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The preliminary results from Domain continue to show momentum, with Melbourne still leading the charge, and a national clearance rate above 70%, down a bit on last year on lower volumes.
Brisbane cleared 46% of their scheduled 104 auctions, Adelaide 89% of their 46 scheduled, and Canberra 73% of their 61 scheduled auctions.
In 2017 ABC Four Corners looked at the Australian housing market, and discussed the pressure on households, even at current low interest rates thanks to rising costs of living, flat wages and the risk of rising mortgage rates.
They used data from Digital Finance Analytics household surveys to create an interactive map looking at mortgage stress across the country.
You can read more about how we calculate stress in our definitive guide, or watch our video discussing the latest analysis.
The underlying mortgage data is available in our core market model.
A quick reminder, the core market model ingests data from our surveys, focus groups and other private data, as well as information from various public sources.
The core model, working off a rolling sample of 52,000 household records enables us to analyse many aspects of the market. We have clients who take a range of outputs from the model.
In this video we walk through some of the key dimensions in the model, including segmentation, mortgage profiles and locations.
Note the data is for demonstration purposes only.
In some countries, owning a home is a rite of passage: a symbol of a stable life and a sound investment.
However young adults in the United Kingdom, United States, and Europe have experienced declining home ownership rates.
Our chart of the week, drawn from research by Lisa Dettling and Joanne W. Hsu, senior economists at the US Federal Reserve, in the June issue of Finance & Development magazine , shows that millennial home ownership rates are nearly 10 percent lower than those of their baby boomer and Generation X counterparts of the same age.
For millennials who have purchased a home, net housing wealth—the value of the home, minus mortgage debt—is about the same as that of their baby boomer parents at the same age.It remains to be seen if millennials are delaying home purchases or forgoing home ownership all together. New research suggests barriers to financing a home, such as borrowing constraints, are at least partially to blame for falling home ownership rates and rising co-residence rates.
Whether these barriers will ease in the future is unknown. However, a recent study in the UK finds that groups experiencing low home ownership rates at age 30 tend to catch up later in life.
To read more research and find data on housing markets around the world, check out the IMF’s Global Housing Watch .
You can also read more blogs about global house prices and our recent chart of the week on the housing price boom in Norway .
This week across the combined capital cities, the preliminary auction clearance rate rose to 71.7 per cent, up from last week when the final clearance rate fell to 67.5 per cent. There were 2,041 capital city auctions this week, virtually unchanged from last week’s 2,040 auctions as well as being higher than the 1,795 auctions held one year ago.
Volumes continue to track higher than what was seen over the corresponding July-August period last year. Across the two largest markets, Melbourne’s preliminary clearance rate rose this week (77.7 per cent), after last week’s final results saw a weakening in the rate of clearance, falling below 70 per cent for the first time since July 16 (69.8 per cent), while Sydney’s clearance rate also improved up to 70.8 per cent this week, however volumes were lower week-on-week in Sydney, while Melbourne held more auctions this week than last.
A decade of housing price rises, low interest rates and relatively easy credit has left Australians carrying the second highest level of household debt in the world.
And despite efforts to tighten lending and to address problems in the lending culture, the ABC’s Four Corners program has learnt bank staff and mortgage brokers are still required to meet tough lending targets and some staff are threatened with dismissal if they do not meet the banks’ requirement to sign up more mortgages.
The problems in the lending culture were acknowledged by the banks themselves earlier this year in a review conducted by the former public service chief, Stephen Sedgwick.
Incentive payments and lending targets are still a primary motivator for bank staff.
Internal performance expectations for Westpac bank lenders, obtained by Four Corners, include targets of six-to-nine home-finance requests a week and between two and three home-loan drawdowns a week.
All the big banks have performance targets.
Most bank CEOs, including Westpac, were unavailable for interview but ANZ chief Shayne Elliott did agree to talk to Four Corners.
Mr Elliott said changes had been made and not all the targets were simply sales targets.
