Category: Home Prices

72 Hours That Changed Banking – The Property Imperative Weekly 10 Feb 2018

Recent events have the potential to create a revolution in Australian Finance. We explore the 72 hours that changed banking forever.

Welcome to the Property Imperative Weekly to 10th February 2018.Watch the video or read the transcript.

In our latest weekly digest, we start with the batch of new reports, all initiated by the current Australian Government – and which combined have the potential to shake up the Financial Services sector, and reduce the excessive market power which the four major incumbents have enjoyed for years.

On Wednesday, the Productivity Commission, Australian Government’s independent research and advisory body released its draft report into Competition in the Australian Financial System. It’s a Doozy, and if the final report, after consultation takes a similar track it could fundamentally change the landscape in Australia. They leave no stone unturned, and yes, customers are at a significant disadvantage. Big Banks, Regulators and Government all cop it, and rightly so. They say, Australia’s financial system is without a champion among the existing regulators — no agency is tasked with overseeing and promoting competition in the financial system.  It has also found that competition is weakest in markets for small business credit, lenders’ mortgage insurance, consumer credit insurance and pet insurance. The report demonstrates the inter-linkages between difference financial entities, and their links to the four majors. They criticised mortgage brokers and financial advisers for poor advice (influenced by commission and ownership structures) and the regulatory environment, where the shadowy Council of Finance Regulators (RBA, ASIC, APRA and Treasury) do not even release minutes of the meetings which set policy direction. You can watch our separate video blog on this.

On Thursday, the Treasurer released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018.   They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan. This removes the current strategic advantage which the majors have thanks to the credit data asymmetry, and the current negative reporting. We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred. It does however smaller lenders to access information which up to now they could not, so creating a more level playing field.  Consumers may benefit, but they should also beware of the implications of the proposals.

On Friday, Treasurer Morrison released the report by King & Wood Mallesons partner Scott Farrell in to open banking which aims to give consumers greater access to, and control over, their data and which mirrors developments in the UK.  This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service. Great news for smaller players and fintechs, and possibly for customers too. Bad news for the major players. The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now. In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping.  A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From the Commencement Date, the four major Australian banks should be obliged to comply with a direction to share data under Open Banking. The remaining Authorised Deposit-taking Institutions should be obliged to share data from 12 months after the Commencement Date, unless the ACCC determines that a later date is more appropriate.

Then of course the Royal Commission in Financial Services starts this coming week. We discussed this on ABC The Business on Thursday.  Lending Practice is on the agenda, highly relevant given the new UBS research (they of liar loans) suggesting that incomes of many more affluent households are significantly overstated on mortgage application forms.   And The BEAR – the bank executive behaviour regime legalisation – passed the Senate, and as a result of amendments, Small and medium banking institutions have until 1 July 2019 to prepare for the BEAR while it will commence for the major banks on 1 July 2018.

APRA Chairman Wayne Byers spoke at the A50 Australian Economic Forum, Sydney. Significantly, he says the temporary measures taken to address too-free mortgage lending will morph into the more permanent focus on among other things, further strengthening of borrower serviceability assessments by lenders, strengthened capital requirements for mortgage lending, and the comprehensive credit reporting being mandated by the Government.

Adelaide Bank is ahead of the curve, as it introducing an alert system that will monitor property borrowers that are struggling with their repayments. The bank and its subsidiaries and affiliates will compare monthly mortgage repayments with borrowers’ income ratios. In addition, extra scrutiny will be applied where the loan-to-income ratio exceeds five times or monthly mortgage repayments exceed 35% of a borrower’s income.

But combined, data sharing, positive credit and banking competition and regulation are all up in the air, or are already coming into force and in each case it appears the big four incumbents are the losers, as they are forced to share customer data, and competition begins to put their excessive profitability under pressure.  It highlights the dominance which our big banks have had in recent years, and the range of reforms which are in train. The face of Australian Banking is set to change, and we think customers will benefit. But wait for the rear-guard actions and heavy lobbying which will take place ahead.

Of course the RBA left the cash rate on hold this week, and signalled the next move will likely be up, but not for some time.  Retail turnover for December fell 0.5% according to the ABS seasonally adjusted.  This is the headline which will get all the coverage, but the trend estimate rose 0.2 per cent in December 2017 following a rise of 0.2 per cent in November 2017. Compared to December 2016 the trend estimate rose 2.0 per cent. This is in line with average income growth, but not good news for retailers.

