The total value of residential dwellings in Australia was $6,926,538m at the end of the June quarter 2018, falling $13,321.1m over the quarter. We need to get use to more falls ahead. Of course it varies by locations and property types.
The mean price of residential dwellings fell $4,100 to $686,200 despite the number of residential dwellings rising by 40,800 to 10,093,700 in the June quarter 201
The price index for residential properties for the weighted average of the eight capital cities fell 0.7% in the June quarter 2018. The index fell 0.6% through the year to the June quarter 2018. So the falls are accelerating and the more recent CoreLogic series shows further falls ahead.
The capital city residential property price indexes fell in Sydney (-1.2%), Melbourne (-0.8%), Perth (-0.1%) and Darwin (-0.9%), and rose in Brisbane (+0.7%), Hobart (+3.0%), Adelaide (+0.3%) and Canberra (+0.6%).
Annually, residential property prices fell in Darwin (-6.1%), Sydney (-3.9%) and Perth (-0.9%), and rose in Hobart (+15.5%), Canberra (+3.0%), Melbourne (+2.3%), Adelaide (+2.1%) and Brisbane (+1.7%).
You can follow up by joining my live stream YouTube event tonight, where we will discuss the programme and my analysis. Details below.
Ok this ain’t sexy, but it could be the most important thing you read this year. Did you know that Australian household debt compared to our GDP is sitting at 120% and is one of the highest in the world? That’s what the latest data from the Bank for International Settlements (BIS) says, and they should know, as they are the central bankers’ banker.
Now you might well ask, why this is a problem. After all, in the past decade, the banks have been lending freely, mostly to help households buy real estate to live in or as an investment, and on that back of that they have been able to increase dividends to their shareholders and inflate their balance sheets, while the bank regulators are saying the banking system is sound, and despite the growth in debt, there is really nothing to see here – move along. Any anyone holding property, at least on paper, has done well, much of our wealth is in real estate.
As someone who have been watching the debt ballooning for many years I have become more and more concerned that we are laying a trap which could catch out a significant number of people, and have a flow-on effect on our broader economy. Yet the banks continue to say their mortgage loan portfolios are just fine thanks, despite the revelations from the Royal Commission showing that many loans were written under false pretences, and in some cases lenders were simply breaking the law, as the quest for sustained profits overtook their focus on doing the right thing for their customers. Moreover, while loan defaults are still quite rare, when they occur no-one wants to talk about them, and the default count has started to rise.
So when 60 Minutes approached me to talk about the current state of play, I wanted to assure myself that this would be an objective look at the situation we face. And during our discussions over a number of weeks, I was pleased that they did just this.
There are more than 3.5 million owner occupied mortgage holders across the country and based on our latest analysis, close to 1 million are struggling with cash flow – due to flat incomes, rising costs and higher mortgage repayments – meaning that ahead there is a risk of higher defaults.
At the same time, the regulators RBA, ASIC and APRA have finally started to bear down on the banks over free lending practices, and as a result, now lenders are looking much harder at the real costs and incomes of mortgage applicants, all leading to a significant reduction in what I call “Borrowing Power” – the amount you can borrow on a given set of income and expenses. In fact, for many, this is now 40% lower compared with just a year ago. Plus, property investors are also crimped by the same rules, just as foreign property investors are also leaving the field. The net results of all this is that demand for property is now falling, more is coming onto the market, as some are forced to sell, and so home prices are falling in the major centres. The rate of fall varies, but in some Sydney post codes, we are seeing falls of more than 20% in the past year. Areas of Melbourne and Brisbane are headed the same way.
As prices fall, mortgage lending is also stalling, especially investment loans, and I see a spiral down which is becoming unstoppable. Yet many in the construction and real estate sectors, and the finance sector just do not want to accept the facts, saying it’s a minor correction and prices will jump back up in the Spring.
In fact, the question now is just how hard prices will fall, and where may they end up? And here is the ghastly truth. Property is on an absolute basis valued more than 40% above its true worth. As lending contracts, we think there is a risk we end up over the next couple of years with a major correction to these levels. If that were to occur, this would be like the USA and Ireland in 2007, when the Global Financial Crisis (GFC) hit. In fact, we could be seeing the same here, triggered but the same lending binge, inappropriate lending standards and poor levels of banking supervision. Last time around it took a decade to recover, so this could be a long torrid road.
I believe our political leaders and regulators need to wake up and smell the roses, because for those who want to see the signs the debt bomb is about to explode. I hope I am wrong on the 40%, it may be less, but the number of people who might default, or live in property where the mortgage is worth more than the value of the home could be significant, and devastating for the broader community and economy. It’s time for us to wake from our property induced slumbers and start planning to handle that debt bomb. If not GFC 2.0 in Australia is on the cards, and 2019 will be the critical year!
If you want to know more, join me on my YouTube live stream 20:00 Tuesday 18th September where we will discuss the program, my analysis and what may happen in the years ahead.
Welcome to the Property Imperative weekly to 15th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, listen to the podcast or read the transcript.
On the 10th Anniversary of the failure of Lehman Brothers, the consensus seems to be that the financial system is still stressed, under the impact of sky high global debt, artificially low interest rates and asset bubbles. The shadow is long, and the risks high. I discussed this on ABC Radio Sydney, and also in a Video Post with Robbie Barwick from the CEC. Perhaps of most concern is the lack of acceptance that we have a problem, with the RBA this week recognising that household debt is high, but declaring it manageable and the Housing Industry Association calling for a relaxation of lending standards to support housing construction. That is in my view the last thing we need. The truth is, pressures on households, and tighter lending standards mean more price falls will follow. Those who follow my analysis will know I run four scenarios, including the one, the worst case, where prices could drop 40-45% from their highs over the next few years. This is the angle which the upcoming 60 Minutes programme, to be aired tomorrow, Sunday is driving at.
Just remember this is one of four scenarios! But its rated a 20% probability now.
There was more evidence this week as to the issues under the hood. For example, Domain says that whilst housing affordability has improved in all capitals where property prices have started to decline, the median multiple is still well above affordable housing thresholds in several capital city markets. They said that drawing on Domain price data and adjusted census income data, the change in price and the median multiple across capital city markets, since the respective peaks, was analysed.
While the house price to income ratio is a simple, standard indicator for understanding affordability — particularly across countries — it is far from comprehensive. Other affordability metrics still spell out tough times ahead for homeowners. Rental affordability, mortgage serviceability and the deposit hurdle are also vital considerations. But Domain says that as of June 2018, data shows the median income household in Sydney would require 59.8 per cent of weekly income to service an owner-occupied mortgage (assuming a 5.2 per cent variable rate on a loan-to-value ratio of 80 per cent). This is down from 64.4 per cent at the peak of the latest cycle
Another angle is credit scoring, as Banking Day called out, as the remaining three Big Four banks are reportedly getting ready to join NAB as participants in the new Comprehensive Credit Reporting regime. This means a massive database will share their customers’ full credit history with each other for the first time from the end of this month, at which point comprehensive credit reporting will be a foregone conclusion with the remaining major banks. The new data-sharing regime will allow lenders to better verify loan applications and assess credit risk by accessing the full repayment history of a potential customer, including their total debts. The major lenders have pushed ahead with the changes following pressure from the prudential regulator, The Australian reported, noting that ANZ said it had been testing positive data reporting since the end of June, although the data was not shared with the public at this stage. The big banks’ embrace of the new regime would put pressure on others to sign up, since only lenders who supplied comprehensive reporting to the credit bureaus would have access to the data, Australian Retail Credit Association chairman Mike Laing told The Australian. “If they don’t join then the people who intend to borrow money but not pay it back will quickly find out which ones are not in the system and they’ll go to the lenders who don’t have access to verifiable data. So it’s risky for a lender not to take part once most of the data is in there”.