“The targets are small in relation to their overall income,” he said.
Mr Elliott said, following the Sedgewick review, 70 per cent of ANZ’s targets were weighted towards good customer outcomes and customer satisfaction.
“[The targets are] not all about sales, not about the number of mortgages,” he said.
Banking regulators have also moved to tighten lending, forcing banks to make investor loans in particular harder to get — but bank staff told Four Corners they still had to meet tough performance targets.
Four Corners has obtained letters written to lenders by bank branch managers at NAB and Bankwest — owned by the Commonwealth Bank.
The letters warned lenders who had not met their targets that their positions were under review, and both canvassed the possibility of termination.
Mr Elliot conceded there was room for further reform in the industry.
“I think, in terms of our own staff, there will always be room for further improvement,” he said.
But he said there also needed to be a greater focus on the incentives driving the mortgage brokerage industry.
“We’re accountable for the lending, but [for] future reform we need to look at the way that the broking industry is also compensated,” he said.
Some brokers agree.
Philip Dempsey, a former mortgage broker, left the industry after growing increasingly uncomfortable with the commission-only payment system.
“Brokers are under extreme pressure — most of them don’t have a base salary,” he said.
Mr Dempsey said most brokers also had lending targets they had to meet — some as high as $3 million a month.
He said if the targets were not met, the brokers were forced out of the industry.
“There have been people in the industry who have been lending clients too much money, encouraging them to borrow more than what they can comfortably afford,” he said.
Australian banks now hold at least 60 per cent of their loan assets directly to housing.
Concern is growing among some economists and former bankers about the impact of any housing downturn on the banks and on the wider Australian economy.
Photo: Martin North said he had never before seen what he called a "perfect storm" of issues coming together. (ABC News)
Finance data analyst Martin North conducts a continuous survey of individual household debt and mortgage stress.
He said he had never before seen what he called a “perfect storm” of issues coming together.
“We’ve got very high household debt. We’ve got very high house prices. We’ve got households in some degree of difficulty already,” he said.
“You only need a small consequential change, a small increase in the cost of fuel and stuff, to be able to actually really create that pain point.
“There are a good number of households who are really up against it now.
“It’s a house of cards, I think. It doesn’t take much to see how it could actually go pretty bad.”
Another economist who has raised the alarm is former banker Satiyajit Das.
He said the 60 per cent exposure to mortgage debt in Australia’s banks was “extremely high”.
That figure “is at least 20 per cent higher than Norway, and also higher than Canada, which is a very comparable economy to Australia”, he said.
Australia’s feverish housing market has contributed but Mr Das said other countries that had experienced rapid house price rises did not have the same potentially dangerous exposure.
“One of the biggest housing bubbles in the world is Hong Kong, but the Hong Kong banks have only got exposure to the housing market of around 15 per cent,” he said.
Exposure to housing debt at Australian levels, Mr Das said, would leave banks more vulnerable in the case of any housing downturn.
“If there is a downturn then obviously the losses will build up quite quickly,” he said.
Gerard Minack, the former head of developed market strategy at Morgan Stanley, said Australia had been led down this path by current tax arrangements and lenders who had been increasingly willing to leverage up borrowers.
This, he said, had created “a massive affordability problem” that will exacerbate the pain associated with any downturn.
Australia now has a household-debt-to-income ratio of 190 per cent.
“For every $1 of household income, there’s [nearly] $2 of debt,” Mr Minack said.
“I can’t think of a single economy that’s had a downturn with that much debt where it’s not been a deep downturn.”
Mr Elliot said ANZ was comfortable with its current loan exposure.
“It is a healthy mix at about 60 per cent, ” he said.
“The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of really small loans across the country.”
Mr Elliot said the impact of a downturn on the bank would depend on its nature.
“It’s something we look at incredibly seriously because it’s in our best interest to make sure that our risk is well managed,” he said.
