Canadian real estate prices are acting a little skittish. The Teranet–National Bank House Price Index, shows real estate prices stalled across the country. In addition, the index is making moves we haven’t seen outside of a recession.
Tera-What?
If you’re a regular reader, feel free to skip this. For those that don’t know, The Teranet-National Bank HPI is a different measure of real estate data, that relies on property registry information instead of sales. Many misinformed agents refer to this as a “delayed” measure, but that’s not the case. The use of registry data means that the information is “late” compared to the MLS, but it’s more accurate.
Using registry information means only completed sales are included. In contrast, the MLS uses just sales. In a hot market, few sales fall through, so the MLS is definitely a faster read. In a cooling market, sales can start to fall through, as some buyers look for a way out while prices drop. This is often not reflected in MLS data, since a transfer occurs 30 to 90 days after a sale. They each have their trade offs, and neither is better or worse than they other. If you’re really into housing data, it’s best to check both to get a real feel for the market.
Canadian Real Estate Prices Are Unchanged
Canadian real estate prices didn’t do a whole lot in March. The 11 City Composite index remained virtually unchanged compared to February. Prices are up 6.61% compared to the year before. National Bank analysts noted this is “the first time outside a recession when the March composite index was not up at least 0.2%” It was also the first time that only 4 out of the 11 markets saw an increase, outside of a recession. The unusual move is definitely worth noting from a macro perspective.
Toronto Real Estate Prices Are Flat
The Toronto real estate market has no idea what to do right now. The index showed prices remained flat from last month, and up 4.31% from last year. Prices are down 7.3% from the July peak when adjusted, and 7.9% when non-adjusted. This is the lowest pace of annual price growth since November 2013.
Funny thing to note is experts, including some bank executives, are saying the correction is over. Technically speaking, a correction hasn’t even begun according to this index. A correction is when prices fall more than 10% from peak, in less than a year, which we haven’t seen yet. If I didn’t know any better, it would appear that mortgage sellers bank executives are misinformed. How strange.
Vancouver Real Estate Prices Hit A New All-Time High
Vancouver real estate prices, driven entirely by condo appreciation, hit a new all-time high. Prices increased 0.5% from the month before, and are up 15.43% from the same month last year. Prices on the index showed monthly increases in 13 of the past 15 months. Teranet-National Bank analysts noted that gains are tapering, and this is “consistent with the Real Estate Board of Greater Vancouver.”
Montreal Real Estate Prices Drop 0.2%
The market brokerages have been attempting to rocket, appears to be a failure to launch. The index showed that prices declined 0.2% in March, and are up just 4.27% from the same month last year. Annual price increases peaked in December at just under 6%, and has been tapering ever since. Technically speaking, Montreal has yet to outperform the general Canadian market. Despite what you may have read in Montreal media.
Canadian real estate prices are acting unusual compared to movements typically made outside of a recession. However, they are moving in a typical real estate cycle. A gain as large as we’ve seen nationally, has never not been followed by a negative price movement. Try to act surprised when you see it. Bank economists will.
An excellent FED post which discusses the decoupling of home ownership from home price rises. We think the answer is simple: the financialisation of property and the availability of credit at low rates explains the phenomenon.
In the aftermath of WWII, several developed economies (such as the U.K. and the U.S.) had large housing booms fueled by significant increases in the homeownership rate. The length and the magnitude of the ownership boom varied by country, but many of these countries went from a nation of renters to a nation of owners by around the late 1970s to mid-1980s.
Historically, the cost of buying a house, relative to renting, has been positively correlated with the percent of households that own their home. From 1996 to 2006, both the price of houses and the homeownership rate increased in the U.S. This increasing trend ended abruptly with the global financial crisis that drove house prices and homeownership rates to historically low levels.
It is reasonable to expect prices and homeownership to move in the same direction. A decrease in the number of people who want to buy homes to live in could lead to a decrease in both prices and homeownership. Similarly, an increase in the number of people buying homes to live in could lead to an increase in both prices and homeownership.
However, recent evidence indicates that the cost of buying a home has increased relative to renting in several of the world’s largest economies, but the share of people owning homes has decreased. This pattern is occurring even in countries with diverging interest rate policies. It is important to delve into this fact and try to find potential explanations. (For trends in homeownership rates and price-to-rent ratios for several developed economies, see the figures at the end of this post.)
Increasing Cost of Housing
The price-to-rent ratio measures the cost of buying a home relative to the cost of renting. Factors like credit conditions or demand for homes as an investment asset affect the price of houses but not the price of rentals. These and other factors cause the price-to-rent ratio to move.
