Property Market – Page 153 – Digital Finance Analytics (DFA) Blog

HashChing and DFA Top Eight Mortgage Predictions for 2018

Online mortgage marketplace HashChing has collaborated with research firm Digital Finance Analytics to produce the top eight mortgage predictions for 2018.

1. Mortgage interest rates are expected to continue rising. The consensus among HashChing brokers is that major banks will continue to nudge interest rates higher. HashChing broker George Kozah said the average home loan standard variable interest rate of 5.08 per cent (according to Finder.com.au) could rise approximately 75 basis points to 5.83 per cent by the end of the year.

2. Fixed rate deals to be a focus for many lenders. In 2018, there will be a greater mix of very low “special” rates to try and attract first time buyers and owner-occupied refinanced business. Many lenders will focus on fixed rate deals, taking account of lower funding rates. This may change later in the year in line with a strong likelihood that the RBA will lift the official cash rate.

3. Mortgage lending standards will continue to be tightened. This includes lower income multiples, less generous analysis of household expenses, and more conservative assessment of allowable incomes. In addition, the loan to value hurdles will be lower for many borrowers. This means that households who want to enter the market will need to be able to present with a larger deposit. “As a result, I expect more first time buyers will get help from the “Bank of Mum and Dad”, which can be worth as much as $88,000,” said Martin North, principal of Digital Finance Analytics.

4. Mortgage stress will affect more households. Last month, Digital Finance Analytics reported that mortgage stress – which is generally when a household spends more than 30 percent of its pre-tax income on home loan repayments – affected more than 921,000 households in Australia. This could climb to more than a million by the end of 2018, and Digital Finance Analytics attributes the problem to a range of issues, including rising living costs, slow wage growth, and larger mortgages (due to rising home prices).

5. More borrowers likely to refinance home loans away from the big four banks. This trend was demonstrated last year using data from HashChing which showed the greatest exodus (37 percent of national borrowers with the big four banks) from Commonwealth Bank. Smaller lenders are offering variable rate home loans as low as 3.56 per cent, and the clear savings compared to the major banks is prompting an increasing number of borrowers to jump ship.

6. Cooling property prices to continue into 2018. Tougher lending restrictions on investors and interest-only loans has increased the housing supply, leading to property prices in major cities such as Sydney and Melbourne to decline last year. The national median house price index fell to 0.3 per cent in December (according to CoreLogic data), and this trend is expected to continue in 2018. Overall, new residential construction will stay strong, as recent building approvals flow through, but there will be a fall in the number of high-rise units release to the market – especially in Melbourne and Brisbane.

7. First home buyers will make up a greater percentage of borrowers. Softening property prices, greater housing supply and government grants/stamp duty concessions (in states such as NSW, Victoria and Queensland) will see more first home buyers enter the market in 2018. In the first week of the year, HashChing has already seen a considerable uptick in web traffic, with a 12% increase in home loan enquiries from first home buyers compared to this time last year.

8. Mortgage brokers will continue to settle most residential mortgages. The latest industry data shows Australian mortgage brokers settled 55.7 percent of all residential mortgages during the September 2017 quarter, which is up from 53.6 percent in the same quarter last year. While the upcoming changes to mortgage broker commission structures (namely, the elimination of volume incentives) will result in lower lending volumes, brokers will still maintain significant share, and their overall footprint will likely continue to increase.

The Fall Out From The Negative Gearing Expose

The FOI release, which the ABC covered yesterday, highlighted “the Coalition’s phoney defence of negative gearing and capital gains tax discounts before the last election”.

A number of economists at the time disputed the claims that winding back those two tax write-offs would “take a sledgehammer” to property prices because “a third of demand” would disappear from the market.

But as the excellent Rob Burgess has highlighted in the New Daily today, there are two consequential questions which need answering:

The two questions that need answering, is why were Mr Turnbull and Mr Morrison making such obviously false claims, and why were those claims not torn apart by the Canberra press gallery?

