Category: Financial Markets

Welcome to the Property Imperative weekly to the twenty sixth of January 2019, – Australia day – our digest of the latest finance and property news with a distinctively Australian flavour.   

Watch the video or read the transcript.

This week, amid weaker global economic news, there were signs that more stimulus of the financial system is coming, in response to weak growth, stalling inflation, and still low interest rates. Looks like QE2 is just around the corner – meaning more debt, and higher asset prices will devalue the true value of money further. The debt can will indeed, as expected, be kicked down the road, to support the financial system, incumbent governments and the 1%, as real people get taken to the cleaners – again.

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We start with the global scene, with Fitch ratings reporting that Global government debt reached 66 trillion US dollars at end-2018, nearly double its 2007 level and equivalent to 80% of global GDP.  Developed market government debt has been fairly stable in US dollar terms, at close to 50 trillion US dollars since 2012. In contrast, Emerging market debt has jumped to 15 trillion US dollars from  10 trillion over the same period, with the biggest increases in percentage terms being in the Middle East and North Africa (104%) and Sub-Saharan Africa (75%), though these regions still have comparatively low debt stocks, at less than 1 trillion US dollars each.

And Fitch also pointed out that recent corporate defaults – including Snton, Reward and KDX in China, have highlighted the risk of broader disclosure and governance problems among Chinese corporates, as well as the variable quality of local auditing, despite these companies having reported under agreed accounting standards.  You can see our recent discussion with Robbie Barwick on the problems created by the big four Auditing firms, and why the CEC is calling for an audit of our big four banks – see “Auditing The Banks – The Bankers’ Deadly Embrace”.

And among the Davos circus, The IMF’s latest World Economic Outlook Update, January 2019, says that global growth in 2018 is estimated to be 3.7 percent, as it was last fall, but signs of a slowdown in the second half of 2018 have led to downward revisions for several economies. Specifically, growth in advanced economies is projected to slow from an estimated 2.3 percent in 2018 to 2.0 percent in 2019 and 1.7 percent in 2020. Weakness in the second half of 2018 will carry over to coming quarters, with global growth projected to decline to 3.5 percent in 2019 before picking up slightly to 3.6 percent in 2020 (0.2 percentage point and 0.1 percentage point lower, respectively, than in the previous WEO). This growth pattern reflects a persistent decline in the growth rate of advanced economies from above-trend levels—occurring more rapidly than previously anticipated—together with a temporary decline in the growth rate for emerging market and developing economies in 2019, reflecting contractions in Argentina and Turkey, as well as the impact of trade actions on China and other Asian economies.

Specifically, growth in advanced economies is projected to slow from an estimated 2.3 percent in 2018 to 2.0 percent in 2019 and 1.7 percent in 2020. This estimated growth rate for 2018 and the projection for 2019 are 0.1 percentage point lower than in the October 2018 WEO, mostly due to downward revisions for the euro area.  We discussed this in our show “It Is Time To Prepare For The Next Downturn”. Problem is the quest for growth is getting harder as we reach peak debt.

Some high-ranking World Economic Forum participants at Davos spoke out sharply negatively against Bitcoin, predicting that its price would literally drop to zero. A little over a year ago, such statements caused a flurry of market emotions. Now these messages are honoured only by a slight smirk. The summary is simple: over the year the market has matured. The main awareness of investors is that no one knows for sure the future of cryptocurrency, and long-term growth forecasts up to “hundreds of thousands of dollars for a coin” or “zeroing rates” are worthless and have no effect on anything.

Elsewhere ECB President Mario Draghi said this week that the risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.

This triggered a Euro sell-off to its lowest level since early December 2018, and the German economy looks especially exposed now.   The ZEW Economic Sentiment for Germany was released this week, and the ZEW president said “It is remarkable that the ZEW Economic Sentiment for Germany has not deteriorated further given the large number of global economic risks”.  The German economy has been grinding along at 1.5% per annum, the lowest in five years, and recent forecasts suggest a lower 1.1% ahead, thanks to basket of risks including Brexit. But as Bloomberg said, one main factor behind the slump in the German manufacturing sector was the failure of inflation, particularly producer price inflation to drop in line with the tumbling price of oil in recent months. That’s in part, because of what’s happening to the Rhine, which has seen its water levels drop after a drought during the summer. The Rhine is crucial for German industry because it provides not only an avenue for the distribution of raw materials to German manufacturers but also a means of transporting finished goods to Europe’s largest port, Rotterdam, which sits at the river’s mouth. Low water levels in the Rhine, translates into a “supply shock in German manufacturing,” by lowering the availability of key goods needed for the sector, which come to factories situated on the river by barge. These barges need a depth of water to traverse the river above current levels.