And yet another angle. Between 2008 and 2012, the number of self-managed super funds grew by 27 per cent to nearly half a million. That was more than 40 per cent of the growth of the whole superannuation system. The global financial crisis coincided with the Howard government lifting the ban on superannuation funds borrowing money. As a result, self-managed super funds have rushed to take advantage and racked up $32 billion in debt in little more than a decade. The Financial System Inquiry in 2014 recommended that borrowing by superannuation funds be banned. It’s a view shared by Saul Eslake, the former ANZ Bank chief economist, who describes the decision to allow super funds to borrow as “the dumbest tax policy of the last two decades.” “The last thing Australians really needed in the last 20 years is yet another vehicle or incentive for Australians to borrow more money in order to speculate on property prices continuing to rise,” Mr Eslake said.
Overlaying that is the perennial problem of property spruikers trying to persuade people to borrow big to buy, and tip their newly acquired, heavily leveraged, property into a self-managed super fund. Super fund borrowing is known as “limited recourse” — which means if the fund can’t pay off the loan, the bank can’t go after any other assets — just the property in question. Remember this was at the heart of the sub-prime mortgage fiasco 10 years ago, which morphed into the global financial crisis. Whilst not wanting to be alarmist, Saul Eslake is concerned with what he’s seeing now in self-managed super funds with their limited recourse borrowing. “You might have thought that someone would have heard the term ‘limited-recourse borrowing’ and recognised that there were some significant risks associated with it that we could have done without in the Australian context.”
And CoreLogic Reported that the combined capital cities returned a final auction clearance rate of 55.3 per cent last week, a slight improvement on the 55 per cent over the week prior when volumes were lower. There were 1,916 homes taken to auction last week, up on the 1,748 held the previous week. While one year ago, a higher 2,258 auctions were held with a 66.9 per cent success rate.
Melbourne returned a final auction clearance rate of 60 per cent this week; an improvement not only over the week but the highest seen since May, with clearance rates for the city remaining within the mid-high 50 per cent range up until this week. The improved clearance rate was across a higher volume of auctions week-on-week, with 891 auctions held, increasing on the 805 held the week prior when 57 per cent sold.
Sydney’s final auction clearance rate came in at 50.6 per cent last week across 656 auctions, falling on the week prior when a 53.8 per cent clearance rate was returned and auction volumes were a similar 664.
As usual the performance across the smaller auction markets was mixed last week, with clearance rates improving in Adelaide, Brisbane and Canberra, while Perth’s final clearance rate fell.
The Gold Coast region was the busiest non-capital city region last week with 56 homes taken to auction, although only 26.4 per cent sold. Geelong was the best performing in terms of clearance rate with 88 per cent of the 34 auctions successful.
And this week, CoreLogic is tracking 1,882 capital city auctions this week. If we compare activity to the same week last year volumes are down 25 per cent on the 2,510 auctions held one year ago.
And finally, APRA released their quarterly property exposure data to June this past week. APRA release their quarterly property exposure lending stats for ADI’s today. There are some interesting data points, and some concerning trends and loosening of standards recently. I will focus on the new loan flows here. First the rise in loans outside serviceability continues to rise, now 6% of major banks are in this category a record, reflecting first tightening of lending standards, but second also their willingness to break their own rules! This should be ringing alarms bells. APRA?
Foreign Banks are writing the greater share (relative percentage) of 80-90% LVR loans. Other lenders tracking lower.
Foreign Banks are lending more 90+ LVR loans in relative percentage terms.
New investor loans are moving a little higher for Credit Unions and Major Banks, suggesting a growth in volumes.
The share of interest only loans dropped below 20% but is now rising a little, as lenders seek to grow their books.
All warning signs, especially when as APRA reports ADIs’ residential term loans to households were $1.62 trillion as at 30 June 2018. This is an increase of $86.6 billion (5.6 per cent) on 30 June 2017. Of these: owner-occupied loans were $1,076.4 billion (66.4 per cent), an increase of $76.7 billion (7.7 per cent) from 30 June 2017; and investor loans were $544.0 billion (33.6 per cent), an increase of $9.9 billion (1.9 per cent) from 30 June 2017. Debt is sky high, the grow rate must be slowed substantially – there are rumours of more tightening to come, we will see.
Looking at the local markets, the ASX 100 was down at the end of the week, ended up at 5,065.90, up 29.8 on the day, and it continues to underperform compared with the US markets. In the banking sector, NAB ended the week at 27.35, after they announced they would not follow the lead of Westpac, CBA and ANZ for now by not lifting their variable mortgage rates, for now. NAB closed up 0.18% on the day. ANZ, who it was announced with be subject to civil proceedings from ASIC for an alleged continuous disclosure breach in relation to a $2.5 billion institutional share placement undertaken by the ANZ in 2015. Their shares rose 0.32% on Friday to 28.15. CBA who took some further knocks this week thanks to further evidence of poor practice in CommInsure in the Banking Royal Commission, among others in the industry. They ended the week at 71.50, and up 0.45% today. And Westpac ended the week at 27.76 up 0.69% on Friday. Despite the relatively benign employment figures out this week, still at 5.3%, the Aussie ended the week at 71.54 and down 0.57% on Friday. The downward trajectory is clearly in play. This risks importing inflation into the local economy.
Looking across to the USA, many investors may be inclined to dismiss yet another headline on global trade and focus on the more granular aspect of the markets. But make no mistake, the markets were gyrating with the twists in the saga between the U.S. and its trading partners. The latest salvo came Friday, when Bloomberg reported that Trump instructed aides the day before to proceed with tariffs on about $200 billion more in Chinese products, but that the announcement has been delayed as the administration considers revisions based on concerns raised in public comments.
Earlier in the week, China had welcomed an invitation by the United States to hold a new round of trade talks. The Trump administration had invited Chinese officials to restart trade talks, the White House’s top economic adviser said on Wednesday. In addition to those tariffs, Trump has said he’s ready to add an additional $267 billion in tariffs “on short notice if I want.”
Earlier in the week, Beijing indicated it will ask the World Trade Organization for permission to impose sanctions on the U.S. as part of a dispute over U.S. dumping duties that China started in 2013.
