Home Prices – Page 76 – Digital Finance Analytics (DFA) Blog

Why housing supply shouldn’t be the only policy tool politicians cling to

The most popular government policy at the moment for solving housing affordability continues to be increasing housing supply. After a visit to the UK to look at this very problem, Treasurer Scott Morrison said:

The issue here fundamentally is about supply.

And it’s little wonder the government dwells so much on this argument. Rising house prices are very popular amongst Australian households, the majority of which are owners. And stamp duties on housing transactions are key sources of income for state governments. Our research found the default position for politicians is to sound concerned about housing affordability, but do nothing.

The supply refrain has all the hallmarks of a good policy for a politician. Increasing housing supply – rather than reducing the tax breaks that stimulate excessive demand – is a popular policy with peak property groups. The Property Council has been saying the same thing for years, so the supply solution has come to sound like fact.

If the supply doesn’t flow or, as is occurring now, doesn’t cool prices, the federal government can blame the states for sluggish planning and land supply without having to put their money where their mouth is. States in turn can blame recalcitrant local governments for blocking housing development and “gold-plating” infrastructure requirements. Since the private sector almost wholly funds and delivers new housing, calling for more of it has been a pretty cheap strategy for government.

It’s true that increasing the supply of new homes in line with population and economic growth is a fundamental part of maintaining a healthy housing system. But to tout new housing production as the only policy lever without examining the question of demand is clearly an ineffective policy position.

The supply argument sounds believable – increasing supply will actually reduce prices in markets for most types of goods, like bananas, cars or televisions. Unfortunately, the housing market is different.

Why are housing markets different?

So why is it that despite record supply levels in Australia in recent years, prices have continued to rise in Sydney and Melbourne? We think there are a number of reasons.

New supply is a small fraction of the total stock of dwellings (about 2% in Australia). Prices are set by the total housing market – most of which already exists in the form of established homes.

Also housing is an unusual good in that as prices increase, demand in the short term actually increases (it’s an asset market). This makes it much more difficult for supply increases to reduce prices.

Increasing prices feeds demand

In most other markets increasing prices both encourage extra supply and reduce demand, so these two key forces are working together – prices in these markets come down sharply when supply increases. In housing markets these two forces are working against each other – the growth of investor demand is simply swamping new supply.

The very low interest rates on offer at the moment are exacerbating this trend.

Developers manage supply

Developers, and the banks that fund development, simply won’t allow supply to get ahead of demand in a way that would put significant downward pressure on prices. Dwelling approvals in Sydney and Melbourne are running way ahead of building starts, but housing projects are released in stages to avoid swamping the market. Since our major banks have the majority of their loan books in retail mortgages, it’s no wonder they avoid funding enough supply to increase their own risk levels.

How much new supply would improve affordability anyway?

Even if Australia’s developers and financiers were less cautious, it’s probably not feasible to produce enough supply to really knock prices around when demand is very strong.

For example, prior to the global financial crisis, Ireland – which is about the same size as Sydney, increased supply to 90,000 dwellings per year (Sydney does about 30,000 dwellings per year) and prices still kept rising. It wasn’t the over-supply of homes that caused Irish house prices to fall dramatically but rather the sudden contraction of demand when the global financial crisis hit.

Under more stable conditions, the problem of generating additional housing supply remains. Australia’s prime minister has encouraged the states to fix their planning laws to make it easier get housing approvals and building to flow.

But there has been a continuous wave of planning reform over the last 10 years in Australia, and Sydney and Melbourne dwelling approvals are at long-term highs. For example, in 2015-16, Sydney recorded over 56,000 new dwelling approvals and Melbourne over 57,000.

In fact, approvals are running at about double the actual dwelling construction levels, so “fixing” the planning system is unlikely to have much impact on dwelling supply levels.

High-density supply fuels land speculation

Much new supply is in apartments. In the rush to create new supply, some local councils and state governments have provided bonuses to developers by allowing, at no charge, more apartments on a site. Land owners have seen this behaviour and are likely to increase land prices on the assumption that this will always happen. So, in this case, more supply (through additional apartments) may have actually increased prices not reduced them.