Over the period 1996-2006, the cost of buying a home grew more quickly than the cost of renting in many large economies. For example, the price-to-rent ratio in the U.S. increased by more than 30 percent between 2000 and 2006. Even larger increases occurred in the U.K. and France, where the price-to-rent ratio rose by nearly 80 percent over the same period.
The price-to-rent ratio declined in the wake of the housing crisis in the U.S., the eurozone, Spain and the U.K., but in the past few years, it has started to increase again. The price of houses is again increasing more quickly than the price of rentals.
Decreasing Homeownership
However, the homeownership rate has not increased along with the price-to-rent ratio. The homeownership rate (the percent of households that are owner-occupied) has fallen in several large economies:
In the U.S., the homeownership rate fell from around 69 percent before the recession to less than 64 percent in 2016.
In the U.K., the rate fell from nearly 69 percent to around 63 percent.
The homeownership rates in Germany and Italy have also fallen.
Diverging Policies
The pattern of increasing house prices and decreasing homeownership has occurred even in countries with diverging monetary policies:
By 2016, the Federal Reserve had ended quantitative easing and had begun raising rates in the U.S.
In contrast, the Bank of England and the European Central Bank continued quantitative easing throughout 2016 and reduced rates.
Nonetheless, the homeownership rate continued to fall in the U.S., the U.K. and many parts of Europe, while the price-to-rent ratio continued to increase.
Housing Supply
Several factors could be driving the decoupling of the price-to-rent ratio and the homeownership rate. From the housing supply side, there is a trend toward decreased construction of starter and midsize housing units.
Developers have increased the construction of large single-family homes at the expense of the other segments in the market. From 2010 to 2016, the fraction of new homes with four or more bedrooms increased from 38 percent to 51 percent.
This limited supply, particularly for starter homes, could result in increased prices for those homes and fewer new homeowners. One possible factor is regulatory change. The National Association of Home Builders claims that, on average, regulations account for 24.3 percent of the final price of a new single-family home. Recent increases in regulatory costs could have encouraged builders to focus on larger homes with higher margins. Supply may be just reacting to developments in demand that we discuss next.
Housing Demand
From the demand side, there are three leading explanations, which are likely complementary and self-reinforcing:
Changes in preferences toward homeownership
Changes in access to mortgage credit
Changes in the investment nature of real estate
Preferences for homeownership may have changed because households who lost their homes in foreclosure post-2006 may be reluctant to buy again. Also, younger generations may be less likely to own cars or houses and prefer to rent them.
Demand for ownership has also decreased because credit conditions are tighter in the post-Dodd Frank period.
Real Estate Investment
The previous demand arguments can explain why the price-to-rent ratio dropped post-2006. As rents grew relative to home prices, together with the low returns of safe assets, rental properties became a more attractive investment. This attracted real estate investors who bid up prices while depressing the homeownership rate.
Moreover, builders increased their supply of apartments and other multifamily developments. From 2006 to 2016, single-family construction projects declined from 81 percent to 67 percent of all housing starts.
There are several types of real estate investors:
“Mom and dad” investors looking for investment income
Foreign investors who have increased real estate prices in many of the major cities of the world
Institutional landlords like Invitation Homes or American Homes 4 Rent
In fact, since 2016 the real estate industry group has been elevated to the sector level, effective in the S&P U.S. Indices.
In addition, the widespread use of internet rental portals such as Airbnb and VRBO has increased the opportunity to offer short-term leases, increasing the revenue stream from rental housing.
There are several potential explanations, but more research is needed to determine the cause of the decoupling of house prices from homeownership rates and what it means for the economy.
Authors: Carlos Garriga, Vice President and Economist; Pedro Gete, IE Business School; and Daniel Eubanks, Senior Research Associate
The IMF’s latest Global Financial Stability Report April 2018, includes a chapter on housing. They look at the global hike in home prices and attribute much of it to the globalisation of finance.
Australian cities are well up the list in terms of gains and also global impact. However, to me they missed the key link. It is the ultra-low interest rates result from QE, across many of these markets, either formally, or informally, which have driven the home prices higher; it is credit led. Sure credit can move across borders, but it was monetary policy which has created the problem.
The fall out of higher international finance rates will now flow directly to our doors, thanks to this same globalisation. Not pretty. So they also warn of risks as this all unwinds.
The chapter finds an increase in house price synchronization, on balance, for 40 advanced and emerging market economies and 44 major cities.
Countries’ and cities’ exposure to global financial conditions may explain rising house price synchronization. Moreover, cities in advanced economies may be particularly exposed to global financial conditions, perhaps because they are integrated with global financial markets or are attractive to global investors searching for yield or safe assets.
Policymakers cannot ignore the possibility that shocks to house prices elsewhere will affect markets at home. House price synchronization in and of itself may not warrant policy intervention, but the chapter finds that heightened synchronicity can signal a downside tail risk to real economic activity.
