently of the cash rate. In particular, Australian-US yield differentials are likely to further invert, undermining the carry trade appeal of the AUD/USD. The Fed still seems quite determined to hike rates. But the RBA is unlikely to be matching the Fed’s hawkishness given the slowdown in train, and given what the banks are doing to rates and credit supply.

So we are in for a period of more out of cycle rate rises, as well as tighter lending standards. No surprise, then that refinance rejections are rocketing, as we reported this week, and mortgage prisoners are getting locked in.  The ABC story even got picked up by ZeroHedge in the US.

So back to that NineNews report, they missed completely the real reason why home prices are falling, it’s all about credit availability.  Lending standards are tighter now – borrowing power is reduced, and so new loans are only available on tighter terms. If you want to understand the link between credit and home prices, which is still not widely understood, I recommend you watch my recent conversation with Steve Keen, who explains the mechanisms involved, and the policy failures behind them. See “Are Icebergs Fluffy? … A Conversation with Steve Keen”. This show has already become one of the most popular in the site, and it is really worth a watch.

The upshot though is home prices are likely to continue to fall. CoreLogic’s dwelling price index showed another fall in August, recording a 0.38% decrease in values at the 5-city level. This is the 11th consecutive monthly decline in home values, down a cumulative 3.4% over that period at the 5-city level: Quarterly values also fell another 1.3% In the year to August, with home values down by 3.09% at the 5-city level, driven by Sydney (-5.64%). Significantly, Perth’s housing bust continues to roll on, with dwelling values now down 13% since peaking in June 2014 after falling another 0.6% in August: the cumulative loss in values at 13% is greater than the 11.5% peak-to-trough falls experienced between 2009-09, and the duration of the downturn has hit 50 months – more than twice as long as prior downturns. Plus, rents there have similarly fallen, with median asking rents down 29% for both houses and units since June 2013.

My theory is, where Perth has gone, other centres are likely to follow as the great property reset rolls on. Melbourne and Victoria is deteriorating significantly, and remember there net rental yields are some of the lowest across the country. No, prices are not likely to recover anytime soon.

And if you want further evidence, auction clearance rates remain in the doldrums.  It is interesting to see now the main stream media is beginning to talk about this, and I have been busy this week with interviews on Radio Melbourne, 2GB and elsewhere. Remember this is only the end of the beginning. I continue to believe 2019 will be a really bad year, what with more rate hikes, interest only loan switches, and decaying sentiment. As one industry insider told me this week, “some of my property investor clients have decided to try and sell before the falls bite”. It may be too late.

And to add to the mix, ABC’s Michael Janda wrote an excellent piece this week on the advantage some large banks have with regard to how APRA assesses their capital base.  The big four banks between them hold around 80 per cent of all Australian home loans. There are many factors that have led to this extreme market dominance: economies of scale, better credit ratings and an implicit Federal Government guarantee — all of which are linked. But the major banks — plus Macquarie and, recently, ING — also enjoy a regulatory benefit that is little known outside the financial sector, but provides a substantial competitive advantage. “The average capital risk weights of the standard banks is around 39 per cent, the major banks average around 25 per cent, and the actual cost [difference] of that equates to around 15 basis points in margins, so it’s not insignificant at all,” the chief executive of second-tier lender ME Bank, Jamie McPhee, told The Business. Those 15 basis points, or 0.15 percentage points, either have to be added onto the interest rate of mortgages that ME Bank and other smaller lenders offer or they take a hit to their profit margins.

For regional banks on the “standardised” system, the safest high-deposit, fully documented housing loans are considered just 35 per cent at risk, meaning they only have to hold $35,000 in capital on $1 million home loan. However, the major banks, plus Macquarie and ING, are allowed to set their own risk weights, using internal financial modelling under the internal ratings-based (IRB) approach. Until the Financial System Inquiry (FSI) there was no floor on how low these could be — a couple of the major banks were averaging less than 15 per cent on mortgages, meaning they held less than $15,000 in capital to protect against losses on $1 million home loan. Smaller banks have ‘disadvantage baked in’. However, on recommendations from that inquiry, the bank regulator APRA introduced a floor of 25 per cent on the average mortgage risk weight for these banks. That still leaves a significant difference between the amount of capital the big banks hold and what the smaller banks have to put aside.

APRA continues to argue that these more sophisticated banks deserve benefit from their investment in more advanced management systems, and yet APRAs recent reviews suggest significant issues. Here is a recent discussion between Senator Whish-Wilson and APRA Chair Wayne Byers discussing in a Senate committee hearing in May the outcomes from their targeted reviews of major bank lending practices in 2017, but only released publicly through the royal commission process earlier this year.

This casts doubt on whether the big four actually live up to the theory of having better risk assessment and management than the smaller banks. Is APRA still captured we ask, and should the playing field be levelled. We continue to think so.

So now to the markets. Locally, Bendigo and Adelaide Bank fell 0.26% on Friday to 11.59, Suncorp rose 0.06% to 15.49, Westpac fell 0.38% to 28.54, well down from a year ago, despite the mortgage rate hike, and CBA fell 1.26% to 71.24. More are getting negative on the banks, given recent events.  The ASX 200 fell 0.51% to 6,319, just off its highs, as the financial sector fell away.  The Aussie continues to fall against the US dollar, down a significant 0.96% to 71.93, and we continue to expect more weakness ahead.

Sentiment is rather different in the US markets, with the 10-year rate still elevated, and the gap to the 3 month Libor very narrow, as we discussed before a potential harbinger of a recession later. But the US stock markets remain in positive territory.  The Dow Jones Industrial Average fell 0.09% to 25,964, still below its peak in February. The S&P 500 passed a new record in the week, and ended on Friday at 2,901.  The VIX was down again, falling 4.95% to 12.87, indicating the market is risk off at the moment.  The US Dollar Index Futures was up 0.43% to 95.05.