The latest Housing Finance Data from the ABS shows a fall in flows in December. In trend terms, the total value of dwelling finance commitments excluding alterations and additions fell 0.1% or $31 million. Owner occupied housing commitments rose 0.1% while investment housing commitments fell 0.5%. Owner occupied flows were worth $14.8 billion, and down 0.3% last month, while owner occupied refinancing was $6.2 billion, up 1.2% or $73 million. Investment flows were worth 11.9 billion, and fell 0.5% or $62 million. The percentage of loans for investment, excluding refinancing was 45%, down from 49% in Dec 2016.  Refinancing was 29.5% of OO transactions, up from 29.2% last month. Momentum fell in NSW and VIC, the two major states. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 17.9% in December 2017 from 18.0% in November 2017 – the number of transactions fell by 1,300 compared with last month. But the ABS warns that the First Time Buyer data may be revised and users should take care when interpreting recent ABS first home buyer statistics.  The ABS plans to release a new publication which will see Housing Finance, Australia (5609.0) and Lending Finance, Australia (5671.0) combined into a single, simpler publication called Lending to Households and Businesses, Australia (5601.0).

We continue to have data issues with mortgage lending, with the RBA in their new Statement on Monetary Policy saying it now appears unnecessary to adjust the published growth rates to undo the effect of regular switching flows between owner occupied and investment loans as they have been doing for the past couple of years.  So now investor loan growth on a 6-month basis has been restated to just 2%. More fluff in the numbers! Additionally, the RBA will publish data on aggregate switching flows to assist with the understanding of this switching behaviour.

More data this week highlighting the pressures on households.  National Australia Bank’s latest Consumer Behaviour Survey, shows the degree of anxiety being caused by not only cost of living pressures but also health, job security, retirement funding as well as Australian politics.  Of all the things bothering Australian households in early 2018, nothing surpasses cost of living pressures. Over 50% of low income earners reported some form of hardship, with almost one in two 18 to 49-year-olds being effected.

Despite improved job conditions and households reporting healthier financial buffers, the overall financial comfort of Australians is not advancing, according to ME’s latest Household Financial Comfort Report. In its latest survey, ME’s Household Financial Comfort Index remained stuck at 5.49 out of 10, with improvements in some measures of financial comfort linked to better employment conditions – e.g. a greater ability to maintain a lifestyle if income was lost for three months – offset by a fall in comfort with living expenses.

We released the January 2018 update of our Household Financial Confidence Index, using data from our rolling 52,000 household surveys. The news is not good, with a further fall in the composite index to 95.1, compared with 95.7 last month. This is below the neutral setting, and is the eighth consecutive monthly fall below 100. Costs of living pressures are very real, with 73% of households recording a rise, up 1.5% from last month, and only 3% a fall in their living costs. A litany of costs, from school fees, child care, fuel, electricity and rates all hit home. You can watch our separate video on this.

We also published updated data on net rental yields this week, using data from our household surveys. Gross yield is the actual rental stream to property value, net rental is rental payments less the costs of funding the mortgage, management fees and other expenses. This is calculated before any tax offsets or rebates. The latest results were featured in an AFR article. The results are pretty stark, and shows that many property investors are underwater in cash flow terms – not good when capital values are also sliding in some places. Looking at rental returns by states – Hobart and Darwin are the winners; Melbourne, and the rest of Victoria, then Sydney and the rest of NSW the losers. The returns vary between units and houses, with units doing somewhat better, and we find some significant variations at a post code level.  But we found that more affluent households are doing significantly better in terms of net rental returns, compared with those in more financially pressured household groups. Batting Urban households, those who live in the urban fringe on the edge of our cities are doing the worst.  This is explained by the types of properties people are buying, and their ability to select the right proposition. Running an investment property well takes skill and experience, especially in the current rising interest rate and low capital growth environment. Another reason why prospective property investors need to be careful just now.

Finally, we saw market volatility surge, as markets around the world gyrated following the “good news” on US Jobs last week, which signalled higher interest rates.  In our recent video blog we discussed whether this is a blip, or something more substantive.  We believe it points to structural issues which will take time to play out, so expect more uncertainly, on top of the correction which we have already had. This will put more upward pressure on interest rates, and also on bank funding here.

Overall then, a week which underscores the uncertainly across the finance sector, and households. This will not abate anytime soon, so brace for a bumpy ride. And those managing our large banks will need to adapt to a fundamentally different, more competitive landscape, so they are in for some sleepless nights.

If you found this useful, do like the post, add a comment and subscribe to receive future updates. Many thanks for taking the time to watch.

RBNZ Holds Official Cash Rate

The New Zealand Reserve Bank has left the Official Cash Rate (OCR) unchanged at 1.75 percent and released their February 2018 Monetary Policy Statement.

Global economic growth continues to improve.  While global inflation remains subdued, there are some signs of emerging pressures.  Commodity prices have increased, although agricultural prices are relatively soft.  International bond yields have increased since November but remain relatively low.  Equity markets have been strong, although volatility has increased recently.  Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

The exchange rate has firmed since the November Statement, due in large part to a weak US dollar. We assume the trade weighted exchange rate will ease over the projection period.

GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending and population growth.

Labour market conditions continue to tighten. Compared to the November Statement, the growth profile is weaker in the near term but stronger in the medium term.

The Bank has revised its November estimates of the impact of government policies on economic activity based on Treasury’s HYEFU.  The net impact of these policies has been revised down in the near term. The Kiwibuild programme contributes to residential investment growth from 2019.