And there’s still the revamp of NAFTA to consider. The U.S. and Canada have been in talks to bring Canada into a new agreement between the U.S. and Mexico, but there have been on announcements to far. Talks are expected to continue through Monday.
Beyond the US manufacturing sector – for example Boeing is still pretty strong, at 359.80, while Caterpillar ended down 0.44% to 144.90; the potential spill over into the consumer sector impacted a range of stocks, with Whirlpool down 1.68% to 123.21, Walmart down 0.56% to 94.59 and Mattel was up 1.49% to 16.35. Among the financials, Morgan Stanley was at 48.19, a little higher on the day, but still well down on March highs. The S&P 500 ended up 0.03% to 2904.98, as did the Dow Jones Industrial Average to 26,154, while the NASDAQ was down just a little to 8,010.
Apple got the type of promotional attention some companies can only dream of when the eyes of tech lovers and investors alike were glued to its keynote event for details on its new products, especially phones. Apple announced Wednesday its new iPhone product line. Shares of Apple rose the day before the event in anticipation of the kind of surprise announcement for which former CEO Steve Jobs was famous. The stock sold off as details about the new iPhones arrived and shares ended the day lower. But shares bounced back on Thursday, leading the overall tech sector higher, despite negative analyst commentary about the price of the iPhone XR. Apple ended the week down 1.14% to 223.84.
Bucking the recent trend that’s made investors nervous about price pressure, the latest data showed inflation cooling. First, figures showed wholesale prices fell unexpectedly. Producer price index decreased 0.1% last month. In the 12 months through August, the PPI rose 2.8%. Economists had forecast the PPI rising 0.2% last month and increasing 3.2% from a year ago. The core PPI decreased by 0.1% from a month earlier and rose 2.3% in the 12 months through August. Analysts had predicted core PPI to increase 0.2% month on month and 2.7% on an annualized basis.
Next, retail inflation rose less than anticipated. The consumer price index advanced 0.2%, missing expectations for a gain of 0.3%. In the 12 months through July, the CPI increased 2.7%, below forecasts for a reading of 2.8% and down from 2.9% in July. The core CPI increased by 0.1% from a month earlier, below forecasts for a gain of 0.2%. The annual increase in the so-called core CPI was 2.2%. Economists were looking for it to hold steady at July’s 2.4% advance. But despite these softer inflation numbers, traders ended the week still predicting a more-than-80% chance of the Federal Reserve hiking rates at its December meeting on top of the expected boost this month.
Bond yields rose sharply this week, owing to confidence that the Federal Reserve will lift rates for a total four times this year. The rise was particularly strong Friday, when the United States 10-Year yield topped 3% briefly. A big reason for that was Friday’s retail sales numbers.
The August retail sales numbers were disappointing at first blush, rising 0.1%, compared with expectations for 0.4%. But July’s gain was revised up to 0.7% from 0.5%. That revision gave market watchers some more confidence that the U.S. could see GDP growth of 4% in the third quarter, which would all but guarantee another rise in rates in December.
Gold ended the week lower at 1,198, down 0.82%, with preference for the US Dollar as a safe haven. And Copper fell 2.61%, well down on the start of the year, with demand slowing. Oil prices were higher to 69.00, up 0.60% on Friday, reflecting concerns about supply thanks to Hurricane Florence, and trade concerns. Of course, with the lower Aussie, this means fuel prices will rise further ahead.
Finally, Bitcoin is still making lower highs, even though the cryptocurrency has seen slightly higher lows. The key is going to be when bitcoin trades back above $7,000. There is a trend line connecting all the recent highs going back to early 2018. If BTC can bust above that level, it will likely take out the high at $7,350 and make a higher high. Once that happens, institutions may start buying heavily and upside could be back above $10,000 within months. That said, it ended the week down 1.15% to 6,488.
According to Bloomberg, Morgan Stanley plans to offer trading in complex derivatives tied to the largest cryptocurrency, according to a person familiar with the matter, joining other Wall Street firms in creating ways for clients to play the digital currency market. The U.S. bank will deal in contracts that give investors synthetic exposure to the performance of Bitcoin, said the person, who asked not to be identified because the information is private. Investors will be able to go long or short using the so-called price return swaps, and Morgan Stanley will charge a spread for each transaction, the person said. Citigroup is developing a new mechanism for trading cryptocurrencies known as digital asset receipts, a person with knowledge of the plans said earlier this month. Goldman Sachs is exploring derivatives on Bitcoin called non-deliverable forwards, and is considering a plan to offer custody for crypto funds.
Finally, today a couple of quick reminders, first the 60 Minutes programme tomorrow evening and our live stream event on Tuesday at 20:00 Sydney, where you can discuss with me the latest on the outlook for home prices, as well as all our other analysis. You can bookmark the event by using this link. I look forward to your questions in the live chat.
If you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
I discuss in more detail the latest developments in the property market with Chris Bates, Financial Adviser and Mortgage Broker, drawing from his direct experience in the market.
The Housing Industry Association continues to discuss a simply demand supply equation for property prices, when in fact our analysis suggests it is credit supply which is the real lever of price growth. As credit is tightening, and supply of property is booming, which ever lever you look at, it suggests prices will continue to fall, and further than many are predicting….
Here is the HIA release:
“Housing affordability is about ‘supply and demand’ and for most of this century there have been constraints on new home building that have limited supply and forced up prices.
“Since 2014, Australia has built an unprecedented volume of new homes and we are starting to see affordability indicators improve,” stated HIA’s Principal Economist, Tim Reardon.
Mr Reardon was speaking at HIA’s Industry Outlook event in Canberra today marking the release of HIA’s latest forecasts for residential building activity in the State and National Outlook reports. The reports include updated forecasts for new home building and renovations activity for each of the eight states and territories.
“The fall in house prices in Sydney and Melbourne is one indicator that affordability is improving, but the stalling of rental price inflation in the June quarter this year is the most important indicator as it tells us that the pent-up demand for new housing in Sydney and Melbourne is beginning to be met with a record volume of new housing,” added Mr Reardon.
“The fall in house prices will dampen demand for new housing over the next 12 months. Add to this, the proliferation of punitive taxes on investors in the housing market, disincentives to overseas buyers and tighter oversight of mortgage lending for home purchases and the environment for residential building is facing significant challenges.
“For these reasons we expect that the housing market will cool over the next couple of years, but the down-cycle that has emerged, in certain segments of the market and locations, will be moderate.
“Detached house starts in March 2018 were the strongest quarterly result in 18 years. Leading indicators suggest that we should expect another strong result for the June 2018 quarter. On this basis, it now looks like we will round out the 2017/18 year with over 120,000 detached house starts. This would be the strongest four quarter performance for the sector since the mid-1990s.
“The market for apartments in metropolitan areas will be the most significantly affected by the improvement in affordability and by the regulatory imposts.
“In the March 2018 quarter Victoria posted a record high of 12,000 multi-unit starts, which accounted for nearly half of the 26,300 units that were commenced across the entire country. The slowdown in apartments is also likely to be focused on metropolitan Melbourne and Sydney.
