Category: Property Market

RBA Financial Stability – Move Along, Nothing To See Here….

The latest 62 page edition of the RBA Financial Stability Review has been released, and it continues their line “of some risks, but no worries”. International economic conditions, and business confidence are, they say, on the improve while Australian household balance sheets and the housing market remain a core area of interest. The potential impact of rising rates and flat income are discussed, once again, but little new is added into the mix.

From a financial stability perspective, banks hold more capital, have tightened lending standards, and shadow banking is under control.

The key domestic risks in the Australian financial system continue to stem from household borrowing. Household indebtedness, most of which is mortgage borrowing, is high and gradually rising against a backdrop of low interest rates and weak income growth. While some households have taken advantage of low interest rates to make excess mortgage payments, others have increased their borrowing. Higher interest rates, or falls in income, could see some highly indebted households struggle to service their debt and so curtail their spending.

Prepayments are an important dynamic in the Australian mortgage market as they allow households to build a financial buffer to cushion mortgage rate rises or income falls. Aggregate mortgage buffers – balances in offset accounts and redraw facilities – remain around 17 per cent of outstanding loan balances, or over 2½ years of scheduled repayments at current interest rates.

These aggregates, however, mask substantial variation; about one-third of mortgages have less than one months’ buffer Not all of these are vulnerable given some borrowers have fixed rate mortgages that restrict prepayments, and some are investor mortgages where there are incentives to not pay down tax deductible debt. This leaves a smaller share of potentially vulnerable borrowers with new mortgages who have yet to accumulate prepayments, and borrowers who may not be able to afford prepayments. Partial data suggest that the share of households with only small buffers has declined in recent years, in part due to declines in mortgage rates. Households with small buffers also tend to be lower-income or lower-wealth households, which could make them more vulnerable to financial stress.

Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher. Steps taken by regulators in the past few years to strengthen the resilience of balance sheets, including limiting the pace of growth of investor lending, discouraging loans with high loan-to-valuation ratios (LVRs) and strengthening serviceability metrics, have seen the growth in riskier types of lending moderate. The most recent focus has been on limiting interest-only lending, and banks have responded by further reducing lending with high LVRs for interest-only loans, increasing interest rates for some types of mortgages and significantly reducing interest-only lending.

The tightening of banks’ lending standards for property loans is constraining some households and developers but, in doing so, making the balance sheets of both borrowers and lenders more resilient. Conditions are relatively weak in the Brisbane apartment market, with a large increase in supply reflected in declines in prices and rents. There are, however, few signs of significant settlement difficulties to date. More generally, while housing market conditions vary across the country, there are signs of easing of late, particularly in Sydney and Melbourne where conditions have been strongest.

With the tightening of lending standards, there is a potential that riskier lending migrates into the non-bank sector. To date, non-bank financial institutions’ residential mortgage lending has remained small though their lending for property development has picked up recently. While the banking system has minimal exposure to the non-bank financial sector, growth in finance outside the regulated sector is an area to watch.

Here are some of the other nuggets:

Very low interest rates have also contributed to strong growth in property prices internationally as investors search for yield. To the extent that prices have moved beyond what their underlying determinants suggest, this increases the risk of sharp price falls if interest rates were to rise suddenly or if risk sentiment were to deteriorate.

While household debt levels are high, and rising, to date the impact on households’ ability to service their debt has been muted by falls in interest rates to historically low levels. Nonetheless, highly indebted households are more likely to struggle to repay their debts, or substantially reduce their consumption, in response to a negative shock, such as a rise in unemployment, an unexpectedly large increase in interest rates or a sharp fall in housing prices.

The distribution of debt is also important in identifying where risks lie as typically it is not the ‘average’ household that gets into financial In Canada and Sweden, for example, the risks from high household debt may be heightened since the debt is concentrated among younger and low‑to-middle-income households, who are likely to be more vulnerable
to negative shocks.

Further, interest-only (IO) lending has been identified as increasing risks in some jurisdictions.4 Households with IO loans remain more indebted throughout the life of the loan than if they had been paying down the loan principal, making them more vulnerable to higher interest rates, reduced income, or lower housing prices. Such households are also more vulnerable to ‘payment shock’ due to the increase in repayments following the end of the interest-only period of the loan.