And the latest from the US, is suggesting that the FED may have finished with interest rate hikes in the near term, and even their quantitative tightening agenda may be in question, in the light of the market reactions at the end of last year and pressure from political quarters in the US.

And to emphasize the “loosening” bias, in the UK, still in the Brexit muddle, the UK Financial Conduct Authority said they plan to improve so-called mortgage prisoners’ access to refinancing by relaxing current mortgage affordability regulations that preclude them refinancing into cheaper mortgage deals because they fail to meet affordability standards that were tightened in 2016. The FCA has suggested that authorised UK lenders would be willing to refinance such mortgage prisoners if the borrower qualified for refinancing under the new rules, which would require the new mortgage installments to be lower than previous installments and for the borrower to be up to date with their payments. The new rules would replace current affordability tests for these borrowers, which make sure a borrower has enough money left to pay their mortgage installments in a stressed interest rate environment after covering all other basic needs (e.g. bills, food, childcare).   

This despite the continued unaffordable housing across many countries, including the UK, as reported in the newly released 15^th edition of the Demographia survey.  Once again it shows that Australia and New Zealand property is unaffordable. Globally there were 26 severely unaffordable major housing markets in 2018. As normal they argue for planning reforms to release land, but do not consider credit availability, the strongest lever to affordability! You can watch our show on this “Housing Affordability – Still In The Doldrums”.  The severely unaffordable major markets include all in Australia (5), New Zealand (1) and China (1). Two of Canada’s six markets are severely unaffordable. Seven of the 21 major markets in the United Kingdom, and 13 of the 55 major markets in the United States are severely unaffordable.

This is simply the fruits of unrelenting quantitative easing, money printing and easy credit. Yet we seem destined for more of the same.

Locally there was one bright spot this week, unemployment fell to a record 5% low, according to the ABS data to December 2018. The participation rate remaining steady at 65.6%; and the employment to population ratio remaining steady at 62.3%. In fact, they revised down last month’s data to get to the 5%, where it remained in December. This will temper any RBA response to the falling housing market in our view. But of course the hurdle to be “employed” is ultra-low, and many of the jobs are in sectors paying low wages, plus we expect to see a rise in unemployed construction workers ahead, so this may be a hollow victory.

But beyond that, you had to look hard to find any other good news on the economy here this week. For example, following the heavy 15% decline in new car sales in 2018, plus the 9% decline in motorcycle sales, Moody’s said delinquencies for Australian auto loan asset-backed securities (ABS) has surpassed Global Financial Crisis levels. These auto loans are non-revolving with a fixed interest rate so they are an excellent benchmark to true credit stress and this again shows the impact of high debt despite low interest rates. As our mortgage stress analysis highlights, many households are up to their eyeballs in debt.

And there was more evidence of the weakness in the Australian economy. The Economist took a bearish view, saying our housing market is now one of the most overvalued… Household debt has reached 200% of disposable income. The saving rate is skimpy… House prices have been falling for a year. Australia’s banks may not have been quite as conservative as previously advertised. The share of interest-only loans, favoured by speculators, was as high as 40%. The number of permits issued for apartment buildings has fallen. The momentum that drove the market up, as higher prices fuelled expectations of further gains, works in reverse too. The lucky country has avoided so many potential slip-ups that even long-standing bears are wary of predicting a fall. The more banana skins you dodge, the bigger the manhole waiting for you.

And we made a series of posts this week, which underscores the pressures, mainly centred on housing and finance. For example, AFG, the mortgage aggregator showed a significant slowing in loan applications in their latest quarterly index.  NAB lifted their mortgage rates for existing variable rate borrowers, by up to 16 basis points, as NABs chief customer officer Mike Baird said that the bank could no longer afford to absorb higher funding costs. And AMP’s Shane Oliver upped his expectation of home price falls in Sydney and Melbourne to 25%, see our post The “Good News” on Property Prices, where we discussed his reasoning, and also highlighted that another half a percent of mortgage rate rises are on the cards thanks to higher funding costs.

Following Domains property price trend falls, released this week,  see our post “More Evidence of Home Price Falls”, CoreLogic’s home price index slide again. As a result, the quarterly decline has steepened to 3.31%, across the five capital cities, with Sydney, Melbourne and Perth worst hit. In the last year home values have fallen by 7.1%, thanks mainly to falls in Sydney, Melbourne and Perth. And from past peaks, dwelling values have fallen by 8.1%, led by Sydney (-12.1%), Melbourne (-8.5%) and Perth (-16.3%). And remember these are averages, some areas have done much worse.