“The slowdown in Sydney and Melbourne is not consistent across the rest of their respective states. Strong activity in major regional centres has offset some of the decline in metropolitan areas. Queensland, Tasmania and South Australia are also on different trajectories and Western Australia is no longer in decline,” concluded Mr Reardon.
Welcome to the Property Imperative weekly to 11th August 2018, our digest of the latest finance and property news with a distinctively Australian flavour. Another week, more data, so let’s dive straight in.
And by the way, if you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
Watch the video, listen to the podcast or read the transcript.
We start with the trauma from Turkey which showed how fragile the financial markets are at the moment. Turkey’s finance minister (the President’s Son in Law) unveiled a new plan for their economy. The new economic stance will be one with “determination” — that’s a key part of it, he said. It will “transform” Turkey’s economy. It will also have a “strategic” and “powerful infrastructure.”
U.S. President Trump has repeatedly lashed out at Turkey over the continued detention of pastor Andrew Brunson, whom Turkish officials accuse of terrorism for his part of the failed 2016 coup, and no progress was made as delegates from both NATO countries met in Washington this week. Then Donald Trump, tweeted that he would double tariffs on Turkish steel and aluminum products.
As a result, the Turkish Lira plummeted further. In the course of an hour, it reached a new low of 6.80 to the dollar, marking its worst daily performance in over a decade. This from Bloomberg:
It recovered a little afterwards, but it has lost about 40% of its value against the dollar since the start of the year.
Many fear the fallout could spread beyond Turkey’s border, prompting traders to abandon riskier assets like stocks in search of safe-havens like gold, yen and Treasuries. Volatility, as measured by the VIX “fear index”, rose nearly 17%, highlighting investor concerns about the broader impact of a possible crash in Turkey’s economy.
One analyst said the exposure to a slump in Turkey’s economy is “pretty international,” though limited to the banking sector, but data from the Bank for International Settlements showed that Japanese banks are owed $14 billion, U.K. lenders $19.2 billion and the United States about $18 billion. Enough to make a dent.
The Turkish Lira also moved the same way against the Euro, up 14.33%. “We’re not going to lose the economic warfare” being waged against Turkey said President Erdogan.
In the US, core consumer prices rose by their quickest pace in a decade in July and topped market forecasts, keeping the Federal Reserve on track to raise interest rates twice more this year. The data add to a robust picture of the US economy, which grew by a speedy annual rate of 4.1 per cent in the June quarter. The unemployment rate is close to its lowest level in 18 years. Core inflation, which strips out volatile energy and food prices and is closely followed by the Fed, rose 2.4 per cent year on year in July and up from 2.3 per cent in June. That was the fastest annual pace of core inflation since September 2008.
While headline inflation is rising more quickly than average hourly earnings, wages may pick up given the strength of the labour market. The Fed seems well positioned to carry on tightening policy at its current pace, with no reason to either speed up or slow down. That said, the Turkish situation took the probability of two more cuts down a little according to Bloomberg.
The US dollar was relatively steady following the inflation data. The DXY index, tracking the US currency against a weighted basket of global peers, was up 0.8 per cent following the inflation figures, having been up 0.6 per cent before the data release. The index rose above 96 on Friday for the first time in 11 months.
Looking at the US indices, the NASDAQ slipped 0.67% to 7,838 on Friday, while the DOW Jones Industrial slipped 0.77% to 25,313. Gold futures slide a little to 1,219 and Copper was down 0.74% to 2.75. Oil futures rose 1.45% to 67.78, as the International Energy Agency warned that the recent cooling in the market may not last. Bitcoin was weaker, down 6.03% to 6,153, not helped by the news that creditors of the defunct coin exchange Mt. Gox are trying to recoup money.
European shares also fell on Friday as worries over a dramatic fall in the Turkish lira jolted financial markets amid concerns of the region’s banks’ exposure to upheaval in Turkey. The Germans DAX fell 1.99% to 12,424.
Asian stocks closed mostly lower on Friday as global investors opted to sell risk assets while they also continued to assess the impact of the latest tit-for-tat in the trade war between the U.S. and China.
China’s Shanghai Composite index managed to eke out meagre gains on high volatility. The index had recorded seven straight swings of 1% or more, the longest stretch since Chinese markets crashed in 2015.
In other emerging markets currency, the Russian rouble continued its decline, hitting fresh two year lows, after the US imposed fresh sanctions against the Kremlin for its alleged part in poisoning a former British spy and his daughter in the UK. It closed at 67.71, up 1.52%.
The Aussie continued to slide, as expected, down 1.04% on Friday to 72.96. And we also slipped against the British pound, down 0.63%.
Trade Tariffs continue to worry the market, with Fitch suggesting there is every reason to believe the United States’ trade dispute with China will get worse before it gets better, and that the US trade deficit will widen further rather than shrinking.
Now that they are on the receiving end of US tariffs, Chinese policymakers have three options. First, they could capitulate, by scaling back many of the “discriminatory practices” identified in the US Trade Representative’s March 2018 report on technology transfers and intellectual property. So far, there is no indication that China is considering this option. Second, China could escalate the dispute. It could set its own tariffs higher than those of the US, apply them to a larger range (and greater dollar value) of US exports, or offset the impact of US tariffs on Chinese exporters by allowing the renminbi to depreciate against the dollar. Alternatively, policymakers could look beyond trade in goods to consider capital flows and related businesses associated with US firms, effectively allowing the authorities to impede US financial and nonfinancial firms’ Chinese operations. As with the first option, this one seems unlikely, at least at this stage of the dispute. So far, China has chosen the third option, which lies between capitulation and escalation. China has retaliated, but only on a like-for-like basis, matching US tariff rates and the dollar value of trade affected. At the same time, it has tried to claim the moral high ground, by eliciting international condemnations of protectionism and unilateralism. This hasn’t been difficult, given that several other major economies are currently facing US tariffs. Securing such third-party buy-in is critical for the Chinese leadership’s domestic position. If the government were perceived at home as being bullied by the US, it would have to take a much tougher line in the trade dispute.
Fitch thinks that the US actually has rather limited options, despite having initiated the dispute. Even for a notoriously unpredictable administration, a full and unconditional reversal on tariffs seems out of the question. But so is the status quo, now that China has already levelled the playing field by retaliating in kind. That leaves only escalation – a possibility that the Trump administration has already raised by threatening additional tariffs on all imports from China
With the US locked in a trade war with China and other nations, Gregory Daco at Oxford Economics suggested that higher tariffs could gradually filter through to producer and consumer prices, supporting expectations of a gradual pick-up of inflationary pressures.
Locally, the RBA released its quarterly Statement on Monetary Policy with updated forecasts for inflation, unemployment and economic growth. The central bank has downgraded its inflation forecast for 2018. The RBA now expects both core and underlying inflation to rise by 1.75% to December 2018, down from the May forecasts of 2.25% and 2% respectively. Beyond that time frame, the central bank kept its inflation forecasts relatively unchanged. Previously, it expected both core and underlying inflation to reach 2.25% by the middle of 2020. In Tuesday’s rate announcement, Lowe also said that “a further gradual decline in the unemployment rate is expected over the next couple of years to around 5%”. The bank has maintained its forecasts that the unemployment rate will stay at around 5.25% through to June 2020, before dropping to 5% in December.