Macroprudential policies seem to have some ability to influence local house price developments, even in countries with highly synchronized housing markets, and these measures may also be able to reduce a country’s house price synchronization. Such unintended effects are worth considering when evaluating the trade-offs of implementing macroprudential and other policies.
Welcome to the Property Imperative Weekly to 07 April 2018.
Watch the video, or read the transcript.
In this week’s digest of finance and property news, we start with Paul Keating’s (he of the recession we had to have fame), comment that the housing boom is really over at the recent AFR conference.
He said that the banks were facing tighter controls as a result of the Basel rules on capital adequacy, while financial regulators had had a “gutful” of them. This was likely to lead to changes that would restrict the banks’ ability to lend. He cited APRA’s recent interventions in interest only loans as one example, as they restrict their growth. Keating also said the royal commission into misconduct in the banking and financial services sector would also “make life harder” for the banks and pointed out that banks did not really want to lend to business these days and would “rather just do housing loans”. Finally, he spoke of the “misincentives” within the big banks to grow their business by writing new mortgages, including having a high proportion of interest-only lending.
Anna Bligh speaking at the AFR event, marked last Tuesday her first year as CEO of the Australian Banking Association (ABA) – but said she feels “like 500 years” have already passed. Commenting on the Royal Commission she warned that credit could become tighter ahead. The was she said an opportunity for a major reset, not only in how we do banking but how we think about it, its place in our lives, its role in our economy and, most of all, it’s trustworthiness”.
At the same conference, Rod Simms the Chair of the ACCC speech “Synchronised swimming versus competition in banking” He discussed the results of their recent investigation into mortgage pricing, and also discussed the broader issues of competition versus financial stability in banking. He warned that the industry should be aware of, and respond to, the fact that the drive for consumers to get a better deal out of banking is shared by many beyond the ACCC. Every household in Australia is watching. You can watch our video blog on this for more details.
He specifically called out a lack of vigorous mortgage price competition between the five big Banks, hence “synchronised swimming”. Indeed, he says discounting is not synonymous with vigorous price competition. They saw evidence of communications “referring to the need to avoid disrupting mutually beneficial pricing outcomes”.
He also said residential mortgages and personal banking more generally make one of the strongest cases for data portability and data access by customers to overcome the inertia of changing lenders.
Finally, on competition. he says if we continue to insulate our major banks from the consequences of their poor decisions, we risk stifling the cultural change many say is needed within our major banks to put the needs of their customers first. Vigorous competition is a powerful mechanism for driving improved efficiency, and also for driving improved price and service offerings to customers. It can in fact lead to better stability outcomes.
This puts the ACCC at odds with APRA who recent again stated their preference for financial stability over competition – yet in fact these two elements are not necessarily polar opposites!
Then there was the report from the good people at UBS has published further analysis of the mortgage market, arguing that the Royal Commission outcomes are likely to drive a further material tightening in mortgage underwriting. As a result, they think households “borrowing power” could drop by ~35%, mainly thanks to changes to analysis of expenses, as the HEM benchmark, so much critised in the Inquiry, is revised. Their starting point assumes a family of four has living expenses equal to the HEM ‘Basic’ benchmark of $32,400 p.a. (ie less than the Old Age Pension). This is broadly consistent with the Major banks’ lending practices through 2017. As a result, the borrowing limits provided by the banks’ home loan calculators fell by ~35% (Loan-to-Income ratio fell from ~5-6x to ~3-4x). This leads to a reduction in housing credit and a further potential fall in home prices.
Our latest mortgage stress data, which was picked by Channel Nine and 2GB, thanks to Ross Greenwood, Across Australia, more than 956,000 households are estimated to be now in mortgage stress (last month 924,500). This equates to 30.0% of households. In addition, more than 21,000 of these are in severe stress, no change from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA are higher at 4.9 basis points. Flat wages growth, rising living costs and higher real mortgage rates are all adding to the burden. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead as underwriting standards are tightened and home prices fall further”. The latest household debt to income ratio is now at a record 188.6. You can watch our separate video blog on this important topic.
ABS data this week showed The number of dwellings approved in Australia fell for the fifth straight month in February 2018 in trend terms with a 0.1 per cent decline. Approvals for private sector houses have remained stable at around 10,000 for a number of months. But unit approvals have fallen for five months. Overall, building activity continues to slow from its record high in 2016. And the sizeable fall in the number of apartments and high density dwellings being approved comes at a time when a near record volume are currently under construction. If you assume 18-24 months between approval and completion, then we still have 150,000 or more units, mainly in the eastern urban centres to come on stream. More downward pressure on home prices. This helps to explain the rise in 100% loans on offer via some developers plus additional incentives to try to shift already built, or under construction property.
