Category: Home Prices

ABC Radio Does Housing

I had the chance to discuss at some length the latest dynamics of the housing and property markets with ABC’s Jules Schiller on ABC Radio last night.

You can listen to the discussion.

We discussed the concept of affordability to first-time house buyers and the latest Bankwest study which shows how budget-friendly the Australian housing market is today. North says that the country has an existing dilemma to repair in able for younger people to buy houses easily.

North says that giving incentives to first-time buyers will only lessen the interest of the house they are set to buy, adding that it might not help those people. He believes that reforms in the housing sector are needed to solve this issue of unaffordable housing among new buyers. He talks about the different housing prices in the East coast where Sydney resides and the West Coast where Perth is located. He gives advice to first-time buyers when is the right time to buy houses in capital cities in Australia.

He believes that there are several uncertainties concerning the current set-up of the housing market. He says that a Housing Royal Commission is more needed than a Banking one, though this inquiry can affect the housing industry but he is not sure whether first-time buyers will feel the effect once the inquiry is finished. He says that the inquiry should look into how banks are dealing with mortgage payments and other transactions.

He cannot say whether foreign ownership of some houses and lands in the country are largely affecting the first-time buyers but it is a factor. He says that there are many markets where first-time buyers can invest like Adelaide, Hobart and Brisbane.

Home Prices Wobble In Sydney; Melbourne Higher

From CoreLogic.

National dwelling values held steady in November, with a 0.1% fall in capital city dwelling values offsetting a 0.2% rise in values across the combined regional markets of Australia, according to CoreLogic’s November Hedonic Home Value Index results.

According to CoreLogic head of research Tim Lawless, a significant contributor to the downwards movement over the month came from the Sydney housing market, which recorded a 0.7% fall in dwelling values, while a fall in values was also recorded across Darwin and regional Northern Territory which were both down 0.4% over the month. For the remaining broad regions of Australia, dwelling values were relatively steady, or experienced a subtle rise, over the month.

Index results as at November 30, 2017

2017-12-01--indices

National dwelling values tracked 0.2% higher over the past three months and have increased 5.2% over the twelve months ending November. The national annual growth rate has now halved since reaching a recent peak in May 2017, when dwelling values rose 10.4%.

Conditions remain diverse across the regions

Mr Lawless said, “The diversity in capital city housing market conditions is highlighted by the rolling quarterly change in dwelling values, which range from a 3.3% rise in Hobart, to a 2.7% decline in Darwin.  However, considering that together these two cities account for less than 1.5% of total housing stock in Australia, they have had little effect on the overall headline figures.”

He said, “On the other hand, softer housing market conditions across Sydney, which comprises roughly one fifth of national dwelling stock (and approximately one third by value), has a material influence over the headline growth trends.”

The Sydney housing market moved through a recent peak in July 2017 and dwelling values have been trending lower each month since that time.  Dwelling values were down 0.7% in November to be 1.3% lower relative to the market peak. Sydney’s 1.3% fall over the past three months is the greatest decline over a three month period since March 2016. While the rate of value decline in Sydney has gathered some momentum, it remains extremely modest.

Mr Lawless believes there is mounting evidence that the Perth housing market may finally have bottomed out. Dwelling values across Perth have edged higher over each of the past three months to record the first rolling quarterly capital gain since late 2014. The three months to November saw Perth dwelling values rise by 0.3%.  In addition to values moving off their low base, settled sales are rising (+3.8% year on year), homes are selling faster (59 days compared with 68 days a year ago) and advertised stock levels have reduced substantially (-12.7% compared with last year). He said, “If this is indeed the start of a recovery phase in the Perth housing market, it comes after dwelling values have fallen 10.8% since peaking in mid-2014.”

Many Households Think Property Values SHOULD Fall

According to ME Bank, in a study of 1500 Australian adults, 43% of respondents said they were reliant on future house prices to achieve future life / financial goals, with 10% completely reliant.

But it’s a tug-of-war as to which way we want prices to go: 38% want prices to increase while 37% want them to fall.

Where you sit largely comes down to your property ownership status: 39% of those who own the home they live in and 47% who own an investment property indicated they are ‘reliant’ on future prices, presumably increasing, while 48% of those who don’t own a property also say they are reliant, presumably wanting prices to fall.