CoreLogic says Weekly rents across the nation fell by -0.1% in December 2018 to be -0.3% lower over the fourth quarter of 2018 however, rents increased by 0.5% over the 12 months to December 2018. Capital city rents were -0.4% lower over the quarter and unchanged year-on-year while regional market rents were 0.3% higher over the quarter to be 1.8% higher over the past 12 months. The annual change in both combined capital city and national rents is the lowest on record based on data which is available back to 2005. Over the past 12 months, rents have increased in all capital cities except for Sydney and Darwin. Brisbane and Perth are the only two capital cities in which the annual change throughout 2018 has accelerated relative to the change in 2017.

NAB’s latest property survey to December 2018, showed that confidence, prices and transaction expectations are all falling, no surprise there.  Average survey expectations for national house prices for the next 12 months were cut back further in Q4, and are now tipped to fall -2.4% (-1.0% in Q3).  This largely reflected a big downward revision by property professionals in VIC, who now expect prices to fall by a much bigger -4.0% (-2.4% forecast in Q3). In NSW, expectations were also scaled back heavily to -3.9% (-2.4% forecast in Q3). As a result, VIC has also replaced NSW as the weakest state for house price growth in the next 12 months.  Falling house prices are expected to extend beyond VIC and NSW. In SA/NT, average prices are also expected to fall 0.4% (-0.3% in Q3). In QLD, property professionals now believe prices will fall -0.5% in the next 12 months, after forecasting growth of 0.8% in the previous survey. WA is the only state in which property professionals don’t expect prices to fall in the next 12 months (0.0%), albeit expectations have been scaled back from 0.5% forecast in Q3. Consequently, WA has replaced QLD for having the best prospects for house prices in the country in the next 12 months. 

In early-December, NAB Economics revised down their house price forecasts, seeing a larger peak to trough fall of around 10-15% in capital city dwelling prices. House prices continued to fall Q4 alongside the cooling in the housing market more generally. Capital city house prices declined by 6.1% in 2018, and are now 6.7% lower than their peak in mid-2017… Overall, they expect some further price declines in 2019, before levelling out in 2020. We expect the weakness to be driven by ongoing declines in Sydney and Melbourne…

But the killer was the data on foreign buyer transactions, which shows a significant fall in both new and established home purchases.  And linked to that, and the fall in new building approvals, the Australian reported that more building firms are under pressure.  “Dozens of development sites in Sydney, Brisbane and Melbourne, some large enough for 600-unit apartment towers, are hitting the market as Chinese developers plagued by poor buyer appetite and lack of finance are forced to sell. “The apartment market is in serious trouble and development sites are falling in price. A lot of Chinese paid pretty big prices in 2016 and a lot of development sites doubled or trebled in value between 2014 and 2018 and they will halve or worse,” Property Developer David Kingston told The Australian. “I am certain the Chinese will be selling development sites for multiple reasons including the fact that development margins have disappeared and values have plummeted. The ability to obtain development finance has been substantially reduced, and the ability to pre-sell apartments has collapsed.”

We appeared in a number of television shows this week, I took part in a discussion on Peter Switzer’s Money Talks, along with Michael Blythe from CBA and Nicki Hutley from Deloitte, making my case for more sustained falls in home prices, compared with the mainstream – we will see who is right in a year or two!

I discussed the latest trends in home prices on ABC News 24, and also discussed the latest on the high-rise building fiasco, after the Opal Tower.  Talking, of which the Australian has reported that The NSW government could be liable for any major defects in at least four major apartment ­projects in Sydney Olympic Park as well as a flagship tower in the city’s $8 billion Green Square project under its own laws that define the “developer” as the legal owner of the land… Under NSW statutory warranties, the owners corporation of an apartment block can sue the dev­eloper and builder within two years for minor defects and six years for major defects.     Sydney Olympic Park Authority, a NSW government entity, was the legal landowner in the case of Opal Tower and Ecove, the developer, never owned the land. Sydney Olympic Park Authority has confirmed it had a similar Project Delivery Agreement with four other of its projects: Australia Towers, Jewel, The Pavilions and Bennelong… The NSW government’s property developer, Landcom, likewise said it retained ownership of the land at Green Square…  Remember that under the six-year warranty period introduced via the recent Home Building Act, those people living in high-rise constructed prior to 2012 don’t even have the option of taking a builder to court – they must fund any remediation works themselves.