House price inflation has increased somewhat over the past few months but housing credit growth continues to moderate.

The Bank says ” Bank funding costs eased slightly in the second half of 2017. Consistent with the decline in funding costs and a fall in the two-year swap rate, the average two-year mortgage rate has declined by around 15 basis points since June 2017. In contrast, most other mortgage rates have remained relatively stable. Mortgage rates are higher than a year ago across all terms, but remain low relative to history”.

Annual CPI inflation in December was lower than expected at 1.6 percent, due to weakness in manufactured goods prices.

While oil and food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period. Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures.  Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.

Housing Weakness Could Drive Rates Lower, and Ease Macroprudential

So now we come to it. Australia’s future is totally locked into the housing market. If prices continue to fall (to begin to correct the massive over swing) , the macroprudential settings may be eased, and the RBA may cut the cash rate to stimulate the already over high household debt (200%).

Or in other words, once again the property sector becomes a political football.  The question is does the “independent” RBA have the intestinal fortitude to resist the chorus. We simply have to get housing under control, as the longer term harm in not so doing will cripple us down the track .

In an AFR interview, the Treasurer signals that the macro-prudential lending controls could be eased.

Financial regulators may dial back home lending restrictions which have helped clamp down on rampant property price growth, if the recent slowdown in property values descends into sharper-than-anticipated falls, the federal Treasurer has signalled.

The government was “closely watching” the cooling residential real estate market Scott Morrison said.

Tighter home lending measures imposed on banks over the past year were “completely malleable”, he told The Australian Financial Review in an exclusive and wide-ranging interview in the United States.

Mr Morrison said he was meeting regularly with the Australian Prudential Regulation Authority – led by chairman Wayne Byres – and Reserve Bank of Australia – headed by governor Philip Lowe – to discuss the Council of Financial Regulators’ process.

The council, comprising the heads of APRA, RBA, the Australian Securities and Investments Commission and Mr Morrison’s Treasury Secretary, John Fraser, meets at least quarterly and is the guiding body informing APRA’s home lending rules for banks.

Mr Morrison said APRA’s restrictions over the past year to control lending to investors and to cap interest only loans had been “very effective” in achieving a “soft landing”.

But he signalled the rules were open to revision according to market conditions.

And elsewhere, Credit Suisse analysts are forecasting a large miss in Australian economic growth for the December quarter and residential investment could fall a lot sooner-than-expected if house prices weaken further, requiring a CUT in official interest rates. From Business Insider.

Credit Suisse analysts are forecasting a large miss in Australian economic growth for the December quarter.

And the recent housing downturn forms a central part of their analysis, as consumers reduce spending amid cooling house prices and other areas of the economy fail to pick up the slack.

The consensus forecast is for Q4 economic growth to come in around 0.9%, leaving annual growth in a range between 2.75% and 3.25%. The data is scheduled for release on March 7.

“We believe that the actual number is likely to come in south of 0.5%, taking year-ended growth below 2.4%,” Credit Suisse said.

The chart below shows the bank’s GDP tracker, which is pointing to softer growth in the near-term:

This chart shows each of the components Credit Suisse uses in the tracker to calculate its GDP forecasts:

“We remain of the view that without timely rate cuts, house prices are on an L-shaped trajectory, meaning that consumption and employment growth could slow sharply, while residential and infrastructure investment flatten out,” Credit Suisse said.

So when it comes to Australia’s near-term growth prospects and the outlook for interest rates, “much turns on the housing outlook”.

The analysts said the recent decline in foreign investment — along with tighter bank lending standards in the wake of the latest APRA restrictions — were two key factors in the recent house price-action.

“If the RBA is satisfied that eventually, foreign buying will return and banks will relax their lending standards, perhaps a short-term downturn is tolerable without cutting rates.”

“But if officials cannot see a recovery in house prices over the next few years, there is more urgency to cut rates, because the direct and indirect effects of housing weakness are too big to ignore.”

The analysts cited the December decline in building approvals as further evidence that Australia’s housing market is at risk of a sustained downturn.

They noted the result was partly due to monthly volatility after a sharp rise in November, but said recent numbers are indicative of a broader downtrend.

“It appears that fundamentals are now re-asseting themselves. Consistent with past experience, building approvals are now coming off their highs with house prices, albeit with a slight delay.”

“The bad news is that residential investment could fall a lot sooner-than-expected if house prices weaken further.”

“This is over and above the negative wealth and credit effects on consumer spending from falling house prices.”

In view of that, it’s “hard to see a silver lining without rate cuts”.

The Home Price Crunch – The Property Imperative Weekly – 03 Feb 2018

The Home Price Crunch is happening now, but how low will prices go and which areas will get hit the worst? Welcome to the Property Imperative Weekly to 3rd February 2018.

Welcome to our digest of the latest finance and property news. Watch the video or read the transcript.

