The latest data from the ABS on housing finance for October 2015, continues to tell the story of the turning market, with investors slowing, and owner occupied loans still rising (and supported by growth in refinanced loans). It also contains a number of adjustments, so trends are hard to read. But, do not be deceived, the market still has significant momentum, and overall volumes and values are still high.
Looking at the national monthly trend flows first, we see that in October total housing loans of $33.2 bn were written, up 0.04% from the previous month, or $12.9m. Note that significant home lending is still happening, though overall growth has slowed.
Within these numbers, $14.4bn owner occupied loans were written, a rise of 2.1%, or $291m; whilst $12.1bn of investment loans were written, down 3.1% or $386m. Refinancing grew 1.7%, of $109m and equated to $6.7bn in the month. Loans for new houses or for construction of new dwellings (across investment and OO), rose 0.5% to $3.8bn.
Taking a longer, and state based view of loans for new construction for owner occupation, there are significant variations. New home lending to owner occupiers increased by 7.8 per cent in New South Wales and was unchanged in the Norther Territory. In the other six states and territories, the number of loans to owner occupiers purchasing or constructing new homes decline in October 2015 when compared with October 2014: Tasmania (-28.6 per cent); Western Australia (-24.5 per cent); Australian Capital Territory (-20.9 per cent); Queensland (-9.2 per cent); Victoria (-6.0 per cent); and South Australia (-2.5 per cent). Construction momentum is waning.
Of course, there is a whole load of noise in the data, with loan reclassifications so we need to treat the numbers with care, but the trend is clear now. These adjustments show clearly in the ADI stock trend data, which shows how the proportion of investment loans were adjusted up (thanks to the bank reclassifying loans to investment loans in the year from June 2014, and more recently households telling the banks their loans were NOT investment loans, see our earlier post on this, referring to the more reliable(?) RBA numbers. At a portfolio level, in original terms, ADI loans for all housing were up 0.53% to $1.44 trillion, of which OO contributed $911bn, up 2.6% and investment loans $526bn, down 2.9%.
Turning to first time buyers, owner occupied loans fell 2.85%, making 15.1% of all new loans taken by first time buyers. The average FTB loan rose again from $351,800 last month to $355,700 this month. An astonishing rise, given flat incomes.
Finally, if we add back in the hidden first time buyers who are going direct to the investment sector (using data from the DFA surveys), we see that momentum here continues to weaken, with a fall of more than 7% is loans written this month, a fall from 4,147 in September to 3,835 in October. Together first time buyer numbers fell 5.5%, from 13,100 to 12,534.
To further muddy the waters, the ABS also made revisions:
In this issue revisions have been made to the original series as a result of improved reporting of survey and administrative data, and updated first home buyer modelled estimates. These revisions have impacted on:
First home buyers owner occupied housing for August 2015.
Investment housing for August 2015.
Housing loan outstandings to households; owner-occupied and investment housing: for periods from March 2014 to September 2015.
Monthly First Home Buyer statistics will be subject to future revision, as the modelled component is adjusted to reflect improved reporting by lenders.
The HIA New Home Sales Report, a survey of Australia’s largest volume builders, reveals that while sales volumes are off their peak they are still holding up relatively well.
The latest update – for October 2015 – reveals a decline of 3.0 per cent in total seasonally adjusted new home sales. Detached house sales fell by 4.1 per cent while the sale of ‘multi-units’ notched up a 1.0 per cent gain.
In the month of October 2015 detached house sales declined in four out of the five the mainland states. Detached house sales fell by 9.3 per cent in Victoria, 5.4 per cent in Western Australia, 0.9 per cent in Queensland and 0.8 per cent in New South Wales. Detached house sales increased by 2.6 per cent in South Australia.
In the latest release, the IMF have provided data to October 2015, and also some specific analysis of the Australian housing market. We think they are overoptimistic about the local scene, and we explain why.
But first, according to the IMF, globally, house prices continue a slow recovery. The Global House Price Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.
As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.
Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play.
For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.
House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.
Turning to the Australia specific analysis, Adil Mohommad, Dan Nyberg, and Alex Pitt (all at the IMF) argue that house prices are moderately stronger than consistent with current economic fundamentals, but less than a comparison to historical or international averages would suggest. Here is just a summary of their arguments, the full report is available.
Argument: House prices have risen faster in Australia than in most other countries, suggesting, ceteris paribus, overvaluation.
Counter argument 1: House prices are in line on an absolute basis – Price-to-income ratios have risen in Australia and now near historic highs. However, international comparisons suggest that Australia is broadly in line with comparator countries, although significant data comparability issues make inference difficult.