That said, the burst of optimism about trade in the market during the week, didn’t last until the closing bell on Friday. The U.S. announced a bilateral deal with Mexico on Monday. But tension built throughout the week as the U.S. announced there was a Friday deadline to bring Canada into a newly-revamped NAFTA. The U.S. and Canada missed that deadline, but announced that talks would resume next Wednesday, leaving the market facing more wait-and-see trading days. There was also drama during Friday’s discussions after the Toronto Star reported that Trump told Bloomberg off the record he had no plans to give any concessions at all to Canada. The president appeared to later confirm that stance in a tweet, saying Canada now knows where he stands.

Trade worries spread beyond North America, though. Trump told Bloomberg he was prepared to withdraw from the WTO if necessary. And he plans to move ahead with tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes next week. China’s foreign ministry said Friday that the U.S. putting pressure on Beijing would not work.

The Yuan rose a little against the US Dollar, but remains way down on a year ago.

Meantime retail earnings dominated the calendar this week, leading to strong stock movements in the low-volume environment. The S&P Retail index ended up slightly for the week.

Among big movers, Abercrombie & Fitch stock plummeted on second-quarter revenue and same-store sales missed estimates. Best Buy stock tumbled despite better-than-expected second quarter revenue and earnings as online sales slowed and the company warned that it is “expecting a non-GAAP operating income rate decline in the third quarter.” And Tiffany & Co spiked on second-quarter results and strong outlook, but then tumbled in later sessions.

In tech, Tesla shares started the week with a quick drop and finished it lower as it scrapped plans to go private. CEO Elon Musk wrote in a blog late last week that he would not move forward with a plan to take the company private, noting that after speaking with retail and institutional shareholders that “the sentiment, in a nutshell, was ‘please don’t do this.’”

Musk had surprised the market out of the blue, tweeting he was thinking of taking the company private at $420 per share and had funding secured. The SEC was interested in whether the tweet was designed in a way to punish short sellers, according to reports.

The NASDAQ rose 0.26% to 8,109.5 in record territory driven by the booming sector.

Data out this week illustrated two contrasting segments of the U.S. economy, one stronger and one weaker. Economic indicators on the consumer side remained very strong. The Conference Board’s index of consumer confidence increased to 133.4 this month, compared to a reading of 126.7 forecast by economists. That was its highest level since October 2000. The University of Michigan’s August consumer confidence index was revised up to 96.2 from its preliminary measure of 95.3. And consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month, matching June’s reading and analyst forecasts.

But the National Association of Realtors said its pending home sales index, which measures signed contracts for homes where transactions have not yet closed, fell 0.7% to a reading of 106.2 after rising by a revised 1.0% in the previous month. Economists had forecast pending home sales rising 0.3% last month. So more questions on the housing sector ahead.

Oil closed out the month higher as traders balanced expectations of crude supply losses with the potential of trade wars denting global demand. China, the world’s largest commodity importer, has seen economic growth dwindle since the trade war with the U.S. kicked off, and a further escalation could dent growth, forcing Beijing to rein in crude imports. Oil prices ended the month nearly 2% higher on bets on renewed global supply shortage as U.S. sanctions on Iran’s crude exports are expected to reduce crude from market, underpinning higher crude prices. Both WTI and Brent crude are expected gain on a potential slump in Iranian exports, although gains in WTI prices will be limited as the refinery maintenance season is set to get underway. Oil prices were helped earlier in the week by an EIA report showing crude oil stockpiles fell much more than expected.

Gold moved a little higher this week, ending up 0.16% on Friday to 1,206, Bitcoin lifted 1.23% to 7,029

So, we can see a significant divergence between the local market here, dragged down by negative sentiment on banks and housing (and the increasing realisation of more issues ahead) and the US where stocks are at the highs despite the building risks from higher corporate debt and the yield curve inversion.

The two markets are poles apart.

How Far Will U.S. Housing Momentum Ease?

From Moody’s

The U.S. housing market has garnered attention recently but for the wrong  reason amid numerous signs of some weakening. Parts of the housing market have likely peaked while others haven’t, including new-home sales and construction, which pack the biggest GDP and employment punch.

Source: Mortgage News Daily.

Before assessing where housing is headed, it’s important to identify the possible culprits in the recent weakness in sales and construction. Common theories being tossed around blame the tax legislation that reduced the incentive to be a homeowner by increasing the standard deduction, lowering the deduction for a new mortgage, and capping the deductible amount of state and local taxes (which include property taxes) at $10,000 per year. More time is needed to assess the law’s impact on housing, since evidence is lacking. Sales of higher-priced homes, which would be most vulnerable, have been climbing. The tax legislation’s drag on housing will likely play out by reducing home sales and pushing some households to rent instead of buy, potentially putting upward pressure on rents.

We believe that affordability issues, mainly mortgage rates, are a more credible reason for housing’s recent slump. Affordability is a function of house prices, mortgage rates and income. Earlier this year, we noted that there was evidence that the housing market’s sensitivity to mortgage rates is increasing. The recent weakness in housing is consistent with this, since past increases in mortgage rates have been sufficient enough to be a drag.

To assess the impact, we ran through our U.S. macro model a scenario of a permanent increase in mortgage rates of 1 percentage point in the first quarter. That would be roughly the average of the gain during the taper tantrum and following the presidential election. The results show that the hit to residential investment is noticeable over the course of the subsequent year; real residential investment would be 7% lower than the baseline —enough to shave 0.1 to 0.2 percentage point off GDP growth for the year.

So far, mortgage rates have risen by 60 basis points this year, so the hit is smaller than our exercise, but it supports our view that higher interest rates are hurting housing.