There was lots of new data this week, after the summer break. NAB released their Q4 2017 Property Survey and it showed that property dynamics are shifting.  They see property prices easing as foreign buyers lose interest, and a big rotation from the east coast.  Tight credit will be a significant constraint. National housing market sentiment as measured by the NAB Residential Property Index, was unchanged in Q4, as big gains in SA and NT and WA (but still negative) offset easing sentiment in the key Eastern states (NSW and VIC). Confidence levels also turned down, led by NSW and VIC, but SA and NT were big improvers. First home buyers (especially those buying for owner occupation) continue raising their profile in new and established housing markets, with their share of demand reaching new survey highs. In contrast, the share of foreign buyers continued to fall in all states, except for new property in QLD and established housing in VIC, with property experts predicting further reductions over the next 12 months. House prices are forecast to rise by just 0.7% (previously 3.4%) and remain subdued in 2019 (0.8%). Apartments will under-perform, reflecting large stock additions and softer outlook for foreign demand.

Both CoreLogic and Domain released updated property price data this week. It is worth comparing the two sets of results as there are some significant variations, and this highlights the fact that these numbers are more rubbery than many would care to admit.  Overall, though the trends are pretty clear. Sydney prices are sliding, along with Brisbane, and the rate of slide is increasing though it does vary between houses and apartments, with the latter slipping further. For example, Brisbane unit prices have continued their downward slide, down to $386,000; a fall of 2.2 per cent for the quarter and 4.4 per cent for the year. Here units are actually at a four-year low. Momentum in Melbourne is slowing though the median value was up 3.2 per cent to $904,000 in the December quarter, according to Domain. Perth and Darwin remains in negative territory. Domain said Darwin was the country’s worst performer with a 7.4 per cent drop in its median house price to $566,000 and a 14 per cent plunge in its unit price to $395,000, thanks to a slowing resources sector. It also hit Perth, with a house median fall of 2.5 per cent to $557,000, and its units 1.7 per cent to $369,000. On the other hand, prices in Hobart and Canberra are up over the past year and Hobart is the winner, but is it 17% or 12%, a large variation between the two data providers?  And is Canberra 8% or 4%? It depends on which data you look at. Also, these are much smaller markets, so overall prices nationally are on their way down.  My take out is that these numbers are dynamic, and should not be taken too seriously, though the trend is probably the best indicator. Perhaps their respective analysts can explain the variations between the two. I for one would love to understand the differences. The ABS will provide another view on price movements, but not for several months.

The latest ABS data on dwellings approvals to December 2017 shows that the number of dwellings approved fell 1.7 per cent in December 2017, in trend terms, and has fallen for three months. Approvals for private sector houses have remained stable, with just under 10,000 houses approved in December 2017, but the fall was in apartments, especially in NSW and QLD.  More evidence of the impact of the rise in current supply of apartments, and why high rise apartment values are on the slide.  Also, the ABC highlighted the fact that Real estate sales companies are using big commissions to tempt mortgage brokers, financial planners and accountants to sell overpriced properties to unsuspecting clients. This is a way to offload the surplus of high-rise apartments, and looks to be on the rise, another indicator of risks in the property sector.

In other economic news, the ABS released the latest Consumer Price Index (CPI) which rose 0.6 per cent in the December quarter 2017. Annual inflation in most East Coast cities rose above 2.0 per cent, due in part to the strength in prices related to Housing.  This follows a rise of 0.6 per cent in the September quarter 2017. However, there were some changes in methodology which may have impacted the results. Softer economic conditions in Darwin and Perth have resulted in annual inflation remaining subdued at 1.0 and 0.8 per cent respectively. Many commentators used this data to push out their forecast of when then RBA may lift the cash rate – but my view is we should watch the international interest rate scene, as this is where the action will be.

Whilst the FED held their target rate this week, there is more evidence of further rate rises ahead. Most analysts suggest 2-3 hikes this year, but the latest employment data may suggest even more. The benchmark T10 bond yield continues to rise and is at its highest since 2014, and now close to that peak then of about 3%. Have no doubt interest rates are on their way up. This will put more pressure on funding costs around the world, and put pressure on mortgage rates here. In fact Alan Greenspan, the former Fed Chair, speaking about the US economy said “there are two bubbles: We have a stock market bubble, and we have a bond market bubble”. “Irrational exuberance” is back! He said we’re working, obviously, toward a major increase in long-term interest rates, and that has a very important impact, on the whole structure of the economy. Greenspan said. As a share of GDP, “debt has been rising very significantly” and “we’re just not paying enough attention to that.”  US rate hikes will lift international capital market prices, putting more pressure on local bank margins.