The answer to the first question is straightforward. They were either responding to an ideological commitment from the right-wing of their own party room that tax is somehow optional for asset-rich Australians, or they were following the advice of party strategists who could not see them re-winning government if wealthier Australians did not hear them loudly condemning Labor’s plans.

Historians will not doubt tell us which of those it was in years to come.

The answer to the second question is more complicated.

Journalists were not brazenly siding with the banks who had profited so much from the negatively-geared property investment mania, and they were not simply playing partisan politics in favour of a Liberal-led government.

Rather, the get-rich-quick culture of the then 16-year-old property boom, and the gradually normalised claim that tax avoidance is somehow a basic human right, has infected Canberra policy makers and fourth-estate critics alike.

That’s why in 2016 it was so refreshing to hear NSW planning minister Rob Stokes lay out the moral case against these tax write-offs.

He said at the time: “We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services – through generous federal tax exemptions and the ownership of multiple properties – while a generation of working Australians find it increasingly difficult to buy one property to call home.”

While he told the truth, his federal colleagues were telling lies.

They lied on behalf of the 10 per cent of Australians who profit from the tax write-offs, and against the interests of the other 90 per cent.

Perhaps now that the nation’s best-equipped economic modellers have highlighted the benefits of these reforms – around $6 billion a year returned to the budget bottom line – the news media will finally call these laws out for what they are.

They are grossly unfair. They have helped pump up the Australian housing bubble. And they have redistributed tens of billions of dollars from poorer to wealthier Australians.

As interest rates start to rise around the world, and the interest-payment write-offs of property investors start to bite even harder into the federal budget, these laws need urgent reform.

A news media that vigorously holds the defenders of these laws to account would be a good start.

The Property Market is Repeating US Mortgage Mistakes

In an opinion piece on the UNSW site, Professor Richard Holden writes that troubling borrowing and lending markers in the Australian housing market suggest that the lessons from the US mortgage meltdown have not been learned. We agree!

For all the endless discussion of housing prices in Australia, it is very hard to tell if there is a bubble. Sydney price-to-income ratios are the second highest in the world – above London and New York – but hey, Sydney is a great place to live. Supply is constrained by zoning laws, two national parks, a mountain range and an ocean. Yet demand continues to grow, so prices tend to rise.

I don’t know if there’s a bubble in the Australian housing market, but there are some very troubling markers that suggest imprudent borrowing and lending. Just the sort of things that preceded the US housing implosion nearly a decade ago. And I worry that bankers, borrowers, and regulators seem not to have learned the lessons of that very painful piece of economic history.

First, the markers.

Australia lenders will let you borrow a lot compared to your income. If one adjusts for tax and exchange rates and uses an online mortgage calculator, it is easy to see than a major Australian bank will lend about 25% more for the same income level compared with what a major US bank will now lend.

Not only can one borrow a lot, the structure of the loans is often very risk. A staggering 35.4% of home loans in Australia are interest only, according to recent APRA figures. That has dropped from above 40% thanks to APRA’s recent 30% cap on the amount of new loans that can be interest only.

Don’t forget that a key trigger of the US housing meltdown was when five-year adjustable rate mortgages could not be refinanced, and borrowers faced steep upticks every quarter in their interest rates.

Interest-only loans in Australia typically have a five-year horizon and to date have often been refinanced. If this stops then repayments will soar, adding to mortgage stress, delinquencies, and eventually foreclosures.

So-called “liar loans”, where borrowers provide inaccurate information about their income, assets, or expenses to lenders seem both prevalent and on the rise. A UBS survey in late 2017 found that approximately 30 per cent of home loans, or $500 billion worth could be affected. This is exactly what occurred in the US – as anyone who has read Michael Lewis’s book The Big Short, seen the movie, can tell you.

We can’t even be sure that people have true equity in their new properties. With deposit insurance one can get away with a 5% deposit, although it is typically 20% without. But how careful are banks about where the deposit comes from? There are now troubling suggestions that the leading use of unsecured personal loans is for a mortgage deposit.