CoreLogic reported last week’s Easter period slowdown saw 670 homes taken to auction across the combined capital cities, down significantly on the week prior when a record number of auctions were held (3,990). The lower volumes last week returned a higher final clearance rate, with 64.8 per cent of homes selling, increasing on the 62.7 per cent the previous week. Both clearance rate and auctions volumes fell across Melbourne last week, with only 152 held and 65.5 per cent clearing, down on the week prior when 2,071 auctions were held across the city returning a slightly higher 65.8 per cent success rate.
Sydney had the highest volume of auctions of all the capital city auction markets last week, with 394 held and a clearance rate of 67.9 per cent, increasing on the previous week’s 61.1 per cent across a higher 1,383 auctions.
Across the smaller capital cities, clearance rates improved week-on-week in Canberra, Perth and Tasmania; however, volumes were significantly lower across each market last week compared to the week prior.
Across the non-capital city auction markets, the Geelong region recorded the strongest clearance rate last week with 100 per cent of the 20 auction results reporting as successful.
The number of homes scheduled to go to auction this week will increase across the combined capital cities with 1,679 currently being tracked by CoreLogic, up from last week when only 670 auctions were held over the Easter period slowdown.
Melbourne is expected to see the most significant increase in volumes this, with 669 properties scheduled for auction, up from 152 auctions held last week. In Sydney, 725 homes are set to go to auction this week, increasing on the 394 held last week.
Outside of Sydney and Melbourne, each of the remaining capital cities will see a higher number of auctions this week compared to last week.
Overall auction activity is set to be lower than one year ago, when 3,517 were held over what was the pre-Easter week last year.
Finally, with local news all looking quite negative, let’s look across to the USA as the most powerful banker in the world, JPMorgan Chase CEO Jamie Dimon, just released his annual letter to shareholders. Given his bank’s massive size (it earned $24.4 billion on $103.6 billion in revenue last year) and reach (it’s a giant in consumer/commercial banking, investment banking and wealth management), Dimon has his figure on the financial pulse.
He says that’s while the US economy seems healthy today and he’s bullish for the “next year or so” he admits that the US is facing some serious economic headwinds.
For one, he’s concerned the unwinding of quantitative easing (QE) could have unintended consequences. Remember- QE is just a fancy name for the trillions of dollars that the Federal Reserve conjured out of thin air.
He said – Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal.
We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets.
And of course the DOW finished the week on a down trend, down 2.34%, and wiping out all the value gained this year, and volatility is way up. Here is a plot of the DOW.
This extreme volatility does suggest the bull market is nearing its end… if it hasn’t ended already. Dimon seems pretty sure we’re in for more volatility and higher interest rates. One scenario that would require higher rates from the Fed is higher inflation:
If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect.
As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.
Now– here’s the important part. For the past ten years, the largest buyer of US government debt was the Federal Reserve. But now that QE has ended, the US government just lost its biggest lender.
Dimon thinks other major buyers, including foreign central banks, the Chinese, etc. could also reduce their purchases of US government debt. That, coupled with the US government’s ongoing trade deficits (which will be funded by issuing debt), could also lead to higher rates…
So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.
We’ll leave you with one final point from Jamie Dimon. He acknowledges markets have a mind of their own, regardless of what the fundamentals say. And he sees a real risk “that volatile and declining markets can lead to a market panic.”
Financial markets have a life of their own and are sometimes barely connected to the real economy (most people don’t pay much attention to the financial markets nor do the markets affect them very much). Volatile markets and/or declining markets generally have been a reaction to the economic environment. Most of the major downturns in the market since the Great Depression reflect negative future expectations due to a potential or real recession. In almost all of these cases, stock markets fell, credit losses increased and credit spreads rose, among other disruptions. The biggest negative effect of volatile markets is that it can create market panic, which could start to slow the growth of the real economy. Because the experience of 2009 is so recent, there is always a chance that people may overreact.
Dimon cautioned investors that interest rates could rise much sooner than they expect. If inflation suddenly comes roaring back. Indeed, it’s entirely possible the 10-year could break above 4% in the near future as inflation returns to 2% and the Fed shrinks its balance sheet.
Dimon also cast a wary eye toward exchange-traded funds, which have seen their popularity multiply since the financial crisis. There are now many ETF products that are considerably more liquid than their underlying assets. In fact far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.
And Finally America’s net debt currently stands at 77% of GDP (this is already historically high but not unprecedented). The chart below also shows the Congressional Budget Office’s estimate of the total U.S. debt to GDP, assuming a 2% real GDP growth rate. Hopefully, with the right policies they can grow faster than 2%. But more debt does seem on the cards.