Global experience is that the culture within banks can have a major bearing on how a wide range of risks are identified and managed. There have been a number of examples where the absence of strong positive culture has given rise to a deterioration in asset performance, misconduct and loss of public trust. In Australia, there have also been examples of weak internal controls causing difficulties for some banks. These include in the areas of life insurance, wealth management and, more recently, retail banking. In August, AUSTRAC (the Australian Transaction Reports and Analysis Centre) initiated civil proceedings against the Commonwealth Bank of Australia for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. In the current environment where investors still expect high rates of return, despite regulatory and other changes that have reduced bank ROE, banks need to be careful of taking on more risk to boost returns.

A central element to address this issue is to ensure that banks build strong risk cultures and governance frameworks. Regulators have therefore heightened their focus on culture and the industry is taking steps to improve in this area.

NAB expects prices to slow in 2018-19, but not a severe adjustment.

The latest NAB Residential Property Index is out, and it rose 6 points to +20 in Q3, with sentiment (based on current prices and rents) improving in all states except NSW (which edged down). Sentiment rose sharply in Victoria (up 27 to +63) and in Queensland (up 4 to +16). Whilst sentiment rises and confidence lifts among property experts in Q3, NAB expects prices to slow in 2018-19, but not a severe adjustment.

Australian housing market sentiment lifted over the third quarter of 2017, supported mainly by a large increase in the number of property experts reporting positive rental growth in the quarter and continued house price growth in most states.

“The NAB Residential Property Survey shows an improvement in market sentiment across most states last quarter, but we continue to see market conditions that vary across different locations. The momentum is clearly with Victoria, while NSW is experiencing something of a slowdown,” NAB Chief Economist Alan Oster said.

Confidence (based on forward expectations for prices and rents) lifted in all states, led by Victoria, and with WA the big improver. Despite weakening price growth in NSW, higher confidence is being supported by predictions for higher rents.

First home buyers continue emerging as key buyers in both new and established housing markets, accounting for over 36% of all sales in new housing markets and around 29% in established markets.

During Q3, the overall market share of foreign buyers in new property markets fell to a 5-year low of 9.5%, potentially due to lending restrictions on foreign buyers. Low foreign buying activity in new property markets was led by Victoria, where the share of sales to foreign buyers fell to 14.4% (20.8% in Q2).

For the first time, tight credit was identified as the biggest constraint on new developments in all states, while access to credit was the biggest barrier for buyers of established property. Price levels were the biggest concern in both Victoria and NSW. In WA and SA/NT, property experts said that employment security was the biggest barrier to buying an established home.

They also highlighted lower foreign buying activity in new property markets, with VIC saw the share fall to 14.4% (from 20.8% in Q2) and NSW down to 7.8% from 12% in Q2. In contrast, QLD saw a rise to 11.4%, up from 8.6% last quarter.

NAB’s forecasts on residential prices

NAB Group Economics has revised its national house price forecasts, predicting an increase of 3.4% in 2018 (previously 4.3%) and easing to 2.5% in 2019. Unit prices are forecast to rise 0.5% in 2018 (-0.3% previously), with a modest fall expected in 2019.

“More moderate market conditions reflect a combination of factors which vary across markets, including deteriorating affordability, rising supply of apartments, tighter credit conditions and rising interest rates in the second half of 2018” said Mr Oster.

“But still relatively low mortgage rates, a favourable housing supply-demand balance and strong population growth population growth should continue to provide support for prices going forward.”

“By capital city, house price growth is forecast to be moderate outside of Perth – where prices are flattening out – consistent with good business conditions and better employment growth.”

“Melbourne and Hobart are currently experiencing solid growth in prices; Sydney is cooling and we expect Brisbane and Adelaide will cool. Finally, we expect 2018 to mark the beginning of a gradual turnaround for Perth.”
About 300 property professionals participated in the Q3 2017 survey.

Chinese Still Buying Australian Property In Droves

According to new analysis by Credit Suisse, demand for housing from Chinese buyers remains strong, especially the purchase of new developments, and this will put a floor under property especially in the main urban centres of Sydney and Melbourne.