There’s been a lot of talk about apartment living of late. Whether it’s millennials who can’t afford to buy a house, downsizers making a lifestyle change, owner-occupiers struggling to get defective buildings fixed, or foreign investors buying into new development, there’s no shortage of opinions and interest.
Except for one group: lower-income and vulnerable residents.
In Greater Sydney, the latest census data show that almost one in five households (17%) living in apartments and townhouses have weekly household incomes of less than A$649.
Among this group the largest sub-group (36%) live in private rental housing. That’s more than 72,000 households living on $649 or less per week in a housing market where average weekly rents for apartments are $550.
Our research for Shelter NSW identifies multiple challenges such households face.
Why does this matter?
It matters because some things about apartment and townhouse living are fundamentally different to living in a house. These differences have particular impacts on lower-income and vulnerable people living in higher-density housing.
The significant differences include:
- You live closer to your neighbours, so it’s more likely you’ll see, hear or meet them.
- You share services and spaces with neighbours, from gardens to laundries to lifts.
- You have to co-operate with other residents and owners to manage and pay for building operation and upkeep.
If you live in a private apartment building then the fact that a large proportion of apartments are sold to investors and rented out will likely have three key impacts on you:
- Developers often cater for investors when designing new apartment buildings, so you will likely find a limited variation in apartment designs and sizes available.
- Resident turnover in your building may be high, as private renters move more frequently.
- Tensions between owner-occupiers and investor-owners may result in disagreements and disputes over budgeting and maintenance.
While these unique aspects of higher-density living can be tricky for anyone, they present particular challenges for lower-income and vulnerable residents. They tend to have less choice about their living arrangements, so they can’t up and move to better-designed, constructed and managed properties if things aren’t working out.
Building flaws affects some residents in particular
Poor building quality is one of the major issues in high-density development in Australia. The problems relate to design, defects and maintenance.
The design issues include noise disturbances as a result of poor design, inadequate solar access and cross ventilation, the availability and flexibility of shared spaces, and safety and security considerations.
Another issue is design that fails to help meet the needs of particular groups (such as people with a disability, and families with children).
Beyond design, the construction quality of higher-density developments is a major issue in Australia. Key concerns include the quantity and severity of building defects, as well as the difficulties owners face having defects fixed.
Among the problems are quality of workmanship, management of construction, private certification, limited warranties and the often-prohibitive cost of legal action.
As with poor design, lower-income households are particularly susceptible to construction issues. This is because there are more incentives to cut corners when constructing more affordable housing. Examples include rushing jobs, hiring cheaper but less experienced tradespeople, or using substandard materials.
Once residents move in, negotiating to fix defects is particularly difficult for private renters, as they typically must go through the real estate agent or landlord. This means renters may be stuck with unsatisfactory living conditions.
Lower-income renters are also likely to be over-represented in poorly maintained buildings, as these are usually cheaper to rent. Compared to a detached house, maintenance in higher-density properties is complicated by the complexity of the buildings themselves and the governance structures.
As a result, required maintenance work is often not carried out, or is reactive rather than proactive. This is especially true in buildings occupied by lower-income renters with no direct recourse to the strata committee. They often cannot afford to move and may fear retaliatory rent increases if they report maintenance issues.
Social relations can be challenging
Neighbour disputes happen everywhere, but evidence suggests disputes are more common in areas with more lower-income and vulnerable residents and with more apartments.
Common causes of neighbour conflict in higher-density housing reflect different expectations about noise levels, parking practices, or spending on maintenance and improvements.
Neighbour disputes can have significant impacts on health. This potentially counteracts the health benefits associated with the walkable nature of many higher-density neighbourhoods.
When disputes arise, the number of stakeholders involved complicates efforts to find a resolution. They might include renters, resident owners, investor owners, building managers, strata managers and strata committee members.Research with strata residents in New South Wales shows residents find formal dispute resolution mechanisms complex and slow. Most disputes are resolved informally.