And to add to that perspective, we spoke about the recent Brookings report which highlighted the rise in non conforming housing debt in the USA. debt as lending standards are once again being loosened, and risks to mortgage services are rising.
The authors quote former Ginnie Mae president Ted Tozer concerning the stress between Ginnie Mae and their nonbank counterparties.
… Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen. We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights and all of these things have created a new and challenging environment for Ginnie Mae. . . . In other words, the risk is a lot higher and business models of our issuers are a lot more complex. Add in sharply higher annual volumes, and these risks are amplified many times over. . . . Also, we have depended on sheer luck. Luck that the economy does not fall into recession and increase mortgage delinquencies. Luck that our independent mortgage bankers remain able to access their lines of credit. And luck that nothing critical falls through the cracks…
They say that goldfish have the shortest memory in the Animal Kingdom… something like 3-seconds. But not even a decade after these loans nearly brought down the entire global economy, SUBPRIME IS BACK. In fact it’s one of the fastest growing investments among banks in the United States. Over the last twelve months the subprime volume among US banks doubled, and it’s already on pace to double again this year.
CoreLogic has released their March Index results. Their hedonic home value index showed national dwelling values were unchanged in March, with the steady month on month reading comprised of a 0.2% fall in capital city dwelling values while the combined regional markets saw values rise by 0.4%.
Trends across the March quarter showed that capital city home values were 0.9% lower over the March quarter, while values across the regional markets have tracked 1.1% higher. Focusing on the capital cities, six of the eight capital cities have recorded a fall in values over the first quarter of 2018, ranging from a 1.8% drop in Sydney values to a 0.1% fall in Darwin.
Sydney unit values are up 1.9% over the past twelve months, while house values are down 3.8%. Similarly in Melbourne, unit values are 6.6% higher over the past twelve months while house values are up just 4.9%.
Movements were stronger in some regional centers, with Geelong the strongest over the past year, and Outback Queensland the weakest.
Welcome to the Property Imperative Weekly to 31st March 2018.
Watch the video or read the transcript.
In this week’s review of property and finance news we start with the latest CoreLogic data on home price movements.
Looking at their weekly index, after last week’s brief lift, values fell 0.17% in the past week and as a result Sydney home values have now declined by a cumulative 4.2% over the past 29-weeks, with values also down 4.1% over the past 34 weeks. Sydney’s quarterly growth rate remains firmly negative, down 1.8% according to CoreLogic and annual growth is also down 2.2%.
More granular analysis shows the most significant falls in higher value property, and also in high-rise apartments. Our own analysis, and feedback from our followers is that asking prices are falling quite consistently now, and the same trend is to be see in Brisbane and Melbourne, our largest markets. This despite continued strong migration. We see two trends emerging, more people getting desperate to sell, so putting their property on the market, and having to accept a deeper discount to close a sale.
As we showed this week in our separate videos on the latest results from our surveys, down traders in particular are seeking to release capital now, and there are more than 1 million who want to transact. On the other hand investors are fleeing, though some are now also being forced to sell thanks to the switch from interest only to more expensive principal and interest loans.
This is all consistent with the latest auction results, which Corelogic also reported. They said that volumes last week broke a new record with 3,990 homes taken to auction across the combined capital cities in the lead up to Easter, which exceeded the previous high of 3,908 over the week ending 30th November 2014. The preliminary clearance rate was reported at 65.5%, but the final auction clearance rate fell to 62.7 per cent last week, down from 66.0 per cent across 3,136 auctions the previous week. Over the same week last year, 3,171 auctions were held, returning a significantly stronger clearance rate (74.5 per cent).
CoreLogic said that Melbourne’s clearance rate last week was 65.8 per cent across 2,071 auctions, making it the busiest week on record for the city. In comparison, there were 1,653 auctions held across the city over the previous week, returning a clearance rate of 68.7 per cent. This time last year, 1,607 homes were taken to auction, and a clearance rate of 78.9 per cent was recorded. Sydney was host to 1,383 auctions last week, the most auctions held across the city since the week leading up to Easter 2017 (1,436), while over the previous week, 1,093 auctions were held. The clearance rate for Sydney fell to 61.1 per cent, down from 64.8 per cent over the previous week, while this time last year, Sydney’s clearance rate was a stronger 75.8 per cent.
Across the smaller auction markets, auction volumes increased week-on-week, however looking at clearance rates, Adelaide (64.6 per cent) and Canberra (69.1 per cent) were the only cities to see a slight rise in the clearance rate over the week.
The Gold Coast region was the busiest non-capital city region last week with 87 homes taken to auction, while Geelong recorded the highest clearance rate at 79.7 per cent across 75 auctions.