As reported in Business Insider, new restrictions on foreign investors are unlikely to stop the flow of housing demand from China, according to Credit Suisse analysts Hasan Tevfik and Peter Liu.

And crackdowns on capital outflows by Chinese authorities appear not have slowed China’s appetite for Australian property, the pair say.

The latest numbers are based on state tax revenue data obtained by Tevfik and Liu in March through a Freedom of Information Request.

“We calculate foreign buyers are acquiring the equivalent of 25% of new housing supply in NSW, 17% in Victoria and 8% in Queensland. Almost all of this is from China,” the analysts said.

Updated to June, the figures show that foreign buyers are snapping up Australian property at an annualised rate of $10 billion per year across NSW, Victoria and Queensland.

That’s only a small percentage of Australia’s $6.7 trillion housing market, but importantly, it makes up a significant percentage of the demand for new housing supply.

Nearly a third of new housing stock being built in NSW is being bought by foreigners. Obviously not all of that is for new dwellings, but the vast majority would be.

And while much has been made of the crackdown on investor-funds leaving China, the Credit Suisse research shows the actual impact has been minimal.

Here are Tevfik and Liu’s comments :

In December 2016, the Chinese authorities introduced new and stronger capital controls to slow money flowing out of the middle kingdom. Our tax receipt data help measure how effective these controls have been — and it seems they haven’t been. In NSW, where we have three complete (and reliable) quarters of tax receipt data, we can see foreign demand for property has so far hovered around $1.4 to $1.6bn per quarter.

After concluding that China’s crackdown doesn’t appear to be stemming off-shore capital flows, Tevfik and Liu also noted that Chinese investors are cashed up and ready to spend.

There are currently 1.6 million US dollar millionaires in China, and that converts to shared wealth of a whopping $13 trillion – around twice the size of Australia’s housing market.

“As our property market becomes more global perhaps we should be concentrating less on Australian incomes as a measure of buying power and more on wealth creation in the Asian region,” the analysts said.

So, what factors could stem the seemingly invevitable flow of capital from Asian markets into Australian property?

Tevfik and Liu highlighted the potential impact of recent tax increases on foreign investors introduced by Australian states, as well as the impact from a devaluation of the Chinese currency.

In June, NSW announced that it would double stamp duty on foreign investors from 4% to 8% while land tax would increase to 2% from 0.75%, effective from July 1.

Victoria and Queensland also impose additional taxes on foreign investors of 7% and 3% respectively, calculated as a proportion of the purchase price.

However, they said that past examples from other international suggest the impact on house prices will be small.

“The introduction or increase of a tax on foreign buyers seems to slow demand to a point where property prices decelerate, but it does not cause housing values to contract,” Tevfik and Liu said.

This chart shows the impact on house prices in other international markets after the implementation of tax increases on foreign investors.

“Based on the experience of other cities around the world, we do not believe the recent increase in taxes by NSW will cause property prices to contract,” the pair said. Although they added that Chinese investors are an easy target for Australian state governments, and didn’t rule out further rate increases in the future.

A more likely scenario to reduced demand, the analysts said, would be a devaluation of China’s currency, the renminbi.

“From our many and various discussions with Chinese investors and companies, there is a consensus view that the renminbi is set to depreciate further from here. If and when it does the buying power of Chinese investors will diminish.”

Tevfik and Liu noted that the renminbi has been broadly depreciating since 2014. In that context, they added that Chinese policy-makers are focused on stability ahead of the 19th Communist Party Congress later this month, but said movements in the currency after that will be worth monitoring.

In summary, the two analysts dispute recent reports suggesting foreign investor demand will slow. On the contrary, “we forecast these flows to continue at a strong pace and will serve to cushion the downside in activity and prices”, they said.

“It’s different this time. While we acknowledge residential investment and house price inflation are set to moderate we don’t think there will be a collapse. The foreign buyer has never before been as an important driver of the Australian housing market as she is now.”

Auction Volumes Bounce Higher But Clearance Rates Fall

From CoreLogic.

