Category: Home Prices

LTV and DTI Limits—Going Granular

DFA analysis of Australian mortgages highlight that we have high LTI ratios, and high LVR ratios, both indicating a build up of systemic risks in the system. We used postcode level analysis, and believe that it is essential to “get granular”.

Now the IMF has released a working paper on the effectiveness of using loan-to-value (LTV) and debt-service-to-income (DTI) limits as many countries face a new round of rising house prices. Yet, very little is known on how these regulatory instruments work in practice. This paper contributes to fill this gap by looking closely at their use and effectiveness in six economies—Brazil, Hong Kong SAR, Korea, Malaysia, Poland, and Romania.

IMF-LTI-LVRIn most cases,the caps on LTV and DTI started in the range of 60–85 percent and 30–45 percent, respectively, for mortgage loans. In all countries, there were changes to the limits of LTV/DTIs typically because the authorities noted that they were not having the desired effect. In some cases, house price and mortgage growth did not fall, and in other cases, the limits did not bind. Concerned with speculative activities, authorities in some countries lowered the caps selectively either for speculative prone (geographical) areas or for individuals with multiple mortgages. In one case, the centrally set caps were removed and banks were allowed to set their own limits, validated by supervisors. However, this did not work, and stricter requirements were put back in place.

To curb leakages, the limits were extended in some of the countries to insurance companies, mutual funds and finance companies that advertised mortgage products. It was also extended to development financial institutions.

Insights include: rapid growth in high-LTV loans with long maturities or in the number of borrowers with multiple mortgages can be signs of build up in systemic risk; monitoring nonperforming loans by loan characteristics can help in calibrating changes in the LTV and DTI limits; as leakages are almost inevitable, countries strive to address them at an early stage; and, in most cases, LTVs and DTIs were effective in reducing loan-growth and improving debt-servicing performances of borrowers, but not always in curbing house price growth.

Note: The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

A Typical Capital City Home Increased in Value by About $50,000 Last Financial Year – CoreLogic RP Data

CoreLogic RP Data data for June confirms the housing market remained strong.  In addition, Based on the current median dwelling price of $565,000, the 9.8% increase means the typical capital city home has increased in value by about $50,000 over the year. At 9.8% the rate of growth across the 2014-15 financial year, was virtually on par with the previous year where dwelling values were 10.1% higher. In June:

Home values increased across most capital cities and the combined capital cities in June 2015

  • Home values increased by 2.1% across the combined capital cities in June 2015 and rose across all cities except for Perth and Darwin.
  • Home values have increased by 2.0% over the three months to June 2015 with values lower in Perth and Darwin.
  • On an annual basis, combined capital city home values have increased by 9.8% which is their fastest annual rate of growth since August 2014.
  • The value growth performance has been extremely varied over the past year. Sydney (16.2%) has been much stronger than other capital cities while Melbourne (10.2%) has recorded moderate growth while increases have been minimal in Brisbane (3.4%), Adelaide (4.5%), Hobart (0.9%) and Canberra (2.4%). Home values have fallen over the past year in Perth (-0.9%) and Darwin (-2.9%).
  • The annual home value growth in Sydney and Melbourne is now at its fastest pace since August of last year.

Sales activity across the country is slightly lower than at the same time last year

  • Over the 12 months to March 2015 there were 357,972 houses and 140,246 units sold across the country.
  • House sales are 2.1% higher over the year compared to a -8.0% fall in unit sales.
  • It should be noted that off-the-plan sales aren’t counted until they settle so we would expect the unit figure to be revised much higher over the coming months and years.

 Vendor metrics indicate strong housing market conditions

  • Auction volumes have surged since the RBA cut interest rate in February and again in May clearance rates have also recorded a sharp rise but have eased slightly from their recent record high levels.
  • Discounting levels remain low while time on market is also at a near record low, in fact Sydney’s time on market is equal to its record low and in Melbourne homes are selling at their fastest rate on record.