Given the upcoming Easter long weekend, auction volumes are much lower this week with only 540 capital city auctions scheduled; significantly lower than last week when 3,990 auctions were held across the combined capital cities.
The next question to consider is the growth in credit. As we discussed in a separate blog, credit for housing, especially owner occupied mortgages is still running hot. The smoothed 12 months trends from the RBA, out last Thursday, shows annualised owner occupied growth registering 8.1%, up from last month, investor lending falling again down to 2.8% annualised, and business credit at just 3.6%
Looking at the relative value of lending, in seasonally adjusted terms, owner occupied credit rose 0.71% to $1.15 trillion, up $8.08 billion, while investment lending rose 0.12% to $588.3 billion, up just 0.69 billion. Business lending rose 0.17% to $905 billion, up 1.55 billion and personal credit fell 0.15%, down 0.22 billion to $152.2 billion.
Note that the proportion of investment loans fell again down to 33.9%, and the proportion of business lending to all lending remained at 32.4%, and continues to fall from last year. In other words, it is owner occupied housing which is driving credit growth higher – if this reverses, there is a real risk total credit grow will run into reverse. Again, we see the regulators wishing to continue to drive credit higher, to support growth and GDP, yet also piling on more risks, when households are already terribly exposed. They keep hoping business investment and growth will kick in, but their forward projections look “courageous”. Remember it was housing consumption and Government spending on infrastructure which supported the last GDP numbers, not business investment.
Now, let’s compare the total housing lending from the RBA of $1.74 trillion, which includes the non-banks (though delayed, and partial data), with the APRA $1.61 trillion. The gap, $130 billion shows the non-bank sector is growing, as historically, the gap has been closer to $110 billion. This confirms the non-bank sector is active, filling the gap left by banks tightening. Non-banks have weaker controls on their lending, despite the new APRA supervision responsibilities. This is an emerging area of additional risk, as some non-banks are ready and willing to write interest only and non-conforming loans, supported by both new patterns of securitisation (up 13% in recent times) and substantial investment funds from a range of local and international investors and hedge funds.
Once again, we see the regulators late to the party. This continues the US 2005-6 playbook where non-conforming loans also rose prior to the crash. We are no different.
The ABS released more census data this week, and focussed on the relative advantage and disadvantage across the country. Ku-ring-gai on Sydney’s upper north shore is Australia’s most advantaged Local Government Area (LGA). Another Sydney LGA, Mosman, which includes the affluent suburbs of Balmoral, Beauty Point and Clifton Gardens, has also been ranked among the most advantaged. In fact, SEIFA data shows the 10 most advantaged LGAs in Australia are all located around the Northern and Eastern areas of Sydney Harbour and in coastal Perth.
The most disadvantaged LGA is Cherbourg, approximately 250 kilometres north-west of Brisbane (QLD), followed by West Daly (NT). The 10 most disadvantaged LGAs in Australia can be found in Queensland and the Northern Territory.
The latest data has found that more than 30 per cent of people born in China, South Africa and Malaysia live in advantaged areas and less than 10 per cent reside in disadvantaged areas. Meanwhile, 40 per cent of Vietnamese-born live in disadvantaged areas and only a small proportion (11 per cent) live in advantaged areas.
People of Aboriginal and/or Torres Strait Islander origin are more likely to live in the most disadvantaged areas with 48 per cent living in the bottom fifth most disadvantaged LGAs, compared to 18 per cent of non-Indigenous people. Overall, only 5.4 per cent of Aboriginal and/or Torres Strait Islander people live in areas of high relative advantage compared with 22 per cent of non-Indigenous people.
What the ABS did not show is that there is a strong correlation of those defined as advantaged to valuable real estate – home price rises have both catalysed the economic disparities across the country, and of course show the venerability that more wealthy areas have should home prices fall further. The paper value of property is largely illusory, and of course only crystallises when sold.
The HIA reported that new home sales declined for the second consecutive month during February 2018 overall, but the markets were patchy, based on results contained in the latest edition of their New Home Sales report – a monthly survey of the largest volume home builders in the five largest states.
Despite the fact that the overall volume of sales declined during February, reductions only occurred in two of the five states covered by the HIA New Home Sales Report – the magnitude of these reductions outweighed the increases which took place elsewhere. The largest fall was in Queensland (-16.3 per cent) with a 9.9 per cent contraction recorded in WA. The largest increase in sales was in NSW (+11.7 per cent), followed by SA (+10.3 per cent) and Victoria (+4.8 per cent).
Finally, we walked through our survey results in a series of separate videos, but in summary, the latest release of the Digital Finance Analytics Household Survey to end March 2018, helps to explain why we think home prices are set to fall further by drawing on our 52,000 sample, from across Australia.