Though there are headwinds, new-home sales and construction haven’t peaked, as fundamentals remain supportive. To estimate the underlying demand for new housing units, we broke it up into its main components, the trend in household formations, demand for second homes, and scrappage or obsolescence. The biggest source of demand is household formations, which have been running around 1.3 million per annum recently and this should continue over the next couple of years.

Demand for second homes tends to grow with the total number of housing units. We estimate that demand is running around 200,000 per annum. Housing units are scrapped from the housing stock each year because of demolition, disaster and disrepair. We estimate scrappage at 200,000 per year.

Even though underlying demand for new housing units is 1.7 million,  housing starts should exceed that. Each year some housing units are started but never completed; assuming this is 1% of total housing starts—likely conservative—that would be an additional 17,000 starts. Underlying  demand is about 25% below housing starts in the first half of this year. To close this gap over the next two years, would require homebuilding to rise 15% per annum. However, given the constraints facing builders this is unlikely. Alternatively, closing the gap in four years would require  approximately an 8% gain per annum. Therefore, residential investment won’t be booming but it will be respectable.

The Cats Among The Pigeons – The Property Imperative Weekly – 04 August 2018

Welcome to the Property Imperative weekly to 4th August 2018, our digest of the latest finance and property news with a distinctively Australian flavour.

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.

A big week of news to cover, so let’s get straight in at the deep end with the Productivity Commission report on Competition in Financial Services which was released on Friday.  The final report, which was released earlier than expected really highlights the never-mind-the customer attitude of the industry and its regulators. They call out regulatory failure and conflicts of interest across the sector, referring to opaque pricing, unsuitable products, no reward for customer loyalty as well as product complexity and faux competition.  Major players have too much market power, and have fingers in multiple segments of the market. Customers lose out as a result. They made a wide range of recommendations, including the introduction of a best interest obligation for all providers in the home loans market, mortgage Brokers trail commissions should be phased out,   ASIC to ensure that the interests of borrowers are adequately safeguarded in the LMI market, APRA is singled out for myopic regulation. ACCC should focus on encouraging competition across the industry and safeguarding the interests of consumers in the regulatory system, the new payments system needs a proper access regime and the Payments System Board of the RBA should ban all card interchange fees. We discussed the implications in our recent video, and the link to that is above. In summary a number of critical reforms which if implemented could certainly change the landscape for financial customers in Australia for the better, whilst clipping the wings of the major incumbents.  We discussed this on ABC Radio. Good Job, Productivity Commission. Let’s now see if the Government is up to the challenge.

There was a bit of good news on the retail front, with turnover for June, the month of the end of year sales, where deep discounting was the hallmark.  The ABS says retail turnover rose 0.4 per cent seasonally adjusted, which follows a 0.4 per cent rise in May. The trend estimate, which I prefer, reported a 0.3 per cent in June following a rise of 0.4 per cent in May 2018. Compared to June 2017, the trend estimate rose 3.1 per cent. In trend terms, clothing and footwear rose 0.7%, department stores rose 0.5% and household goods 0.3%. Across the states, New South Wales and Victoria rose 0.5%, ACT 0.8% and Tasmania 0.9%. Queensland was flat and WA rose just 0.1%, so again the variations are significant. Online retail turnover contributed 5.7 per cent of total retail turnover in original terms in June 2018, a rise from 5.6 per cent in May 2018. In June 2017 online retail turnover contributed 4.1 per cent to total retail.

This means households are spending more than their income growth, by continuing to tap into their savings. So it will be interesting to see if the retail momentum continues, or sags in July after the end of season sales.

Continuing the “cat among the pigeons” theme, ANZ parted company from its competitors by cutting its variable home loan rate for new customers. While banks including the CBA have cut fixed loan rates and offered “honeymoon deals” in recent weeks, the ANZ is the first to move on variable rates. The ANZ told mortgage brokers it was bringing down its basic principal and interest home rate for owner-occupiers by 0.34 percentage points to 3.65 per cent. The ANZ offer only applies to new customers looking for a loan valued at 80 per cent or less than the value of their property. Loan-to-value ratios above 80 per cent remain unchanged at 3.99 per cent. As we discussed in our separate post “ANZ Ups The Ante In The Mortgage Wars” – the industry is homing in on lower risk customers in an attempt to maintain loan book growth. We also discussed this significant event on 2GB’s Money Show with Ross Greenwood. As Ross said, picture the lions around a shrinking watering hole trying to protect their territory!

Also this week ASIC released their review of exchange traded products (ETP’s) in Australia.     These are open-ended investment products that are traded on a securities exchange market. ETPs trade and settle like shares and give investors exposure to underlying assets without owning those assets directly. They differ from listed funds because they are open-ended. This means that the number of units on issue may increase or decrease daily depending on investor demand. ETPs, especially exchange traded funds (ETFs), are increasingly popular with retail investors and self-managed superannuation funds (SMSFs). This is because of their accessibility, perceived low cost, transparency, intraday liquidity, diversification benefits and ability to provide exposure to new asset classes. There has been steady growth in both funds under management and the number of ETP products available on the market in Australia. ASIC called out a number of concerns, including the question of spreads and liquidity, the concentration of market makers, and the lack of good disclosure. More of the same-ol’ same -ol’. Potential investors should be wary.

Data from the Household, Income and Labour Dynamics in Australia   HILDA survey came out this week and showed again the rise in the proportion of the household population who is renting, with the number of Australian renters eventually becoming homeowners plummeting over the last 15 years – particularly for those between the ages of 18 and 24. The survey found the overall proportion of people living in rental accommodation has increased by 23 per cent since 2001 to 31.3 per cent in 2016. They called out “The growing evidence of ‘intergenerational inequality’”. The data also chimes with our surveys, that more households are under financial pressure thanks to flat incomes and rising costs.  It’s worth highlighting their data only runs to 2016, so it’s already a couple of years old. We think the trends continue to grow, based on our latest Mortgage Stress data which will be out next week.