 The amount of homes for sale is much lower than at the same time last year

  • New listings are 11.3% higher than a year ago nationally and 5.5% higher across the capital cities.
  • Nationally, total listings are -3.9% lower than a year ago and total listings are -6.5% lower.
  • Sydney has less stock listed for sale (16,614) than each of Melbourne (26,225), Brisbane (18,260) and Perth (20,198).
  • The total number of listings in Sydney is -19.1% lower than at the same time last year.

 Mortgage demand has rebounded strongly following the Christmas / New Year period

  • The RP Data Mortgage Index (RMI) shows that mortgage demand eased a little in June 2015.
  • ABS housing finance data to April shows the market growth continues to be driven by investors and owner occupier refinances.
  • Housing credit data shows that over the past year investor housing credit has increased by 10.4% which is in excess of the cap targeted by APRA.

Capital city dwelling values 9.8% higher over the financial year – CoreLogic RP Data

Based on the CoreLogic RP Data June home value results capital city dwelling values finished the 2014/15 financial year on a strong footing, with dwelling values rising 2.0 per cent over the June quarter and 9.8 per cent higher over the year. The rate of capital gain was slightly higher over the second half of the year (5.1 per cent) compared with the first half (4.5 per cent) highlighting that the housing market has gathered some momentum during 2015. The previous 2013/14 financial year recorded a slightly higher rate of growth at 10.1 per cent.

Since dwelling values started rising in May 2012, Sydney dwellings have seen a 43.1 per cent surge in values and Melbourne values are up by 25.9 per cent. Despite softer market conditions in Perth, dwelling values are currently up 12.8 per cent over the cycle which represents the third highest growth rate across the capitals. Simultaneously, Brisbane’s property market has shown the fourth highest rate of growth at 12.4 per cent, followed by Adelaide (10.4 per cent), Hobart (9.6 per cent), Darwin (8.9 per cent) and Canberra (8.8 per cent).

Looking at the performance of detached housing versus apartments over the financial year, houses are clearly outperforming units in the capital gains stakes. Over the financial year, house values were 10.4 per cent higher across the combined capitals index while unit values increased by a much lower 5.6 per cent. The same trend where houses are showing a higher capital gain than units is evident across each of the capital cities except Hobart and Darwin.

Today’s results confirm a scenario where detached housing outperforming apartments is most evident in Melbourne. Based on the results, Melbourne house values have shown a very strong 11.2 per cent capital gain over the financial year while apartment values are up by only 2.4 per cent.

Gross rental yields drifted another notch lower in June due to dwelling values rising at a faster pace than weekly rents. Currently, the typical gross yield for a capital city house is recorded at 3.5 per cent, which is equivalent to the record low last recorded in 2007. The average gross yield on a capital city unit also fell over the month to reach 4.4 per cent; the lowest gross apartment yield since 2010 and not far off the all-time low of 4.3 per cent recorded in 2007.

Residential Property Now Worth A Record $5.5 Trillion

The ABS released their data on Residential Property Prices to March 2015. The total value of Australia’s 9.5 million residential dwellings increased to $5.5 trillion. The mean price of dwellings in Australia is now $576,100, an increase of $8,400 over the quarter. Sydney continues to drive residential property price increases with the Residential Property Price Index (RPPI) for Sydney rising 3.1 per cent in the March quarter 2015 and 13.1 per cent in the previous year. Established house prices for Sydney rose 3.8 per cent and attached dwelling prices rose 2.2 per cent.

The price index for residential properties for the weighted average of the eight capital cities rose 1.6% in the March quarter 2015. The index rose 6.9% through the year to the March quarter 2015. The capital city residential property price indexes rose in Sydney (+3.1%), Melbourne (+0.6%), Brisbane (+0.4%), Adelaide (+0.7%), Canberra (+1.1%) and Hobart (+0.5%) and fell in Darwin (-0.2%) and Perth (-0.1%). Annually, residential property prices rose in Sydney (+13.1%), Melbourne (+4.7%), Brisbane (+3.9%), Adelaide (+2.5%), Canberra (+3.0%) and Hobart (+1.9%) and fell in Darwin (-0.4%) and Perth (-0.3%).

