Category: Home Prices

Don’t Buy Now! – The Property Imperative Weekly 24 November 2018

Welcome to the Property Imperative weekly to 24th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.

More volatility on the markets this week, more home prices falls, and more revelations from the Royal Commission which put the spotlight on poor culture in the banks and regulators. It’s time to be very cautious in my view.

So let’s get started. Watch the video, listen to the podcast or read the transcript. Caveat Emptor! Note: this is NOT financial or property advice!!

Property listings are skyrocketing according to CoreLogic, with an 11.6% rise in total listings over the last year nationally, but with a 17.4% rise in Sydney and a massive 19.3% rise in Melbourne.  New listings are down, so property is sitting on the market for longer and longer, and vendor discounts are rising. Darwin units are seeing discounts of 14.64% and Perth units 10.5%. All signs of a stalling property market.

Sydney has been one of the strongest markets for value growth over recent years however, a big spike in listings and tighter credit conditions has made selling much more difficult. At one point in mid-2015 more than three quarters of properties sold for more than the original list price. Fast forward to the current market and 83.3% of properties are selling for less than the original list price compared to 13.3% selling above the list price. Sydney vendors are now discounting their asking prices by 7.3% on average in order to make a sale, compared with only 5.4% a year ago.

Melbourne is currently seeing 76.3% of properties selling below the original list price which is the highest share in at least 12 years. As recently as April last year, when values were rising at a double-digit annual rate, 34.4% of properties were selling for less than the original list price. By comparison today, only 18.7% of properties have sold over the past three months for more than the original list price and vendors are, on average, discounting their prices by 6.1% to make a sale.

And CoreLogic’s latest home price update revealed their 5-city daily dwelling price index, which covers the five major capital city markets, declined another 0.27% last week, which is the biggest weekly decline of the past year. Prices fell across all the major markets, with Melbourne leading the way down, as expected, with a drop of 0.38%, Sydney down 0.31%, Perth down 0.29%, Adelaide down 0.04% and Brisbane down 0.01%.  The falls in Sydney Melbourne and Perth this month are mounting, with Sydney down 0.91%, Melbourne 0.59% and Perth 0.63%.

Remember that Perth has been in the doldrums for years, and while many “property expects” claimed there were signs of a recovery in the West, this is just not true. Through Sydney and Melbourne prices are up compared with a couple of years back, the falls are likely to continue. The declines from the last peak are down 9% in Sydney, 5.4% in Melbourne and 14.7% in Perth.

ANZ said this week “The fall in Sydney housing prices is already the largest in many years. Prices are now 9% below the June 2017 peak, a larger correction than in 2010-11, 2008, 2004-05, 1994-95 and, by the end of this month, the fall will be larger than the 9% fall in 1988–91”. They now think housing prices in Sydney and Melbourne will fall around 15–20% from peak to trough.  They link the falls to tighter credit availability, plus additional risks from changes to negative gearing and higher mortgage rates.

And the combined capital city final auction clearance rate saw further weakening last week, with 42 per cent of homes successful at auction; the lowest weighted average result seen since June 2012.  The lower clearance rate was across a higher volume of auctions week-on-week with 2,745 capital city homes taken to market, increasing on the 2,386 held the week prior. Both volumes and clearance rates continue to trend lower each week this year relative to the same week’s last year.

Melbourne’s final clearance rate was recorded at 41.3 per cent last week, making it the weakest result the city has seen since June 2012. There were 1,401 homes taken to auction across Melbourne last week, increasing on the week prior when 1,127 auctions were held. One year ago, a much higher 1,732 auctions were held with 66.9 per cent selling.

Sydney’s final auction clearance rate was recorded at 42.8 per cent across 875 auctions last week, increasing slightly from 42.1 per cent across a lower 844 auctions over the previous week. Over the same week last year, 1,061 Sydney homes went to auction and a clearance rate of 54.8 per cent was recorded.

Across the smaller auction markets, Adelaide returned the highest clearance rate of 59 per cent, while Perth saw only 28 per cent of homes successful at auction

The combined capital cities are expected to see a slightly lower volume of auctions this week with CoreLogic currently tracking 2,571 auctions, down from the 2,745 auctions held last week.

Melbourne is the busiest city for auctions again this week, with 1,069 auctions being tracked so far. This week’s volumes are down from the 1,401 auctions held last week and significantly lower than the 1,736 Melbourne homes taken to auction this week one year ago.

Sydney has over 1,000 homes scheduled for auction this week. This is not only an increase on last week’s 875 auctions, but the highest number of auctions the city has seen since March this year. Last year there were a higher 1,215 auctions held across the city over the same week.

Adelaide and Canberra are both expecting a higher volume of auctions week-on-week, while the remaining auction markets have fewer scheduled auctions this week.

S&P Ratings said falling property prices triggered by tightened lending conditions are dominating Australian media headlines. The Australian residential mortgage-backed securities (RMBS) sector so far has been relatively resilient to pressure, with mortgage arrears remaining low and ratings performance stable. The RMBS sector is now facing more elevated risk than it was 12 months ago. Alongside high household debt and low wage growth are emerging risks such as lower seasoning levels in new transactions and increasing competition.

Meantime, looking in the rear-view mirror, Fitch Ratings said that their RMBS index 30+ days’ arrears fell by 4bp quarter on quarter to 1.04% during 3Q18. Fitch Ratings has observed a drop in third-quarter arrears for the previous decade. They say national dwelling prices continued to decline in 3Q18, led by falls in Melbourne, which dropped by 2.33% from the previous quarter, and Sydney, down by 2.11%. The price falls followed tighter lending standards, which restricted new loans and made refinancing more difficult, reducing demand in Australia’s property market. The peak-to-trough decline in Sydney is now 8.2%, which is the second-largest fall in the past 35 years. The largest fall was seen during the last recession in the early 1990s when prices fell by 9.2%.

RMBS transactions rated by Fitch continued to experience extremely low levels of realised losses and a rising lenders’ mortgage insurance (LMI) payment ratio since 4Q12. Excess spread was sufficient to cover principal shortfalls on all transactions during 3Q18.