The global ‘financialisation’ of housing

Demand has increased because the focus for many housing investors is now not the cash flow generated by rents but the value of a house as a financial product. For example, at the moment there is continued strong demand for housing by investors despite the fact that apartment rents have started to decrease in Sydney and are flat in Melbourne.

The internet, and the global real estate market it helps support, enables national and international investors to be an increasingly important part of the market. They increase demand pressures in the best-performing (in terms of price growth) cities of Sydney and Melbourne by “soaking” up the new supply.

If politicians were serious about the affordability crisis, they would be trying to support the important but underfunded affordable housing sector. Better targeting tax breaks towards new and affordable rental housing, rather than fuelling demand for existing homes, would also help. But until our politicians can see past supply slogans we can expect very little policy change.

Authors: Peter Phibb, Chair of Urban Planning and Policy, University of Sydney; Nicole Gurra, Professor – Urban and Regional Planning, University of Sydney

A Blow To The Negative Gearing Bonanza

The AFR says Bankwest has changed its affordability calculators for investor loans, such that the tax benefits are now excluded from the assessment. This reduces the amount prospective investors can get in a loan, and it also may impact some existing customers.

The post-tax affordability assessment explains why on one hand some banks have been able to lend hard on investor loans yet on the other hand, on a pre-tax basis many investors have little wriggle room if rates raise, as we highlighted recently.

Note though that not all lenders were so generous in their handling of tax benefits, and Bankwest appears now to have revised their approach to meet APRA guidelines – see specifically APG 223 within the Residential Mortgage Lending prudential practice guide.

Another market change which will further rightly tighten investor lending.

The move was confirmed by The Real Estate Conversation.

Bankwest has confirmed it will remove the tax advantages of negative gearing when determining whether or not applicants are eligible for investor loans.

The changes will mean the amount investors can borrow will be lower, and could result in the bank, a subsidiary of the Commonwealth Bank, writing fewer investment loans.

The Commonwealth Bank is expected to announce similar moves.

The Australian Financial Review reports of speculation Bankwest and the Commonwealth Bank are close to breaching the Australian Prudential Regulation Authority’s 10 per cent growth cap for investor loans.

Mark Chapman, a director of tax accountants H&R Block, told The Australian Financial Review the change would be most dramatic for existing borrowers, who will have to deal with altered rules.

“The impact of Bankwest’s decision on new borrowers is not too bad – they can just borrow through another bank,” he said. But for existing BankWest borrowers, the change is retrospective he said.

“They borrowed in good faith from this bank under one set of rules, now they are having another set of rules imposed on them.”

Australian Broker said:

“For customers who operate their investment property at a loss, where the income of the investment property does not exceed the costs, the related tax benefit will no longer be included in Bankwest’s calculation for serviceability of the loan,” the spokesperson said.

The changes will impact all new applications involving an investment lending facility as well as any existing deals which may require a new serviceability calculation.

RBA Warns on Housing – Sort of…

Hidden away at the end of the 62 page Statement on Monetary Policy is a gem of a paragraph relating to housing. I think this is the first warning I can remember on the subject, as up to now the RBA has been remarkable bullish. Will this mean the regulators efforts to control the risks be accelerated?

Housing prices have picked up over the second half of 2016, most notably in Sydney and Melbourne. This could see more spending and renovation activity than is currently envisaged.

On the other hand, a widespread downturn in the housing market could mean that a more significant share of projects currently in the residential construction pipeline is not completed than is currently assumed. While this is a low-probability downside risk, it could be triggered by a range of different factors.

Low rental yields and slow growth in rents could refocus property investors’ attention on the possibility of oversupply in some regions.

Although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall. Softer underlying demand for housing, for example because of a slowing in population growth or heightened concerns about household indebtedness, could also possibly prompt such a reassessment.

Now, you can read this a couple of ways, first it is a low-probability – they say, so not to worry. Or could it be that this is a way of getting housing expectations reset.

We have been highlighting potential risks in housing thanks to low income growth, sky-high debt and rapid growth in the investment sector at a time when rental yields are under pressure.