House-Price-CHanges-to-March-2015-TrendWe see how Sydney steamed ahead of other states in the last quarter.

House-Price-Change-March-Q-2015We also see significant differences between the relative price of established houses and attached dwellings in Sydney compared with other centres, the rest of the states outside the capital cities.

Average-House-Prices-March-2015---Cities-and-Rest
A review of the Residential Property Price Indexes was undertaken in 2014 as a response to planned reductions to the ABS work program. The outcomes of the Review were released on the ABS website in a feature article in the September 2014 issue of Residential Property Price Indexes: Eight Capital Cities. The implementation of the review outcomes is occurring in this issue.

In summary, the changes in this issue are:

  • all Australian residential property sales data used to compile the price indexes and related statistics are now supplied to the ABS by CoreLogic RP Data;
  • from the March quarter 2015 the suite of residential property price indexes are considered final;
  • the method of calculating prices in the total value of the dwelling stock has been modified due to the change in timing of this release;
  • the unstratified median price and number of dwelling transfers series are now being published up to the current quarter.

Five Reasons Housing Is More Affordable Overseas

From The Conversation. Housing affordability continues to be an issue of importance to voters, with a recent Fairfax-Ipsos poll showing 69% of Australian capital city residents disagree that housing is affordable for prospective first home buyers.

Different countries have adopted varying approaches to improve access to affordable housing – with governments playing a central role in ensuring people are adequately sheltered, as well as being encouraged to buy housing where possible. In many countries there is an underlying desire by households to own their own home, although renting is the norm in others.

More than 84% of households in Berlin rent their home. exilism/Flickr, CC BY-NC-ND
In each case there are specific and sometimes unique-to-that-country approaches that have helped address the issue of affordability. Here’s five.

Government intervenes in the rental market

In some countries there is a general culture of renting for accessing accommodation, rather than assuming all households should achieve home ownership. At times, renting is cheaper than buying. In Germany most households (54.1%) are renters due to the long-term intervention in the marketplace by the government, as well as the accepted culture that renting is suitable over the long-term. In Berlin a total of 84.4% of all households rent. Providing this amount of rental accommodation is a major challenge without substantial government intervention and/or provision of housing.

Federal Statistics Office Germany, 2011

For example, in Germany a housing allowance was paid to approximately 783,000 households in 2012, equating to 1.9% of all private households. However most of this funding was allocated to single person households (57%) unable to compete in the open housing market with multiple income households.

Federal Statistics Office Germany, 2011

Other countries have acknowledged the gap between (a) the maximum amount of rent a tenant can pay and (b) the minimum level of rent a landlord will charge. For example in the US, this gap is bridged by the widespread use of a voucher system which subsidies the payment of rent to private landlords. This system is funded by the US government and ensures tenants can access a minimum quality of affordable housing.

Government provides affordable housing

In Singapore there is a high level of government intervention in the market with the HDB (Housing and Development Board) providing approximately 80% of all housing in the country. Approximately 90% of households in Singapore own their own home and there are also grants for first time buyers and second time buyers in Singapore.

In Hong Kong about 29.7% of residents live in PRH (public rental housing) provided by the Hong Kong government. In Scotland a large proportion of the supply of affordable housing is undertaken by housing associations and local authorities. This collectively equates to about quarter of total housing accommodation in the market. However the recent trend for many countries, including Australia, has been the provision of less direct housing by governments.

Housing Statistics for Scotland, 2011

Cities embrace higher density housing

There are numerous examples of global cities making better use of limited inner-city land supply by encouraging higher density living in high rise units or condominiums, especially in Asian cities including Hong Kong, Macau and Singapore. The provision of affordable housing for purchase or renting is therefore more likely to be achieved in these circumstances due to minimal land use and higher densities. However high-rise living is not commonly accepted in many European cities or in locations with a resistance due to cultural preferences for detached housing.