We published our latest mortgage stress research, to January 2018, Across Australia, more than 924,000 households are estimated to be now in mortgage stress compared with 921,000 last month. This equates to 29.8% of borrowing households. In addition, more than 20,000 of these are in severe stress, down 4,000 from last month. We estimate that more than 51,500 households risk 30-day default in the next 12 months, down 500 from last month. We expect bank portfolio losses to be around 2.7 basis points, though with losses in WA are likely to rise to 4.9 basis points. Some households have benefited from refinancing to cheaper owner occupied loans, giving them a little more wriggle room in terms of cash flow. The typical transaction has saved up to 45 basis points or $187 each month on a $500,000 repayment mortgage. You can watch our separate video blog on the results, where we count down the top 10 most stressed postcodes.

But the post code with the highest count of stressed households, once again is NSW post code 2170, the area around Liverpool, Warwick Farm and Chipping Norton, which is around 27 kilometres west of Sydney. There are 7,375 households in mortgage stress here, up by more than 1,000 compared with last month. The average home price is $815,000 compared with $385,000 in 2010. There are around 27,000 families in the area, with an average age of 34. The average income is $5,950. 36% have a mortgage and the average repayment is about $2,000 each month, which is more than 33% of average incomes.

We continue to see mortgage stress still strongly associated with fast growing suburbs, where households have bought property relatively recently, often on the urban fringe. The ranges of incomes and property prices vary, but note that it is not necessarily those on the lowest incomes who are most stretched. Banks have been more willing to lend to these perceived lower risk households but the leverage effect of larger mortgages has a significant impact and the risks are underestimated.

The latest data from The Australian Financial Security Authority, for the December 2017 quarter shows a significant rise in personal insolvency – a bellwether for the financial stress within the Australian community. The total number of personal insolvencies in the December quarter 2017 was 7,578 and increased by 7.4% compared to the December quarter 2016. This year-on-year rise follows a rise of 8.0% in the September quarter 2017.

This is in stark contrast to the latest business conditions survey from NAB. They say that the business confidence index bounced 4pts to +11 index points, the highest level since July 2017, perhaps driven by a stronger global economic backdrop and closes the gap between confidence and business conditions. Business confidence is strongest in trend terms in Queensland and SA and to a lesser extent NSW. Confidence is also reasonable in WA, and is in line with business conditions in the state. Victoria and Tasmania meanwhile are reporting levels of confidence which are lower than their reported level business conditions. But the employment index suggests employment growth may ease back from current extraordinary heights.

The RBA credit aggregates data reported that lending for housing grew 6.3% for the 12 months to December 2017, the same as the previous year, and the monthly growth was 0.4%.  Business lending was just 0.2% in December and 3.2% for the year, down on the 5.6% the previous year.  Personal credit was flat in December, but down 1.1% over the past year, compared with a fall of 0.9% last year. This is in stark contrast to the Pay Day Loan sector, which is growing fast – at more than 10%, as we discussed on our Blog recently (and not included in the RBA data).  Investor loans still make up around 36% of all loans, and a further $1.1 billion of loans were reclassified in the month between investment and owner occupied loans, and in total more than 10% of the investor mortgage book has been reclassified since 2015.

The latest data from APRA, the monthly banking stats for ADI’s shows a growth in total home loan balances to $1.6 trillion, up 0.5%. Within that, lending for owner occupation rose 0.59% from last month to $1.047 trillion while investment loans rose 0.32% to $553 billion. 34.56% of the portfolio are for investment purposes. The portfolio movements within institutions show that Westpac is taking the lion’s share of investment loans (we suggest this involves significant refinancing of existing loans), CBA investment balances fell, while most other players were chasing owner occupied loans. Note the AMP Bank, which looks like a reclassification exercise, and which will distort the numbers – $1.1 billion were reclassified, as we discussed a few moments ago.

Standing back, the momentum in lending is surprisingly strong, and reinforces the need to continue to tighten lending standards. This does not gel with recent home price falls, so something is going to give. Either we will see home prices start to lift, or mortgage momentum will sag. Either way, we are clearly in uncertain territory. Given the CoreLogic mortgage leading indicator stats were down, we suspect lending momentum will slide, following lower home prices. We will publish our Household Finance Confidence Index this coming week where we get an updated read on household intentions. But in the major eastern states at least, don’t bank on future home price growth.

If you found this useful, do like the post, leave a comment or subscribe for future updates. By the way, our special post on Bitcoin will be out in the next few days, we have had to update it based on recent market gyrations.

Property Dynamics Shifting – NAB

NAB released their Q4 2017 Property Survey.  They see property prices easing as foreign buyers lose interest, and a big rotation from the east coast.  Tight credit will be a significant constraint.

National housing market sentiment (measured by the NAB Residential Property Index) was unchanged in Q4, as big gains in SA/NT and WA (but still negative) offset easing sentiment in the key Eastern states (NSW and VIC).

Confidence levels also turned down, led by NSW and VIC, but SA/NT a big improver. SA/NT is now also the only state expected to record faster house price growth over the next 1-2 years, but prices are expected to grow fastest in QLD and fall in NSW. Income yields should however improve over the next 1-2 years as rental expectations exceed house prices in most states except QLD and WA. First home buyers (especially those buying for owner occupation) continue raising their profile in new and established housing markets, with their share of demand reaching new survey highs.