At very least it seems the housing expectation sails are being trimmed, and should things go bad later, the RBA can point back to the “I told you so” paragraph.

Lets see if the regulators get their act together now, though it is late in the day!

‘Speeding’ housing investors are pushing families too far

From The NewDaily.

Market watchers are expecting a bombshell to be dropped on the property market next week, with Commonwealth Bank reportedly about to close its doors to refinancing housing investors wishing to migrate from other banks.

Fairfax Media suggested this could send “shockwaves” through the property market – though whether it will cause a price correction is far from certain.

At present, the consensus view is that CBA is simply taking a breather from lending to investors so as not to breach the mortgage growth speed limit imposed by the regulator.

The Australian Prudential Regulatory Authority introduced the speed limit in late 2014, requiring banks to limit growth in their investment mortgage books to 10 per cent per annum.

But even if CBA does slam on the brakes on Monday, it won’t be nearly enough.

A broker’s view

One independent mortgage broker told The New Daily that the speed limit is a fairly weak measure for controlling the housing credit bubble because so many smaller lenders exist to pick up the overflow of demand from the big banks.

Housing market risks may be staying the RBA’s hand

So an ANZ customer chasing a better deal at CBA may now find their broker raking up names they’ve never heard of.

AFG, for instance, offers what the broker calls a “white label” home loan built on funding from a number of other banks.

A confident investor should have no problem signing up with such a provider, although less savvy investors may baulk at moving away from the psychological safety of the big banks.

A second flaw

The net result of the speed limit is to slow lending to a degree, but it has likely helped smaller lenders take additional market share.

The latter is not a stated goal of the policy, and even the real goal – to reduce investor activity – really doesn’t go far enough.

To understand why, two factors need to be considered. The first is population growth and the second is inflation. Consumer price index inflation is currently running at 1.5 per cent per annum, and population growth is around 1.4 per cent.

Combining those two figures, the amount of money lent against the housing market would have to grow just under 3 per cent to stay ‘steady’ in relation to the rest of the economy.

In fact, although the value of mortgage debt in Australia has grown by an average of 8 per cent since the onset of the GFC, the last calendar year saw banks’ mortgage books grow by almost exactly the ‘steady’ amount – 2.9 per cent.

That’s partly due to lower volumes of homes changing hands, and partly due to a slow-down in house price growth.

Why 10 per cent is too much

What’s alarming about the 10 per cent speed limit, which CBA is apparently hitting and other banks are getting close to, is that it’s more than three times the ‘steady’ rate of growth.

That means the mortgage market continues to be rebalanced away from owner-occupiers and towards investors.

It is investors driving extraordinary price growth in Sydney – up more than 60 per cent since 2012 – and Melbourne, and it is first home buyers and young families being priced out of the market.

This has to change. One suggestion, from economist Leith van Onselen, is to halve the speed limit to 5 per cent. That would still see investment loans growing faster than the population and inflation, but it would at least be a start.

Let’s get the language right

It would also be useful if media commentators could start focusing on the younger, more vulnerable portion of the housing market rather than celebrating the windfall capital gains made by the older and wealthier portions.

To illustrate what I mean, I’ve prepared two charts from the same set of ABS numbers for Sydney – one with a happy upward slant, the other with a depressing downward slide.

The first, which many readers will be familiar with, shows the huge capital gains investors have made in the past few years –expressed as the house price to income ratio.

The second looks at this period of financial exuberance from the first home buyer’s perspective where the question is not “how many incomes is my asset worth?” but rather “how much of the asset is my income worth?”

From that perspective, the appropriate headline is not ‘House prices boom in Sydney’ or ‘Investor returns at record levels’ – it is ‘Purchasing power of wages plummets’ or ‘Housing affordability tumbles’.

Rates on hold, but housing affordability remains ‘hotly debated’

From The Real Estate Conversation.

The Reserve Bank has left interest rates at historic lows as economic conditions improve, but the property industry says other measures are required to improve housing affordability.

The Reserve Bank of Australia left interest rates on hold at its first meeting of 2017, with rates held at a record low of 1.50 per cent.