Public transport allows residents to commute to less expensive housing

The main driver of where a household lives is the need to be close to their workplace. As more affordable housing is usually located away from the central business district, households can buy cheaper homes but the trade-off is additional commuting time to work. When this extended commuting time (e.g. up to 2 hours each way) is combined with improved transport infrastructure such as in Japan, it is possible to access affordable housing in outlying satellite towns and cities where land is more affordable. Therefore governments which improve road and public transport infrastructure also increase access to affordable housing.

(Japan Guide, 2000)

Multiple person households are encouraged

Lower demand can be achieved by limiting population levels and underlying demand for housing. But while this may not be an option for many governments, another option is to encourage multiple person households which otherwise would remain as single person households. According to the ABS (2012) in 1911 the average persons per household was 4.5, decreasing to 2.7 persons per household by 1991.

List of countries by number of households

Wikipedia compiled from various sources.

Author: Richard Reed, Chair in Property & Real Estate at Deakin University

Bubble Smuzzle

The sudden talk of bubbles in the property market, by the regulators and treasury, looks like an attempt to talk the housing market down whilst not really doing that much in reality, and leaving space for more rate cuts in the cash rate as broader economic activity slows. The RBA’s low rate strategy is partly to blame. But, is it really a bubble? Well. If you look at the growth in house prices now compared with a decade or more ago, growth in the past three years in every capital city is lower than it was in the period 2001-2004. Darwin and Hobart are the centres with growth which most closely match the ramp up in 2001 onwards and the current rises.

We did not have the 20-40% corrections post the GFC that the USA and UK had, prices tended to stall, or rise slowly, but we started the current run-up from a higher base position.

The next point is that household debt is higher compared with GDP than it has ever been, and whilst the savings ratio is high, it is now actually falling. The current low interest rates are encouraging people to grab a loan, and buy a property, especially investment property. It’s simple, low interest rates, negative gearing to offset costs, and the prospect of capital growth makes property investment compelling, as it is in a number of other countries. Indeed, overseas investors are joining in the fun (and FIRB has not tackled the issue). First time buyers are going direct to the investment sector, and down traders are selling up, releasing cash and investing in leveraged property. It’s all very logical.

Demand is also being stoked by population growth, including migration, and the expanding number of households in Australia. We have not built enough property for more than a decade, so there is more demand against supply. Also, we have more single person families (thanks to relationship breakup, older singles, and other people preferring to live alone). So we need different types of property, and more of it.

Because supply/demand is out of kilter, prices are rising, it’s not a bubble, its fundamental economics. We need to think about three factors, first, interest rates are low and will at some time rise, many people who have borrowed today and can afford repayments will find it increasingly difficult if rates rise, mortgage stress is quite high today, at low rates, and will rise. Second, income growth is flat, and this means that people won’t get out of jail as they did in 2001+, because incomes rose faster then, and helped to ease the pain when rates rose. Also, rentals are more linked to incomes than house prices, so rental income wont lift much. Third, on any absolute measure, (Loan to income, Prices to GDP) we are 25-30% above the long term norm. At some point it will correct – but it’s a structural problem not a bubble. This is true in all major centres, and is also spilling out into the regional areas. It’s not just a Sydney-Melbourne thing.

The solution requires joined up thinking. We need to revisit negative gearing. Plan better to build more houses, tighten lending and capital rules to restrict bank lending, tackle foreign purchasers and provide innovative options to assist first time buyers back into the owner occupied sector (joint equity share arrangements is my bet). Finally, and desperately, we need to deflect the banks appetite to lend to housing towards productive lending to business because this will give productive growth, not useless asset price growth and bank balance sheet growth. We need to ease price growth, and get back to trend. This will be painful and politically charged. On the supply side, we need to build more, reduce new development taxes and change planning regulations.

Meantime we have property which is chronically overvalued. Not a bubble, a structural problem. I doubt Canberra will do much more than hold yet another inquiry into housing (Oh, Hockey kicked one off a couple of weeks ago!)

