Category: Property Market

Six lessons on how to make affordable housing funding work across Australia

From The Conversation.

A suitable construction funding model is the critical missing ingredient needed to deliver more affordable housing in Australia. Aside from short-lived programs under the Rudd government, we have seen decades of inconsistent and fragmented policies loosely directed at increasing affordable housing. These have failed to generate anything like enough new supply to meet outstanding needs.

Our latest research looked at recently built, larger-scale affordable housing projects in contrasting markets across Australia. We examined each scheme’s cost, funding sources and outcomes. We then developed a housing needs-driven model for understanding the financial and funding requirements to develop affordable housing in the diverse local conditions across the country.

Up to now, the key stumbling block has been the “funding gap” between revenue from rents paid by low-income tenants and the cost of developing and maintaining good-quality housing. The Commonwealth Treasury acknowledged this problem last year. And the problem is greatest in the urban areas where affordable housing is most needed.

What does the new model tell us?

The Affordable Housing Assessment Tool (AHAT) enables the user to calculate cost-effective ways to fund affordable housing to meet specified needs in different markets. It’s a flexible interactive spreadsheet model with an innovative feature: it enables users to embed housing needs as the driver of project and policy, rather than project financial feasibility driving who can be housed.

Affordable housing developments have recently been relatively sparse. However, our research highlighted the varied and bespoke funding arrangements being used.

Despite this variety, too often project outcomes are driven purely by funding opportunities and constraints, rather than by defined housing needs. One notable constraint is the fragmented nature of affordable housing subsidy frameworks both within and across jurisdictions.

Our case study projects generated a diversity of housing outcomes. This can be seen as an unintended positive of the bespoke nature of affordable housing provision as a result of the need to “stitch together” gap funding from multiple sources on a project-by-project basis.

Equally though, the lack of policy coherence and fit-for-purpose funding added cost and complexity to the development process. By implication, this leads to a less-than-optimal outcome for public investment. Despite providers’ best efforts, current approaches are not the most efficient way to deliver much-needed affordable housing.

What are the lessons from this research?

We applied the model to typical housing development scenarios in inner and outer metropolitan areas and regions. By doing so, we identified six key lessons for funding and financing affordable housing delivery.

1) Government help with access to land is central to affordable housing development and enhances long-term project viability.

Especially in high-pressure urban markets, not-for-profit housing developers cannot compete with the private sector for development sites. High land costs, particularly in inner cities where affordable housing demand is most extreme, can render financial viability near impossible. Having access to sites and lower-cost land were two of the most important components of feasible projects.

2) Government equity investment offers considerable potential for delivering feasible projects and net benefit to government.

How governments treat the valuation of public land with potential for affordable housing development must be reviewed. Conventionally, even where affordable housing is the intended use, governments typically insist on a land sale price based on “highest and best use”.

It would be preferable in such cases to treat the below-market value assigned to public land as a transparent subsidy input. This would mean the sale price reflects the housing needs that the development seeks to meet. That is, the land value should be priced as an affordable housing development for a specific needs cohort.

By retaining an equity stake, government could account for its input as an investment that will increase in value over time as land values appreciate.

3) Reducing up-front debt load and lowering finance costs are critical to long-term project viability.

Debt funding imposes a large cost burden over a project’s lifetime. This is ultimately paid down through tenant rents. Reducing both the cost and scale of private financing can have a significant impact on project viability.

The analysis reinforces the rationale for the Australian government’s “bond aggregator” facility for reducing financing costs for affordable housing projects. But this must come in tandem with other measures to reduce up-front debt.

4) Delivery across the range of housing needs helps to meet overall social and tenure mix objectives. This also can help improve project viability through cross-subsidy.

Mixing tenure and tenant profiles can enable affordable housing providers to produce more diverse housing that meets the full range of needs.

Cross-subsidy opportunities arising from mixed-tenure and mixed-use developments can also enhance project feasibility. By improving a provider’s financial position, this helps advance their long-term goal of adding to the stock of affordable housing. And, by providing welcome flexibility, this enables organisations to better manage development risk across different markets and cycles.

5) The financial benefit of planning bonuses is limited

Inclusionary zoning mechanisms impose affordable housing obligations on developers through the planning system. This approach potentially offers a means of securing affordable housing development sites in larger urban renewal or master-planned areas.

However, our research demonstrated that planning bonuses allowing increased dwelling numbers in return for more affordable housing have little beneficial impact on project viability. This is because the additional dwellings allowed generate additional land and/or construction costs but no matching capacity to service a larger debt.

However, planning bonuses can be useful as part of a cross-subsidy approach. In this case, they may support project viability, without necessarily resulting in any additional affordable dwellings.