This chart, which looks across our property segments, shows that both portfolio property investors (who hold multiple properties) and solo investors (who hold one, or perhaps two) intentions to transact are tanking, down 8% since December 2017. This is because credit is less available, capital growth has stalled, and in fact only the tax breaks remain as an incentive! This decline started in 2015, but is accelerating. Remember that around one thirrd of mortgages are for investment purposes, so as this demand dissipates, the floor on prices starts to shatter.
Whilst there are offsetting rises from down traders (who are seeking to release capital before prices fall further) and first time buyers (who are being “bribed” by first owner grants) there is a significant net fall in demand. This pattern is seen across the country, but is most prevalent in our two biggest markets of Sydney and Melbourne.
Refinancing is up a little, thanks to the attractive discounts being offered by many lenders, and the prime driver is to reduce monthly repayments, as currently household finances are under pressure. We release the latest mortgage stress analysis in a few days.
And if you want to think about the consequences of all this, then watch our commentary on the Four Scenarios which portrays how the property and finance sector may play out, and compare the comments from APRA with those in Ireland in 2007 in our latest video blog – they are eerily similar, and we all know what happened there!
The outlook for finance and property in Australia in decidedly uncertain.
Governments can encourage more affordable housing by targeting first home buyer subsidies to specific locations and housing types, a new report finds. It also suggests incentivising developers and builders to create smaller houses with more cost-efficient designs.
The report is based on the housing market in Perth, Western Australia, and shows that historically building single houses as opposed to units or town houses is a more effective way of delivering affordable housing on the city fringes.
The report examined housing affordability through individual transaction records over a six year sample period. It compared prices between established and new housing, showing that new land and building developments play important roles in supplying affordable housing options.
New dwellings comprise 13% of single house transactions and 33% for dwellings such as apartment or townhouses. Although new dwellings like apartments provided some affordable housing options, in general they are selling at a premium over existing houses.
Australia’s largest cities, like Perth, are stretched to the limit of land supply and infrastructure for affordable housing. The most infrastructure exists in city centres where houses are expensive.
Over the past two decades Perth has grown rapidly. Between 2001 and 2016 the population increased by 46.7%, the largest proportional increase of any Australian capital city. The make-up of the housing market is similar to other capitals: 68% of the housing stock is single houses, 20% other dwellings and 11% vacant.
Levels of home ownership are generally consistent with the national pattern: 62% of housing is owned outright or mortgaged, and 24% rented.
House prices have grown rapidly. From 1999 to 2016 house prices grew at an average annual rate of 8.4%; other dwellings grew 9%. Both sectors report the highest annual increases for all Australian capital cities over this period.
How can governments help?
The challenge in Australia’s housing market is supplying an adequate range of affordable new dwelling types within a range of suitable locations – both inner city and outer suburban choices.
Clusters of cheaper housing on the urban fringe and more expensive inner-city development suggest new building activity is confined to specific locations. These are defined by the price the constructor or buyer is willing to pay.
Housing policy in Australia has relied on market outcomes to determine aesthetic and economic characteristics of housing in our cities. Government intervention has mainly been through zoning, predominantly at local levels. More recently there’s also been stimulus at state and federal levels for first home buyers through various deposit subsidy schemes.
Subsidy schemes have been important in helping first home buyers bridge the deposit gap. Incentives have included cash payments and stamp duty relief.
In some states additional payments have been made for new building and for purchases in specific locations. But the Perth study indicates that some of these subsidies are becoming ineffective.
Standard “one type fits all” subsidies are limiting first home buyers’ choices of location and housing type.
The solution to this problem is to make subsidy schemes more flexible to nudge first home buyers towards affordable locations. This would even out the supply of affordable houses from areas where housing is densely clustered in certain locations.
Policy would also need to take into account the needs of different demographics in certain locations. Housing requirements of young singles are obviously different than for young families.
Effective policy would also need to take into account the types of housing finance available for first home buyers. One example is the WA government’s Keystart loans which help eligible people to buy their own homes through low deposit loans and shared equity schemes.
These types of schemes include shared ownership with the government owned housing authorities and include existing and newly built homes in a variety of locations.
But it’s not all up to state governments. The problems of lack of land supply and infrastructure are the same in all Australian capital cities. The federal government could play a more prominent role through infrastructure grant funding in changing the location choice of buyers and variation of affordable housing types at a national level.
Author: Greg Costello, Associate Professor, Curtin University
The latest release of the Digital Finance Analytics Household Survey to end March 2018, helps to explain why we think home prices are set to fall further. We discussed four housing and property scenarios in a recent video blog.