Residential Property Prices Increased Significantly YOY in Real Terms 4Q14 – BIS

The Bank for International settlements released their latest cross-country house price database. They highlight the volatile nature of property, and longer term, contrasts the rise and rise we have seen in Australia, with very different stories elsewhere. Between 2007 and now, prices in real terms are still lower than they were then in US, UK and Japan. In Australia, and Canada, they are higher. Real residential property prices had almost doubled in Brazil and had risen by 80% in India; but they had declined by almost one third in Russia.

“In the fourth quarter of 2014, residential property prices increased significantly year on year in real terms (ie deflated by the CPI) in several advanced economies. They grew by 3–5% in Australia, Canada and the United States, and by around 10% in Sweden and the United Kingdom. Real prices increased by 1% in the euro area, although there were important disparities among member states: they rose by 16% in Ireland and more moderately in Germany and Spain, but continued to decline in France, Greece and Italy. Prices also fell in Japan. The picture was also mixed among major emerging market economies. Property price inflation remained strong in India, and to a lesser extent in South Africa and Turkey, but prices continued to fall in China and Russia.

BIS-PPty-May-2015-1From a longer-term perspective, residential property prices generally peaked in real terms in 2006–07 in most advanced economies. Since the end of 2007, they had decreased by 14% in the euro area, reflecting a fall of around 40% in Greece, Ireland and Spain, and by 23% in Italy, partly offset by a price increase in Germany. As of the fourth quarter of 2014, real prices were also still well below their 2007 levels in the United States (by 13%) and, to a lesser extent, Japan and the United Kingdom. Most other advanced economies, such as Australia, Canada, Norway, Sweden and Switzerland, had registered a significant rise in property prices over the previous seven years. Among major emerging market economies, real residential property prices had almost doubled in Brazil and had risen by 80% in India; but they had declined by almost one third in Russia.”

BIS-PPty-May-2015-2

 

New Zealand’s Restrictions on Mortgage Lending in Auckland Will Benefit Banks – Moody’s

Last Wednesday, the Reserve Bank of New Zealand (RBNZ) announced that starting 1 October 2015 bank lending to home investors in Auckland, New Zealand, will be restricted to mortgages with loan-to-value ratios (LTVs) of less than 70%. The RBNZ also said it was raising the percentage of residential mortgage loans that can be originated outside of Auckland with LTVs of 80% or higher to 15% of all mortgage loans from 10%. These measures are credit positive for New Zealand’s banks because they will reduce banks’ exposure to riskier mortgage loans in Auckland, where house prices are at historical highs, having risen 14.6% in the 12 months to March 2015.

Moody’s says these steps would particularly benefit New Zealand’s four major banks, ASB Bank Limited (Aa3/Aa3 stable, a2 review for downgrade), ANZ Bank New Zealand Limited (Aa3/Aa3 stable, a3), Bank of New Zealand (Aa3/Aa3 stable, a3) and Westpac New Zealand Limited (Aa3/Aa3 stable, a3). These banks held approximately 86% of total system mortgages as of 31 December 2014. Additionally, Auckland, New Zealand’s largest city, constitutes the largest market for these banks, and the RBNZ reports that around 40% of mortgage originations in Auckland are to investors.

The introduction of an LTV limit on property-investor lending in Auckland will reduce the risk of recently originated mortgages experiencing negative equity, where the size of the loan exceeds the value of the property. Both house prices and household indebtedness in Auckland are at historical highs creating a sensitivity to increases in unemployment and interest rates. Although LTV restrictions are likely to dampen house price growth in Auckland, we expect the effect to bemarginal owing to supply shortages and the official cash rate, which the RBNZ sets to meet inflation targetsand remains accommodative by historical standards, continuing to support price gains. However, reducingbank exposures to high-LTV loans that are more exposed to a house price correction would benefit banks.

NZ-Price-to-Income-May-2015The LTV restrictions would not apply to loans to construct new residential properties, given the RBNZ’s focus on alleviating Auckland’s housing shortage. Although the new 15% cap on high-LTV loans outside Auckland will allow banks to lend more at higher LTVs, price growth outside of Auckland has been relatively subdued. By responding to current housing market developments and loosening restrictions, the RBNZ is making housing finance more accessible in areas of New Zealand where there are fewer risks of stimulating excessive price speculation.