And another survey from mortgage lender State Custodians found that as many as 15% of surveyed homeowners have faced challenges when trying to refinance, due to falling property prices. The figures published by State Custodians also revealed that young people were the most affected, with around 34% of those under the age of 34 saying they’ve been unsuccessful in re-financing because of declining property values. This highlights the rise of “mortgage prisoner’s” who cannot refinance to get the better deals because of little or no equity, or other financial pressures.

And talking of households in financial pressure, the number of Australians falling behind on their mortgages will rise in the next two years as interest-only loans end and repayments get more expensive, ratings agency Moody’s warned this week. Delinquencies on loans that have converted from interest-only to principal and interest are running at double the rate of those still on interest-only, they said. About 40 per cent of loans by Australian banks in 2014 and 2015 were interest-only for five years, meaning a large portion are set to come under pressure with higher repayments in 2019 and 2020, said Moody’s. This backs up our findings, which estimates that more than 970,000 Australian households are now believed to be suffering housing stress. We discussed this in our video Wither Interest Only Loans.

Genworth, the Lender’s Mortgage Insurer related their 1H18 results this week and their profit remains under pressure, as claim rates rise. The Delinquency Rate increased from 0.51% in 1H17 to 0.54% in 1H18, and they pointed and increase in the number of delinquencies in Western Australia, New South Wales and to a lesser extent South Australia. This was partially offset by a decrease in delinquencies in Victoria and Queensland. New delinquencies were down in the half (1H18: 5,565 versus 1H17: 5,997). Delinquencies in mining areas are showing signs of improving. In non-mining regions there are indications of a softening in cure rates.

Turning now to property, the home price slides continue, as we discussed in our post “Home Price Falls Are Just Starting (…more to come!). We discussed the importance of looking at the local, micro property markets as the averages mean nothing. For example, over the past year prices are down more than 20% in some suburbs, and not necessarily where you might expect.

And talking of videos, do check out the latest in our series of Adams/North discussions, “The Great Airbrush Scandal – Policy Failure of the Year!”, where we dissect APRA’s Bank Stress Tests and conclude they were not fit for purpose.  This one has already generated a large number of comments and observations. John suggests our regulators are asleep at the wheel! You can also read his original article.

Corelogic says Auction volumes are lower across each individual capital city this week with 1,224 homes scheduled to go under the hammer, down from 1,536 last week. A further sign of weakness in the property sector. Melbourne is particular is slowing fast.

Last week the homes taken to auction across the combined capital cities, returning a final auction clearance rate of 55.6 per cent, down from 57.0 per cent across 1,257 auctions the previous week. Over the same week last year, 1,987 homes went to auction and a clearance rate of 68.7 per cent was recorded. Melbourne’s final clearance rate was recorded at 58.5 per cent across 802 auctions last week, compared to 59.9 per cent across 613 auctions over the previous week. This time last year 956 homes were taken to auction across the city and a much stronger clearance rate was recorded (75.6 per cent). Sydney’s final auction clearance rate came in at 52.4 per cent across 469 auctions last week, down from 55.2 per cent across 407 auctions over the previous week. Over the same week last year, 714 homes went to auction returning a clearance rate of 65.4 per cent.  Across the smaller auction markets, clearance rates improved across Canberra and Perth, while Brisbane and Adelaide saw clearance rates fall week-on-week. There were no auctions recorded in Tasmania last week. Of the non-capital city auction markets, the Hunter region was the best performing in terms of clearance rate, with 10 of the 14 reported auctions selling (71.4 per cent), followed by Geelong with a 65.0 per cent clearance rate across 20 results. The busiest region for auctions was the Gold Coast where 39 homes were taken to auction, returning a clearance rate of just 32.3 per cent.

Building approvals in June were slightly stronger in trend terms, rising by just 0.1% as reported by the ABS. The Mainstream media fixated on the stronger, but less reliable seasonally adjusted figures. Among the states and territories, dwelling approvals rose in June in the Australian Capital Territory (5.8 per cent), South Australia (5.6 per cent), Northern Territory (4.8 per cent), Tasmania (2.2 per cent), Western Australia (1.7 per cent) and New South Wales (0.2 per cent) in trend terms. Dwelling approvals fell in trend terms in Queensland (1.6 per cent) and Victoria (1.2 per cent). Overall momentum is slowing in our view, as demand for high-rise investment apartments ease.

And overall lending for housing is still tracking higher despite investor lending sliding, according to the latest RBA and APRA figures for June.   Owner occupied housing lending rose 0.6% or $6.6 billion to $1.18 trillion, while investment lending fell $800 million, down 0.1% in seasonally adjusted terms, or rose $1 billion, up 0.2% in original terms. (I have no idea what adjustments the RBA makes, it’s not disclosed!).  Investment lending fell to 33.5% of the portfolio. Total lending for housing is a new record $1.77 trillion, and remember this is at a time when housing debt to income is knocking on the 200 door, and we are one of the most in debt nations on the planet.  Lest we forget, loans need to be repaid, eventually! We discussed both the credit data and the building approvals in our video “Another Housing Record Set”. We have not fundamentally addressed the credit elephant in the room. Despite all the noise. Perhaps the regulators would like to tell us, how much debt is too much? We clearly have not hit their pain threshold yet, despite the rising financial stress in many households.