Younger respondents indicated they are more reliant on future house prices than older: 51% of Millennials (25 to 39 year olds) said they are reliant compared to 30% of Baby Boomers (55-74 year olds).

Most tellingly, the survey indicates more Australians would benefit from property prices falling than rising, with only 28% indicating they’d benefit by selling if prices continued to rise compared to 47% who said they’d benefit by buying in if property prices fell.

A quarter of home owners happy to see house prices to fall

ME home loan expert, Patrick Nolan, said he was surprised to find 37% of respondents want property prices to fall, including 24% of those who own a home and even 20% of those with an investment property, compared to 38% of who want prices to continue rising 38%.

“Traditionally Australians fall into two camps when it comes to property prices: owners, who want them to rise, and non-owners, who want them to fall.

“But with high prices disrupting the dream of home ownership and the benefits that brings, views are changing.”

“That property owners were willing to see asset values fall is a sure sign house prices had reached heights many think are unfair,” Nolan said.

When asked why they want prices to fall, the overwhelming reason given was to help address the housing affordability issue (57%), a sentiment expressed by 97% of those with property.

The bulk of those wanting house prices to continue rising are property owners: 49% of home owners and 55% of investors.

Chinese Homebuilder Outlook Stable, but Market to Cool

China’s housing market is likely to continue to cool in 2018, with sales growth set to slow across most of the country and house prices likely to stay relatively flat, says Fitch Ratings.

However, the authorities have considerable policy flexibility to support housing demand, which limits the risk of a market downturn. We therefore maintain a stable sector outlook for Chinese homebuilders.

The Chinese government has imposed tougher rules on home purchases and minimum loan deposits in higher-tier cities since October 2016 to dampen speculation. We do not expect further tightening in 2018, except perhaps in some lower-tier cities in strong economic regions that could see price increases. Most of the existing restrictions are likely to remain in place, but policies could be adjusted to encourage homeownership for first-time homebuyers or to attract skilled labour migration in some cities where house prices have stabilised.

The curbs have had a clear impact on the market, reining in house price inflation, tempering home sales growth and encouraging destocking. We expect them to limit any gains in house prices in 2018. Contracted sales growth is likely to slow for most homebuilders, and we forecast that overall housing sales will decelerate to 5%, from 10.9% yoy on a trailing 12-months contracted sales at end-October 2017. The destocking cycle could, however, begin to reverse, as some companies now only have land bank reserves for two to three years of development.

A major house price correction is unlikely, given that the authorities directly control many aspects of the housing and mortgage markets. Moreover, the restrictions in higher-tier cities, which have seen the strongest price gains in recent years, have led to considerable pent-up demand that could be released if policy is relaxed.

Homebuilders’ EBITDA margins could begin to narrow in 2018 and 2019 as homebuilders start to work through their higher-cost inventory in a market where prices are under pressure from government controls. Leverage is likely to remain relatively stable over the next two years, with net debt/adjusted inventory averaging 40%-43% among Fitch-rated homebuilders. Cash flow generation is also likely to remain strong.

We maintain a stable sector outlook on commercial property. Mall traffic in higher-tier cities is suffering from strong saturation and competition from e-commerce, with only mature malls in prime locations performing well. We believe these first-tier city malls will achieve low single-digit yoy rental growth in 2018, similar to 2017. However, malls of established operators in less-saturated lower-tier cities are seeing strong traffic growth.

Grade A office space in most first-tier cities is likely to remain broadly stable, and we expect the vacancy rate to stay below 15%. However, office assets in Guangzhou and Shenzen, as well as in lower-tier cities, have higher vacancy rates and could be affected by an increase in supply in 2018.

Poorer Australians Bearing the Brunt of Rising Housing Costs

From The Conversation.

Rising housing costs are hurting low-income Australians the most. Those at the bottom end of the income spectrum are much less likely to own their own home than in the past, are often spending more of their income on rent, and are more likely to be living a long way from where most jobs are being created.

Low-income households have always had lower home ownership rates than wealthier households, but the gap has widened in the past decade. The dream of owning a home is fast slipping away for most younger, poorer Australians.

As you can see in the following chart, in 1981 home ownership rates were pretty similar among 25-34 year olds no matter what their income. Since then, home ownership rates for the poorest 20% have fallen from 63% to 23%.

Home ownership rates also declined more for poorer households among older age groups. Home ownership now depends on income much more than in the past.