Governor Philip Lowe noted in his statement that growth in China was stronger in the second half of 2016, that global business and consumer confidence is improving, and that global inflation is rising. He also said recent rises in commodity prices are increasing Australia’s national income.

Lowe said the RBA expects Australian economic growth in the final quarter of 2016 to firm, and re-affirmed the RBA is forecasting growth to pick up to “around 3% over the next couple years”. Lowe said Australian inflation is heading back towards the target range.

In his November 2016 statement, Lowe said cutting rates further may not be in the “public interest” if it further increased household debt.

Real Estate Institute of New South Wales President John Cunningham said the central bank’s decision was no surprise, but said he expects housing affordability to be “hotly debated” this year.

“An emphasis will again be placed on first homebuyers and there will be much debate this year on ways to improve their plight,” he said.

“A review of stamp duty is urgently required and should focus on first homebuyers and older Australians,” said Cunningham.

The RBA cut interest rates twice in 2016, first in May and then in August. However, banks are independently increasing interest rates for investors as increased global economic uncertainty raises their borrowing costs.

Laing+Simmons managing director and REINSW president-elect Leanne Pilkington echoed Cunningham’s sentiment, saying rate cuts are not the answer to improving housing affordability. Further rate cuts are not required in the current housing cycle, she said.

“Obtaining housing finance at attractive terms is already possible for those with the means,” said Pilkington.

“It’s those without the means – stuck in the rental cycle or unable to accumulate a suitable deposit – that face the greatest challenge in the market,” Pilkington said.

“Further rate cuts are not a solution to the problem. Between government and the industry, we need to table some alternative solutions to help people buy their first home,” she said.

“From a housing industry perspective,” said Pilkington, “rates are already low and have been for some time, so that piece of the affordability puzzle is in place.”

Like Cunningham, Pilkington believes changes to stamp duty are necessary to address housing affordability problems. “It’s through other avenues like stamp duty reform that improvements in affordability need to be addressed,” she said.

Pilkington also said making downsizing more viable for older Australians, introducing a Government-backed savings scheme to help people save for a deposit, and minimising the cost of mortgage insurance could all alleviate housing affordability problems in Australia.

The Property Council of Australia welcomed the statement by Lowe on interest rates, saying it was a sober assessment of housing markets.

The governor’s statement said “conditions in the housing market vary considerably around the country”.

Ken Morrison, chief executive of the Property Council of Australia, said the statement confirms the current situation of “prudent lending practices and the best environment for renters in a generation with consistent low rental growth.”

“The deterioration in housing affordability is a serious problem in a number of our major cities, but is not an Australia-wide problem,” said Morrison.

1300 HomeLoan managing director John Kolenda said the RBA will remain on the sidelines until uncertainty about the economic impact of US president Trump becomes clearer.

“The RBA will stay on the sidelines and assess the impact on the global economy although our domestic economy appears stable with no need to adjust interest rates,” said Kolenda.

Kolenda said while the RBA’s cash rate is unlikely to change in the short term, confusion could arise from varying mortgage rates, and reinforced his recommendation to use a mortgage broker.

Is Local Unemployment Related to Local Housing Prices?

From The St. Louis FED.

The U.S. national labor market has recovered from the effects of the 2007-2009 recession; however despite the national labor market recovery, significant regional variation remains. Recent economic research highlights links between regional labor and housing markets. In their article, “ The Recent Evolution of Local U.S. Labor Markets, ” Authors Maximiliano Dvorkin and Hannah Shell examined the recession and recovery by reviewing the correlation between county-level unemployment rates and changes in housing prices.

National unemployment reached a pre-recession low in December 2007; by October 2009 the unemployment rate in most counties increased between 4 and 20 percentage points. The authors found that areas with higher unemployment rates before the recession experienced larger increases in unemployment during the recession, and those areas with lower unemployment rates before the recession experienced smaller upticks in unemployment during the recession.

The authors theorized that one reason for the disparity in unemployment rate increases could be related to the housing supply. Specifically, the unemployment rates in Arizona, New Mexico, Nevada and Utah remained above their pre-recession levels; these are also areas where housing prices dropped significantly.