This is starting to hit the broader economy now, as expected. Home price falls often lead broader economic falls by 12-18 months.

ANZ said momentum slowed further in the September quarter across most of Australia.  All states and territories except Tasmania and the Northern Territory decelerated and recorded growth at below their trend rates. The loss of momentum demonstrated by the Stateometer is consistent with their forecast that the Australian economy will grow at a year-ended pace of 2.9% by the June quarter 2019, down from 3.4% in June this year. The slowing, brings into doubt the 3.25% year-ended growth rate forecast by the Reserve Bank for June 2019. Every state, except Tasmania, experienced a drag to momentum from the housing component of the index in the September quarter. The labour market also became less positive for all states and territories except Victoria and the Northern Territory. Trade was a highlight with the mining states of Western Australia and Queensland recording stronger positive contributions as resource prices, export volumes and the AUD/USD exchange rate moved in their favour. In New South Wales and Victoria, which are less commodity intensive but have large service sectors, trade momentum also picked up, suggesting a further boost to tourism and education exports. They concluded that tightening of credit market conditions remains a negative factor that together with a poorer outlook for house prices is pulling back demand in this important sector, especially in New South Wales and Victoria.

And the six-month annualised growth rate in the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 0.41% in September to +0.08% in October. With this latest slowdown, the Index growth rate continues to point to slowing momentum into the new year. Over the seven months from October last year to April this year the growth rate averaged 0.89%. In the six months since April the growth rate has averaged only 0.19% – a clear step down.

So to the Royal Commission. In Sydney this week, with most time spent on CBA (CEO and Chairperson) and ASIC (Chairperson). A few key areas came into focus including Broker remuneration, where CBA advocated a fix fee model, Front line staff and senior executive remuneration; how the boards looked at risk related issues (often seemingly myopically); the question of vertical integration – especially relating to the question of advice versus sales in wealth management, and oversight and enforcement by regulators.

The core issue was the question of misaligned incentives, which has led to the misconduct thrown into sharp relief in the inquiry. As a result, we would expect to see reform in the areas of broker commissions, front line remuneration, and vertical integration. All significant, and likely to crimp bank performance further.

On brokers, CBA estimated that the average remuneration for a broker writing an average loan would fall from $6,627 to just $2,310. And that CBA would save $197m on a cumulative basis over 5 years. So some would say they are talking their own book!  At very least we expect trail commissions to go, and a best interest obligation introduced.

ASIC rightly copped flack, and as a result, we would expect them to be more proactive, demanding larger penalties, perhaps naming and shaming, and more litigation through the courts.  Frankly ASIC was too close to the big banks, and has not met its regulatory obligations, and insufficient funding is not a valid excuse. The inquiry also questioned why ASIC needs to discuss the terms of “infringement notices” with banks before they are finalised. “The parking inspector doesn’t seek an indication from the person he’s giving a parking fine to as to whether they will accept and pay it. He just does it. Why don’t you just do that?” Ms Orr asked. “My understanding from the team is that if there is an unwillingness to accept an infringement notice we would just go straight to court,” Mr Shipton said rather weakly.

We will see more next week, when the Melbourne Banks and APRA are up.

As the AFR put it “Kenneth Hayne looks like reshaping the governance of Australia’s leading public companies judging from the line of questioning directed at Commonwealth Bank of Australia chairman Catherine Livingstone and chief executive Matt Comyn. Based on the lines of inquiry pursued by counsel assisting, Rowena Orr, QC, the Hayne governance era looks something like this: verbatim records of conversations held by board and sub-committee members, longer board meetings, more extensive board room information packs, intensive director induction programs, more robust challenging of management, and increased employment of lawyers and accountants as non-executive directors. This would go hand-in-hand with the increased rules and regulations such as those already pushed through parliament covering bank remuneration. The new laws have given greater intervention powers to the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, both of which will need significantly expanded budgets.

There was nothing here that suggested the lending tightening we have seen will be reversed, which then puts the acid back on the RBA, APRA and Treasury. As we discussed this week, Governor Lowe went public at CEDA with his concern that banks were becoming too risk adverse.  See our post “The People’s Gold Will Not Be Kept Among the People”, which also covered the Governors comments on Australia’s gold.  All the more reason for effective banking separation in my book!

But the more immediate point is the fact that home prices are tightly locked to accelerating rates of credit growth, – we call this the credit impulse. Even a slowing of the rate of credit growth is more than sufficient to lower home prices, precisely as we see now – so a fall to 5.2% or thereabouts as reported by the RBA is sufficient to drive prices lower. Most Central Bankers just do not understand this critical linkage, preferring to believe that as credit creates assets, increasing debt is a zero sum game – this is just plain wrong!

We updated our scenarios, and you can watch the replay of our recent live stream where we discussed our thinking – the probability of more significant home price falls is rising. Even in the smaller markets. Have no doubt this will have a significant impact on the broader economy. GDP will fall.

Locally, the markets, were all over the place this week, in volatile trading. The S&P ASX 100 rose 0.51% to 4,711, still reflecting recent lows on Friday. The ASX VIX eased a little on Friday down 2.41%, but at 16.55 is still in “fear” territory.    The banks did better on Friday, with the S&P ASX 200 Financials up 1.08% to 5,731. AMP was up 1.65% to 2.46, still near the bottom, ANZ was up 2.29% to 26.34, Bank of Queensland was up 0.62% to 9.79, Bendigo was up 1.17% to 10.40, CBA rose 0.95% on Friday, to 71.30,   NAB was up 1.03% to 24.48, Suncorp was up 0.67% to 13.49, Westpac was up 1.4% to 26.04, Mortgage Insurer Genworth was up 0.91% to 2.21 and continues in the doldrums.  Macquarie Group was up 0.29% to 114.53.

The Australian Dollar US Dollar slid 0.25% to 72.36, still in its trading range, while the bitcoin Aussie fell 10.38% to 5,297 and the Aussie Spot Gold rate fell 0.11% to 1,691.

Stocks on Wall Street ended lower as another tumble in oil prices weighed on energy stocks. The Dow fell 0.73% ending at 24,286, while the broader S&P 500 index lost 0.66% to 2,632. The tech-heavy Nasdaq composite was down 0.48% to 6,939. The volatility index rose 2.74% to 21.37 as the gyrations continue.  Trading was light after the Thanksgiving break.  The S&P 100 was down 0.84% to 1,161.