Lower home ownership rates mean more low-income households are renting, and for longer. But renting is relatively unattractive for many families. It is generally much less secure and many tenants are restrained from making their house into a home.

For poorer Australians who do manage to purchase a home, many will buy on the edges of the major cities where housing is cheaper. But because jobs are becoming more concentrated in our city centres, people living on the fringe have access to fewer jobs and face longer commutes, damaging their family and social life.

Prices for low-cost housing have increased the fastest

The next chart shows that the price for cheaper homes has grown much faster than for more expensive homes over the past decade. This has made it much harder for low-income earners to buy a home.

If we group the housing market into ten categories (deciles), we can see the price of a home in the lowest (first and second) deciles more than doubled between 2003-04 and 2015-16. By contrast, the price of a home in the fifth, sixth and seventh deciles only increased by about 70%.

Tax incentives for investors may explain why the price of low-value homes increased faster. Negative gearing remains a popular investment strategy; about 1.3 million landlords reported collective losses of A$11 billion in 2014-15.

Many investors prefer low-value properties because they pay less land tax as a proportion of the investment. For example, an investor who buys a Sydney property on land worth A$550,000 pays no land tax, whereas the same investor would pay about A$9,000 each year on a property on land worth A$1.1 million.

Rising housing costs also hurt low-income renters

As this last chart shows, more low-income households (the bottom 40% of income earners) are spending more than 30% of their income on rent (often referred to as “rental stress”), particularly in our capital cities. In comparison, only about 20% of middle-income households who rent are spending more than 30% of their income on rent.

Why are more low-income renters under rental stress?

First, Commonwealth Rent Assistance, which provides financial support to low-income renters, is indexed to the consumer price index and so it fell behind private market rents which rose roughly in line with wages.

Secondly, rents for cheaper dwellings have grown slightly faster than rents for more expensive dwellings. Finally, the stock of social housing – currently around 400,000 dwellings – has barely grown in 20 years, while the population has increased by 33%.

As a result, many low-income earners who would once have been in social housing are now in the private rental market.

What can be done about it?

Increasing the social housing stock would improve affordability for low-income earners. But the public subsidies required to make a real difference would be very large – roughly A$12 billion a year – to return the affordable housing stock to its historical share of all housing.

In addition, the existing social housing stock is not well managed. Homes are often not allocated to people who most need them, and quality of housing is often poor. Increased financial assistance by boosting Commonwealth Rent Assistance may be a better way to help low-income renters meet their housing costs

Boosting Rent Assistance for aged pensioners by A$500 a year, and A$500 a year for working-age welfare recipients would cost A$250 million and A$450 million a year respectively.

Commonwealth and state governments should also act to improve housing affordability more generally. This will require policies affecting both demand and supply.

Reducing demand – such as by cutting the capital gains tax discount and abolishing negative gearing – would reduce prices a little. But in the long term, boosting the supply of housing will have the biggest impact on affordability. To achieve this, state governments need to change planning rules to allow more housing to be built in inner and middle-ring suburbs.

Unless governments tackle the housing affordability crisis, the poorest Australians will fall further behind.

Authors: John Daley, Chief Executive Officer, Grattan Institute;
Brendan Coates, Fellow, Grattan Institute; Trent Wiltshire, Associate, Grattan Institute

78% of Australians say prices won’t fall

From Mortgage Professional Australia.

Nearly four out of five Australians don’t see house prices falling in their state over the next two years, according to a new report by comparison site CANSTAR.

CANSTAR surveyed 2,026 consumers on their views on property prices and home buying. Nationally, 47% of respondents expected steady growth in house prices, with a further 8% predicting prices would ‘skyrocket at some point’.

Just 11% of respondents thought prices could fall in the next two years.

Even in Perth, where according to CoreLogic, values fell 2.5% over the past year, just 7% of respondents thought prices could fall. Conversely, 37% of Perth respondents believed prices could rise.

Sydney was the most pessimistic city, with 16% predicting values would fall. CANSTAR’s results were timely, with the Harbour City experiencing a quarterly decline of 0.6% in October.

Are Australians just naive?

With many Australians preparing to invest in property, driven by optimism on house prices, CANSTAR’s results may be cause for concern.

QBE recently published their 2017-2020 Housing Outlook, which predicted that the price of units would fall in four of Australia’s capital cities.