Auction activity across the combined capital cities increased this week after last week’s grand final and public holiday slowdown.  2,286 homes were taken to auction, returning a preliminary auction clearance rate of 68.1 per cent.  The preliminary clearance was up from the 66.3 per cent last week when volumes dipped significantly across the capitals amidst the festivities of the grand finals and long weekend.

Melbourne was the only capital city to record a preliminary clearance rate above 70 per cent (72.1 %), while clearance rates across Sydney remained below 70 per cent for the eleventh consecutive week.  Compared to one year ago, clearance rates continue to track lower with final results from the corresponding week last year recording a 76.4 per cent clearance rate, while volumes were a similar 2,290.

2017-10-09--auctionresultscapitalcities

Households Get Crushed – The Property Imperative Weekly 07 Oct 2017

Mixed economic news this week, which makes the call on the next cash rate move more complex, but even at current levels, more households are getting crunched as wages tall, debt rises and property prices turn.

Welcome to the Property Imperative weekly to 7th October 2017, the latest digest of finance and property news. Watch the video, or read the transcript.

The big shock this week was the horrible retail spending data from the ABS.  Retail turnover in August declined for a second month in a row, down 0.6 per cent, the worst monthly performance in more than four years, which puts economic growth at risk. In seasonally adjusted terms, there were falls in all states and territories but Victoria (-0.8 per cent) and Queensland (-0.8 per cent) led the way.  The full impact of the August slump will be seen when the September quarter GDP figures are released. Last time, the share of economic growth flowing to wage earners fell to 51.3 per cent in trend terms, the lowest since 1964.

Commonwealth Bank economist Gareth Aird said mortgage interest payments are taking up a larger proportion of household income, and were acting as “a handbrake on consumer spending and the retail sector in general”. All too true – as followers of our blog will know, poor wage growth is the problem.

Even the PM highlighted the impact of slow or no wage growth. “While we’re seeing strong growth in employment, we’re yet to see stronger growth in wages so people feel as though they’re not getting ahead,” Mr Turnbull told Neil Mitchell on 3AW radio. But its more than a feeling, it’s an economic reality.

To underscore the pressure on households, we released our mortgage stress data to end September, which confirmed the uptrend by crossing the 900,000 household rubicon for the first time.  Across the nation, more than 905,000 households are now in mortgage stress (last month 860,000) and more than 18,000 of these are in severe stress. This equates to 28.9% of households. A rising number of more affluent households are being impacted as the contagion of mortgage stress continues to spread beyond the traditional mortgage belts. We estimate that more than 49,000 households risk default in the next 12 months, up 3,000 from last month. You can watch our video summary to see which post codes are most impacted.

New research commissioned by mortgage brokers iSelect through Galaxy Research which polled over 1,000 Australian households also found that 25% were experiencing difficulty covering their mortgage repayments and 33% have had their interest rates increased in the past year. Almost 40% of households making their payments have no surplus left over and if interest rates were to rise by 1%, more than 780,000 mortgage holders would struggle to make repayments. This includes 632,000 households which would have to cut back to cover repayments and 150,000 which would be forced into further debt.

Roy Morgan Research mortgage stress data also confirmed the rising pressure, with a rise, to 17.3%, despite a decline in loan rates.  Those they identified as ‘Extremely at Risk’ also increased from 12.4% to 12.8%. They define stress on a different basis to the DFA cash-flow method, but the trend is still clear.

We also found, in joint research with HashChing a massive discrepancy in home loan interest rates across NSW, with vast differences in rates even within the same suburbs. The data shows that in some cases, neighbours are paying up to $87,027 more for new owner occupied loans (105 basis point disparity), and $201,704 more for refinanced owner occupied loans (235 basis point disparity). The calculation is based on an average home loan of $500,000 over 25 years. Those borrowers paying higher rates are essentially adding an extra three years of mortgage repayments compared to those on a lower rate.

More bad news from banking analysts at UBS who said a third of borrowers with interest-only (IO) loans “do not know or understand that they have taken out an IO mortgage”. According to the results, 23.9 per cent (by value) of respondents stated that they were on an IO mortgage, well below APRA’s figure of 35.3 per cent. UBS said “While we initially suspected that this was a sample error… We believe a more plausible explanation is that around one-third of IO customers do not know or understand that they have taken out an IO mortgage. We are concerned that it is likely that approximately one-third of borrowers who have taken out an IO mortgage have little understanding of the product or that their repayments will jump by between 30-60 per cent at the end of the IO period”.