It’s also worth looking at Lowe’s speech on Wednesday, when he said that “Electricity prices in some cities have declined recently after earlier large increases, and changes in government policy are likely to result in a decline in child care prices as recorded in the CPI,” Lowe said. “There have also been changes to some state government programs that are expected to lead to lower measured prices for some services.” In Tuesday’s rates decision, Lowe said “the central forecast is for inflation to be higher in 2019 and 2020 than it is currently”.
The central bank slightly bumped up its forecasts for GDP growth in Q2 2018, to 3% from 2.75%. Longer-term, the bank’s growth projections were little-changed. It still expects GDP growth to average 3.25% over the next two financial years, before falling to 3% in June 2020 and remaining at that level through to December.
Given the projections were the first to include a time frame out to December 2020, the forecasts confirmed that underlying inflation pressures are expected to remain low for at least the next two and a half years. The latest set of projections confirmed that the RBA still looks set to keep interest rates on hold for the foreseeable future.
The Royal Commission hearings were back with avengence this week, with NAB’s MLC Wealth management business in the spotlight first, and later in the week IOOF. We saw more of the poor cultural norms on display, with investors being charged for no service, and attempts to block the release of documents and the late delivery of evidence to the commission. In fact, the CEO of NAB went as far as releasing an apology in Twitter. NAB shares ended up slightly to $28.09.
Shares in IOOF, Australia’s second largest wealth manager fell as senior executives from the fund manager appeared before the commission. At the close, the shares were down 2.7% to $8.73. Questioning in the royal commission centred around payments to related parties and the flow of cash back to the super fund from external fund managers when IOOF invests in those funds. Michael Hodge, senior counsel assisting the royal commission, said: “One of the things we are trying to understand is how trustees go about dealing with these volumes based fees where a percentage of the investment of the trust’s money is being paid to another part of the retail group.” Tendered to the commission today was a letter from prudential regulator APRA to IOOF about the conflicts of interest between members of the IOOF super fund and shareholders of IOOF.
The bottom line, is that poor corporate behaviour and the inability of regulators to get to the key facts was again in evidence, and again, consumers lose out as a result. It is shameful.
The CBA’s full-year results to 30 June 2018 (FY18) highlighted the pressure on Australian banks with an increase in wholesale funding costs squeezing CBA’s net interest margin in 2H18, slower loan growth and continued investment into the business and compliance contributed to higher expenses. Mortgage arrears also trended upwards due to some pockets of stress, and while they have not translated into higher provision charges as yet due to strong security values, continued moderation in Australian house prices may result in higher provisioning charges in future financial periods. CBA shares were up 0.03% on Friday to 75.39, and several commentators are claiming the worst is over for them, unlike for AMP, who also reported, and whose shares remain in the doldrums, reflecting the major changes to turn that ship around. Suncorp also reported and they did pretty well in the tight market, their shares rose after their results, and now stands at 15.63.
However, expect more bad news ahead, placing pressure on profit growth for all Australian banks. Increased regulatory and public scrutiny of the sector may make it difficult for the larger banks to reprice loans to incorporate the increase in wholesale funding costs, meaning net interest margins are likely to face some downward pressure. Loan growth is likely to further slow as the housing market continues to moderate, while compliance costs continue to rise due to the scrutiny on the sector. And of course the most prominent scrutiny is the royal commission into misconduct in the banking, superannuation and financial services industry, which has already identified a number of shortcomings within the industry.
That said, CBA’s FY18 results show a level of resiliency despite these issues. The bank reported cash net profit after tax from continuing operations declined 5% to AUD9.2 billion in FY18, but this was driven by a number of one-off charges, including a AUD700 million fine to settle a civil case in relation to breaches of anti-money laundering and counter-terrorism financing requirements. Cash net profit after tax from continuing operations rose by 4% to AUD10.0 billion when the one-off items were excluded.
CBA has much more to do to fix its reputation, and strong capital ratios are not sufficient to allay the concerns in the business. It is more about culture and putting customers first.
So, perhaps no surprise this week, the Greens called for the big banks to be broken up. They said “It’s time that banks became banks again. Australians are sick and tired of these massive financial institutions getting away with murder because they can throw stacks of money at the two old political parties. Our banks should be working for us, not against us and this policy will make sure that happens.
Under the Greens proposal: Banks will no longer be able to own wealth management businesses that both create financial products and spruik them to unsuspecting customers. Consumers will be able to easily distinguish between the simple and essential products and services that the vast majority of Australians use—deposits and loans, superannuation and insurance—and the more complex and selective activity that is the domain of big business, the wealthy, and the adventurous. By removing hidden conflicts of interest, Australians will be able to trust that the advice they’re getting from their banker is designed to line their own pocket, not the other way round. The watchdogs have failed. They would strip ASIC of its responsibility for overseeing consumer protection and competition within the essential services of basic banking, insurance and superannuation and return them to the ACCC.
But we believe there is much more to do than just breakup the banks. We will be discussing this in a future post. The major banks have too much market power, as we discussed on our recent video How Much Market Power Do “The Big Four” Hold? and they continue to milk customers using poor business practice, for example in the home loan market, the mortgage rate you get is hard to compare, and obtuse. We discussed this in our show “Price Information In the Home Loan Market”.
You might also like to watch our show on the latest lending statistics and mortgage stress data, “Lending, Stress and All Things DFA”, as we are not going to have time to cover these today.
So quickly to the property market. Once again prices continue to fall in the main centres of Sydney and Melbourne.
In terms of auctions, CoreLogic says that last week the number across the combined capital cities fell with 1,324 held with a final clearance rate of 54 per cent, down from the previous week. Combined clearance rates have levelled out somewhat remaining within the low to mid 50 per cent range for 13 consecutive weeks. They note that despite the continued slowing in the market, clearance rates are still tracking higher each week relative to the same period in 2012; during the last significant downturn in home values.
Melbourne’s final clearance rate came in at 57 per cent across 629 auctions last week compared with 911 last year returning a substantially higher clearance rate of 73.9 per cent. Sydney’s final auction clearance rate fell to 51.9 per cent across 462 auctions last week, down on the previous weeks. In same week last year, 620 homes went to auction and a clearance rate of 66.4 per cent was recorded.
This week, 1,320 capital city auctions are currently being tracked by CoreLogic; remaining relatively steady on last week’s final result which saw 1,324 auctions held. Over the same period one year ago, there was a considerably higher 2,040 homes taken to auction.
In June, according to the latest ABS housing finance data, first-home buyers accounted for 18.1% of the growth in owner-occupier loans, continuing a trend seen throughout this year. The chart from the RBA helps illustrate the effect that first home-buyers are having on the market. Clearly, there’s a trend underway in Sydney and Melbourne: The value of cheaper homes is holding up, while more expensive home prices have gone into reverse.