Unit prices in Sydney would fall by 3.8% over the three years, with units in Melbourne and Brisbane falling by 4.8% and 7.2% respectively.

However, house buyers are far better placed, with falls only predicted for Sydney and Darwin.

Housing – All About Supply and Demand; But Not What You Think

The Government view is high home prices is ultimately driven by lack of supply, relative to demand, including from migration. So the solution is to build more (flick pass to the States!). It has nothing to do with excessive debt, nor does the fact the average number of people per home is falling signify anything.  And tax policy is not the problem.

However, a new working paper “Regional housing supply and demand
in Australia” from the ANU Center for Social Research and Methods blows a mighty hole in that mantra.  They suggest that demand factors (availability of loans, tax concessions etc.) have a significant impact, while demand and supply equilibrium varies significantly across different regions, with some hot spots, and some where vacant property exists (yet prices remain high, because of these demand factors). Significantly, much of the surplus is in areas where high-rise development has been strong. We think this may signal further downward pressure on prices in these areas.

Over the year to June 2017 Australia built nearly 220,000 dwellings.  Construction rates of units and other attached housing have more than doubled this decade, with around 103,000 units, townhouses and terrace houses completed in the latest financial year. Most of these completions are high-rise units in Australia’s capital cities (which is why the average home size is falling). Detached house completions have also trended up in recent years, but the growth has been more modest. This paper accounts for differential in the type of stock being built, with detached housing supporting a greater number of persons per dwelling than units and townhouses.

The paper measures the gap between housing supply and demand at
a regional level in Australia. They have taken into account a range of complicating factors such as changing demographics, building types and the increase in unoccupied dwellings at the regional level.

Previous research efforts in Australia focus on national estimates of the housing ‘gap’ or shortage but here we recognise that housing markets tend to be regional and that house price movements and affordability are likely to be as influenced by local demand and supply conditions as by broad national conditions.

Between the years 2001 and 2017, we estimate the Australian housing market experienced an oversupply of 164,000 dwellings. However, there are significant regional differences with some regions experiencing significant undersupply while others have significant housing surpluses.

Nationally, we do find periods of significant undersuppy, particularly between 2007 and 2014 but for other periods beyond 2001 we find oversupply more than compensated.

The majority of Australia’s housing surplus is situated in the inner-city areas of its major capitals, with Inner Brisbane, Melbourne and Sydney all oversupplied due to recent strong growth in unit developments. Many regional centres, particularly those in mining-sensitive areas such as North
Queensland and Western Australia, also retain housing surpluses.

Many regions in the middle and outer rings of our major capital cities, particularly Sydney, face modest housing shortages.

The modelling suggests that there is some evidence, albeit relatively weak, that a housing shortage is associated with higher house price growth.

The analysis exclusively concerns the concept of underlying demand, recognising that this may not be representative of the demand for housing in a traditional economics sense. The paper also acknowledges the limitations of the analysis in terms of both its conceptual basis and the data it relies on.

This paper does not conclude that people’s housing needs are being met or that what is being supplied is at an affordable price point for all families.

The lack of a housing shortage may have significant implications for housing policy in Australia and the economy more broadly. If Australia’s current record home-building levels are not balanced by a large housing shortage, then there is the risk that these current levels will reduce in the near future. Policy makers will also need to place greater emphasis on other potential drivers of house price growth and housing affordability, such as a range of demand influences.

Australia’s property market growth comes to a halt

From The New Daily.

Sydney’s deflating house prices have dragged the property market down across the entire country, in the most conclusive sign yet that the boom is over, figures from CoreLogic have revealed.

For the month of October – traditionally a bumper month for property sales – average house prices across Australia’s capital cities posted no growth at all.

Sydney house prices fell by 0.5 per cent, bringing quarterly losses to 0.6 per cent.

Prices in Canberra and Darwin also fell (by 0.1 per cent and 1.6 per cent respectively), while Adelaide and Perth each posted zero growth.

Of the capital cities, only Melbourne, Brisbane and Hobart saw property prices increase, at 0.5 per cent, 0.2 per cent and 0.9 per cent respectively.

Perth’s flat growth was also an improvement on a long period of falling prices.

The poor results will be a disappointment to sellers who assumed a spring sale would optimise the value of their property.

CoreLogic’s head of research Tim Lawless put the low growth down, primarily, to tighter restrictions on lending.

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” he said.