So to the markets.  Locally, the ASX100 finished down a little on Friday to 5,126, still significantly higher than earlier in the year.  The banks were down, for example, CBA fell 1.15% on Friday, to end the week at 72.83, in reaction to the Productivity Commission report. Westpac fell 0.96% to end at 28.91.  AMP also fell, down 0.85% on Friday, to 3.50, despite a broker’s report suggesting there may be long term value in the stock, after a restructure. The market was perhaps not convinced.

The Aussie was below 74 cents against the US dollar, despite a small rise on Friday, to 73.97, but higher, up 0.29% to 5.05 against the Chinese Yuan. It appears China is flexing its currency muscles in response to the US trade tariffs.

The Bank of England lifted their cash benchmark rate 0.25% to 0.75% as inflation is above the lower bounds target, despite the uncertainty surrounding Brexit (be it hard or soft).  The Aussie was up 0.62% on Friday against to UK Pound to 0.56 cents in reaction to the news.

Across the pond in the US market, Apple took market attention for a host of reasons this week, including reaching a historic Wall Street milestone by becoming the first U.S. company to hit $1 trillion in market capitalization. Apple Inc stock hit the target number of $207.05 (based on the numbers of shares outstanding reported in its 10Q) just before noon on Thursday. Shares closed solidly above that Friday at 207.99. Shares moved into trillion-dollar territory following a strong earnings report earlier this week. On Tuesday, Apple’s fiscal third-quarter results beat on the top and bottom lines, driven by sales of the pricier iPhone X and subscription revenue to services such as Apple Music and its App Store. Apple also lifted the cloud that was hovering over the tech sector following weak reports from Facebook and Twitter. The NASDAQ ended the week at 7,812, a strong finish, but not a record, despite the Apple price. The S&P Information Technology sector index finished at 1,277.05 Friday, compared with 1,262.27 a week ago.

The July US employment report gave the market more evidence that the economy is humming along at a pace that won’t alarm the Federal Reserve. Although the rise in nonfarm payrolls was less than expected for July, jobs gains for the two previous months were revised up by 59,000, making the overall rise about in line with forecasts. And average hourly earnings showed wage inflation at the same year-on-year pace as before. That leaves the Fed set up to continue its plan of gradually rising rates. “The economy is growing really strongly and headline inflation set to hit 3% next week, so the case for September and December Fed rate hikes remains strong,” ING Chief International Economist James Knightley said.

Fed fund futures are still pricing in the next rate hike to be at the next September 25-26 meeting. Odds for an additional increase in December remained little changed after the release at around 65%.

The Fed had its say this week as well. The Federal Open Market Committee kept rates unchanged as expected, and also kept the language in its statement substantially the same. The FOMC said it continues to expect that further gradual increases in the target range for the federal funds rate will be consistent with “sustained expansion of economic activity, strong labor market conditions and inflation near the Committee’s symmetric 2% objective over the medium term.” That reaffirmed investor expectations that the central bank remained on track to hike rates twice more this year. “The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation,” the Fed said in its statement.

A report on Tuesday showed that the Fed’s preferred measure of inflation, the core personal consumption expenditures price index, which excludes food and energy prices, was up 0.1% and 1.9% on a year-over-year basis. The Fed targets inflation of 2%.

Oil settled lower for the day and week Friday, as concerns about a trade war stifling demand hurt sentiment. On the New York Mercantile Exchange crude futures for September delivery fell 47 cents to settle at $68.65 a barrel. Oilfield services firm Baker Hughes reported on Friday that the number of U.S. oil drilling rigs in operation fell by 2 to 861, pointing to tightening U.S. output. And the weekly oil inventories numbers showed an unexpected rise in U.S. stockpiles, further weighing on prices. Concerns also remained about escalating output from the OPEC and Russia. On June 22-23, OPEC, Russia and other non-members agreed to return to 100% compliance with oil output cuts that began in January 2017, after months of underproduction elsewhere had pushed adherence above 160%. Even though output continued to decline in Iran, Libya and Venezuela, the survey suggested that compliance had only fallen to 111% in July, suggesting more room for increasing production from the likes of Saudi Arabia or OPEC’s non-member ally Russia.

Trade worries whipsawed this week, keeping the market on edge, amid conflicting reports of U.S. action and proposed retaliation from China. Tensions on Wall Street eased significantly on Tuesday on a report from Bloomberg that both sides were trying to restart trade talks. But that was quickly countered by another report that the U.S. was considering raising tariffs on $200 billion in Chinese goods to 25% from 10%, which the White House later confirmed was under consideration. On Friday, China shot back with a potential plan for tariffs on $60 billion of U.S. goods. “The U.S. side has repeatedly escalated the situation against the interests of both enterprises and consumers,” China said, according to Reuters. “China has to take necessary countermeasures to defend its dignity and the interests of its people, free trade and the multilateral system.” White House Economic adviser Larry Kudlow warned China not to underestimate President Donald Trump.

The Dow Jones ended at 25,462, up 0.54%, high, but not at a peak, while, the US Dollar Chinese Yuan sat at 6.83, right at the top of its range, and China exerts pressure on the rate.

Bond rates were down a little, with the 10 Year benchmark sitting at 2.95, well down from its 3.12 in May.  At the short end, the 3-month bond rate is 2.00, still at the top of its range.   Libor is still sitting at 2.34, at the top of its range, signalling higher funding costs in the system.

Gold continues lower, at 1,222, as many risk investors are favouring the US Dollar at the moment.  Bitcoin ended the week at 7,443 up 0.65% on Friday, but below its recent highs.

So back once more to cats and pigeons. Next week we will be hearing the latest from the Royal Commission in sessions covering wealth management. NAB and MLC are up first, but I will be especially interested in the evidence from the Industry superfunds. We suspect more revelations as the Commission works its magic. And the results from CBA will be a highlight, it will be interesting to see what they report in terms of net interest margin. I am expecting more loan repricing, both up and down.