This is explained by increasing incentives in NSW and Victoria for first time buyers, and also more lower priced small apartments are coming on stream. The figures tie in with recent trends evident in the Sydney market, with more evidence of recent price falls among higher-end properties valued above $2 million.
Of course the question is, with prices falling, and likely to continue to fall further, could first time buyers get a better deal later by waiting for further falls. That, in my view is a tricky call but our modelling of future credit growth suggests first time buyers will continue to prop up the lower end of the market for some time to come yet.
And finally today, mark your diary, the next DFA live stream event will be on Tuesday 21st August at eight PM Sydney. I will be providing more information shortly about the event, but is already scheduled on the channel if you want to set a reminder. And feel free to send questions in beforehand.
Today we look at the current home price dynamics, as we are still seeing the property sprukiers saying that, first now that prices have fallen, it’s a great buying time and second, that prices will stay high because of the lack of supply. Neither of these statements are true.
The Domain quarterly house price data to June 2018, suggests that in Sydney the average house price is $1,144,217 and has dropped 1.46% in the past quarter. But the averages tell us nothing, as many suburbs are down more than 10% in the past year. For example, in Petersham, the median house price is $1,367,500, and has fallen by 15.2% since June 2017. In Chatswood the average house is down 11.1%. But the real damage is being done in the apartment market, with Milsons Point units at an average price of $1,480,000 and down 22.9%, followed by Lewisham at $697,500 down 22.4% and Ultimio at $730,000 down 13.1%. All these suburbs have been subject to significant numbers of new high-rise property investors, and now many will be well under water.
There was a very timely article in The Conversation today from Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University. She makes the point that rents have hardly risen at all over the past decade, siganlling no lack in property supply.
Overall, rent increases are clearly not keeping pace with soaring property prices in all major capital cities in Australia. So claims that a housing shortage is the principal cause of a lack of affordable housing are unfounded. Supply-side solutions, while important, will need to be targeted directly at low-income groups who find it difficult to compete in private rental markets to meet housing needs.
On the other hand, successive governments have offered preferential tax treatments of housing assets. These have encouraged a significant build-up of wealth in housing assets. Some of these favourable tax advantages have undoubtedly been capitalised into rising property prices. That has made it harder and harder for renters to break into the home ownership market. These are structural problems embedded within our tax policy settings. Hence, their impacts on house prices will not magically disappear any time soon unless policymakers are willing to undertake meaningful tax reform that shifts the emphasis away from treating housing as a commodity back to affordable housing as a fundamental right of all Australians.
And I would add to the mix, too easy credit, also helped to drive prices higher, as we have discussed before. Plus, we note the average number of families per dwelling has not moved for years, suggesting that supply it simply not the problem. Og is correct, the policy settings are wrong, and by the way if Labor did crimp negative gearing, as they have said they would, thill will put further downward pressure on prices in the investment sector.
But this leads to two important observations, first that there is no supply limited floor to home prices, they will fall further in the months ahead, as credit continues to be tight with more new stock coming on stream, and this despite the current migration rates. Second, as more investors in particular see their capital values sliding, they will have to decide whether to cut their losses and sell into a falling market (which will drive prices lower) or hold and lose more value. All this points to prices lower for longer, which really highlights how out of key those property sprukiers really are. Remember the old warning, prices can fall as well as rise, and we are seeing this in spades at the moment. I continue to think 2019 will be the crunch year.
Over the past decade there has been a significant change in house and unit values throughout each of Australia’s largest sub-state regions (best known as SA4).
Illawarra in NSW recorded the greatest increase in house values of all regional markets over the past decade with values increasing 86.8% and for units, the strongest was South East in Tas (63.3%), according to On The House.
Our findings found that over the 10 years to June 2018, national dwelling values have increased by a cumulative 43.9% with the combined capital cities recording an increase of 52.6% and the combined regional markets recording growth of 16.6%.
Houses values increased by 46.9% nationally over the past decade with combined capital city values growing at a faster pace (56.2%) than the combined regional markets (20.0%) Of the 88 regions SA4 national regions, 73 areas recorded an increase in dwelling values over the past decade with the remaining 15 recording falls. No SA4 regions of NSW, Vic, Tas, NT or ACT have recorded a decline in values over the past decade. Meanwhile, a majority of the WA SA4 regions have recorded declines in values over the past decade.
The region to record the greatest increase in house values over the past decade was the South West region of Sydney where values increased 112.9% over the period. An additional five SA4 regions have seen house values double over the past decade, they were: Parramatta in Sydney (107.4%), Inner South West of Sydney (106.6%), Outer South West of Sydney (103.3%), South East of Melbourne (102.7%) and the West region of Melbourne (102.3%).
The regions of the country in where house values recorded the largest decline over the past decade were:
Outback (North) in WA (-38.3%)
Outback (South) in WA (-34.0%)
Mackay-Isaac-Whitsunday in Qld (-27.3%)
Central Queensland (-26.8%)
Townsville (-23.6%)
Only 3 capital city SA4 regions, all of which are in Perth, have recorded house value falls over the past decade.
Value growth in NSW and Vic has been substantially stronger than growth elsewhere. In fact, the regions of NSW (Riverina) and Vic (North West) that recorded the weakest conditions over the decade have seen value growth well in excess of the best performing WA region (Perth-North West).
Outside of NSW and Vic, the regions with the strongest value growth across the remaining states and territories over the decade were: Brisbane-South (30.2%), Adelaide-West (20.3%), Perth-North West (2.2%), South East in Tas (43.9%), Outback in NT (35.2%) and ACT (30.3%).
Illawarra in NSW recorded the greatest increase in house values of all regional markets over the past decade with values increasing 86.8%. Illawarra recorded the 15th highest rate of house value growth over the past decade nationally.
The remaining regional markets that recorded relatively large increases in house values were:
Geelong (79.6%)
Southern Highlands
Shoalhaven in NSW (77.9%)
Newcastle and Lake Macquarie (68.6%)
Bendigo in Vic (63.3%)
Looking at unit values, nationally throughout the past decade, units increased by 34.2% which is lower than the 46.9% increase in house values. Unit value growth in the combined capital cities (42.0%) and combined regional housing markets (0.4%) was similarly lower than that for houses (56.2% and 20.0% respectively).
Of the 88 SA4 regions across the country, 53 have recorded an increase in unit values over the past decade with the remaining 35 recording a fall.
The South West region of Sydney recorded the greatest increase in house values of all SA4 regions (112.9%) and it has also recorded the greatest increase in unit values (98.0%). While seven regions of the country have recorded a doubling of house values over the past decade, not one region has seen unit values double over the same period. Only the Outer South West region of Sydney (81.0%) and Sydney’s Eastern Suburbs (78.2%), along with Sydney’s South West have recorded decade unit value growth of more than 75%. By comparison, over the past decade, 24 regions of the country have recorded house value growth in excess of 75%.