He added that more expensive rates on interest-only loans were acting as a disincentive for property investors, particularly those that offered low rental yield.

Commenting on the NSW capital’s poor results, Mr Lawless said: “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”

However, despite the recent depreciation, house prices in Sydney are still 7.7 per cent higher than they were a year ago.

Turning to Melbourne, Mr Lawless put the city’s continued growth down to “record-breaking migration rate”, which he said was creating “unprecedented housing demand”.

Units v Houses

In most capital cities, houses continued to see higher capital growth than units, due to overdevelopment of the latter. A notable exception to this was Sydney.

Over the year, unit values in Sydney grew by 7.9 per cent, compared to 7.7 per cent for houses.

“While Sydney is seeing a large number of new units added to the market, it seems that high levels of investment activity and strained affordability is helping to drive a better performance across this sector,” Mr Lawless.

The report found that rental yields, while they had grown 2.8 per cent over the year, were still extremely low when compared to house prices – which have on average risen 6.6 per cent over the year.

Sydney and Darwin were exceptions to this.

“If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be a slow process,” Mr Lawless said.

Chinese money dries up

While CoreLogic put the flat growth down to tougher mortgage lending restrictions, a report by Credit Suisse offered a different explanation.

According to the ABC, the report found Chinese capital flows into Australia had fallen in recent months, and this was having a pronounced effect on the domestic property market.

“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” ABC quoted Credit Suisse as saying.

“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.

“This fall foreshadows weakness in NSW housing demand in the year ahead.”

This, Credit Suisse argued, could see the Reserve Bank forced to cut interest rates even further. Currently the cash rate sits at a record low of 1.5 per cent.

Australia’s housing boom is ‘officially over’ – and that could have a big economic impact

From Business Insider.

Australian house price growth stalled in October, according to data from CoreLogic, thanks largely to a 0.5% decline in Sydney, the nation’s largest and priciest property market.

Prices in Australia’s largest city fell in the two months, leaving the decline since July at 0.6%, the largest over a comparable period since May 2016.

As a result of the weakness in Sydney, prices nationally have grown by just 0.3% since July in weighted terms, seeing the increase on a year earlier slow to 6.6%.

On the recent evidence, a Sydney-led national housing market slowdown is now underway.

Tim Lawless, Head of Research at CoreLogic, called it a “significant turn of events”, acknowledging that if historical patterns are repeated, there’s likely to be further declines to come.

He’s not alone on that front.

To George Tharenou, economist at UBS, the weakness in CoreLogic’s Home Value Index signals that Australia’s housing boom is now “officially over”.

“Australia’s world record housing boom is ‘officially’ over after a large ‘upswing’ of 6556% price growth in 55 years,” he says.

“After dwelling price growth was resilient at a booming 10% [plus annual] pace earlier this year, there is now a persistent and sharp slowdown unfolding.

“Indeed, the weakness in auction clearing rates, and the near flat growth in prices in the last 5 months, suggest the cooling may be happening a bit more quickly than even we expected.”

If the chart below from UBS is anything to go by, the decline in auction clearance rates in recent months points to the likelihood that annual price nationally will continue to decelerate into early 2018.

Source: UBS

 

“Price growth now seems likely to end 2017 around 5% year-on-year, below our expectation for 7%,” Tharenou says.

Like Lawless at CoreLogic, he says the Sydney-led slowdown is a lagged response to macroprudential tightening from Australia’s banking regulator, APRA, something that has led to out-of-cycle mortgage rate hikes as a result of tougher lending standards.

“This slowdown in house prices has coincided with a sharp slowing of investor housing credit growth to a 5.5% annualised pace in the last three months to September,” Tharenou says.

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth ahead via a fading household wealth effect.”

Source: UBS

 

Given his expectation that weaker house price growth will soften household consumption, the largest part of the Australian economy, Tharenou says it will prevent the Reserve Bank of Australia from lifting interest rates until the second half of next year.

Should house price growth weaken further in the months ahead, it must surely cloud the outlook for residential construction, another crucial part of the Australian economy and the third-largest employer in the country.

With new home sales and building approvals both rolling over from the record levels reported last year, a bout of price weakness may exacerbate that slowdown, creating negative second-round effects across the broader economy given the sheer size of the residential construction sector.