But drawing on our 52,000 sample, from across Australia, today we will walk through the top-level survey findings, before later drilling into the segment specific data in later posts. You can read about our household segmentation models here. This analysis of course then feeds into our Property Imperative Report, which we publish twice each year as a summary of our research and analysis. The last edition – volume 9 – from 2017 is still available on request.
Read the transcript. or watch the video.
The first chart, which looks across our property segments, shows that both portfolio property investors (who hold multiple properties) and solo investors (who hold one, or perhaps two) intentions to transact are tanking, down 8% since December 2017. As we will see later, this is because credit is less available, capital growth has stalled, and in fact only the tax breaks remain as an incentive! This decline started in 2015, but is accelerating. Remember that 35% of mortgages are for investment purposes, so as this demand dissipates, the floor on prices starts to shatter.
Whilst there are offsetting rises from down traders (who are seeking to release capital before prices fall further) and first time buyers (who are being “bribed” by first owner grants) there is a significant net fall in demand. This pattern is seen across the country, but is most prevalent in our two biggest markets of Sydney and Melbourne.
Refinancing is up a little, thanks to the attractive discounts being offered by many lenders, and as we will see the prime driver is to reduce monthly repayments, as currently household finances are under pressure. We release the latest mortgage stress analysis in a few days.
First time buyers and those wanting to buy, are saving a little more in an attempt to access the market, and those planning to trade up are also still putting some funds aside, otherwise, there is little evidence of concerted attempts to save cash for property transactions.
Turning for demand for credit, we see is crashing, especially in the investment segments. There was a 12% fall in the solo property investor group and an amazing 27% fall in the portfolio investor segment. One of the clearest messages from the survey is how much lending standards just got tighter, with an average 20% drop in “borrowing power” compared with a few months ago. As a result many first time buyers and investors simply cannot get credit, because they cannot meet the tighter requirements. The outfall from the Royal Commission will simply exacerbate the situation. There is a strong link between home prices and credit supply, so this will put further downward pressure on property values.
Refinancing households are tending not now to seek to release additional capital from their properties, as part of a refinance deal. We also note a rise in those being forced to refinance from interest only loans to principal and interest loans, and our latest modelling still is tracking an estimated $100 billion problem.
We find that ever fewer households are expecting home prices to rise, this registered across the board – but the trajectory down is strongest among investors. No segment is more bullish on prices compared with last year. This falling trend is strongest in Sydney, but Melbourne appears to be following about 6 months later. Households in Perth and Hobart are more bullish, but only slightly, and this was not enough to prevent the general decline. Remember WA has seen prices slide in recent years.
Households use of mortgage brokers appears pretty consistent (even if the volume of transactions is falling). Those seeking to refinance are most likely to approach a broker, followed by first time buyers.
Next time we will look in more detail at the underlying drivers by segments. But current home prices appear to have no visible means of support – they are going to fall further.
The Royal Commission into Financial Services Misconduct, yesterday spent time with ANZ, and examined their expenses validation and verification processes, especially when applications were made via the broker channel.
Astonishingly, it appears that the bank may ignore the expense data from the broker as submitted (so the Commission asked why they capture the data at all!). Household Expenditure Measure (HEMs) figured in the discussion, as a test which was used by the bank in the assessment process. It will be interesting to see if the Commission views this approach is compliant with their responsible lending obligations.
It begs the question more broadly, are mortgages held by the banks supported by appropriate expense calculations? Some are saying that up to 40% of loans on book may have issues.
We also note that the “mortgage power” type calculators available on bank web sites to give an indication of a borrowers ability to get a mortgage, on average now gives a mortgage figure some 20% lower than a couple of years back.
So, many borrowers would not now get the mortgage they did then. Think about the implications for existing borrowers seeking to refinance, or to move from interest only loans to principal and interest loans!
There was also more data on lower auction clearance rates. Plus predicted falls in home prices, from Moody’s.
When you overlay the Commission findings, with the sales trends (deep discounts are now a feature of current sales, see above), it seems to me home prices are set for more falls in the months ahead.
We discussed this in our latest video blog.
More broadly, the Commission shows the massive repair job the banks have to do on their reputations and culture. No wonder their share prices are down. Of more significance are the structural risks to the economy, as households continue to struggle with over-committed budgets thanks to lax lending. This is unlikely to end well.
The purpose of the Commission was to remove uncertainty from the banking sector, but as it goes about its business, in fact the levels of concern are rising. It has royally back-fired!
But there is a good chance that customer outcomes will be enhanced as the consequences are digested. This would be an excellent outcome. But not an intended one.
As reported in the Business Insider, Moody’s Investor Services thinks there will be further declines to come, suggesting that Sydney prices will suffer a “correction” in the year ahead.
“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values,” Moody’s says, pointing to the chart below. “However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”