And finally, I spent more than 3 hours with Nine’s Sixty Minutes team, making a contribution to their next programme on home prices, in which we touched on our home price scenarios (now more mainstream that during the previous show back last August), household finances and negative equity. It is likely to go to air within the next month, so keep an eye out for it.

So to the markets. The Australian markets, did pretty well, with the ASX up 0.61% on Friday to 4,869, which is down just 2.6% compared with a year ago. The low employment number helped to lift prices higher.  The volatility index in Australia was 4.21% lower on Friday to end at 11.98, but is still 11.2% higher than a year ago. The ASX financials index ended the week at 5,747 on Friday, and up 0.37% on the day, but still 11.71% lower than a year ago, which really underscores the pressures on the sector – the Royal Commission final report is due next week, but it may be delayed for political reasons. We will see.

Among the individual banks, ANZ was up 1.04% on Friday to 26.19 but is still 10% lower than a year ago, while CBA was up just 0.04% on Friday to 72.54, and is 7.91% lower than a year ago. NAB rose 0.65% to 24.74 after the mortgage repricing announcement, but remains 15.58% lower than a year ago, while Westpac was up 0.62% to 25.88, and is 16.69% lower than a year ago. So the Hain effect is fully visible.

Among the regionals, Bank of Queensland was up 1.28% to end at 10.28, but is 17% lower than a year ago, Suncorp was up 0.69% to 13.05, but down 5% over the past year, Bendigo and Adelaide Bank was up 0.63% to 11.22, just 2% lower than a year back, while AMP fell 7.87% on more bad news, as they published a further profit warning, to end a 2.34, an amazing 54% lower than a year ago. AMP expects to report an underlying profit of “around $680m” and profit attributable to shareholders of “approximately $30m. Macquarie Group was down slightly to 117.81 but up 12.53% compared with a year ago. In contrast Lenders Mortgage Insurer Genworth was up 0.89% on Friday to 2.26, but down 23% over the year, and Mortgage Aggregator Mortgage Choice was up 0.5% to 1.00, but down 59% from this time last year.

The Aussie was up 0.10% to 71.90, down 12% compared with last week, and more analysts have marketed to lower ahead, towards 60 cents. The Gold Aussie cross was up 0.47% to 1,815, and up 7% on the year. The Aussie Bitcoin Cross was up 4.65% to 4,702 on Friday but down 67.58% compared with a year ago.

Wall Street gained ground on Friday in a broad-based rally as investors were heartened by news that Washington would move to temporarily end the longest U.S. government shutdown in history. All three major U.S. stock indexes advanced, with the Dow up 0.75% to end at 24,737, though still down 6% across the year, and the Nasdaq eking out their fifth straight weekly gains, up 1.29% to 7,165 and down 3% from a year ago. But the S&P 500 posted its first weekly loss of the year, despite being up 0.85% on Friday to 2,665 snapping a four-week run and down 6% from a year ago, and the S&P 100 ended up 0.74% to 1,176 and down 7% from a year back. 

The indexes backed off their highs after President Donald Trump confirmed he and lawmakers agreed to advance a three-week stop-gap spending plan to reopen the government. In fact, Investor sentiment had faltered in recent days in the face of revived jitters related to the shutdown and the prolonged U.S.-China tariff spat.

Among these uncertainties, the ongoing trade dispute between the United States and China continues to worry investors. With the World Economic Forum in Davos, Switzerland, nearing its conclusion, business leaders have expressed worries over the tariff battles, saying they are “fed up” with Trump’s policies. An escalation of the U.S.-China trade war would sharpen the global economic slowdown already under way, according to a Reuters poll of hundreds of economists worldwide.

In an interview with CNBC, Commerce Secretary Wilbur Ross shook investor sentiment on trade on Thursday, saying that the U.S. was still “miles and miles” from a trade deal with China. That came a day after Top White House economic adviser Larry Kudlow denied that the U.S. had cancelled a trade meeting with Chinese officials that was slated for this week. China’s Vice Premier Liu He will return to the U.S. next week to resume the next round of trade talks.

The rally on Wall Street was also propped up by expectations for a more dovish tone from the Federal Reserve, when it meets next week, following a report from The Wall Street Journal that the Fed is closer than expected to ending its balance sheet unwind.

The VIX, or fear index was lower, down 7.78% on Friday to 17.42, but still 65% higher than this time last year, suggesting elevated risk. The S&P Financials index was up 1.73% on Friday to 431.73, but 13% lower than a year ago, suggesting pressure on the sector.  Goldman Sachs was higher, up 1.49% to 200.74, but 26% lower than a year ago.