The S&P 500 Financials was down 0.91% to 430.5 signalling more weakness in the financial sector, while Goldman Sachs fell 1.86% to 189.02.

Crude oil prices fell more than 7.7% as concerns persisted about a supply glut, down to 50.42. Dow components Exxon Mobil fell 2.7% and Chevron slumped 3.3%.

Helping the sinking sentiment, of course, was the notion that President Donald Trump would successfully prevent OPEC from slashing production when the cartel meets in Vienna on Dec. 6, by using his “no-sanctions trump card” for Saudi Arabia, which has admitted a premeditated murder of journalist Jamal Khashoggi, but denies any involvement by Crown Prince Mohammed bin Salman.

The energy sector has lost 16.5% since the beginning of October, making it the worst performing S&P sector during the period and putting it on pace for its biggest two-month drop since September 2011.

“If we get clarity on any of these – oil prices, trade war with China and the Federal Reserve’s rate of monetary policy tightening – we could go a long way towards making investors comfortable in investing in the market,” one analyst said.

Meanwhile, retail stocks were in focus with Black Friday sales underway. Discounts will continue through to Cyber Monday as investors will look to see if the companies can overcome an underwhelming retail earnings season.   Walmart was up more than 1%, but Amazon.com dropped 0.96% to 1,502. Apple fell 2.54% to 172.20 and Intel fell 1.04% to 46.54. Google was also down 1.28% to 1.030.

Cryptocurrency prices slumped on Friday, with Bitcoin falling to a new 14-month low down 6.59% to $4,342, The digital currency is down more than 75% from its peak of $20,000 in 2017. Meanwhile, UK regulators warned investors against digital coin derivatives earlier this week. The Financial Conduct Authority (FCA) could ban some crypto-based derivatives, Christopher Woolard, executive director of strategy and competition at the FCA, said at a crypto event in London. “We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens … Given this, the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities,” Woolard warned.

The US Dollar index was up 0.26% to 96.96.  The Euro USD was down 0.61% to 1.13 and the British Pound US Dollar was down 0.47% to 1.28, on more Brexit weakness.  Deutsche Bank was down 0.84% to 8.18.  Gold was down 0.37% to 1,223.

All this may slow the FED’s drove towards higher rates, with the 3-month rate down 0.02% to 2.41% and the 10-Year rate down 0.48% to 3.05.  That said, I expect another couple of hikes, which will put the cat among the pigeons in terms of corporate debt, and funding costs more generally.

We believe there will be further market volatility in the run up to Christmas, and more home price falls locally. Thus we cannot think of any good reason why you would consider buying property in the current climate – best to ignore the spruikers, and so call great mortgage offers, and bide your time. Those with a current mortgage should check to see if better refinanced rates are available, but that will depend on your risk profile. But for some, there are savings to be made (though the Banks may like to hope you are not smart enough to find them!).

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.

Today, Do The Bears Have It? – The Property Imperative Weekly 17 Nov 2018

Welcome to the Property Imperative weekly to 17th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.

Watch the video, listen to the podcast or read the transcript.


It has been a roller coaster ride on all fronts this week, with more market gyrations, larger predicted falls in home prices locally, and the first “unnatural act” from the Government to try and sustain the finance sector, ahead of next year’s election, expect more ahead.

And by the way 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.

We start with the markets this week the Dow closed lower for the week, despite a rally on Friday that came despite the White House reportedly walked backed President Donald Trump’s upbeat comments on trade.

The Dow Jones Industrial Average rose 0.49% to 25,413 at the end of the week, the S&P 500 rose 0.22% to 2,736, but the Nasdaq Composite fell 0.15%.

After the falls earlier in the week, Wall Street went into rally mode Friday after Trump said he was hopeful the U.S. and China will reach a consensus on trade deal. Later the White House, however, peddled a more sombre narrative on trade in the wake of Trump’s comments, telling CNBC that a deal was not coming soon. Still, the broader averages held their gains, but that did little to avert a weekly loss following a rout in tech.  The fear index, the VIX eased a little on Friday, down 9.21% to 18.14, but is still elevated, signalling uncertainty ahead.

In tech, Facebook fell 3% amid the fallout from a New York Times article detailing how the company conspired to cover up warnings that Russia had used the social media platform to disrupt the U.S. election in 2016. Apple moved higher after recent falls, up 1.11% to 193.53, while Alphabet fell 0.26% to 1,068.  Intel was up 1.5% to 48.53.

Financials were mixed, with the S&P 500 Financials index up 0.06% on Friday to 443.45 but Goldman Sachs Group was down 0.8% to 202.12.

Sentiment on stocks were also lifted by easing concerns about steeper U.S. rate increases after Federal Reserve Vice Chairman Richard Clarida indicated that the U.S. central bank may stop at the neutral rate, rather than continue hiking beyond the neutral rate, which might be interpreted as an effective “rate cut,” JPMorgan said in a note to clients.  The 3m bond rate slid 0.67% to 2.35, and the 10-year was 1.71% down on Friday to 3.065. Clarida does not expect a big increase in inflation this year. With that in mind, both central bankers are still confident enough in the domestic economy to proceed with a December rate hike, but there’s a good chance that it will be accompanied by a less hawkish outlook.

Energy added steel to the rally on Friday as oil prices settled flat, but slumped 6% for the week on concerns about a global glut in supplies. The WTI futures was up 0.66% to 56.83.  Oil bears are back to taunting Saudi Arabia by pressuring the market again, just two days after giving a reprieve to the record sell off in crude.

In fact, West Texas Intermediate and Brent crude futures settled steady to slightly higher on Friday after rallying more than 2% earlier in the day on fears that the oil-rich kingdom and the OPEC cartel it leads could cut supplies substantially at a December 6-7 meeting. Friday’s s rebound didn’t help crude’s weekly loss of 6%, making it the sixth-straight week in the red.