When they examined the percent change in county house prices with the change in the county unemployment rate, the results showed a strong negative correlation, meaning that counties with larger decreases in housing prices experienced larger increases in the unemployment rate, perhaps because larger house price declines during downturns are leading to larger declines in local consumption spending that further depress the local economy.

Since 2008 only four capital cities have recorded real growth in home values

More nice, if sobering analysis from CoreLogic.

With the Australian Bureau of Statistics releasing the Consumer Price Index for the December 2016 quarter recently, using the CoreLogic Home Value Index we can adjust changes in dwelling values for the effects of inflation. The value of looking at inflation-adjusted or ‘real’ home value changes is that it highlights whether housing values are moving higher or lower relative to other costs across the economy.

Combined capital city dwelling values increased by 10.9% throughout 2016 while headline inflation increased by a much lower 1.5%. When adjusted for inflation, value growth is lower across all cities (as you’d expect) with values having fallen over the year in both Perth and Darwin.

In 2008 home values fell by 6.1% between the end of the March and December quarters. In real terms, capital city dwelling values fell by a larger -8.3% over the same period. Both in nominal and real terms values started to rise once again from the end of 2008. This recovery in growth was fueled by generous grants to first home buyers and the stimulus of extremely low interest rates. Over the eight years from December 2008 to December 2016 only Sydney and Melbourne have recorded real dwelling value growth in excess of 12%. Outside of Sydney and Melbourne, Darwin (2.6%) and Canberra (11.7%) are the only two cities that have recorded a real increase in values. In Brisbane (-2.3%), Adelaide (-2.6%), Perth (-9.0%) and Hobart (-8.6%) real home values are lower than they were eight years ago.

The chart above shows the real change in individual capital city home values from their previous market peak. The chart shows that in only Sydney and Melbourne are real values above their previous peak. In Sydney, values are 37.8% higher than their March 2004 previous peak. Real Melbourne home values are 19.4% higher than their September 2010 peak. In Brisbane, real home values peaked over the March 2008 quarter and at the end of 2016 they were still 9.1% lower than they were at that time. Adelaide home values were 5.3% lower in December 2016 than they were at the time of their real value peak in June 2010. Perth home values peaked in real terms all the way back in September 2007 and at the end of 2016 they were still -18.5% lower in real terms. Real dwelling values peaked in December 2007 in Hobart and at the end of 2016 were still -14.3% lower. Following their peak over the September 2010 quarter, Darwin dwelling values are currently -19.8% lower in real terms. Finally in Canberra, real dwelling values are -1.4% lower than their June 2010 peak.

Although most people tend to not look at the world in inflation-adjusted terms, it is important to consider housing costs from this aspect from time-to-time. It highlights that although the cost of housing at times escalates quickly (particularly so in Sydney and Melbourne at the moment) in real terms the growth may not be substantial. It is undeniable that Sydney home values have risen rapidly over recent years however, consider that since their previous March 2004 peak, they have only increased at a rate of 2.5%pa. This is largely due to the fact that values fell in real terms between March 2004 and March 2014.

With inflation remaining low and values continue to rise we would anticipate that in real terms values are likely to continue to rise across most of the capital cities throughout 2017

What interest rates will mean for your mortgage choices

From The Conversation.

For many of us, our home is the single most important investment we will make in our lifetime and mortgage payments can take up a huge chunk of our income. As politics and economics seem to deliver nothing but uncertainty, how should home owners or first-time buyers react?

Things still look tight for household budgets. One recent survey showed that the average mortgage payment for a three bedroom house in the UK is about £965 per month, more than half the average take-home wage.

That is with interest rates at historic lows. And they are staying put. The nine members of the Bank of England’s Monetary Policy Committee have decided to keep the official interest rate in the UK, the Base Rate, at that ultra low level of 0.25%.

The fortified walls of the Bank of England on Threadneedle Street. Robert King/Flickr, CC BY

In various guises, this rate has been around since 1694. It is the rate at which high-street banks borrow from the central bank and its function in the economy is simple but effective. If banks can borrow money cheaply from the Bank of England then they tend to pass it on cheaply to us, the public. When their borrowing gets expensive, so does ours.