In contrast, the share of foreign buyers continued to fall in all states, except QLD (new property) and VIC (established housing), with property experts predicting further reductions over the next 12 months.

NAB’s view for 2018 is largely unchanged, but the degree of moderation has been ramped up – driven by revisions to Sydney. House prices are forecast to rise 0.7% (previously 3.4%) and remain subdued in 2019 (0.8%).

Apartments will under-perform, reflecting large stock additions and softer outlook for foreign demand.

Sell Overpriced Properties to Unsuspecting Clients

From The ABC’s Michael Janda.

Real estate sales companies are using big commissions to tempt mortgage brokers, financial planners and accountants to sell overpriced properties to unsuspecting clients. Here is the segment from ABC The Business.

 

It is a business model that has been operating for years, but is raising more concern now that many of Australia’s largest property markets are heading for a potential apartment glut.

Developers generally contract out sales to these companies when they are having difficulty shifting their stock, such as when there is an oversupply of new apartments or houses in the area.

Real estate agents say developers use these sales companies, which often market themselves as property investment firms, because they can achieve higher-than-market prices.

One reason the properties are so far above market prices is to cover the cost of the commissions going to the marketing firm.

Those fees can add tens of thousands of dollars to the cost of a new apartment or house.

A large part of those commissions are often then passed on to mortgage brokers, accountants or financial planners who refer their clients to the marketing firms.

The Real Estate Institute of Australia (REIA) said it has been “ferociously lobbying” both the federal and state governments to impose more regulation on this type of property sales tactic.

In the meantime, the REIA’s president, Malcolm Gunning, said clients need to do their homework if offered a property deal that sounds too good to be true.

“This is really aimed at, I suppose, the new investor or the lazy investor who really doesn’t want to go out and do their own due diligence,” he said.

“You should always cross-check. You should go off, walk down to your local real estate agent who’s been there for 25 years and say, ‘if I buy this property, what rent can I get for it and what in your opinion is the current market value?’

“So at least you’re making an informed decision. Don’t rely just on one source of information.”

So if an adviser or broker tries to sell you a property investment, it is worth asking who is paying theirs.

Whats In A Home Price Number?

So, we have new data from both CoreLogic and Domain on home price growth.  The problem is we are getting somewhat different results, driven presumably by their different methodologies. But is does make it hard to decode the true story in some locations.  Trends are still pointing down though.

Here is a plot of changes in values over the past year, based on CoreLogic’s December 2017 and January 2018 data, and the December 2017 data from Domain.

Domain looks more bullish in the eastern states, Brisbane apart. Corelogic is showing a fall between December and January in most east coast states.

Hobart is the winner, but is it 17% or 12%, a large variation.  And is Canberra 8% or 4%?

Perth and Darwin and stuck in negative territory.

My take out is that these numbers are dynamic, and should not be taken too seriously, though the trend is probably the best indicator.

Perhaps their respective analysts can explain the variations. I for one would love to understand the differences.

Its a pity we have to wait so long for the ABS price data.  But then again, that just adds another data point, which does not directly match.

Another case of being careful with the data!

The Sydney Melbourne Home Price Divide

The latest data from Domain highlights the difference between the Sydney and Melbourne home prices movements.   The question is, will Melbourne follow Sydney’s lead, and slow in the months ahead, or chart a different path?

Sydney’s median house price, $1,179,519, increased by 0.5 per cent over the quarter and 4 per cent over the year.

HSBC chief economist Paul Bloxham said Sydney was getting less support from international and domestic migration compared with Melbourne. “A cooling in investor interest has also been more apparent in the Sydney market.”

The gap between house prices in Melbourne and the harbour city continues to narrow. Over the latest quarter the difference was reduced to $276,000, the lowest in three years.

Melbourne’s median shot up 3.2 per cent to $903,859 in the December quarter, according to the Domain Group’s latest State of the Market report. Prices have risen every quarter for nearly five and a half years.

Market Economics managing director Stephen Koukoulas said “even though there has been a bit of a tightening in credit for investors, in terms of the amount that is lent and interest-only loans, it doesn’t appear to have had a significant impact in Melbourne”.

Melbourne was again a strong performer compared to most other capital cities, with only Hobart and Canberra posting higher growth.

Domain Group data scientist Nicola Powell said Melbourne’s most affordable regions — the west, north west and south east — had recorded the strongest price growth off the back of heightened first-home buyer activity.

Worth also noting that the strongest growth areas are also the highest in terms of mortgage stress, according to our analysis. So household debt remains extended, and the risks are rising.

Even in the CBD, a market many consider to be overheated, prices for apartments climbed 1.9 per cent over the December quarter,. But compare this to a significant fall in Brisbane apartments, so it is important to get granular when examining the data.