Prices initially rose on an analysis from tanker-tracking firm ClipperData that showed Saudi Arabia was already loading fewer barrels on ships bound for the United States this month, continuing a trend that began in September. By sending fewer barrels to the United States, the Saudis hope to starve U.S. crude stockpiles, which have swelled by nearly 50 million barrels the past eight weeks. It’s a strategy the kingdom used last year while working alongside OPEC members, Russia and other producers to rescue oil prices from lows under $50 a barrel. But after the morning highs in New York trade, prices turned volatile before returning to positive territory just before the close. Adding pressure to the market was weekly U.S. oil rig data showing drilling activity at its highest in over three years, after an addition of two rigs this week.

In an extreme turn of events, the fire from Bitcoin Cash’s hardfork war has spread wildly across the entire crypto market, burning through virtually every cryptocurrency and leaving many investors burnt too. Bitcoin had more than $28 billion stripped from the market, as it fell beyond the support of its long-standing safety net at $5,800.

Gold was higher, up 1.9% to 1,222 on Friday, with some suggesting that the US$ bull run might be ending, as economic outperformance, rising interest rates, equity market pressure and trade policy all look suspect, and a switch to metals might make sense. But more likely it is the risks around Brexit, Theresa May could be fighting for her political survival, but the Brexit crisis she’s in has thrown gold bulls a lifeline. Initially resigned to losing the market’s $1,200 support level as the week began, fans of the yellow metal not only got to stay in their comfort zone but also saw their best weekly gain in five as hedgers rushed to the relative safely of bullion after the pounding taken by sterling from Britain’s EU-exit woes. Tory MPs may have enough votes – 48 are needed – for a letter of no confidence that would force a vote in Parliament. If the rebels within her ranks really do have the votes to force a no-confidence motion UK politics will be thrown into an even greater existential crisis.

Not that a change in leadership there would make much difference.  U.K. Prime May on Friday reshuffled her minister team and took personal charge of the divorce talks with the European Union. The moves came at the end of an extraordinary week in which seven members of her government resigned and a push to force her from power gained momentum.

The pound gained 0.4% against the U.S. dollar on Friday, rebounding a bit from Thursday’s plunge. But sterling still suffered a loss for the week and volatility soared to a two-year high. The British Pound Dollar was up 0.48% on Friday to 1.2835, while the Euro USD rose 0.76% to 1.1414.  The US Dollar index fell 0.51% to 96.43.  Deutsche Bank, was down 0.06% to 8.59, not helped by recent Eurozone bank stress test results.

All 3 of the commodity currencies traded higher on Friday with the Australian hitting a 2-month high and the New Zealand dollar hitting a 4-month high. AUD and NZD ripped higher on the hope that President Trump will forgo another round of tariffs on China. Ever since the mid-term elections, his tone toward China has been softening.  The Aussie ended up 0.76% to 73.32, helped by strong jobs numbers in October and bullish noises from both the treasurer and the RBA.

In the local market, the ASX 100 fell 0.17% to 4,711, reflecting similar weakness in US stocks. The ASX Financials was also down, 0.09% to 5,635.60 in bearish territory.  Regional Bendigo bank was up 0.99% to 10.20, while Suncorp fell 0.15% to 13.54 and the Bank of Queensland was higher up 0.82% to 9.78. Macquarie who generates more than half of its business offshore, rose 0.16% to 119.00 whilst the majors were softer, with NAB down 0.46% to 23.77, Westpac down 0.28% to 25.27, then went ex. Dividend this week, ANZ was down 0.12% on Friday to 25.36 while CBA was up a tad to 68.90. Lenders Mortgage Insurer Genworth tracked lower down 0.91% to 2.18, not least because they are exposed to the housing sector and the investment markets, both of which look weaker. AMP continues in weak territory, although up 1.98% to 2.58. The Australian VIX index eased back, down 3.33% to 16.80, still will in the nervous zone. The Aussie Bitcoin dropped 2.76% to 7,492 and the Aussie Gold slid 0.06% to 1,666.43.

The property news continues south, with the latest CoreLogic average clearance rate down again last week, with only 42.7 per cent of homes successful at auction.  And that excludes the large number of unreported results, so the true numbers in even worse. There were 1,541 auctions held across the combined capital cities, having decreased from the 2,928 auctions held over the week prior when a higher 47 per cent cleared. Both volumes and clearance rates continue to track lower each week when compared to the same period last year (2,046 auctions, 61.5 per cent).

In Melbourne, final results saw the clearance rate fall last week, with 45.7 per cent of the 266 auctions successful, down from the 48.6 per cent across a significantly higher 1,709 auctions over the week prior.  Across Sydney, the final auction clearance rate came in at 42.6 per cent across a slightly higher volume of auctions week-on-week, with 813 held, up from 798 the previous week when 45.3 per cent cleared. Sydney’s final clearance rate last week was not only the lowest seen this year, but the lowest the city has seen since December 2008.

The only capital city to see more than 50 per cent of auctions successful last week was Adelaide (50.8 per cent), however this was lower than the prior week’s 57.6 per cent. Brisbane saw the lowest clearance rate, with only 30 per cent of homes selling.

Geelong recorded the highest clearance rate of all the non-capital city regions, with 57.1 per cent of auctions reporting as successful, while the Sunshine Coast region had the highest volume of auctions (55).

CoreLogic are expecting more auctions today, so we will see if this eventuate.

I discussed the latest household data at a UBS forum on Monday, other members of the Panel were included Tim Lawless from CoreLogic and Christopher Joye Coolabah Capital as well as Jon Mott Head of Banks at UBS and George Tharenou their Chief economist. You can watch my segment of the discussion “Some Thoughts About The Housing Market” via a scratch recording I made.   Frankly demand for property continues to weaken, as supply rises, and sales volumes fall. First time buyers and investors are becoming more cautious.  Jon Mott has been negative on the sector for some time and his new note proposes a worst case scenario in which Aussie house prices crash 30%, the RBA cuts rate to zero and launches quantitative easing, and banks are crushed by cascading bad debts, cut dividends and class actions. Smartly he has developed a range of different scenarios (scenarios will sound familiar to anyone following DFA, as we have been doing this for years, it’s the best way to communicate the intrinsic uncertainty in the system.