Counter argument 2: The equilibrium level of house prices has also risen sharply – Lower nominal and real interest rates and financial liberalization are key contributors to the strong increases in house prices over the past two decades. The various house price modeling approaches indicate that house prices are moderately stronger (in the range of 4-19 percent) than economic fundamentals would suggest.
Counter argument 3: High prices reflect low supply – Housing supply does indeed seem to have grown significantly slower than demand, reducing (but not eliminating) concerns about overvaluation.
Counter argument 4: It is just a Sydney problem, not a national one – The two most populous cities, Sydney and Melbourne, have seen strong house price increases, including in the investor segment. A sharp downturn in the housing market in these cities could be expected to have real sector spillovers, pointing to the need for targeted measures—including investor lending—to reduce risks from a housing downturn.
Counter argument 5: There are no signs of weakening lending standards or speculation – While lending standards overall seem not to have loosened, the growing share of investor and interest-only loans in the highly-buoyant Sydney market, is a pocket of concern.
Counter argument 6: Even if they are overvalued, it doesn’t matter as banks can withstand a big fall – While bank capital levels are likely sufficient to keep them solvent in the event of a major fall in house prices, they are not enough to prevent banks making an already extremely difficult macroeconomic situation worse.
Second, we agree, in the main centres, house prices are about 20% over fundamentals, and in some pockets up to 30%, so yes this is a problem, especially at a time of flat income growth.
Third, supply has been increasing, but this has stoked investment housing speculation, and is not equally strong in all areas and price brackets. We still have a massive under-supply of affordable housing, just ask prospective first time buyers – and many are having to reach for the skies just to buy something, so we thing prices are still hiked because of supply problems.
Fifth, underwriting standards had declined, refer to recent APRA. ASIC and RBA comments. Guidelines on assessment of income, and baseline interest rate assumptions have been tightened. Speculation is also rife, especially in the investment sector (refer our surveys).
Thus, DFA concludes the IMF initial statement is correct, and despite their detailed analysis, their counterarguments are not convincing. We do have a problem.
ABS figures released today show that building approvals increased by 3.9 per cent in October, the second consecutive month of growth, said the Housing Industry Association.
During October, total seasonally-adjusted new dwelling approvals rose to 19,652, the strongest monthly result since the all-time record high reached in July. The distribution of the growth was mixed, however; while multi-unit approvals increased by 10.1 per cent during October, detached house approvals fell by 2.1 per cent during the month. The back-to-back increases in approvals during September and October were the first consecutive monthly increases since the beginning of the year.
During October 2015, total seasonally adjusted new home building approvals saw the largest increase in South Australia (+23.4 per cent), followed by New South Wales (+22.0 per cent) and Victoria (+21.2 per cent). Approvals fell in Tasmania (-41.6 per cent), Queensland (-28.7 per cent) and Western Australia (-1.1 per cent). In trend terms, approvals saw a 7.1 per cent increase in the NT but declined by 10.8 percent in the Australian Capital Territory.
The latest home finance data from the ABS confirm the trend that investor loans are on the slide, and being replaced by growth in owner occupied loans and refinancing. In September, trend, owner occupied housing commitments rose 2.0% to $20.5 bn while investment housing commitments fell 1.9% to $12.9 bn. The number of commitments for owner occupied housing finance rose 0.7% in September whilst the number of commitments for the purchase of new dwellings rose 1.3% the number of commitments for the purchase of established dwellings rose 0.8%. The number of commitments for the construction of dwellings fell 0.1%.
The proportion of investor loans fell back to 48%, whereas a few months back it was well above 50%. Refinance of owner occupied loans continues to rise, to nearly 20% of all loans written, a level not seen since 2012. So the relative shift away from investment loans is confirmed, in response to regulatory intervention.
In stock terms, the mix of investment loans – as reported in original terms, has fallen back to 38%, but is still way higher than when regulators officially started to worry about the systemic risks of investment loans above mid thirties. we can expect to see further data revisions in coming months, as banks continue to reclassify loans.
Turning to first time buyers, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 15.4% in September 2015 from 15.8% in August. However, this does not tell the full story.
Looking at DFA adjusted data, to take account of first time buyers going direct to the investment sector, we see a further fall in new FTB investor loans, down more than 2% in the month. The number of FTB loans for owner occupation rose however, by 6%, so the overall volume of loans is up. The average FTB loan was 2% larger this month.
The strategies of the banks are clear, focus on owner occupied loans, and offer deep discounts to wrest refinanced loans from competitors, whilst using back-book repricing to fund it. At what point will the regulators step-up their surveillance of owner occupied lending? We think they should do so now.