Asleep At The Wheel? – The Property Imperative Weekly 28 Oct 2017

Another big week of finance and property news, so we pick over the bones and try to make sense of what’s going on. And we ask were the Regulators asleep at the wheel?

Welcome to the Property Imperative weekly to 28th October 2017. Watch the video or read the transcript.

We start this week’s review with a look at the latest economic data. The latest GDP read from the US, at 3.1% annualised, in Q2 and 3.0% in Q3, provides more support to the view the FED will lift their benchmark rate again before the end of the year. This is likely to have a flow on effect by rising rates in the international capital markets, which will mean higher bank funding costs here, as well as putting downward pressure on the toppy stock market. To confirm this view, we saw the benchmark 10-year Treasury Bond Yield in the USA rose to its highest rate in several months.

In Australia, the ABS said the CPI was 0.6 per cent in the September quarter 2017 following a rise of 0.2 per cent in June. The most significant price rises were electricity (+8.9%), tobacco (+4.1%), international holiday travel and accommodation (+4.1%) and new dwelling purchase by owner-occupiers (+0.8%). These rises were partially offset by falls in vegetables (-10.9%), automotive fuel (-2.3%) and telecommunication equipment and services (-1.5%). The CPI rose 1.8 per cent through the year to September quarter 2017 having increased to 1.9 per cent in the June quarter 2017, below the RBA’s 2-3% target band.

The RBA’s Guy Debelle spoke about some of the uncertainties in taking the economic temperature in Australia. He homed in on the CPI data from the ABS, making the point that our belated quarterly CPI reports are out of kilter with the monthly data now provided in many other western countries. In addition, the ABS will be revising their expenditure weightings in the CPI series, which means that CPI may currently be over stated by perhaps a quarter of a percent. These revisions are made every 5 or 6 years, although there are plans afoot to make them more frequently. The ABS is under tremendous funding pressure, and there are risks their critical data series may be compromised.

The National Accounts data from the ABS for the year 2016-17 really brought home how much of the growth in the economy was thanks to household consumption, as opposed on business or government investment. This helps to explain why the RBA was willing to let household debt escalate to their current astronomical levels, why rates are so low, and why the property sector is so important.  In summary, overall growth was 2%, the lowest since 2008-9; wages rose 2.1%, the weakest since 1991-2; growth in household expenditure as measured in current price terms was 3.0%, the lowest on record; the household saving ratio was at its lowest point (4.6%) in nine years and yet household consumption was the strongest growth driver at 1.22 percentage points.

This was because households borrowed an additional $990 billion over the 10 year period from 2006-07, mainly in mortgages. The value of land and dwellings owned by households increased by $2.9 trillion over the same period and increased by $621 billion through 2016-17 and despite slow wage growth, household gross disposable income plus other changes in real net wealth increased $456.6 billion, or 32.6%, in 2016-17, largely due to a $306.5 billion appreciation in the value of land held by households.

But of course, such high debt and high property prices are now creating fault lines in the property market and household finances.

We are seeing more risks in the property investment sector. Traditionally, in the Australian context, loans to property investors have tended to perform better than loans to owner occupiers. This is because investors receive rental income streams to help pay for the mortgage costs, they are willing to carry the costs of the property against future capital gains, and many will be able to offset costs against tax, especially when negatively geared. In addition, occupancy rates in most states have been stellar.

But things are changing, as the costs of borrowing for investment purposes have risen (thanks to the banks’ out of cycle rises), while rental returns are flat, or falling and the costs of managing the property are rising. In addition, the supply of investment property is rising, and occupancy rates are declining in a number of key markets. As a result, more investors are seeing net rental yields – after mortgage payments and other costs drifting into negative territory, especially in VIC and NSW.  Our Core Market Model, and recent data from ANZ suggests defaults from the property investment sector are now running at similar levels to owner occupied borrowers, and are set to rise further.

In fact, the ANZ full year result, which superficially looked strong – up 18% on the prior comparable period – contained a number of negative trends, as they focus more on the retail business in Australia and New Zealand.  Yes, they have a strong balance sheet, as capital is released from their assets sales, and provisions were down; but the underlying net interest margin fell, down 8 basis points on last year to 1.99%, with a fall of 2 basis points in 2H, despite the mortgage book repricing and loan switching. In addition, 90-Day mortgage defaults overall remained similar to last year, but with a spike in WA and a fall in VIC/TAS. Investment loan delinquencies are rising, whereas they have traditionally been lower than OO loans. They have recently tightened underwriting standards, but of course loans already on their books have looser standards. They warn “household debt and savings have both increased, however the ability for households to withstand economic shocks has diminished a little”. “In 2018 we expect the revenue growth environment for banking will continue to be constrained as a result of intense competition and the effect of regulation including a full year of impact of the Australian bank tax.”