He thinks that his scenario 3 – housing correction is most likely, with a 10% drop in prices, and that the banks will be challenged in this environment. But if prices fall further, the banks get hit with class actions, and bad debts they will have to cut dividends.

SQM’s Louis Christopher also issued their latest Boom-to-Bust report, and guess what, he also used scenarios. SQM’s base case forecast is for dwelling prices to fall between -6% to -3%, which is a continuation of the current falls of 4.5% over the past 12 months. Sydney and Melbourne will drive the falls. Other cities will record mixed results with Hobart expected to have a third year of strong price rises of 5% to 9%. The base case forecasts assume no changes in interest rates, a Labor win at the next Federal Election with Negative Gearing repeal and CGT changes coming into effect 1 July 2020. If SQM Research is correct on the Sydney and Melbourne forecasts, it will mean by the end of 2019, the peak to trough declines will be at least in the order of 12% to 17% for these two cities. SQM Research believes that, presuming the RBA does not intervene in the market, 2020 could also record price declines due in part to the repeal of Negative Gearing which is a firmly stated Labor party objective. As such there is a risk that the total peak to trough declines could be in the order of 20% to 30% for our two largest capital cities. The range is dependent on:     When, if and how the RBA responds to the downturn;     How the economy responds to the downturn;   Will the banks be required to lift rates out of cycle;     Will negative gearing and capital gains tax concessions be repealed as per the Labor Party’s policy. Christopher said, “If the RBA does not respond and/or the bank lift interest rates again in 2019, it is possible the peak to trough falls in Sydney and Melbourne could be even more than this negative range. But we do take the view that the downturn in Sydney and Melbourne will be a significant negative for the overall economy, and so the central bank will eventually respond at some point and cut interest rates.”

Gareth Aird the senior economist at CBA discussed the drivers of dwelling prices, and identified four leading indicators that capture the momentum in the property market well. They are: (i) the flow of credit (i.e. housing finance); (ii) auction clearance rates; (iii) foreign residential demand; and (iv) the house price expectations index from the WBC/MI Consumer Sentiment survey. Presently all of these indicators are pointing to dwelling prices continuing to deflate over the near term (up to six months).

Indeed, credit and prices are strongly correlated, as we have discussed before.  From a dwelling price perspective, the flow of credit matters more than changes in the stock. The annual change in housing finance has a close leading relationship with the annual change in dwelling prices by around six months. New lending is driven by the supply and demand for credit. The latest housing finance data indicates that the flow of housing credit continues to fall. And the pace of the decline has accelerated (chart 3). Credit to investors has been trending down for the past 1½ years. But it’s the shift downwards in lending to owner-occupiers that is behind the recent acceleration in the decline of credit.

Generally, auction clearance rates are a leading indicator of prices. Auction clearance rates tend to lead prices on average by two months. Auctions are more popular in Sydney and Melbourne as a means of selling a property. As such, the link between auction clearance rates and property prices is very much a Sydney and Melbourne story. As a rough rule of thumb, the annual change in dwelling prices tends to be negative when the auction clearance rate is below 55%.

Over the past two years, foreign investment in Australian property has waned. This is primarily due to a lift in state government stamp duties levied to foreign investors as well as tighter capital controls out of China. There is a decent relationship between the annual change in property prices against the share of sales going to foreign investors. Generally foreign purchases have led prices on average by around four months, although that lead time has shrunk more recently.

And finally on consumer sentiment, Aird says it has proved a very useful near term indicator of the annual change in dwelling prices. There is of course a self-fulfilling aspect at work. If households expect prices to weaken then demand for credit will fall and prices will correct lower. The reverse is also true when households expect price growth to accelerate. The WBC/MI house price expectations index is pointing to dwelling prices continuing to deflate over the near term.

The RBA’s Deputy Governor Guy Debelle summarised the Bank’s assessment of the various measures put in place to address the risks around housing lending.   He argued risks are under control, though external shocks could still hit household balance sheets.  Loose lending is not seen as a risk…. Hmmmm! Whilst the regulatory measures have significantly reduced the riskiness of new housing lending, we have masses of loans written under weaker regulation, which are still exposed.

He also again illustrated the fall in investor borrowing, the shift away from interest only loans, and a significant decrease in the maximum loan sizes now on offer – on average down 20%, though we think for some households the fall is significantly larger. He also showed some households were now paying higher rates, thanks to larger spreads over the P&I loan benchmark.

The trend unemployment moved a little lower according to the data from the ABS, from 5.2 per cent to 5.1 per cent in the month of October 2018. This is the lowest unemployment rate since early 2012 and the 25th consecutive monthly increase in employed full-time persons with an average increase of 20,300 employed per month. The trend underutilisation rate decreased 0.1 percentage points to 13.4 per cent and the trend participation rate remained steady at 65.6 per cent in October 2018.

But wages growth remains sluggish with the seasonally adjusted Wage Price Index (WPI) up 0.6 per cent in September quarter 2018 and 2.3 per cent through the year. The more reliable trend was 0.5% in the September quarter. Private sector wages grew by 0.55% over the quarter, whereas public sector wages grew by 0.61%. So Public Sector wages are growing more strongly, whilst the private sector continues to struggle. The weak wages growth will dent the budget projections and household budgets. Western Australia recorded the lowest through the year wage growth of 1.8 per cent while Tasmania recorded the highest of 2.6 per cent.

So no surprise that our household financial confidence index was lower in October The index measures households overall comfort level with their finances across a number of key dimensions. Recent home price trends, lower returns on deposits and share market gyrations have combined to take the index lower, despite strong employment trends. The wealth effect is now working in reverse, with a potential impact on future consumption. The index returned a result of 88.1, down from 88.4 last month. This continues the decline since late 2016, and is now approaching the lowest ratings from 2015. The convergence across the states continue as home price falls in NSW and VIC take a toll, with the southern state showing a significant slide. WA and QLD appear to be tracking quite closely.  Across the age bands, younger households are under the most pressure (thanks to large mortgages, or renting) while those aged 50-60 years remain the most confident, thanks to lower net borrowing, and more savings and investments.  For those aged 40-50 recent falls in property prices swamp any benefit from stock market performance. Those holding property for owner occupation remain the most positive, despite falls in paper values of their homes, but property investors are now registering significant concerns, thanks to flat or falling net income from rentals, falling capital values and concerns about the future of negative gearing and capital gains tax relief. More property investors signalled an intention to seek to sell property, as the switch from interest only to principal and interest loans continues. More than 41% of mortgage applications were rejected, compared with 5% last year, as more rigorous underwriting standards bare down.  In fact those renting are in many cases more confident than property investors, significant turnaround. The great property investor decade in passing. You can watch our show “Household Financial Confidence Is In The Gutter”.