Australian Bureau of Statistics (ABS) Building Approvals show the number of dwellings approved fell 1.8 per cent in September 2015, in trend terms, and has fallen for six months.
Dwelling approvals decreased in September in Northern Territory (3.3 per cent), Western Australia (3.2 per cent), New South Wales (2.6 per cent), Victoria (1.8 per cent), Tasmania (1.2 per cent), Australian Capital Territory (0.7 per cent) and Queensland (0.3 per cent) but increased in South Australia (0.4 per cent) in trend terms.
In trend terms, approvals for private sector houses fell 0.2 per cent in September. Private sector house approvals fell in Western Australia (3.1 per cent) and New South Wales (1.2 per cent) but rose in Queensland (2.2 per cent) and Victoria (1.1 per cent). Private house approvals were flat in South Australia, in trend terms.
The value of total building approved fell 0.6 per cent in September, in trend terms, and has fallen for two months. The value of residential building fell 1.1 per cent while non-residential building rose 0.6 per cent in trend terms.
As is well known, the shortage of affordable separate housing in Sydney and Melbourne means that most first home buyers and renters cannot currently find housing suited to their needs in locations of their choice.
The dominant response from the housing industry and commentators is that governments must unlock the potential for more intensive development of the existing suburbs. From this standpoint, the recent surge in high-rise apartment construction in Sydney and Melbourne is part of the solution.
For those looking at the issue from a financial perspective, escalating housing prices is seen as a reflection of low interest rates, as well as incentives for investors to take advantage of negative gearing and capital gains tax concessions. For the Australian Prudential Regulation Authority, this means the answer is to restrict access to borrowing.
While these factors are important in contributing to the affordability crisis in housing, the issue has deeper roots that lie in the changing demographic make-up of Sydney and Melbourne’s populations.
Our new study on new household and dwelling projections for Sydney and Melbourne from 2012 to 2022, highlights the need for rigorous academic research to inform public urban policy.
To date, policy has been driven by advice from commentators using a flawed evidence base. None have grasped the scale of need for family-friendly housing, or understood the full effects of ageing in place on the availability of detached houses in Sydney and Melbourne.
The projections build on the widely-assumed expectation that Net Overseas Migration (NOM) will continue at 240,000 to 2022 and that Sydney and Melbourne will receive almost of this number.
The household projections assume that the propensity to form households by age group and family type will remain the same as in 2011 in both cities. Projections for dwelling needs were then computed for both cities on the assumption that households will occupy the same type of dwelling (separate house, flat) by family type, age group and migration status in 2022 as was the case in 2011.
On these assumptions, Sydney will need to provide dwellings for an additional 309,000 households and Melbourne an additional 355,000 households over the decade 2012 to 2022.
The key finding is that contrary to most housing industry opinion, the greatest need will be for family friendly dwellings. This is because of the large number of young resident and migrant households who will be entering each city’s housing market. Most of these households are likely to start a family and when they do so, will look for a separate house.
It is true that there will be a large increase in the number of single person and couple families over the decade. However, most of this increase will be amongst older, already established households. The evidence indicates that the great majority are ageing in place. (See Table 11 in the report.)
The surge in the number of older households is a consequence of population ageing as successive ten-year cohorts replace smaller cohorts born in earlier years. This ageing effect is having an enormous but largely unrecognised effect on Sydney and Melbourne’s housing markets. It will generate the need for an additional 109,570 extra dwellings in Sydney over the decade to 2022 and 161,990 in Melbourne. In addition, net overseas migration will add a dwelling need of 198,810 in Sydney and 193,140 in Melbourne by 2022.
This combination of high dwelling needs of young residents as well as from NOM, along with the blocking effect of the ageing population, is contributing to a severe and continuing squeeze on the detached housing markets in Sydney and Melbourne. This is particularly marked in the inner and middle suburbs.
The reason is that, by 2011, 50 to 60% of this housing stock was occupied by householders aged 50 (See Table 10 in the report). This situation will get worse as the number of these older households increases.
The study compared the recent pattern of dwelling approvals by housing type in Sydney and Melbourne with the needs implied by the dwelling projections. The conclusion was that there are too few separate houses being approved in both cities and too many apartments, especially in Melbourne.
Current policies of urban renewal or urban consolidation in established suburbs will add little to the supply of affordable family friendly dwellings. This is primarily because of the increase in the price of potential building sites. There is a vicious circle in play as the scarcity outlined above contributes to further increases in the price of separate houses and thus to the cost of possible sites for higher density dwellings.