Whilst FBAA executive director Peter White said that the conclusion was “the biggest load of nonsense on the planet” and that there was no analytical data to support what they’re saying; DFA analysis shows that over the next few years a considerable number of interest only loans (IO) due for review, will fail current underwriting standards.  So households will be forced to switch to more expensive P&I loans, assuming they find a lender, or even sell. The same drama played out in the UK a couple of years ago when they brought in tighter restrictions on IO loans.  We conservatively estimate $7 billion will fall due this year, $9 billion in 2018 and rise to $20 billion in 2020. So the value of the loans is significant and if UBS is right, may be understated.

The IMF released their Global Financial Stability Report, and Australia got a mention for all the wrong reasons. With household debt now 100% of GDP, we are at the top end of the risk curve.  Whilst increased household debt gives an economy a boost in the short term, the IMF has found it creates greater risk 3-5 years later, lifting the potential for a financial crisis, as household struggle to repay.  Given the ultra-high debt levels in Australia, this is an important observation, and we are entering the danger zone now.

Data from the RBA showed that overall household debt rose again with the household debt ratio now at a new record of 193.7.  They left the cash rate unchanged for the 14th consecutive month. But the real problem is that with the current economic settings, mortgage debt is growing at more than three-time income and cpi. There can be no excuse for this, and the settings need to be changed, now.

Even the property news was mixed. ABS data showed overall Building approvals were up 0.4% in August but had fallen 1.2% (on revised figures) in July. This was driven by apartment approvals, which were up 4.8%, while approvals for houses fell 0.6%. Year-on-year the news is still bleak. Approvals are down 15.5% on that basis – the 12th consecutive month they have fallen. The HIA home sales for August lifted but whilst the increase in sales offset larger declines in sales in recent months, it was not sufficient to reverse the decline in sales that is evident since early 2016. The auction volumes were down last week, thanks to the Grand Finals and Long Weekend. But clearance rates in Melbourne remained firm.  And CoreLogic’s September home price series showed slippage in Sydney, down 0.1% in the month, although the national average was up just 0.2%, with Hobart and Melbourne leading the way.

The bottom line is this. We are certainly at a tipping point, and more evidence is amassing on the risks to households, to the housing sector and to the the broader economic outlook. Worryingly, we think there are strong echoes of the pre-GFC conditions which existed in the USA. High debt, extended home prices, suspect mortgage underwriting standards, and the risk of rates rising. There is now a very limited window for regulators to get their act together, and head off the potential crash at the pass. The problem is, intervention also risks creating the crisis they are trying to prevent, so regulators are in a bind, and politicians would prefer to kick the can down the road. The signs are there for those who what to see them, but many prefer to look away.

And that’s the Property Imperative Weekly to 7th October 2017. If you found this useful, do leave a comment below, subscribe to receive future updates and check back next week.

Auction Results 07 Oct 2017

The preliminary results from Domain for today continue to show falling volumes and clearance highest in Melbourne, even after a rebound from the long weekend last week.  The numbers are below those from a year ago.

Brisbane cleared 53% of 11 scheduled auctions, Adelaide 66% of 80 scheduled and 65% of those scheduled in Canberra.

 

Auction Activity Takes a Back Seat to Grand Finals and Long Weekend Festivities

From CoreLogic.

The combined capital cities saw significantly fewer auctions this week, with a total of 953 auctions held; the lower activity a result of most states being host to a long weekend as well as both the AFL and NRL grand finals taking place. Despite lower auction volumes, clearance rates held firm, returning a preliminary result of 69.4 per cent, rising from the 66.2 per cent last week when final results saw volumes reach their highest level since May this year (2,782).

Melbourne was the main driver of the strong clearance, with a preliminary result just under 90 per cent.  Over the same week last year, activity was equally subdued, with 872 auctions held and 75.8 per cent successful.  Brisbane was the only capital city to see a rise in volumes week-on-week.