6) Increasing the scale of not-for-profit provision offers financial benefits that help ensure the long-term delivery of affordable housing.

Our analysis supports the case for targeting public subsidy to not-for-profit developers (government or non-government) to maximise long-term social benefit. Investing in permanently affordable housing ensures the social dividend of affordable housing can be continued into the future.

Comparable subsidies are not preserved when allocated to private owners. They will seek to trade out at some stage, capitalising the subsidy into privatised gain.

The results of our case study analyses and modelling highlight the need to develop comprehensive funding and subsidy arrangements that account for different costs in different locations. These arrangements also must be integrated nationally to support affordable housing delivery at scale.

This study reiterates the common finding of research over the last decade: both Commonwealth and state/territory governments need to develop a coherent and long-term policy framework to provide housing across the full spectrum of need.

Authors: Laurence Troy, Research Fellow, City Futures Research Centre, UNSW; Bill Randolph, Director, City Futures – Faculty Leadership, City Futures Research Centre, Urban Analytics and City Data, Infrastructure in the Built Environment, UNSW; Ryan van den Nouwelant, Senior Research Officer – City Futures Research Centre, UNSW; Vivienne Milligan, Visiting Senior Fellow – City Futures Research Centre, Housing Policy and Practice, UNSW

Auction Clearances A Little Higher, Perhaps

CoreLogic has published their preliminary auction clearance results for last Saturday.

This week across the combined capital cities, auction volumes continued to increase with 1,464 homes taken to auction returning a preliminary clearance rate of 67.7 per cent, increasing from 62.0 per cent across 790 auctions last week, although this is likely to revise down over the week. Over the same week last year 1,591 auctions were held, while the clearance rate was a stronger 73.2 per cent. Adelaide and Perth were the only cities to see clearance rates fall over the week, while volumes increased everywhere except Adelaide. The strongest preliminary clearance rate was recorded in Melbourne (72.5 per cent), followed by Adelaide (68.9 per cent).

2018-02-12--auctionresultscapitalcities

Auction Results 10 Feb 2018

Domain has released the preliminary auction results for today. Volumes are up this week, but still well below this time last year. Sydney lags Melbourne in terms of clearance rate, the opposite to a year ago. Nationally 69.6% cleared against 74.9% last year. This is preliminary and the final results will likely settle lower.

Brisbane cleared 60% of 93 scheduled auctions, Adelaide 67% of 49 auctions and Canberra 65% of 60 listed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Auction Clearance Rates Slide As Listings Rise

According to Corelogic, last week, the combined capital cities returned a final auction clearance rate of 62 per cent across 790 auctions, with both clearance rate and volumes recording lower than last year when 68.8 per cent of the 881 auctions cleared.

The two strongest auction markets in terms of clearance rate last week were Melbourne and Adelaide, with both cities recording a 70.2 per cent rate of clearance. Followed by Canberra (62.2 per cent) and Sydney (57.1 per cent), while Brisbane, Perth and Tasmania all recorded clearance rates at or below 50 per cent.

It is expected that auction volumes will returned to normal levels in the coming weeks and a true reading of auction market conditions can be established.

Outside of the capital city markets, Geelong returned a final clearance rate of 88.9 per cent across 20 auctions. While the Gold Coast recorded the highest volume of auctions with 96 held, however only 46.9 per cent were successful.

A Blip or Something More Substantive?

On day 3 of the current market gyrations, we made this short video blog discussing what we see as the main issues.

How come goodish job and wages growth news in the US led to a market fall, and what will happen ahead?   Is it more than a “healthy correction”?

Note, these are just my views, and are in no way financial advice!

 

Auction Clearance Latest

CoreLogic says  the auction market is starting to bounce back from the seasonal slowdown, with almost three times the number of auctions held this week compared with last week, although volumes are lower than the same week last year. CoreLogic was tracking 779 auctions this week, compared with just 276 last week, while 881 homes were taken to auction this week last year.

Although the overall number of auctions is lower than this time last year, Melbourne was the only capital city to see an increase in volumes year-on-year. The preliminary auction clearance rate, based on the 578 auction results reported so far, was recorded at 67.7 per cent across the combined capital cities, compared to 72.8 per cent last week and 68.8 per cent last year.

All cities recorded a stronger preliminary clearance rate than what was recorded at the end of 2017, however, with auction activity only just starting to pick up, we should get a better idea over the coming weeks as to whether the clearance rates will revert back to the lower levels seen towards the end of last year.

2018-02-05--auctionresultscapitalcity

Housing Weakness Could Drive Rates Lower, and Ease Macroprudential

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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