The use of the Household Expenditure Measure HEM may well be back in play, following the latest from the Westpac ASIC case.  Given that at some banks HEM is still being used for around half of applications, and the Royal Commission commented specifically in the use of HEM, perhaps the law needs to be changed.  The core of the argument is whether the loans were unsuitable, and that it seems would depend of the ultimate progress of the loan subsequently. In other words, it cannot be proved to be unsuitable until it falls over. ASIC would need to prove the loan was unsuitable! Actually we think the law says lenders have to verify expenses, and in other cases, for example in pay day lending specific inquiries are required as part of the assessment. But it’s as clear as mud at the moment! When is unsuitable lending to be demonstrated? This will have a significant impact on any potential class actions. And of course next week the Royal Commission start they next round, with senior bank executives and regulators on the stand. This should at very least be entertaining, and will perhaps get to the heart of the cultural issues in banking and finance.  In this regard you should watch our recent show with John Dahlsen, business man and ex. ANZ Director, who has some important things to say about what has driven the poor outcomes from the sector and what needs to change. It’s a long piece, but highly relevant – “Thinking About Banking From The Inside”.

But for now, banks want more data on expenses, and the latest was ANZ who outlined new tighter rules from 20th November, where mortgage applicants will need to provide much more evidence, and history on income and expenditure. Any income from bonuses will be ignored and income shaded to 80% and evidence of continuous employment is needed. As well as more granularity and evidence on expenditure, they also will want more detail on potential changes to personal circumstances.

And finally, this week we saw the first “unnatural act” from the Government to support the banking sector, in an attempt to alleviate the home price falls and lending freeze ahead of the election next year. The proposed $2 billion funding pool is small beer in the estimated $300 billion SME lending sector. There is precedent a decade ago when the government’s $15 billion co-investment with the private sector into the residential mortgage-backed securities market during the GFC. So the federal government announced a new, $2 billion Australian Business Securitisation Fund to help provide additional funding to small business lenders. But this is lipstick on a pig in my view, and does not get to the heart of the matter at all. But I expect more such measures in the run up to the next election.

And if you want to understand what is ahead, then watch my recent interview with Harry Dent, as we discuss the limitations of central banks, and how QE has really created a monster which is still running rampant.  And we are also extending our reach into the New Zealand market with the help of Joe Wilkes, see our latest Ireland V New Zealand – A Passion For Rugby & Property.

But to sum up the state of play, the Bears are indeed in town, and we should prepare ourselves for more falls ahead. Our scenarios continue to play out as expected.

Finally, a quick reminder, our next live Q&A session is now scheduled for November 20th at 8 pm Sydney time. You can schedule a reminder by using the YouTube Link and join in the live discussion, or send in questions beforehand. If previous sessions are any guide, it should be a lively event!

More From The Property Market Front Line – All Roads Lead To ROME (Sydney)

Edwin Almeida, our property market insider discusses the factors which have led to poor urban planning, and the impact this is having on the property market, and households.

Please consider supporting our work via Patreon

Please share this post to help to spread the word about the state of things….

How Would Negative Equity Fall With A 20% Home Price Fall?

AMP’s, Shane Oliver published a piece in which he revised up his expectations of the housing price correction from peak to trough to 20% in Sydney and Melbourne, and 10% nationally, a downgrade from their previous expectation for a 5% national average fall.

He has, along with a number of other economists progressively raised his expectations of the falls across the market as new data comes to hand. And specifically, he highlights the link between climbing home prices and credit availability.  He says “this has taken the household debt to income ratio from the low end of OECD countries to the top end. The shift to overvaluation and high debt mostly occurred over the 1995-2005 period”.

We have taken his projections and run them across our Core Market Model. If his forecast were to eventuate, we think around 17% of borrowing households would fall into negative equity – meaning their outstanding mortgage would be greater than their property value.

Negative equity is tricky, because it limits households ability to refinance, trade up or down, as well have reducing overall economic activity and confidence.  After the GFC, we saw many households in the UK locked into their properties for several years, the same could happen here.

In addition, of course there are implications for the banks (should they be adjusting their risk and capital models?) as well as for Lenders Mortgage Insurers, who cover the banks exposures above 80% of loan to value, unless they are covered by their captive insurers.  In a falling market the insurers would likely be hit with higher levels of claims.  Note of course there is not a one to one link between property price falls and defaults, the risks are much more complex.

But the results from our modelling are worth looking at in more detail, remembering we are using data from our household surveys and other sources.  Around 560,000 households would be impacted, and we can slice and dice the data to begin to understand their profiles.

Our core segmentation highlights that Multicultural and Young Families would be hit most severely, in terms of the numbers of households in negative equity, with the Battling Urban and Disadvantaged Fringe following closely. But we also see a fair number of affluent households also caught in a negative equity trap. They are often highly leveraged.

Across our property segments, those holding property without an intent to trade up or down figure as the largest sector, plus those who have refinanced recently. The first time buyer cohort also shows up, but this is a smaller count.

Two states NSW and VIC see the bulk of the negative equity, both states with a strong recent run in prices, and now significant reversals. AMP says 20% falls are likely here.

We can also see the more granular regional view showing the same.

Looking across are geographic bands, we see the urban fringe and outer suburban rings most impacted.

Across the age bands, it is younger households who are most exposed.

Finally, in terms of income bands, those in the $50-100k and $100-150k bands are most strongly represented.

So, in a nutshell, younger households with more limited incomes are more likely to be exposed to negative equity, especially if they live in the main urban centres of  Sydney and Melbourne, and they are more likely to be located in the outer suburban rings.