2017-10-01--auctionresultscapitalcities

ANZ acquires REALas to bolster digital offering in Australia’s property market

ANZ today announced it had acquired Australian property start-up REALas to help home buyers access better information about the Australian property market.

Launched in 2011, REALas offers a unique algorithm to predict property prices and has forged a strong reputation as the most accurate predictor of sale prices for listed properties.

Commenting on the acquisition, ANZ Managing Director Customer Experience and Digital Channels Peter Dalton said: “This is an important acquisition for our digital transformation as we know customers are increasingly turning to online resources for help as they navigate the Australian property market.

“It’s also a great success story of an Australian start-up, so we’re really pleased to be working with them and looking at how we might incorporate some of their features into ANZ’s products and services in the future.”

REALas CEO Josh Rowe said: “The algorithm at the centre of our site was built using the latest data science methods, local market knowledge from property experts and crowd-sourced data from buyers. Its predictions change in response to the market, which means buyers have access to the latest prediction right up to the time of sale.

“We’re thrilled that ANZ has recognised the value in what we’ve built over the past six years and we’re looking forward to growing our service and helping people get the information they need to make better decisions when buying or selling property.”

REALas.com will continue to operate independently as a wholly-owned subsidiary of ANZ.

Mortgage Tightening – The Property Imperative Weekly 30 Sept 2017

Mortgage Lending is slowing and banks are tightening their underwriting standards still further, so what does this tell us about the trajectory of home prices, and the risks currently in the system?

Welcome to the Property Imperative weekly to 30th September 2017. Watch the video, or read the transcript.

We start our review of the week’s finance and property news with the latest lending data from the regulators.

According to the RBA, overall housing credit rose 0.5% in August, and 6.6% for the year. Personal credit fell again, down 0.2%, and 1.1% on a 12-month basis. Business credit also rose 0.5%, or 4.5% on annual basis. Owner occupied lending was up $17.5 billion (0.68%) and investment lending was up $0.8 billion (0.14%). Credit for housing (owner occupied and investor) still grew as a proportion of all lending. The RBA said the switching between owner-occupier and investment lending is now $58 billion from July 2015, of which $1.7 billion occurred last month. These changes are incorporated in their growth rates.

On the other hand, data on the banks from APRA tells a different story. Overall the value of their mortgage portfolio fell 0.11% to $1.57 trillion. Within that owner occupied lending rose 0.1% to $1.02 trillion while investment lending fell 0.54% to $550 billion. As a result, the proportion of loans for investment purposes fell to 34.9%.

This explains all the discounts and special offers we have been tracking in the past few weeks, as banks become more desperate to grow their books in a falling market. Portfolio movements across the banks were quite marked, with Westpac and NAB growing their investment lending, while CBA and ANZ cutting theirs, but this may include loans switched between category. Remember that if banks are able to switch loans to owner occupied categories, they create more capacity to lend for investment purposes.  Putting the two data-sets together, we also conclude that the non-bank sector is also taking up some of the slack.

Our mortgage stress data got a good run this week, with the AFR featuring our analysis of Affluent Stress. More than 30,000 households in the nation’s wealthiest suburbs are facing financial stress, with hundreds risking default over the next 12 months because of soaring debts and static incomes. This includes blue ribbon post codes like Brighton and Glen Iris in Victoria, Mosman and Vaucluse in NSW and Nedlands and Claremont in WA.

The RBA is worrying about household debt, from a financial stability perspective, according to Assistant Governor Michele Bullock.  She said households have really high debt – mainly mortgages, as a result of low interest rates and rising house prices, and especially interest only loans. “High levels of debt does leave households vulnerable to shocks.” She said. The debt to income ratio is rising (150%), but for some it is much higher. We will release our September Stress update this coming week.

Debt continues to remain an issue. For example, new data from the Australian Financial Security Authority shows that in 2016–17, the most common non-business related causes of debtors entering personal insolvencies was the excessive use of credit (8,870 debtors), followed by unemployment or loss of income (8,035 debtors) and then domestic discord or relationship breakdown (3,222 debtors). However, employment related issues figured first in WA and SA.