Implications
Because few families can afford detached housing in the inner and middle suburbs, more are being pushed into the outer suburbs and the fringes of Sydney and Melbourne. It is still possible to find such affordable housing in the outer and fringe suburbs of Melbourne, but not in Sydney. A detached house costs a minimum of $600,000 even in the remotest corners of Sydney. The only affordable option for most of these home seekers is a unit in these outer suburban locations.
There is no short term fix. In the long term more resident and migrant families are likely to seek affordable housing elsewhere, or in the case of migrants, may by-pass Australia altogether. Those who choose to stay will have to make adjustments to their life-style as by delaying starting a family.
On the other hand, a glut of high-rise apartments is inevitable, although it is being masked by the long lead time in the completion of newly approved apartment projects.
Author: Bob Birrell, Researcher , Monash University
The HIA Affordability Index for the September 2015 quarter indicates that housing affordability has deteriorated further, said the Housing Industry Association.
“Sluggish earnings growth and the strong pace of dwelling price growth in the two key markets means that home purchase moved beyond the reach of a greater number of Australian households,” explained HIA Senior Economist, Shane Garrett.
During the September 2015 quarter, housing affordability worsened by 4.0 per cent compared with the previous quarter and was 2.1 per cent less favourable than the same time last year. Developments in the eight capital cities were more detrimental from an affordability perspective, with a 4.1 per cent deterioration occurring compared with the previous quarter. Compared with a year ago, affordability in the capital cities is 3.6 per cent less favourable. However, affordability actually improved in six of the fourteen markets included in the report.
“Affordability is now at its least favourable since the final quarter of 2014,” noted Shane Garrett. “The two interest rate reductions in the first half of this year provided a temporary respite from the perspective of affordability,” Shane Garrett pointed out. “The surge in dwelling prices in Sydney and Melbourne, along with near stagnant earnings growth means that the pendulum has since swung backwards to the detriment of affordability.”
“Over 210,000 new dwellings were commenced during the 2014/15 financial year, an all-time high,” said Shane Garrett. “This remarkable pipeline of supply has helped soothe affordability pains in some markets. Were it not for the exceptional level of new home building, Australia’s affordability challenge would be even more severe.”
“In the round, the odds are still stacked far too heavily against the goal of more affordable housing. The burden of taxation on new housing is huge, which is exacerbated by chronic shortages of new residential land in key markets. This effect flows through to the existing housing stock in a way that puts potential buyers at a disadvantage. The unilateral increase in variable mortgage rates over the past month is further aggravating the situation,” concluded Shane Garrett.
The HIA New Home Sales Report, a survey of Australia’s largest volume builders, showed monthly new home sales declined by 4.0 per cent in September 2015, with the level of activity down from the April peak by 5.2 per cent.
“The decline in total new home sales was reflected in both the detached and non-detached segments of the market in September 2015,” said HIA economist, Diwa Hopkins. “Following the peak level of sales that occurred in April this year, sales activity has trended lower only very modestly. This augers well for actual new home building activity in 2015/16. A fresh record level of building activity during this financial year could have been achieved – and could have been of strong benefit to the broader domestic economy – but increasingly restrictive credit conditions are likely to curtail the boom in new home building. The deterioration in credit conditions is likely to weigh more heavily on new home building activity beyond 2015/16. We have therefore pared back our forecasts for activity over our forecast horizon beyond the end of the current financial year.”
In the month of September 2015 detached house sales declined in four out of the five the mainland states. Detached house sales declined by 19.8 per cent South Australia, 8.6 per cent in Western Australia, 5.9 per cent in Queensland and 0.5 per cent in New South Wales. In Victoria, detached house sales increased by 3.1 per cent.
By 2050, the United Nations predicts that around 66% of the world’s population will be living in urban areas. It is expected that the greatest expansion will take place in developing regions such as Africa and Asia. Cities in these parts will be challenged to meet the needs of their residents, and provide sufficient housing, energy, waste disposal, healthcare, transportation, education and employment.
So, understanding how cities will grow – and how we can make them smarter and more sustainable along the way – is a high priority among researchers and governments the world over. We need to get to grips with the inner mechanisms of cities, if we’re to engineer them for the future. Fortunately, there are tools to help us do this. And even better, using them is a bit like playing SimCity.
A whole new (simulated) world
Cities are complex systems. Increasingly, scientists studying cities have gone from thinking about “cities as machines”, to approaching “cities as organisms”. Viewing cities as complex, adaptive organisms – similar to natural systems like termite mounds or slime mould colonies – allows us to gain unique insights into their inner workings. Here’s how.