All of this is aided and abetted by mortgage brokers – or at least some of them. A remarkable 55% of all new mortgages come through a broker. And those brokers get paid based on how many dollars of home loans they write.

Their incentives are thoroughly misaligned with both borrowers and lenders – just as was the case in the US a decade ago. There are also high-powered incentives for those originating loans with banks, creating more moral hazard.

But perhaps the biggest marker of all is the response from lenders. On liar loans, an ANZ spokesperson said UBS’s survey of 907 people was “extremely limited” compared to the total number of home loans.

Opinion polls the day before an election are also small compared to the number of total voters, but they have been pretty accurate in Australian elections overall. A representative sample of around 1000 respondents tells us a lot.

In October last year Westpac CEO Brian Hartzer told the House of Representatives Standing Committee on Economics: “We don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.”

ANZ’s Shayne Elliott holds the same view, telling the same committee the same thing: “It’s not in our interest to lend money to people who can’t afford to repay.” And if it was them lending their own money then I might believe it. But people act differently when they are playing with other people’s money. That is the essence of the moral hazard problem.

Mr Elliott, also told ABC’s Four Corners that mortgages are all individual risks, saying: “The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of relatively small loans across ah across the country.” “Ah”, indeed. One of the key lessons from the US experience was how highly correlated the risks on mortgages are. Do Australia’s lenders really not get that?

Bubble or no bubble, we seem to be blithely repeating the US housing-market experience in almost every respect. People borrow too much and banks let them; there is moral hazard and fraud in mortgage issuances; regulators finally do something – very little and very late.

The happy scenario is that macro-prudential regulation is finally biting, and that underwriting standards are starting to improve. Even if that is true, we are still left with highly indebted households who have nearly $2 of debt for every $1 of GDP, a raft of interest-only loans that will soon involve principal repayments, and stagnant wage growth.

Having lived in the US during the mortgage meltdown I’m sorry to say that I’ve seen this movie before. The question is: why haven’t our bankers?

Richard Holden is Professor of Economics at UNSW Business School.

This article was originally published in the Australian Financial Review.

Q&A – The Property Imperative Weekly 06 Jan 2018

In this edition of of our Vlog, we answer some of the most popular questions received via our social media channels.

These include the following:

How do we define mortgage stress?
Do you see parallels here with the US mortgage market in 2005?
Will underwriting standards get tougher still?
What is the likely trajectory of interest rates and home prices?

Our Views On The Property Market, As Discussed On ABC

We had the chance to discuss the outlook for the Australian property market on ABC News 24, which was rebroadcast on ABC Radio.

Here is the audio from the segment.

Households Under The Mortgage Stress Gun In December

Digital Finance Analytics has released the December mortgage stress and default analysis update. Across Australia, more than 921,000 households are estimated to be now in mortgage stress (last month 913,000). This equates to 29.7% of households. In addition, more than 24,000 of these in severe stress, up 3,000 from last month. We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points. Households in NSW are showing the most significant rise in stress, thanks to larger mortgages relative to income, while income growth is slow.

Martin North, Principal of Digital Finance Analytics said “the number of households impacted are economically significant, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at three times income. This is not sustainable”. The latest household debt to income ratio is now at a record 199.7.[1]

Risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. This is a significant sleeping problem and the risks in the system are higher than many recognise.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end December 2017. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. Households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home. Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

The forces which are lifting mortgage stress levels remain largely the same. In cash flow terms, we see households having to cope with rising living costs whilst real incomes continue to fall and underemployment remains high. Households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, but now there are signs prices are slipping. While mortgage rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises. We expect some upward pressure on real mortgage rates in the next year as international funding pressures mount, a potential for local rate rises and margin pressure on the banks.

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes. Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households.

Stress by The Numbers.

Regional analysis shows that NSW has 258,572 households in stress (251,576 last month), VIC 254,485 (253,248 last month), QLD 156,097 (157,019 last month) and WA 121,934 (123,849 last month). The probability of default rose, with around 9,800 in WA, around 9,500 in QLD, 13,000 in VIC and 14,000 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($957 million) from Owner Occupied Borrowers, which equates to 2.1 and 2.7 basis points respectively. Losses are likely to be highest in WA at 4.9 basis points, which equates to $682 million from Owner Occupied borrowers.