It is also worth saying the Bank of England has now signalled that the UK cash rate will rise, and this follows recent statements from the FED in the same vein. It is increasingly clear these moves to lift rates will raise international funding costs to banks and put more pressure on the RBA to follow suit.

Meantime, lenders continue to tighten their underwriting standards.

ANZ announced that it will be implementing new restrictions on some loans for residential apartments, units and flats in Brisbane and Perth. Now there will be a maximum 80 per cent loan-to-value ratio for owner-occupier and investment loans for all apartments in certain inner-city post codes. We think these changes reflect concerns about elevated risks, due to oversupply and price falls. ANZ’s policy changes apply to all apartments in affected postcodes, including off-the-plan and non-standard small residential properties valued at less than $3 million. Granny flats though are excluded.

More generally, ANZ also issued a Customer Interview Guide with specific which topics brokers should discuss with home and investment loan borrowers. “We expect brokers to use a customer interview guide (CIG) to record customer conversations as a minimum moving forward,” noted ANZ “while it is not required to submit the CIG with the application, it should be made available when requested as a part of the qualitative file reviews.”

CBA launched an interest-only simulator to help brokers show customers the differences between IO and P&I repayments and a new compulsory Customer Acknowledgement form to be submitted with all home loan applications that have interest-only payments to ensure that IO payments meet customer needs. CBA said that brokers must complete the simulator for all customers who are considering IO payments irrespective of whether the customer chooses to proceed with them. These requirements will be mandatory for all brokers and will become effective on Monday, 9 October.

Suncorp announced it is introducing new pricing methodology for interest only home lending. Variable interest rates on existing owner-occupier interest only rates will increase by 0.10% p.a and variable interest rates on all investor interest only rates will increase 0.38% p.a., effective 1 November, 2017.

But what about property demand and supply?

The ABS said Australia’s population grew by 1.6% during the year ended 31 March 2017. Natural increase and Net Overseas contributed 36.6% and 59.6% respectively. In fact, all states and territories recorded positive population growth in the year ended 31 March 2017, but Victoria recorded the highest growth rate at 2.4%. and The Northern Territory recorded the lowest growth rate at 0.1%. Significantly, Victoria, the state with the highest growth rate is currently seeing the strongest auction clearance rates, strong demand, and home price growth. This is not a surprise, given the high migration and this may put a floor on potential property price falls.

On the other hand, we also see an imbalance between those seeking to Trade up and those looking to Trade down, according to our research. Those trading up are driven by expectations of greater capital growth (42%), for more space (27%), life-style change (14%) and job change (11%). Those seeking to trade down are driven by the desire to release capital for retirement (37%), to move to a place which is more convenient (either location, or for easier maintenance) (31%), or a desire to switch to, or invest in an investment property (18%).  In the past we saw a relative balance between those seeking to trade up and those seeking to trade down, but this is now changing.

Intention to transact, highlights that relatively more down traders are expecting to transact in the next year, compared with up traders. Given that there around 1.2 million Down Traders and around 800,000 Up Traders, we think there will be more seeking to sell, than buyers able to buy. As a result, this will provide a further drag on future price growth, especially in the middle and upper segments of the markets, where first time buyers are less likely to transact. This simple demand/supply curve provides another reason why prices may soon pass their peaks. Up Traders have more reason to delay, while Down Traders are seeking to extract capital, and as a result they have more of a burning platform.

Finally, auction clearance rates were still quite firm, despite the fact that property price growth continues to ease and time on market indicators suggest a shift in the supply and demand drivers, especially in Sydney.

So, overall, banks are on one hand still wanting to grow their home loan portfolios (as it remains the main profit driver), but lending momentum is slowing, and underwriting standards are being tightened further, at a time when home price growth is slowing.

This leaves many households with loans now outside current lending criteria, households who are already feeling the pain of low income growth as costs rise. More households are falling into mortgage stress, and this will put further downward pressure on prices and demand.

So we think the risks in the mortgage market are extending further, and the problem is that recent moves to ease momentum have come too late to assist those with large loans relative to income. As a result, when rates rise, as they will, the pain will only increase further.

And that’s the Property Imperative weekly to 30th September 2017.