Complex organisms are characterised by individual units that can be driven by a small number of simple rules. As these relatively simple things live and behave, the culmination of all their individual interactions and behaviours generate more widespread aggregate phenomena. For example, the beautiful and complex patterns made by flocking birds are not organised by a leader. They come about because each bird follows some very simple rules about how close to get to each other, which direction to fly in, and how to avoid predators.
Similarly, ant colonies can exhibit very sophisticated and seemingly intelligent behaviour. But this sophistication doesn’t come about as a result of a good leader. It is the result of lots of ants following relatively simple rules, without any regard for the bigger picture. It is easy to see how this perspective could be applied to human systems to explain phenomena like traffic jams.
So, if cities are like organisms, it follows that we should examine them from the bottom-up, and seek to understand how unexpected large-scale phenomena emerge from individual-level interactions. Specifically, we can simulate how the behaviour of individual “agents” – whether they are people, households, or organisations – affect the urban environment, using a set of techniques known as “agent-based modelling”.
This is where it gets a bit like SimCity. It’s apt that the computer game was originally based on the work of Jay Forrester, a world-renowned system scientist with an interest in urban dynamics. In the game, individual agents are given their own characteristics and rules, and allowed to interact with other agents and the environment. Different behaviour emerges through these interactions and drives the next set of interactions.
But while computer games can use generalisations about how people and organisations behave, researchers have to mine available data sets to construct realistic and robust rule sets, which can be rigorously tested and evaluated. To do this effectively, we need lots of data at the individual level.
Modelling from big data
These days, increases in computing power and the proliferation of big data give agent-based modelling unprecedented power and scope. One of the most exciting developments is the potential to incorporate people’s thoughts and behaviours. In doing so, we can begin to model the impacts of people’s choices on present circumstances, and the future.
For example, we might want to know how changes to the road layout might affect crime rates in certain areas. By modelling the activities of individuals who might try to commit a crime, we can see how altering the urban environment influences how people move around the city, the types of houses that they become aware of, and consequently which places have the greatest risk of becoming the targets of burglary.
To fully realise the goal of simulating cities in this way, models need a huge amount of data. For example, to model the daily flow of people around a city, we need to know what kinds of things people spend their time doing, where they do them, who they do them with, and what drives their behaviour.
Without good-quality, high-resolution data, we have no way of knowing whether our models are producing realistic results. Big data could offer researchers a wealth of information to meet these twin needs. The kinds of data that are exciting urban modellers include:
Electronic travel cards that tell us how people move around a city.
Twitter messages that provide insight into what people are doing and thinking.
The density of mobile telephones that hint at the presence of crowds.
Loyalty and credit-card transactions to understand consumer behaviour.
Participatory mapping of hitherto unknown urban spaces, such as Open Street Map.
These data can often be refined to the level of a single person. As a result, models of urban phenomena no longer need to rely on assumptions about the population as a whole – they can be tailored to capture the diversity of a city full of individuals, who often think and behave differently from one another.
Missing people
There are, of course, serious practical and ethical considerations to take into account, when integrating big data into urban models. The volume of background noise in new data sources can make it difficult to extract useful and reliable information. For example, it can often be difficult to distinguish Twitter messages posted by bots from those by real people.
We must also make sure that we understand who is well-represented in our data, and who is not. The digital divide is alive and well and research suggests a class divide separating those who do and do not produce digital content. This means that there are probably large sections of the population missing from data sets.
We also need to find new ways of making these methods ethical. Traditionally, consumer and research ethics have been structured around informed consent. Before taking part in interviews or surveys, participants need to sign consent forms that give the researchers permission to use their data. But now, individuals are digitising aspects of their lives such as moods, thoughts, feelings, and behaviours that have historically gone undocumented. And, importantly, these are often released publicly on the internet.
And while an individual might have ticked a box that gives permission for their data to be used, that’s no guarantee that they’ve read and understood the terms. iTunes’ June 2015 terms and conditions, for example, are more than 20,000 words long (20 times the length of this article). Researchers and service providers need to ask themselves how many people really get to grips with these documents, and whether their agreement fulfils our idea of consent.
We may never be able to simulate every individual in a city, and we’ll probably never want to. But we are getting closer to being able to simulate the richness of the fabric that weaves together to shape our cities. If we can do this, then we will be able to provide useful input on how best to shape cities in the future – perhaps even down to the last street light, bus and block of flats.
Authors: Alison Heppenstal, Associate Professor in Geocomputation, University of Leeds; Nick Malleso, Lecturer in Geographical Information Systems, University of Leeds.