The Base Rate is only an overnight interest rate but it starts a domino effect with more long-term interest rates. If it is raised then the whole economy is soon paying more to borrow money.

But if that’s not happening now, what about when the MPC meets again on March 16?

Up, up and away

Let’s start with the bad news for those paying a mortgage or seeking one. Interest rates, and consequently our payments, will definitely increase in the future. The graph below shows the history of the Base Rate since 1970. With a historical average of more than 6% and years when the Base Rate stayed consistently over 12% to combat the spiralling inflation of the time, it becomes evident that a rate of 0.25% is abnormally low.

Bank of England, Author provided

The good news for home owners and house hunters is that interest rates could well stay low for a few more years. And all the signs are that when rates do rise, it will be in small increments of 0.25% or 0.50% every few months. A key aim of the Bank of England is not to surprise markets and to be as predictable as possible, particularly at a time when stability and certainty are rare commodities.

Most people will remember why we ended up with such low rates. In the response to the global financial crisis of 2008, central banks sought to make it cheaper for people to borrow money. A low interest rate makes it easier for consumers to afford not just mortgages but also cars, appliances or nights at the pub. Companies profit from our spending and get access to cheap money that helps them expand or stay afloat.

Debt as a driver. Thomas Hawk/Flickr, CC BY-NC

So, if they are so good for the economy, why do interest rates have to go up again? Mainstream economic theory views very low interest rates as harmful in the longer-term. They are a disincentive to healthy saving rates and when the economy is at full-throttle, they act as a boost to inflation which in turn erodes people’s real incomes. They also distort investment decisions and, particularly dangerously for the UK, add fuel to investment bubbles.

Market forces

Brexit and the rise of Donald Trump in the US, the two great causes of uncertainty these days, will probably save us some money, at least in the short to medium term. Brexit brings with it the prospect that businesses will lose full access to an EU market of 450m affluent Europeans. In a climate like this, it would be a foolhardy Bank of England which chose to make money more expensive in the UK.

Trump, meanwhile, is known to favour a cheap dollar and low interest rates in the US in an effort to make exports more competitive. The Bank of England, as ever, will keep a close eye on its US counterpart, and will likely avoid increasing UK interest rates for fear of pushing the pound higher and blocking out much needed investment from the US.

So how can you use this information?

First of all, I’d avoid taking a mortgage or any loan that I could only barely afford as rates will eventually rise. For those that already have a mortgage, most commentary on the real-estate market will advocate for a fixed-term mortgage but that is not necessarily a good idea. The most popular fixed-term products offered by high street banks are usually for a period of two years.

The trouble here is that you will normally pay a fee and a higher interest rate as the cost for fixing, during which time rates are unlikely to rise anyway. And so only fixed mortgages of five years or more start making sense – and you would still pay fees and a relatively higher interest rate for a couple of years before you started to benefit.

A good idea would be to make small but regular overpayments into your mortgage, and request that these payments are used to reduce your monthly instalments (rather than to bring closer the year that the loan will be repaid in full). So when the interest rate does increase in the future, the outstanding amount it will apply to will be reduced. Flexible mortgages typically accept unlimited overpayments and even the fixed deals usually allow overpayments of up to 10% each year.

Banks are not particularly happy with the overpayment approach. It reduces their profits and de-stabilises their portfolio a little. But reluctant banks are usually a sign that this might just be a good deal for you.

Over 300,000 Borrowing Households Have Little Or No Housing Equity

According to Roy Morgan, whilst there was a decline in mortgage holders with no real equity in their homes, over 300,000 still at risk. The results show why house prices are important, and why any fall is a problem.

In the 12 months to October 2016, the latest Roy Morgan Research data has identified 6.9% (302,000) of Australian mortgage holders as having little or no real equity in their home. This is based on the fact that the value of their home is only equal to or less than the amount they still owe, placing them at considerable risk if they have to sell or prices decline. Although this is an improvement on the same time in2015 (345,000), it remains a major concern.

Apart from the ability to keep up with mortgage repayments (ie mortgage stress), another critical factor in assessing financial risk for mortgage holders and banks is to compare the value of their property with the amount outstanding on their loan. The purpose of this is to establish the level of equity (if any) that householders have in their home as this generally accounts for the major component of their assets.