Unit values have recorded the largest declines over the past decade in:
Outback (North) WA (-73.3%), Outback (South) WA (-65.7%)
Darling Downs-Maranoa in Qld (-52.9%)
Central Queensland (-45.8%)
Townsville (-45.6%)
For the regions where unit values dropped, 15 were capital city regions with the remaining 20 located in regional areas of the country. The capital city unit markets that recorded the greatest unit value falls were: Darwin (-26.0%), Ipswich in Qld (-23.5%), Logan-Beaudesert in Qld (-22.1%), Moreton Bay-South (-20.5%) and Perth-Inner (-19.5%).
Outside of NSW, the regions of each state and territory to record the greatest increase in unit values over the past decade were: Melbourne-Outer East (63.1%), Outback region of Qld (28.7%), South East region of SA (41.0%), Wheat Belt region of WA (54.9%), South East region of Tas (63.3%), Outback region of NT (28.7%) and ACT (11.6%).
Outside of the capital cities, the regional markets that have recorded the greatest increase in unit values over the past decade were: South East in Tas (63.3%), Illawarra in NSW (60.2%), Far West and Orana in NSW (55.7%), Wheat Belt in WA (54.9%) and Bendigo in Vic (46.2%).
The growth in house and unit values over the past decade has been characterised as very much slanted to strong growth in Sydney and Melbourne and weaker conditions elsewhere.
While the last 10 years is not predictive of the future, dwelling values are already falling in Sydney and Melbourne and regional markets are currently outperforming capital cities.
With housing in a downturn in Sydney and Melbourne and affordability stretched, at this point it seems unlikely the returns of the past decade will be replicated over the next 10 years.
Welcome to the Property Imperative weekly to 30th June 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, listen to the podcast or read the transcript.
On the global stage, U.S. stocks were met with heavy selling pressure this week as the trade war hotted up. While earlier in the week, Donald Trump decided against imposing measures to restrict Chinese investment in U.S. based technology, the market is still reacting to the initial U.S. and Chinese tariffs which are coming into effect next week. In the world of bricks and click, Amazon was back in the headlines after the e-commerce giant announced its entry into the pharmacy sector with the purchase of Pillpoint. This triggering widespread panic, sending shares of brick-and-mortar drug stores sharply lower. Nike, meanwhile, showed improved results after revealing its first positive North America sales number in over a year. The S&P 500 closed 0.08% higher to close 2,718.37.
Boomberg says a leaked report from a Chinese government-backed think tank has warned of a potential “financial panic” in the world’s second-largest economy, a sign that some members of the nation’s policy elite are growing concerned as market turbulence and trade tensions increase. Bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising US interest rates and a trade spat with Washington, according to a study by the National Institution for Finance & Development The think tank warned that leveraged purchases of shares have reached levels last seen in 2015 – when a market crash erased $US5 trillion of value. “We think China is currently very likely to see a financial panic,” NIFD said in the study, which appeared briefly on the internet on Monday, before being removed. “Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.” The Australian dollar fell against the Chinese yuan from March to early May.
The China effect is on top of damming criticism of Central Bank’s policy by the Bank For International Settlements, which we discussed in our post “Red Alert From The Bankers’ Banker”. They say, economies are trapped in a series of boom-bust boom-bust cycles which are driving neutral interest rates ever lower and driving debt higher. The bigger the debt the worse the potential impact will be should rates rise (as they are thanks to the FED). Yet in each cycle “natural” interest rates are driven lower. Implicitly the current settings are wrong. This was in the Bank for International Settlements latest annual report. They also discussed how banks are fudging their ratios using Repo’s in our post “Are Some Banks Cooking the Books?” Within its 114 pages, the BIS report painted a worrying picture of where the global economy stands. In fact, the risks in the global monetary system remain from the Lehman crisis in 2008 and aggregate debt ratios are almost 40 percentage points of GDP higher than a decade ago.
Crude oil prices were strongly up, their highest since November 2014 extending a rally for a fourth-straight week as focus shifted to the prospect of deeper losses of Iranian crude supplies as the U.S. threatened sanctions on countries that fail to halt Iranian crude imports by Nov. 4. Then there were unexpected disruptions in Canada, Libya and Venezuela, together curbing supply and in addition, U.S. crude supplies fell by 9.9 million barrels. Crude futures settled 65 cents higher on Friday as data showed U.S. oil rigs counts fell for the second straight week, pointing to signs of tightening domestic output.
The US dollar was roughly unchanged for the week as heavy selling pressure on Friday reversed earlier gain after the euro rallied sharply on news of EU members agreeing on measures to tackle the migrant crises in the EU including stepping up border security and setting up holding centers to handle asylum seekers. A signal of easing political uncertainty within the bloc sent the EUR/USD sharply higher, to $1.1677, up 0.94%. The US dollar fell 0.82% to 94.22 against a basket of major currencies on Friday.
Gold tumbled further again this week and suffered its biggest monthly slump since September as investors preferred the US$. This was partly because the FED indicated they were comfortable with inflation running above the inflation target over the near-term, in reaction to the news that inflation hit the Fed’s 2% target for the first time since May 2012, raising the prospect of a faster pace of rate hikes.
And the crypto crunch continues. Bitcoin for example went below $6,000 and it could go lower still. No one is sure where the firm base is, so expect more volatility ahead.
And talking of volatility the COBE VIX index ended the week at 16.09, having been higher earlier in the week, up from the 10-12 range seen earlier in the year, but well below the peaks seen in February. As an indicator of perceived risk, this suggests there are more in the system than last year.
Locally the Australian Dollar ended at 74 cents, and the trend down since February is striking, perhaps mirroring rising UD Bond rates, higher capital market interest rates, and the Financial Services Royal Commission which recommenced this week in Brisbane with a focus on country’s $50 billion farm sector and farm finance, 70% of which resides in Queensland, New South Wales and Victoria. And it was more really bad news for the banks, who again demonstrated poor practice, and in some cases deception. But this is a complex area, with farmers sensitive to weather extremes, global commodity prices, and changing land prices. And players such as liquidators seemed to profit from the failure of farmers, despite selling land and equipment well below value. They are not in scope for the Royal Commission, but we think they should be. There is clearly a case for ASIC to take a more hands-on role in farm finance as some rural lenders, such as the non-bank ones, are not covered by existing complaints-handling systems. But overall, this is another example of poor culture in the banking industry, and players including ANZ and CBA are under the microscope. The findings were so damming that the Commission decided to spend more time looking at farming case studies. For bank-originating farm debt, some lenders changed loan contract terms for farm businesses that were late with payments or in default without warning or explanation. More broadly, the Commission heard about declining access to banking services for the 6.9 million Australians in rural areas, the inflexibility of lenders toward farm-specific challenges like weather, trade disputes, and lack of customized regulations for the sector.
The latest credit data from APRA and RBA, out yesterday, showed that May credit slowed sharply to equal a 6-year low of 0.2% m/m, and a 4-year low of 4.8% y/y. We discussed this in our post “May Credit Snapshot Tells the Story”.