It’s never a dull moment in the finance and property sector, so expect more turbulence ahead. The bumpy ride continues….

Changing demographics to alter dwelling demand

From The Adviser

As Generation Y begins to enter the housing market, there could be a change in the types of dwellings sought after, a new report has suggested.

According to industry analyst and economic forecasters BIS Oxford Economics, changes to the age profile of the population over the next decade will likely result in a shift in the type of demand for dwellings, as Generation Y – those currently aged around 20 to 34 years old – begin to have their own families and move onto the property ladder.

According to BIS’s Emerging Trends in Residential Market Demand report, which examines trends revealed by a detailed analysis of Census data from the past 25 years, there will be “solid demand for units and apartments over the next decade” driven by an overall increase in “the propensity to be living in higher density dwellings across all age groups”.

The report outlines that while there will be continued demand for units and apartments over the next decade, the growth in demand will eventually slow.

Senior manager for residential property at BIS Oxford Economics, Angie Zigomanis, has suggested that, over the past 15 years, there has been rapid population growth among 20-to 34-year olds, as well as strong net overseas migration inflows, which have helped support the boom in apartment construction in the past decade by supplying a steady stream of new tenants to the market.

Mr Zigomanis also noted that there is evidence that people are staying in apartments and townhouses longer.

The analyst highlighted that, in Sydney, more than half (53 per cent) of households aged 35-to 39-years old, and nearly half (49 per cent) of households with children at a pre-school age, now live in these smaller dwellings.

While households have typically favoured townhouses over apartments, in Sydney and Melbourne, there has been an acceleration in the take-up of apartments by both groups since the 2011 Census. The trend has also been similar, although less pronounced in Brisbane, Adelaide and Perth, the report added.

Looking to the future, BIS notes that rising demand for smaller dwellings by Generation Y over the next decade would be apparent across all capital cities, although will be most pronounced in Sydney, and to a lesser extent Melbourne, where separate houses are least affordable.

In Brisbane, Adelaide and Perth, it argued, householders would be much more likely to be in a detached house once they enter their late 30s and 40s, and strong demand for new separate houses is therefore likely to continue.

However, BIS argues that it is likely that rising house prices and decreasing housing affordability in the most desirable locations in the capital cities are causing “an increasing trade-off” for some couples and family buyers between price, size of dwelling, and location, with many seeking smaller and more affordable dwellings to remain close to their desired location.

The analysts argued that, should this trade-off activity increase as Generation Y gets older, then this provides an opportunity for developers in all capital cities to meet this demand, especially given the fact that the boom in multi-unit dwelling construction has up until now been investment-driven “with design being geared toward Generation Y renters living as singles, couples without children, and in share households,” BIS said.

“To meet the potential growing number of Generation Y families in established areas, multi-unit dwellings will need to be designed to be more appropriate to family life, offering more space, both indoor and some outdoor, or located adjacent to public outdoor spaces,” said Mr Zigomanis.

“In particular, new apartment designs will need to change to provide more appropriate product for Generation Y families.”

However, should Generation Y follow the trend of the previous generations and eschew renting for owning their own, larger dwellings as they age, then this would “support a decade-long boom in demand for new houses and land in the new housing estates on the outskirts of Australia’s major cities and affordable major regional centres,” said Mr Zigomanis.

“Pressure is also likely to be maintained on house prices in established areas, as competition remains strong for Generation Y families looking to remain in the established areas where they have already been living and renting in smaller apartments,” he said.

Building Approvals A Little Stronger In June 2018

The number of dwellings approved in Australia rose by 0.1 per cent in June 2018 in trend terms, according to data released by the Australian Bureau of Statistics (ABS) today.  We suspect the MSM will fixate on the less reliable seasonal results, which show a significant bounce in approvals.

Among the states and territories, dwelling approvals rose in June in the Australian Capital Territory (5.8 per cent), South Australia (5.6 per cent), Northern Territory (4.8 per cent), Tasmania (2.2 per cent), Western Australia (1.7 per cent) and New South Wales (0.2 per cent) in trend terms.

Dwelling approvals fell in trend terms in Queensland (1.6 per cent) and Victoria (1.2 per cent).

In trend terms, approvals for private sector houses fell 0.6 per cent in June. Private sector house approvals fell in Western Australia (1.4 per cent), Victoria (0.9 per cent) and New South Wales (0.8 per cent), but rose in South Australia (0.4 per cent). Private house approvals were flat in Queensland.

In seasonally adjusted terms, total dwellings rose by 6.4 per cent in June, driven by a 7.2 per cent increase in private dwellings excluding houses. Private houses rose 5.0 per cent in seasonally adjusted terms.

The value of total building approved fell 0.8 per cent in June, in trend terms, and has fallen for seven months. The value of residential building rose 0.3 per cent, while non-residential building fell 2.9 per cent.

“The rise was driven by private dwellings excluding houses, which increased by 1.1 per cent in June.” said Justin Lokhorst, Director of Construction Statistics at the ABS. “This was offset by a 0.6 per cent fall in private sector houses.”

Is construction sector really facing “biggest fall since GFC”?

From The Real Estate Conversation.

Australia’s building industry, which has been largely fuelled up to this point by investor apartment construction, looks like it’s heading from boom to bust, if the recent report from economic forecaster BIS Oxford Economics is anything to go by.

The Building in Australia 2018-2033 report predicts building commencements will drop sharply over the next two years, driven by weakening domestic and foreign investor demand in the face of tougher lending criteria and increased foreign buyer charges.

BIS Oxford Economic’s Director, Adrian Hart says the “building sector is switching from being a strong growth driver to a drag on the economy”.

“Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, which is set to fall 50 per cent.