And finally, if we ran a uniform 20% fall across the country, the number impacted would more than double. Personally I think the smaller centres are also likely to fall further. But we will see!

 

 

Trade Wars and Regulation Threaten Australia’s House Prices

Falling house prices have prompted half of Australia’s fixed-income investors to nominate a domestic housing market downturn as the top risk to the country’s credit markets over the next 12 months, according to Fitch Ratings‘ 4Q18 fixed-income investor survey.

House prices have been pushed lower by regulations and tighter lending standards, but external threats posed by trade wars also loom. Investors are concerned the trade wars may adversely affect China, with negative flow-on effects for a number of Australia’s other Asian trading partners. This led 82% of investors to expect Australian house prices to decline by between 2% and 10% over the next 12 months. However, broader economic deterioration is not envisaged, as 97% of investors believe unemployment will remain below 6.5% through to mid-2020.

More than 60% of investors responding to our 4Q18 survey believe commercial bank lending standards will tighten for high-yield corporates, SMEs and retail sector borrowers over the next 12 months in the wake of a Banking Royal Commission. At the same time, there is a noticeable rise in the proportion on investors expecting fundamental credit conditions to deteriorate for financials – up to 66%, from 48% in our 2Q18 survey.

Shareholder oriented activities remain the preferred use of cash for Australian corporates, according to 78% of survey respondents. This has been a consistent finding across our surveys to date, but 4Q18 survey investors indicated that corporates may have an increased appetite for M&A as a use for cash.

A majority of Australian fixed-income investors expect spreads to widen in four asset classes over the next 12 months: financials, non-financial corporates, structured finance (RMBS and ABS) and unrated. Likewise, when asked what they are willing to pay across a range of asset classes, investors indicated that a sustained period of compression appears to be coming to an end in seven of ten asset classes surveyed.

The 4Q18 survey was undertaken in partnership with KangaNews – a specialist publishing house that provides commentary on fixed-income markets in Australia and New Zealand. Findings represent the views of managers of more than AUD500 billion of fixed-income assets, accounting for over three-quarters of Australia’s domestic real-money market.

Fitch’s 4Q18 fixed-income investor survey was conducted between 27 August and 10 September 2018. This survey is unique in the Australian context, reflecting the partners’ strong ties with the local investor community.

Is The Property Investor Party Over?

I caught up with property expert Edwin Almeida and we discussed the pressure on property investors and their property portfolios. Is the property investment party over?

Given the falling values, the dilapidation of much of the stock, and falling demand, it may just be the case. At very least, Edwin suggests holding off as prices will fall further!  Then the question becomes, how far and how fast?

Please consider supporting our work via Patreon ;

Please share this post to help to spread the word about the state of things….

Decoding Property Buying Intentions – “You Ain’t Seen Nothing Yet”

We have completed the latest round of our 52,000 household surveys, and today we discuss the results relating to property buying intentions by extracting the data from our Core Market Model. It was this data six months back which enabled us to predict the currently observed slowdown in sales, auction clearances and home prices.

So what is in store for the next few months? Well, in short its more of the same, only more so, with more households reporting difficulties in obtaining finance, fewer expecting to transact in the next year and to see home prices rise.

So we start with transaction intentions.  The first startling observation is the fall in the number of property investors, including those who hold portfolios of investment properties intending to transact.  20% of portfolio investors are expecting to transact, and the bulk of these intend to sell a property, compared with a year ago when 50% said they would transact, and most were looking to add to their portfolios. Most solo property investors are now on the side lines, with around 10% expecting to transact, and most of these on the sell side. Demand for investment property will continue to fall, as rental yields and capital appreciation fall.

On the other hand, the number of people trading down is rising, with more than 50% of these looking to sell before prices fall further.  There is some demand from first time buyers, and up-traders, but the net conclusion is there will be more property coming to market and fewer buyer, so prices are set to fall further, and quite quickly.  The spring season appears all but shot.

These trends are mirrored in the demand for credit.  Property investors are now less likely to borrow, while those trading-up and first time buyers are still in the market (but in terms of volumes this is a smaller group). Refinance households are still in the market for a replacement loan, but these do not add to new demand for credit.

As a result, we expect demand for credit to wilt further in the months ahead. Of course for the banks to maintain their profit output they need to see real growth in new credit, we do not expect that will eventuate, so credit will continue to ease.

Universally, households are less bullish on home price growth, than a year ago, with a sharp down turn since June 2018. Down traders are the least likely to expect rises at 18%, while 35% of those trading up were bullish on home price values.  Property investors are getting less and less positive about future price accumulation.

Turning to the specific segments, 36% of those wanting to buy, but who cannot, reported their barrier related to the (non) availability of finance. This is a record, and reflects the tighter underwriting standards now in force.

We find the same thematic among first time buyers where 42% report a problem with finance availability, a record.

Investors have a similar problem with 36% saying they have issues with finance, and more are now concerned about potential changes in regulation (including Labor’s changes to negative gearing).

In fact, Investors are ever more reliant on the tax breaks, as capital growth eases. 40% are banking on the tax benefits, while 15% expect future capital appreciation.

When we look at the motivations of those seeking to trade down, 48% are looking to capital release, and now few are interested in acquiring an investment property.  Increased convenience remains a significant driver.

Households seeking to refinance are mainly being driven by a quest to reduce monthly repayments (49%) and there is a high correlation with those experiencing mortgage stress, as we reported yesterday.  Lender service, or the lack of it, does not seem to count for much.

And finally, to ice the cake, as it were, the number of loan rejections continues to rise, especially among refinance and investor cohorts.

Add this new data to the other factors:

  • Tighter Lending Standards – focus on income AND expenses, not HEM
  • Mortgage Borrowing Power dropped up to 40%
  • Foreign Buyers dropped 35%, and significant hike in extra fees and taxes
  • SMSF borrowing restricted
  • Interest Only Borrowing Restricted ($120 billion for reset each year)
  • Investors less likely to transact, as capital growth reverses
  • Tighter returns on rentals (half under water in cash flow terms)
  • Higher interbank funding costs
  • Rising mortgage costs and rates (NAB holds)
  • Risk from Class Actions and Royal Commission
  • Etc…

and there is plenty to suggest further home price falls are in the offing. We will add this new set of data into our scenarios, and we will update our findings in a future post.