Brisbane unit prices have continued their downward slide, down to $385,955; a fall of 2.2 per cent for the quarter and 4.4 per cent for the year. Here units are actually at a four-year low, it’s the steepest yearly fall since June 2001. Domain says “we’re starting to see developers start to respond to the oversupply, they’re delaying some projects and not starting some either”. Greater Brisbane’s lacklustre performance, as revealed in the latest Domain Group State of the Market Report, shows median house prices have fallen by 0.6 per cent across the five LGAs, which include Brisbane, Ipswich, Redland, Moreton Bay and Logan, to $548,918.

Hobart has been declared the unlikely star of Australia’s 2017 property market, charting a stellar 17.3 per cent growth rate in house prices, putting the usual mainland glitterati into the shade. Domain Group data scientist Dr Nicola Powell agrees. The strong inter-state migration to Hobart for both lifestyle reasons and the affordability of homes is driving up prices steadily to today’s record Hobart median house price of $443,521, she believes. And with the latest December 2017 quarter alone showing a price surge of 10 per cent, there’s no relief in sight.

Domain reports Canberra’s median house price surged by 5 per cent over the December quarter to a new record high of $753,516. The Canberra growth rate was the highest recorded of all the capitals with the exception of Hobart where the median increased by 10 per cent over the quarter.

But the resources slump turned Darwin into the country’s worst performer with a 7.4 per cent drop in its median house price to $565,696 and a 14 per cent plunge in its unit price to $395,279. It also hit Perth, with a house median fall of 2.5 per cent to $557,567, and its units 1.7 per cent to $369,402.

Perth’s median house price grew 0.5 per cent to $557,567 during the December quarter. However, prices fell 2.5 cent compared with the previous year. In the unit market, median prices grew one per cent to $369,402 – a 1.7 per cent decline year-on-year.

 

Home Prices Slide Further, What Next?

The latest CoreLogic index data continues to underscore a slide in prices, and a rise in property listed in the main centres.

Sydney continues its slowing trend, Melbourne is following, and Perth is lower.

The number of properties listed continues to rise in Sydney and Canberra most notably.

Many are arguing this is just a “blip” over the holiday period, and things will return to normal as the autumn season kicks off. However, we are less sure, given the changed lending environment, and expectations from property investors.  The next month or so will provide a better lens on longer term prospects.

CoreLogic also makes the point that:

The combined capital city auction clearance rate fell to 62.3 per cent over the December quarter, down from 67.8 per cent over the September quarter.

Clearance rates are down across all but two capital cities over the December quarter, with Sydney recording the largest fall, down from 66.8 per cent to 57.7 per cent. Brisbane and Adelaide were the only cities where clearance rates didn’t fall, with both cities increasing by just 0.2 per cent over the December quarter. Melbourne recorded the highest clearance rate over the quarter at 68.1 per cent, down from 72.6 per cent the previous quarter, followed by Canberra at 66.3 per cent. Overall, the combined capital city clearance rate for the December quarter is lower on both a quarterly and annual basis.

To Buy, Or Not To Buy, That IS indeed the Question

We get a steady flow of questions from those who read our research, or follow our posts, but one question, more than any other we get asked is –  Should I Buy Property Now? Many cite the real estate industry claims that now is a great time to buy – but is it really? Today we are going to explore this question, but with a caveat. This is NOT financial advice, and is simply my opinion, based our own research and surveys. Your mileage may vary. The market is different across states and locations.

Watch the video or read the transcript.

But it is an important question given that home prices appear to have reached something of a peak, and may be sliding in some areas; housing is Australia is unaffordable, as the recent Demographia report showed; banks are tightening their lending standards under regulatory pressure; net rental streams are looking pretty stressed; many households are under severe financial pressure, and mortgage interest rates are likely to rise.

In fact, we have a generation of home buyers and prospective home buyers who have only ever seen home values rise, and if you are in the property owning system, is has become a significant source of wealth creation, amplified if you are a property investor, and assisted by ultra-low interest rates, tax breaks and other incentives.  But will the good times continue to roll? Not necessarily.

So to decide if now is a good time to buy, consider these questions.

First, why do you want to buy a property? Up until recently, our surveys have shown the number one reason to buy was capital appreciation and wealth building, with finding somewhere to live a poor second. But now, if you are wanting to buy to grow wealth, we say be careful, as the market dynamics are changing, and its likely prices will slide. Also there may be changes to negative gearing under a Labor government, and property investment mortgage rates are likely to rise, while rental streams are not, so more investment properties, on a cash flow basis will be under water. At the moment there are much better returns from the buoyant stock market, though of course that may change. Remember that prices crashed by 40% in Ireland, 35% in the USA and 25% in UK after the GFC. Prices can go down as well as up. Property is not a one-way bet!