You can request our media release. Note this will NOT automatically send you our research updates, for that register here.

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Note that the detailed results from our surveys and analysis are made available to our paying clients.

[1] RBA E2 Household Finances – Selected Ratios September 2017

National Dwelling Values Fall 0.3% In December – CoreLogic

Further evidence of cracks showing in the property market in the major centres.

From CoreLogic.

According to the CoreLogic December Hedonic Home Value Index results, national dwelling values slipped lower over the month, led by falls across Sydney, Darwin, Melbourne and Perth . This sets the scene For softer housing conditions In 2018

The transition towards weaker housing market conditions has been clear but gradual and is likely to continue throughout 2018 according to CoreLogic head of research Tim Lawless.

Commenting on the results, Mr Lawless said, “From a macro perspective, late 2016 marked a peak in the pace of capital gains across Australia with national dwelling values rising at the rolling quarterly pace of 3.7% over the three months to November.”

“In 2017 we saw growth rates and transactional activity gradually lose steam, with national month-on-month capital gains slowing to 0% in October and November before turning negative in December.”

According to CoreLogic, the 0.3% fall in December was the catalyst for dragging the quarterly capital gains result into negative territory for the first time since the three months ending April 2016. Nationally, dwelling values were 4.2% higher over the 2017 calendar year which is a slower pace of growth relative to 2016 when national dwelling values rose 5.8% and in 2015 when values nationally were 9.2% higher.

Index results as at December 31, 2017

Our Most Popular Posts of 2017

As we tie the ribbons on 2017, here are the top 10 most popular posts from the DFA Blog throughout the past year.

Mortgage stress and the property market were to most visited, but Fintech innovation and household finances also featured. The ABC Four Corners programme generated the most traffic to our site in a single day. Our earlier research on consumer debt continued to rate very highly.

The Definitive Guide To Our Latest Mortgage Stress Research

October Mortgage Stress Higher Again – See The Top 10 Post Codes

Tic:Toc launches with 22-minute home loan

Mounting concerns over Australian housing bubble

Safe as Houses? Not if You Live in Australia

ABC Four Corners Does Mortgage Stress

6 astonishing features of Australia’s current house price boom

Where Do Consumers Fit in the Fintech Stack?

Digital Finance Analytics – Quenching The Thirst For Accurate Household Mortgage Data

The Stressed Household Finance Report 2015 is Available

The Shape of 2018 – The Property Imperative Weekly 30th Dec 2017

In the final edition of the Property Imperative Weekly for 2017, we look ahead to 2018 and discuss the future trajectory of the property market, the shape of the mortgage industry, the evolution of banking and the likely state of household finances.

Watch the video, or read the transcript.

We start with the state of household finances. The latest data from the RBA shows that the ratio of debt to income deteriorated again (no surprise given the 6%+ growth in mortgage debt, and the ~2% income growth). The ratio of total debt to income is now an astronomical 199.7, and housing debt 137.5. Both are at all-time records, and underscores the deep problem we have with high debt.

We think that households will remain under significant debt pressure next year, and the latest data shows that mortgage lending is still growing at 3 times income growth. We doubt that incomes will rise any time soon, and so 2018 will be a year of rising debt, and as a result, more households will get into difficulty and mortgage stress will continue to climb. We think Treasury forecasts of rising household incomes are overblown. On the other hand, the costs of living will rise fast.

As a result, two things will happen. The first is that mortgage default rates are likely to rise (at current rock bottom interest rates, defaults should be lower), and if rates rise then default rates will climb further. The second outcome is that households will spend less and hunker down. As the Fed showed this week, the US economy is highly dependent on continued household spending to sustain economic growth – and the same is true here. We think many households will hold back on consumption, spending less on discretionary items and luxuries, and so this will be a brake on economic activity. This will have a strong negative influence on future economic growth, which we already saw throughout the Christmas shopping season.