Hart notes the “very mild drop in residential commencements in 2017/18 is just the beginning”.

Slowdown won’t reach the ‘apocalyptic’ levels predicted

Despite the report, some are saying the fallback predicted won’t be as bad as what is being reported.

Tim Reardon, principal economist for the Housing Industry Association (HIA), told WILLIAMS MEDIA that while building growth is expected to slow, it is nowhere near as bad as the BIS Oxford Economics report would have you believe.

“The market has been slowing for the last 12 months, it peaked in 2016, and it’s still at one of the highest levels on record,” Reardon said.

“We are forecasting that the market will continue to slow over the next couple of years, but it will remain well above long term averages.

“Given we’re coming off a massive high, with a record number of new homes being built, the slowdown is well and truly expected and is well within the industry’s ability to cope.

“Victoria reached a peak in March this year and has begun slowing. With population growth slowing, we expect building growth to follow suit but we don’t expect anything other than a normal correction in the cycle.

“The previous peak prior to this cycle was 185,000 homes built per year. We’ve had three years with 200,000 homes built per year, and it appears we will continue building more than 185,000 homes per year for the next three years.

“While that is a slowdown it is nowhere near what they are saying,” Reardon said.

The Master Builders ‘Building Industry Outlook 2018’ also predicts that while there will be a slowdown, it won’t reach the crisis levels predicted in the BIS Oxford Economics report.

“It will be a challenging year for those who have come to rely on work on high-rise unit blocks, but there will be new opportunities in other sectors, such as tourism, aged care and student accommodation. It will be a much-improved year for those who build detached houses and those who operate out in the regions,” the report says.

“It will be a much-improved year for those who build detached houses and those who operate out in the regions.

Source: Master Builders

“Residential Master Builders forecasts 38,000 dwelling commencements in 2018 which will be a further moderation on the record highs seen in the past few years, equating to a drop of 4 per cent on the anticipated total for 2017. In 2019 we estimate dwelling commencements will remain low before beginning to move back up in 2020.

“Owner occupiers will increasingly move into the market, while investors will remain cautious. This will help to hold up the total value of work which won’t drop as sharply as the number of new dwellings. Demand will continue to shift away from large unit blocks.

“Concentrated population growth focused on the south east will favour unit developments, but smaller infill developments, like townhouses and boutique unit developments. Detached housing will also see growth where there’s land available” the report says.

“It is still a positive year for the industry,” Reardon concluded.

Dwelling Approvals Fall in May

The number of dwellings approved in Australia fell by 1.5 per cent in May 2018 in trend terms, according to data released by the Australian Bureau of Statistics (ABS) today.  At is all about a fall in unit approvals, with a notable decline in Melbourne.  Expect more falls ahead, a further signs of trouble in the housing sector.

“Dwelling approvals have weakened in May, driven by a 2.6 per cent fall in private dwellings excluding houses,” said Justin Lokhorst, Director of Construction Statistics at the ABS.

Among the states and territories, dwelling approvals in May fell in Queensland (4.2 per cent), Victoria (2.7 per cent), Tasmania (2.0 per cent) and Western Australia (0.8 per cent) in trend terms.

 

Dwelling approvals rose in trend terms in South Australia (4.3 per cent), Northern Territory (2.8 per cent) and Australian Capital Territory (1.5 per cent), and were flat in New South Wales.

In trend terms, approvals for private sector houses fell 0.5 per cent in May. Private sector house approvals fell in Queensland (1.7 per cent), Western Australia (0.6 per cent), South Australia (0.4 per cent) and New South Wales (0.2 per cent). Private sector house approvals were flat in Victoria.

In seasonally adjusted terms, total dwellings fell by 3.2 per cent in May, driven by a 8.6 per cent decrease in private sector houses. Private sector dwellings excluding houses rose 4.3 per cent in seasonally adjusted terms.

The value of total building approved fell 0.7 per cent in May, in trend terms, and has fallen for seven months. The value of residential building fell 0.8 per cent, while non-residential building fell 0.4 per cent.

The HIA said:

“The market is cooling for a number of reasons including a slowdown in inward migration since July 2017, constraints on investor finance imposed by state and federal governments and falling house prices.

“A slowing in Australia’s population growth since June 2017 coincides with changes to visa requirements announced early last year. Since then Australia has experienced almost a year of slowing population growth.

“Finance has become increasingly difficult to access for home purchasers. Restrictions on lending to investors and rising borrowing costs have seen credit growth squeezed. Falling house prices in metropolitan areas have also contributed to banks tightening their lending conditions which have further constrained the availability of finance.

Denmark introduces state-backed public housing covered bonds, a credit positive

On 1 July, legislation in Denmark took effect that will trigger the inaugural issuance of Danish public housing covered bonds (almene realkreditobligationer) as a new asset class, says Moody’s.

These new covered bonds will be issued out of newly established capital centres with the sole purpose of funding mortgage loans granted to public housing companies (almen boligforening). As is the practice in the Danish covered bond market, assets serving as security for covered bonds must be segregated into independent cover pools, referred to as capital centres in mortgage banks. The Danish government guarantees in full the mortgage loans as well as the public housing covered bonds.

The law is credit positive for potential investors in public housing covered bonds because their credit risk will be lower than in existing mortgage covered bonds. Although investors in both types of covered bonds benefit from recourse to the issuing mortgage bank and a pool of good quality mortgage assets, only public housing covered bonds benefit from a state guarantee in case the issuer fails to fulfil its obligations.

Today, public housing loans benefit from a municipality’s partial guarantee of the loan, but under the new framework such loans will benefit from the federal government’s guarantee covering the full loan amount. In 2017, Danish municipalities guaranteed on average the most risky 62% of mortgage loans. Under the new model, the government will charge a guarantee commission from the mortgage banks. The mortgage banks, owing to the government’s full guarantee, will have lower capital requirements and lower over- collateralisation requirements for the covered bonds that are set in Denmark at 8% of risk-weighted assets.