But, if you are seeking to buy, for somewhere to live, and capital growth is less important to you, then it may still be a good time to transact. Prices are already down, and many sellers are accepting deeper discounts off the asking price to make a deal. In addition, if you are a first time buyer, there are state incentives and really low mortgage rates available. But remember you are still buying into a highly unaffordable market, and the capital value of your property may fall. This could turn into a paper loss, and indeed should you need to sell, a real financial hit. The way a mortgage works is you put in a deposit, and the bank lends the rest. But in a falling market, it is your deposit which is eroded. After the GFC many households in the northern hemisphere ended up in negative equity, meaning the value of their mortgage was larger than the market value of their property. As a result, people were stuck living in their properties unable to move, hoping the market would rise again. In fact, it did over the next 10 years, so now many are no longer in negative equity. But it can be a long and winding road.

Next, if you do decide to buy, do the work. First look around at property available, and recent sales, to get a sense of the market. Also look in different areas, and even different states. Often locations a little further from public transport are cheaper – but then is the trade-off worth it? Also compare new builds with existing property. Often newly constructed homes carry a premium, which just like a new car, on first use falls away. On the other hand, there are some desperate builders out there, with big projects, and few buyers, especially in the high-rise belts of Brisbane, Melbourne and Sydney, so they may do a deal. We are seeing a steady stream of people who sign up for off the plan builds, but then when it comes to getting a mortgage, they cannot find one, so cannot complete. So read the small print on these contracts. Ask yourself, what happens if you cannot complete the transaction.

It is also harder to add any value to a new property, whereas an older one may offer more potential for investment and upgrade, and this can be a way of helping to preserve value. There is an old adage – buy the worst property on the best street. This is still true, with caveats – you should check the condition of the property so you know what you are up for.

Also, do the work when it comes to a mortgage. Our research shows you can often get better mortgage rates from some of the smaller customer owned lender, as opposed to the big four by going direct to them. So shop around. Whilst using a broker may help, again we find that some of the best rates are found by borrowers who do the work themselves. Many brokers will do the right thing, and really help, but there is a risk that the commission and ownership structure of broker firms may mean they do not have access to the best rates, and they may not always be working in your best interests, so be careful.

There is more work to do also, on affordability. A lender will make an offer of a mortgage, based on your financial details as contained in the application, and supporting evidence. Remember lenders want to make a loan – it is the only game in town in terms of their profitability – but there is evidence that some lenders will offer a bigger loan, by using more aggressive living expenses, and income assumptions. That said, the industry is getting more conservative, with lower allowable loan to value ratios, and some income categories now reduced.

Just because the lender says you can have a loan, does not mean you should get the loan. The lender is looking at risk of loss from their perspective, not yours. If you have a large deposit, then the bank can assume that capital is available on default to recover their mortgage. Remember in Australia, you cannot just walk away and return the keys, the liability stays with you. So, ask the lender, not just about repayments at current interest rates, but also what happens if they rise. A good rule of thumb is catering for a 3% rise in rates. Get the lender to tell you what the revised repayments would be at this higher rate, and ask yourself if you could still make the repayments. This is important, as incomes are not growing in real terms and mortgage rates may well rise. If you cannot make the repayments at 3% high, get a smaller loan, and buy a smaller place.

You may need to build your own cash flow to test what is affordable – again do not rely on the bank for this – remember they are concerned about risk of loss to their shareholders, not to you.  ASIC’s MoneySmart Budget Planner is a good starting point. Also, remember to include the transaction and stamp duty costs in your calculations.

Another area is the deposit you will need. These days you are likely to need a bigger deposit. 20% would be a good target, as this then avoids having to pay for expensive Lenders Mortgage Insurance. Above that, you will need this facility – which to be clear, protects the bank, not you!

More prospective borrowers are turning to the Bank of Mum and Dad, for help, but there are also risks attached to this arrangement – see our earlier Video Blog on the Bank of Mum and Dad. Some buyers are clubbing together to purchase, but there are risks attached to these arrangements too.

Finally, if you do buy, work on the assumption you will need to hold the property for some time – say a minimum of 3-5 years. The old trick of flicking after a year or so will not work if, as we expect prices fall. Remember too that there are additional costs to owning a property from council rates, running costs – such as electricity – and maintenance costs. Owning property is an expensive business.   Make sure these costs are included in your cash flows.

So what’s the bottom line?  If you are wanting to buy to put shelter over your family’s head, and can afford the mortgage, and are willing to accept a risk of loss of capital, then do the work, and it might be the right thing to do.  A capital gain is by no means certain in the current climate!

But, if you are looking at property as a wealth building tool, I think you might do better to hold off, as prices are likely to slide, and the costs of an investment mortgage are on the rise. At very least look in areas around Hobart and Adelaide where value is better at the moment.

In fact, though, the only reason I can see to transact in this case is to lock in a negative gearing arrangement now, before the next Federal election. But then, that seems to me to be a long bow, and our modelling suggests that the removal of negative gearing will have only a minor impact on the market. There are a bunch of other more compelling reasons to think the market will fall.

So in summary, whatever type of borrower you are, do the work and be very careful. Prices may rise, but they can also certainly fall, and a mortgage could just be a noose around your neck.

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