Mortgage interest rates are likely to rise as international markets follow the US higher, lifting bank funding costs. This is separate from any change to the cash rate. This year the RBA was able to sit on its hands as the banks did their rate rises for them. We hold the view that the cash rate will remain stuck it its current rut for the next few months, because the regulators are acutely aware of the impact on households if they were to lift. They have little left in the tank if economic indicators weaken, and the bias will be upward, later in the year.

Competition for new loans will be strong, as banks need mortgages to support their shareholder returns. The latest credit data from the RBA showed that total mortgages are now at a record $1.71 trillion, and investor lending has fallen to an annual rate of 6.5%, compared with owner occupied lending at 6.3%, so total housing lending grew at 6.4%. Business lending is lower, at 4.7% and personal lending down 1.2%.

But APRA’s data shows that banks are writing less new business, so total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reached $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow. In fact, comparing the RBA and APRA figures we see the non-bank sector is taking up the slack, and of course they do not have the current regulatory constraints. The portfolio movements of major lenders show significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little. Westpac and NAB grew their investment loans more than the others.

We think there will be desperate attempts to attract new borrowers, with deeply discounted rates, yet at the same time mortgage underwriting standards will continue to tighten. We already see the impact of this in our most recent surveys. The analysis of our December 2017 results shows some significant shifts in sentiment – in summary:

First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate away from property investors.
Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, and this could have a profound impact on the market. We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. First time buyers remain the most committed to saving for a deposit, helped by new first owner grants, while those who desire to buy, but cannot are saving less. Those seeking to Trade Up are most positive of future capital growth. Foreign buyers will be less active in 2018.

So our view is that demand for property will ease, and the volume of sales will slide through 2018. As a result, the recent price falls will likely continue, and indeed may accelerate. We will be watching for the second order impacts as investors decide to cut their losses and sell, creating more downward pressure. Remember the Bank of England suggested that in a down turn, Investment Property owners are four times more likely to exit compared with owner occupied borrowers.

So risks in the sector will grow, and bank losses may increase.

More broadly, banks will remain in the cross-hairs though 2018 as the Royal Commission picks over results from their notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards. We expect more issues will surface. The new banking code which was floated before Christmas is not bad, but is really still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits? What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans? And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

We will get to hear about the approach to Open Banking, the Productivity Commission on vertical integration and the ACCC on mortgage pricing, as well as the outcomes from a range of court cases involving poor banking behaviour. APRA will also discuss mortgage risk weights. So 2018 looks like adding more pressure on the banks.

So in summary, we think we will see more of the same, with pressure on households, pressure on banks, and a sliding housing market. Despite this, credit is growing at dangerous levels and regulators will need to tighten further. We are not sure they will, but then the current issues we face have been created by years of poor policy.

Households can help to manage their financials by building a budget to identify their commitments and cash flows. Prospective mortgage borrowers should run their own numbers at 3% above current rates, and not rely on the banks assessment of their ability to repay – remember banks are primarily concerned with their risk of loss, not household budgets or financial sustainability per se. Regulators have a lot more to do here in our view.

Many will choose to spruke property in 2018 (we are already seeing claims that the Perth market “is turning”), and the construction sector, real estate firms, and banks all have a vested interest in keeping the ball in the air for as long as possible. Governments also do not want to see prices fall on their watch, and many of the states are totally reliant on income from stamp duty. But we have to look beyond this. If we are very luck, then prices will just drift lower; but it could turn into a rout quite easily, and don’t think the authorities have the ability to calibrate or correct a fall if it goes, they do not.

The bottom line is this. Think of property as a place to live, not an investment play. Do that, and suddenly things can get a whole lot more sensible.

That’s the Property Imperative Weekly to 30^th December 2017. We will return in the new year with a fresh weekly set of objective news, analysis and opinion. If you found this useful, do leave a comment, or like the post, and subscribe to receive future updates. Best wishes for 2018, and many thanks for watching.