But our conclusion is “you ain’t seen nothing yet” to quote an old Bachman Turner Overdrive song from 1974!

 

 

 

 

Despatches From The Investment Managers’ Front Line

Today we discuss a recent post looking at the Australian finance and property from an international investment managers perspective. Those following our work will find it surprisingly familiar!

As reported in InvestorDaily, following the global financial crisis, the US Federal Reserve has effectively been exporting extraordinarily loose monetary policy to markets across the world. As a result, one of the unintended consequences has been a growing number of asset bubbles around the world, especially in countries where central banks have been forced to run looser monetary policy than they might have wished.

James McAlevey, Head of Rates, Portfolio Manager, AIMS Fixed Income and Target Return funds at Aviva Investors has written about Australia.

He says that nowhere is the asset bubble more apparent than in Australia, where the Reserve Bank of Australia (RBA) has arguably kept monetary policy looser than domestic economic conditions warranted to try to cap the Australian dollar’s value. The resulting loose monetary has fuelled an unsustainable boom in house prices, with strong demand from Chinese investors having further inflated the market.

Given the magnitude of price increases – in Sydney, for example, prices have risen 80 per cent in the past five years – Australia’s housing market has for some time appeared a prime candidate for a sizeable correction. Until now, the prevailing wisdom has been that such a downturn was unlikely without significantly higher interest rates or rising unemployment.

However, in recent months a new threat has emerged. The government in February set up a royal commission to investigate alleged misconduct in the financial services industry. Having examined potential breaches of responsible lending laws in relation to the sale of home loans, it appears to be taking a more rigorous view of banks’ lending practices.

With allegations of fraudulent activity having led some politicians to clamour for more draconian action – the now Australian Prime Minister Scott Morrison warned financial sector executives responsible for breaches of corporate law that they could face jail – banks have begun to tighten lending criteria. Notably, in screening mortgage requests they are undertaking greater due diligence to verify applicants’ income and living expenses to assess their ability to service and repay their loans.

With a material tightening of the availability of credit now underway, suddenly there are plausible grounds for concern Australia could be heading for trouble. That could have serious consequences for house prices, the country’s economy, and ironically the banks themselves.

The dangers posed to banks are all the more acute given mortgages account for somewhere between 60–65 per cent of their assets, which is high by international comparisons. Furthermore, much of this housing collateral is sitting on banks’ balance sheets at inflated valuations, adding to their vulnerability to a housing downturn.

At the same time, Australian households’ finances have begun to look increasingly stretched. The ratio of total household debt to income is now high by international standards. According to a recent report from the RBA, it has risen by almost 30 percentage points to close to 190 per cent over the past five years, after being broadly unchanged for close to a decade. At the time of writing, three of the four major Australian banks had announced increases to their variable mortgage rates despite benchmark lending rates having been held unchanged. With Australian wage growth remaining stagnant, this is likely to lead to Australian household’s further tightening their purse strings.

Worryingly, many mortgages are on interest-only terms, but are set to revert to capital repayment mortgages in the coming years. According to a recent research note, UBS analysts believe Australian banks wrote around A$650 billion in interest-only mortgages over the past five years, representing around 40 per cent of total mortgage lending. With the Australian Prudential Regulation Authority (APRA) having placed a 30 per cent cap on such mortgages, they estimate around A$120 billion of these mortgages will revert to capital repayment loans each year until 2021.

The UBS analysts estimate repayments on these mortgages will increase by between 30 and 50 per cent, leading to a material squeeze on incomes and forcing many into selling their homes.

In 2017 APRA conducted a stress test of the country’s 13 largest lenders. It found in aggregate, the common equity tier 1 ratio of the industry fell from around 10.5 per cent to a little over 7 per cent by year three, and under a worst-case scenario to just below 6 per cent.

APRA concluded that although banks would potentially suffer significant losses, its results nevertheless provided a degree of reassurance: “banks remained above regulatory minimum levels in very severe stress scenarios”.

The regulator has simultaneously been looking to strengthen banks’ ability to withstand a housing downturn by changing the risk-weightings on mortgages and introducing other ‘macroprudential’ measures to limit riskier types of lending. For example, it is looking to tighten lending in Sydney, Melbourne and Perth by encouraging banks to stop lending to developers of high-rise properties – a segment of the market that is suffering from high vacancy rates and has been left badly exposed by the nascent downturn.

Sydney ranks among the most expensive real estate markets in the world.

He concludes that It remains to be seen to what extent the steps the regulator has taken will help limit the scale of losses made by banks in the event of a more severe property market downturn. The dilemma it is facing is that by tightening lending standards it runs the risk of causing property prices to fall further, intensifying the problems faced by the banks.

Some of the problems facing Australia are eerily reminiscent of the events seen in the US and western Europe in 2008. While Australian banks may yet avoid the catastrophe that befell financial institutions in the US and Europe, at the very least their profits appear vulnerable and their debt at risk of downgrades, especially given their reliance on wholesale markets for funding.

Given these concerns, he says, we believe the Reserve Bank of Australia will struggle to raise interest rates as fast as many other central banks. For some time now, we have been ‘short’ the Australian dollar, and bank debt via credit default swaps, and ‘long’ short-dated government bonds. Given the danger the royal commission will continue to generate adverse headlines for Australia’s banks, and given the bearish outlook for the country’s property market, we have in recent months increased the size of each of these positions.

And from our recent conversations with other international investors, he is not alone.

More From The Property Market Front Line – Edwin Almeida

The latest in our “Property Market Front Line” series, with a property insider calling it as it is…with surprising results!

Edwin Almeida predicts prices to fall to 2004-2005 levels in a lot of Sydney areas. Providing, the government don’t come up with, a left field stimulus package.

He is confident, apartments prices will drop 50-60% and homes by as much as 40%-50% from their 2017 peak, regardless.

Makes my 40% indications look quite benign!

His Site

Please consider supporting our work via Patreon

Please share this post to help to spread the word about the state of things….