Our own analysis of default probability, from our Core Market Model, now includes 90-day default risk modelling.  We measure mortgage stress on a cash flow basis – the October data will be out next week – and we also overlay economic data at a post code level to estimate the 30-day risk of default (PD30). But now we have added in 90-day default estimates (PD90) and the potential value which might be written off, measured in basis points against the mortgage portfolio. We also calibrated these measures against lender portfolios. Granular analysis can provide a rich understanding of the real risks in the portfolio. Risks though are not where you may expect them! If we look at the results by state, WA leads the way with the highest measurement, then followed by VIC, SA and QLD. The ACT is the least risky area. In WA, we estimate the 30-day probability of default in the next 12 months will be 2.5%, 90-day default will be 0.75% and the risk of loss will be around 4 basis points. This is about twice the current national portfolio loss, which is sitting circa 2 basis points.

Banks are cracking down on loans to borrowers buying into Brisbane’s over-supplied apartment market, with a number of risky postcodes identified, which require bigger deposits. The four major banks – Westpac, Suncorp, Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB) – are restricting lending for certain Brisbane postcodes, where apartment buyers will now be required to have a deposit of up to 20% to qualify for a home loan. Suncorp has blacklisted nearly 40 postcodes in the Queensland capital, including Inner Brisbane, Teneriffe, Fortitude Valley, Bowen Hills, and Herston. The banks are refusing to loan more than 80% of the cost of a unit due to “[weaknesses] in the investment market” as well as the current oversupply in inner-city apartments. Prices for apartments in Inner-Brisbane have dropped to their lowest level in three years.

QBE’s Housing Outlook, published this week, suggests home price growth will slow further in the years ahead. We continue to see appetite from property investors easing, as property price growth stalls or in some states reverse. Banks on the other hand are chasing new business with deep discounts on new loans. For example, Teachers Mutual cut their rate for new loans by 30 basis point, to 3.84%.  Westpac, St George, BankSA and Bank of Melbourne all introduced promotional discount rates, with rates down by up to 20 basis points. Bank West also offered discounts to both new owner occupied and investor borrowers. So, the war chests created by the back book repricing earlier in the year – especially investor and interest loans are being used to target new business. As a result, we expect to see a hike in refinancing, especially in the lower LVR owner-occupied sector, as borrowers seek to reduce their monthly outgoings.

We also showed that more households seeking a mortgage are generating multiple applications, sometimes direct to a bank, and sometimes via mortgage brokers, as they seek to find the best deals. More applications are made via online systems, which make the process easier, but the net result of all this is that mortgage conversation rates have fallen from around 80% to 50%, creating more noise, and costs in the system. We think this is a direct results of the banks’ so called omni-channel approach to distribution, which will turn out to be quite costly.

Following the concerns expressed recently by RBA and ASIC on the risks to household finances, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income. Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?

The Treasury added their voice this week, when John Fraser, Secretary to the Treasury, gave an update on household finances and housing as part of his opening statement to the October 2017 Senate Estimates.  He expressed the view that debt is born by those with the greater capacity to repay but this belies the leverage effect of larger loans in a rising interest rate environment. He said that “while banks’ progress against these measures has been positive, regulators will need to think carefully about whether future efforts to maintain financial stability should lean against cyclical excesses or address structural risks within the financial system”.

So, we have the full Monty, with all four members of the shadowy “Council of Financial Regulators” expressing concerns about household debt and home price risks. A completed change of tune from the declarations of 2015 when everything was said to be just dandy!

Now those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all-time low.  We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.

All members of the “Council of Financial Regulators” which is chaired by the RBA are culpable.  This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey! The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability. But too little has been done, too late.  And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth. Even now, lending for housing is growing three time faster than incomes or cpi. Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. It’s time to review the regulatory structure and remember that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government! That could prove to be a costly mistake.

And that’s the Property Imperative Weekly to 28th October 2017. If you found this useful, do leave a comment below, subscribe to receive future updates and check back next week for the next installment.