The proposals are the RBNZ’s latest in a series of steps aimed at reducing excess leverage in the financial system and reducing the threat of asset bubbles. In September 2013, the RBNZ raised the capital requirements for high-LTV lending and in October 2013 imposed a 10% cap on high-LTV loans. In March 2015, the RBNZ released a consultation paper indicating that banks would likely need to hold more capital against investor loans than against owner-occupied mortgages. The RBNZ intends to release a consultation paper later this month outlining its most recent announcement.

Housing Market Imbalances Pose Long-term Challenges for Australian Banks – Moody’s

Moody’s Investors Service says that underwriting discipline and capital are key variables in maintaining the health of bank credit profiles in Australia, in the face of rising housing market imbalances.

“Rapid house appreciation, particularly in Sydney, as well as lending imbalances are increasing the risks of a housing market correction,” says Ilya Serov, a Moody’s Vice President and Senior Credit Officer. “This poses long-term challenges to Australian bank credit profiles”.

“We expect that over time the banks will revise up their mortgage risk weights and capital levels to better recognize the rising tail risks embedded in their housing portfolios,” adds Serov .

Moody’s analysis is contained in its just-released report titled “Rising Housing Market Imbalances Pose Long-Term Challenges for Australian Banks,” and is authored by Serov.

Moody’s report points out that dividend policy initiatives announced recently by major Australian banks — including National Australia Bank’s announcement of a capital raising of AUD5.5 billion — represent the start of a capital accumulation phase that is likely to extend well into 2016.

In Moody’s assessment, the risks in Australia’s housing market risks are skewed towards the downside. While over the short run, stability in the housing market will be supported by low interest rates and the healthy state of bank balance sheets, elevated and rising house prices are intensifying imbalances in the housing market.

Moody’s evaluation of the Australian housing market suggests that housing affordability is falling, despite the low interest rate environment. Similarly, lending imbalances, including a decline in the proportion of first-time home buyers and a sharp rise in residential investment activity, pose a further source of risk.

In Moody’s view, Australian banks are well-positioned to adjust their origination practices and capital levels to better recognize the rising tail risks embedded in their housing portfolios.

Moody’s report says likely regulatory changes will see average mortgage risk weights for the major banks in Australia increase to the 20%-25% range, up from the current 15%-20%. It estimates that Australia’s four major banks — National Australia Bank Limited (NAB, rated Aa2 stable, a1), Westpac Banking Corporation (Aa2 stable, a1), Australia and New Zealand Banking Group Limited (Aa2 stable, a1) and the Commonwealth Bank of Australia (Aa2 stable, a1) — are well-positioned to absorb such a change.

However, Moody’s also anticipates a broader increase in regulatory capital requirements, in line with the November 2014 recommendation by Australia’s independent Financial System Inquiry that Australian bank capital ratios should be “unquestionably strong” and rank in the top quartile of internationally active banks. This scenario would necessitate deeper adjustments to the banks’ dividend policies, and potentially the raising of new capital.

Moody’s report points out that the latest regulatory data suggests that Australian banks have become more conservative in their underwriting, as they have curtailed their exposure to high loan-to-value ratio loans. Such moves would help offset the risks posed by the country’s deepening housing market imbalances.

The rating agency sees ongoing adjustment to banks’ underwriting practices to bring them into line with the guidelines released by the Australian Prudential Regulation Authority in December 2014, which include limiting growth in investor housing loans to 10% per annum and specific guidance around stressed debt-service requirements, as supportive of the banks’ high rating levels.

Moody’s report notes that since May 2014, median home prices have risen by 10% nationwide, and by 16% in the core Sydney market . The report further notes that Australian home prices have risen by 23% since the start of the latest interest rate cutting cycle in November 2011.

Overall, Moody’s says that the banks’ asset quality metrics and portfolio quality will remain strong in calendar 2015, supported by Australia’s low interest-rate environment.