As UBS highlights, private credit growth has weakened more quickly than expected to only 0.2% m/m, the equal weakest since 2012; also dragging the y/y to an equal 4-year low of 4.8% (after 5.1%). Also, total deposits growth collapsed in recent months to only 2.4% y/y, the weakest since the last recession in 1991. Meanwhile, the household debt-to-income ratio lifted to a record high of 190% in Q1- 18. However, mainly due to falling house prices, household wealth declined by 0.4% q/q, the largest fall since 2011. While this followed a surge to a record high level of $10.3 trillion in Q4-17, the change in wealth drives the household saving ratio, consistent with a fading ‘household wealth effect’ dragging consumption ahead. They say this will spill over and an ~8-10% fall in new car sales volumes is a strong possibility, Further evidence of the second order impacts.
Housing auction clearance rates slid to a ~6-year low of ~54%, housing credit growth eased to a >4- year low dragged by investors slumping to a record low, while industry data on owner occupier home loans suggests this also started to drop in May; while home prices are falling the most since 2012. Macroprudential policy is reducing borrowing capacity and leading to a clear weakening of housing, which will continue ahead.
CoreLogic says last week, 1,849 auctions were held across the combined capital cities, returning a final clearance rate of 55.5 per cent, increasing from the previous week when 52.4 per cent of the 2,002 auctions held were successful, the lowest clearance rate seen since late 2012. This time last year, the clearance rate was 66.5 per cent across 2,355 auctions.
Melbourne’s final clearance rate was recorded at 59.9 compared with a clearance rate of 70.7 per last year. Sydney’s final auction clearance rate was 50.1 per cent compared with a clearance rate of 68.2 per cent last year. Across the smaller auction markets, clearance rates improved everywhere except Tasmania, however only 3 auctions were held there over the week. Of the non-capital city auction markets, Geelong returned the highest final clearance rate, with a success rate of 71.4 per cent across 26 auctions.
This week they expect to see a lower volume of auctions this week with CoreLogic currently tracking 1,557 auctions, down from 1,849 last week.
Home prices are falling with the CoreLogic 5-city daily dwelling price index, which covers the five major capital city markets, declined another 0.15%. So far in June home values have fallen 0.24%, driven by Melbourne, Sydney and Perth. So far in 2018, home values have declined by 1.72%, with only Brisbane and Adelaide recording a value increase. Over the past 12 months, home values have fallen by 1.72%, driven by Sydney and Perth. Despite the continuing falls. values are now up 36.2% since the 2010 peak at the 5-city level, driven overwhelmingly by exceptionally strong gains in Sydney at 60.2% followed by Melbourne 42.6% and Adelaide 9.8%. Brisbane is 8.3% and Perth is down 11.4% This is before inflation adjustments, which means in real terms only Sydney and Melbourne prices are ahead.
We see more banks lifting rates on the back of the higher BBSW and LIBOR rates. For example, effective Friday 3 July, ING in Australia said it was making changes to variable rates for existing owner occupier home loan customers. This means interest rates for existing residential home loan customers will increase by 0.10%.
Bank of Queensland announced the variable home loan rate for owner occupiers (principal and interest repayments) will increase by 0.09 per cent, per annum; variable home loan rate for owner occupiers (interest only repayments) will increase by 0.15 per cent, per annum; variable home loan rate for investors (principal and interest and interest only repayments) will increase by 0.15 per cent, per annum; and Owner occupier and investor Lines of Credit will increase by 0.10 per cent, per annum. Anthony Rose, Acting Group Executive, Retail Banking said today’s announcement is largely due to the increased cost of funding. “Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90 day BBSW rates, along with elevated competition for term deposits.
This just extends the list of players lifting rates, and we think more will follow. So it was interesting to see Bendigo Bank chairman Robert Johanson saying that he believes the RBA has waited too long to move rates. “They’ve been trying to do too much work with monetary policy,” he told Banking Day. “I’m concerned that apart from the impact we’ve already seen on asset values, mortgage rates are going to break from the official cycle and will do so in a disruptive way.” The funding pressures on lenders are emerging at an awkward time for the Turnbull Government, which is required to call a federal election within the next 12 months. A series of out-of-cycle increases across the industry could induce a blistering political response from government politicians who are cognizant of the historical links between election outcomes and mortgage rate rises. Even small hikes would create significant pain as a piece on Nine News, using our mortgage stress data explained.
I discussed the current situation with Economist John Adams this week in an extended interview – see Australia’s Debt Bomb. I recommend this post as we go through the critical issues are how it may play out.
Finally, as we hit the end of the financial year, it’s worth reflecting on the highlights and lowlights of the past year. It has been a bit of a roller coaster, but those with shares invested direct, or via superfunds will have done well, again – as in 9 of the past 10 years has proved to be. We suspect the next 12 months will be less positive, as rising interest rates, trade wars and political tensions all mount. We also have an election ahead, which will also potentially create waves. Trade wars is the area to watch. Our dollar has been sliding through the year, and this is likely to continue next year as we struggle with GDP growth in this volatile environment.
Corporate profits have been growing fast, as companies cut costs and rationalise their businesses and this has translated to higher dividends – and about half have come from the financial services sector overall. Banks will be hard pressed to maintain their dividends ahead, as lending growth slows, pressure on their culture continues thanks to the Royal Commission and regulators exercising their muscles. And the greatest of these is mortgage lending growth which we think will continue to languish. Provisions, which were cut this year, may need to rise ahead as 90 days plus default rates are rising, as wages and cost pressure hit home. Remember also the next round of penalty rate reductions for 700,000 workers in across sectors such as retail will cut pay by 10% comes in 1 July.
Property has done less well, despite being well up over the past year, in that the recent monthly trends are signalling a fall. In some states we will end the year well up, for example Hobart, Adelaide and Melbourne, in others less well. We expect more falls ahead because prices are most strongly linked to credit supply, which is being throttled back. Most centres will be impacted as investors tread water and foreign buyer momentum slows. This might be good news for first time buyers who have been enticed back into the market, partly thanks to recent FTB incentives. We are bearish on the property sector next financial year.
Those needing to get income from savings and deposit accounts have had a torrid time, as banks have cut, and cut again their returns on savings. Many are getting less than inflation, so their hard earned cash has taken a hit. This is likely to continue, despite banks lifting mortgage rates as international funding pressure continues to bite in the months ahead. Households continue to be taxed on their savings at their marginal rate, while those with property get massive tax breaks. If Labor does win the next election, this is set for a shake up!
So overall a mixed year, with some highs and lows, and we think next year will be no different, only more so. Credit trajectory is the one to watch.
The capital city residential property price indexes fell in Sydney (-1.2%), Melbourne (-0.8%), Perth (-0.1%) and Darwin (-0.9%), and rose in Brisbane (+0.7%), Hobart (+3.0%), Adelaide (+0.3%) and Canberra (+0.6%).
Annually, residential property prices fell in Darwin (-6.1%), Sydney (-3.9%) and Perth (-0.9%), and rose in Hobart (+15.5%), Canberra (+3.0%), Melbourne (+2.3%), Adelaide (+2.1%) and Brisbane (+1.7%).