Denmark’s public housing covered bonds will be issued by mortgage banks via frequently held auctions and tap sales. For the issuance of public housing covered bonds, banks shall obtain bids for purchases from Denmark’s central bank on behalf of the Danish government before the bonds are sold to others, which reduces funding execution risk for the public housing companies and the mortgage banks. According to the Danish central bank, the government will purchase DKK42.5 billion of public-sector covered bonds in 2018, corresponding to the total of new loans and refinancings of existing loans. The government will bid at a rate corresponding to the yield on government bonds.

We expect a quick migration of public housing loans to the newly established capital centres in order to benefit from the government guarantees. This will lead to an increased level of prepayments and refinancings in the existing capital centres. The public housing sector has subsidised loans totalling around DKK180 billion that are largely financed by existing capital centres that issue mortgage covered bonds.

Nykredit Realkredit A/S, Realkredit Danmark A/S (part of Danske Bank) and BRFkredit A/S (part of Jyske Bank) are active lenders in this sector, each currently lending DKK50-DKK60 billion to the public housing sector. Despite the public housing loans being refinanced into the new capital centres, the risk characteristics of the capital centres will not change materially because the share of public housing loans is often small and in active capital centres does not exceed 15% as shown in the exhibit.

Tighter Credit Cramping New Home Sales – HIA

The HIA says their New Home Sales report – a monthly survey of the largest volume home builders in the five largest states – provides an early indication of trends in the residential building industry. The May edition is out, and as expected, tighter credit means fewer sales.  The largest reduction in house sales occurred in New South Wales.

New house sales declined by 4.4 per cent in May and are now 12.8 per cent lower than the most recent cyclical high that occurred in December last year.

“The first half of 2018 has seen a renewed downward trend in new house sales,” said Tim Reardon, HIA’s Principal Economist.

“Access to finance has become the barrier to ongoing growth in home sales.

“The availability of credit has tightened over the past 12 months with banks responding to the decline in house prices and the Banking Royal Commission by limiting lending to new home buyers.

“Australia’s population growth has slowed over the past three quarters in response to tighter visa requirements that have constrained inward migration.

“And for the first time in this cycle we are seeing sales declining in Melbourne.

“The new home market in Melbourne has been exceptionally strong over a number of years and we are now seeing a very modest slow-down in activity.

“While market conditions are slowing in Melbourne, building activity will continue to be solid given the very large volume of work still in the pipeline.

“The impact of the tighter constraints on finance will ease over the year.

“In fact we are expecting detached house starts to rise slightly in 2018 following the 2.8 per cent decline that occurred in 2017.

“Beyond that temporary lift, we expect the downturn in detached house building to properly take root in 2019 – and house sales appear to be providing a very early indication of this occurring,” concluded Mr Reardon.

During May 2018, new house sales declined in all five markets covered by the HIA New Home Sales Report. The largest reduction in house sales occurred in New South Wales (-6.8 per cent) followed by Queensland (-5.0 per cent), Victoria (-4.6 per cent), Western Australia (-2.4 per cent) and South Australia (-0.2 per cent).

New Homes Sales Down In Largest States – HIA

The HIA says new house sales fell in each of Australia’s five largest states during April. Nationally, sales have fallen each month of this year and in April they fell a further 4.2 per cent. New house sales for the year to date are now 3.1 per cent lower, than they were in the same period in 2017.

During April 2018, new house sales declined in all five markets covered by the HIA New Home Sales Report. The largest reduction in house sales occurred in Western Australia (-11.6 per cent) followed by New South Wales (-8.2 per cent), Queensland (-2.9 per cent), South Australia (-1.7 per cent) and Victoria (-0.1 per cent).

New house sales are a leading indicator of new dwelling approvals – and ultimately activity on the ground. New home sales were strong through most of 2017 and the fall back in sales reflects a modest slowdown in demand from both owner occupiers and investors.

There are a number of factors influencing this result. The most recent concern is that access to finance has been constrained as banks exhibit greater caution as house prices fall in key markets. Banks responding to falling house prices by increasing their requirements for collateral is an obvious reaction to the change in house price conditions.

The decline in house prices in Sydney and Melbourne also impacts on the market as more new home purchases are delayed and alternative investments become increasingly attractive.

The second concern is that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry may lead the banks to be increasingly cautious in lending for residential homes.

Australian banks have significant exposure through loans for the purchase of residential homes and the Royal Commission has highlighted concerns in other aspects of the banking industry. Lending for the purchase of home-ownership is an aspect of the banking industry that is closely monitored by a number of government agencies including the RBA, APRA and departments of treasury. This can be demonstrated through the number of interventions in the residential lending market in recent years.

Indications are that the growth in FHB participation has slowed after strong growth since July 2017. The re-emergence of FHBs is due to enhanced state government supports, the deceleration of dwelling price growth in key markets like Sydney and Melbourne working to make the home purchase more accessible to FHBs. Since January’s 2018 the FHB share has retreated marginally to 17.4 per cent in March. Even so, the number of FHB loans totalled 26,460 during the first three months of 2018, an increase of 28.0 per cent on the same time last year.

This upturn in first home buyer participation has been more than offset by a fall in the value of investor lending. The value of housing loans to investors peaked in August 2017 at $152.7 billion in the preceding 12 months. Since then investor loans have been falling quite steadily to $144.2 billion over the year to March 2018. This represents a reduction of 5.6 per cent on last August’s peak.

These risks need to be balanced against the strong population growth rate, solid employment growth and improving economic activity which is maintaining demand for new homes at elevated levels.