In the tech sector, Apple was up 3.31% to 135.76, 12% lower than a year ago, Alphabet Google was up 1.62% to 1,102, but 7% down from a year back, while Amazon was 21% higher than a year ago, up 0.95% on the day, and ended at 1,670.57. Facebook was up 2.18% to 149.01, but is 22% down on this time last year, while Intel fell 5.47% to end at 47.04, still up 9% from last year. The 10-year Treasury bond was up 1.71% to 2.76, while the 3-month bond was up 0.61% to 2.38, suggesting fund costs will remain elevated.

The US dollar index fell 0.82% to end at 95.81, and is up 8.5% over the year. The British pound grew steadily during this week, adding 2% against the dollar and ended at 1.32. An unexpectedly strong wages report was supported in the following days with positive buzz around Brexit. First, we received reports of a possible postponement of the Brexit date in order to avoid “exit without deal”. On Friday, there was news of support for Theresa May’s plan by the Northern Irish political party.

The Footsie – or FTSE 100 fell 0.14% on Friday to end at 6,809 and 11% lower than a year ago. The Financial Services Index fell slightly to end at 644.27, down 7% across the last year.

The British currency growth is particularly noticeable against the euro, as the eurozone economy, on the contrary, saw weak economic data this week: at the beginning of the week the IMF sharply reduced its growth forecasts for the eurozone countries in 2019, and on Thursday EUR was under pressure due to disappointing PMI estimates. On Friday, Ifo data also highlighted slowing. Their Business Climate indicator fell to almost 3 years’ lows.

The ECB added fuel to the fire, stressing that external risks from China to Brexit could undermine the region’s economic growth even more. ECB officials say in their speeches that in 2019 the rate hike may not happen, and that the recent decline of oil will put pressure on inflation in the coming months.

The Euro US Dollar rose a little to end at 1.1415, down 9% from a year ago. The German DAX added 2.6% from Wednesday lows. Deutsche Bank rose 4.24% to 8.036, but is still down 51% from a year ago as the business restricting continues. At least it went back above the 8 level, seen by many as a critical break point.

Next week’s news from the US will be in the spotlight of the markets. On Wednesday, the Fed will announce its decision on the rate and hold a press conference; labour market indicators will be published on Friday. Many releases on the US economy are postponed because of the shutdown, so the remaining publications can cause a stronger than usual market response.

The Chinese Yuan US Dollar rose 0.61% on Friday to 0.1482, and is down 6% from a year ago. Oil was higher, up 0.75% to 53.53, still 19% down from this time last year, Gold was up 1.77% to 1.302, but 6% lower than last year, Silver was up 2.97% to 15,76, down 12% over the year, while copper was up 3.35% to 2.73, down 17% over the year.

Finally, bitcoin was down 0.21% to 3,633, following a flash crash earlier in the week. It remains 68% lower than this time last year and trading volumes are way down, as speculators take to the side lines. Analysts at JPMorgan Chase & Co said that the hype surrounding cryptocurrencies and blockchain — the distributed ledger technology that underpins all cryptocurrencies — is a little overblown, with inroads to mainstream finance patchy at best. They said that while advocates tout that most assets can be shifted to a blockchain-type ledger and the technology will improve everything from transparency to supply chain efficiency, results are yet to match the industry buzz.

One sector ripe for a blockchain shake-up, according to crypto evangelists, is the banking system. Cross-border payments with faster transaction times and lower costs will propel digital currencies and blockchain technology into the established banking industry, but the analysts said a meaningful difference is years away.

Furthermore, a number of prominent companies that began accepting bitcoin have since thrown in the towel, which includes Dell, Expedia, OKCupid and Steam, JPMorgan noted. Whilst there may be niche uses in for example trade finance, they conclude that “most other use cases, such as payments, are already largely digitalized, so we expect the adoption of blockchain may be viewed as providing incremental benefits.”

So, it seems to me that the market volatility at the end of last year have spooked central bankers, and it is likely we will see more QE ahead. Locally, there is talk of APRA dropping the current 7% serviceability cap to ease mortgage lending restrictions, the RBA may cut rates, and even sacrifice the Aussie to stimulate the local economy. However, the downforces on housing, reinforced by poor affordability and high debt suggests to me that QE may not be so effective, as we face into lower growth. With rates in many counties already low, we are entering the “Zero Bounds” twilight zone. Whilst this may support the overinflated banking system, the impact of real households could well be disastrous. As I continue to say, prepare yourselves.