Mortgage holders in WA and SA at increased risk

As of October 2016, 10.4% of mortgage holders in WA (54,000) had little or no equity in their home, the highest in Australia and 2.1% points higher than the same period in 2015. SA was the only other state to show a worsening result over the last 12 months, up by 1.8% points to 8.0% (27,000).

Value of home is less or equal to amount owing
Source: Roy Morgan Research Single Source: Mortgage holders 12 months to October 2015 (n=11,249); 12 months to October 2016 (n=10,655).
Of all the states and two largest cities included in this analysis, Sydney has the lowest proportion of mortgage holders with little or no equity in their home: just 3.9% (33,000), down 1.1% points in the last year. This improvement is due to home prices increasing faster than in most other areas of Australia and outpacing the growth in the average amount owing on mortgages. Tasmania is the second-best performer with 4.7% (5,000) of mortgage holders facing equity risk, followed by NSW with 5.1% (73,000), Victoria with 6.0% (65,000), Melbourne with 6.1% (50,000) and Queensland with 7.2% (63,000).

Mortgage gearing or risk lowest in Sydney and Melbourne

The average loan outstanding as a proportion of the average home value (the loan-to-value ratio or LVR) is an important market metric when assessing overall risk in the mortgage market.

The lowest overall mortgage gearing is in Sydney (28.9%) and Melbourne (32.4%), due mainly to the very rapid growth in average property values.

Average home-loan balance as proportion of average home value
Source: Roy Morgan Research Single Source: Mortgage holders 12 months to October 2015 (n=11,249); 12 months to October 2016 (n=10,655).
All states other than Victoria and NSW have much higher gearing levels due to negative or marginal increases in property prices. The worst performer is Queensland with a LVR of 44.0%, followed by SA and Tasmania (both on 42.3%) and WA (41.4%).

Lower-value homes face more equity risk in all states

The mortgage holders with little or no equity in their homes have much lower average house values ($457,000) compared to all mortgage holders ($688,000).

Mortgage holders with home value less or equal to amount owing vs all mortgage holders
Source: Roy Morgan Research Single Source; Mortgage holders 12 months to October 2016 (n=10,655).

Across all states and the two major cities, the value of homes owned by mortgage holders is much higher than the value of homes owned by mortgage holders with no real equity in their home. In Sydney for example, the average value of homes with a mortgage is $1.1m, compared to the much lower average of $762,000 for mortgage holders with no real equity. In Melbourne the figures are $795,000 for the average value of a home with a mortgage, well above the $523,000 for those with no equity in their home.

Norman Morris, Industry Communications Director, Roy Morgan Research says:

“Despite some improvement over the last twelve months, there are still over 300,000 home borrowers who have no real equity in their homes. This represents a considerable risk to these households and their banks, particularly if home values fall or households are hit by unemployment. With some early signs that home loan rates are rising, the problem is likely to worsen as repayments increase and home values may decline, which has the potential to lower equity levels even further.

“Due to the strong growth in house prices in Sydney and Melbourne over recent years, mortgage holders in those areas have high levels of equity but are still dependent on a strong labour market and low interest rates to maintain their strong position.

“There are a number of potential reasons that some borrowers are not gaining equity in their homes despite a generally strong property market. These include being in areas with declining values, apartments in Sydney and Melbourne losing value, borrowing more than the real value of the property, falling behind in mortgage payments, and increased borrowing for renovations that haven’t been reflected in increased property values.

“The slowdown in WA’s mining sector is seeing the highest proportion of mortgage holders faced with little or no equity in their homes, and this position has deteriorated further over the last twelve months.

“It is clear that borrowers in lower-value homes are among the most likely to be faced with the problem of low equity levels. Higher-value properties with a mortgage appear to be in a much less risky position because they are likely to have had their loan longer and may have had a far larger deposit, particularly if they traded up.

“Although the majority of Australians with a mortgage have considerable equity in their home, there is always speculation that the rapid growth in house prices must soon come to an end and when it does, so will the growth in home equity”.