Lower-income residents, and renters in particular, are likely to have less influence over the outcomes of such processes.
Fostering positive neighbour relations can be more difficult where resident turnover is high, such as in buildings dominated by private renters. It is also more difficult in poorly designed buildings without quality shared spaces.
New norm promotes inequity
Apartment living is the new norm in Australia. As the nursery rhyme says, when it’s good it’s very, very good, but when it’s bad it’s horrid. If these homes are poorly designed, poorly built, poorly maintained or poorly managed, they are poor places to live.
The market-led housing model that underpins Australia’s compact city policies has meant that people with less money get a poorer product. Few planners or politicians have adequately acknowledged these inequities.
Authors: Hazel Easthope, Senior Research Fellow, City Futures Research Centre, UNSW; Laura Crommelin, Research Associate, City Futures Research Centre, UNSW; Laurence Troy, Research Fellow, City Futures Research Centre, UNSW
Domain has released the preliminary auction clearance results for today. Melbourne looks like it is leading the way at 78.3% clearance, ahead of Sydney. Still seems to be momentum in the main centres.
Brisbane achieved 50% clearance on 100 scheduled auctions, Adelaide 67% on 67 scheduled, and Canberra 74% of 37 scheduled auctions.
Household Incomes are growing at the slowest rate for two decades, putting more strain on family budgets who are wrestling with rising costs and bigger mortgages and battling the debt monster.
What the implications for home prices, and the broader economy? Welcome the Property Imperative weekly to 19th August 2017, as we look at the latest finance and property news.
Last week we saw auction clearance rates accelerate. According to CoreLogic they rose to 2,011, compared with 1,857 over the previous week. This was the largest number of auctions held since the last week of June 2017 and one third higher compared with the same week a year ago. Melbourne has held the record for the largest number of sales, but Sydney achieved a higher clearance rate at 72%. So not much sign of the property market flagging.
More data came from the RBA when Assistant Governor Christopher Kent discussed insights from a dataset which covers about 280 ‘pools’ of securitised assets and has information on 1.6 million individual mortgages with a total value of around $400 billion. Currently, this accounts for about one-quarter of the total value of home loans outstanding in Australia.
A couple of caveats. While the dataset covers a significant share of the market for housing loans, it may not be entirely representative across all its dimensions. In particular, the choice of assets in the collateral pool may be influenced by the way that credit ratings agencies assign ratings and by investor preferences. Also, in practice it may take quite a while until new loans enter a securitised pool.
But the first thing to note is that rates on owner-occupier loans and investor loans used to be similar, but investor loans became relatively more expensive from the latter part of 2015. In fact, up until most recently, actual rates paid on interest-only loans have been lower than those on principal-and-interest loans. But now, interest only loans are significantly more expensive for both owner-occupied and investor borrowers. This is reflecting recent bank repricing as they seek to repair margins and throttle back interest only lending in response to regulatory pressure. Monthly repayments are on the rise, and on large loans this is a significant impost.
Looking at loan to value ratios, we see that there is a large share of both owner-occupier and investor loans with current LVRs between 75 and 80 per cent. That is consistent with banks limiting the share of loans with LVRs (at origination) above 80 per cent. Also, borrowers have an incentive to avoid the cost of mortgage insurance, which is typically required for loans with LVRs (at origination) above 80 per cent. This is consistent with the DFA market model, and suggests that a common held view that the average LVR is circa 50% is not correct any more. Bigger loans, lower equity, larger repayments.
Finally, they looked at offset accounts, which showed strong growth up to 2015 probably related to the rise in the share of interest-only loans, with the two being offered as a package. Interestingly, we saw a significant slowing in growth in offset balances around the same time as growth in interest-only housing loans started to decline. Offset balances provide some security for borrowers in times of finance stress. But the RBA highlights that for investor loans, even after accounting for offset balances, there is still a noticeable share of loans with current LVRs of between 75 and 80 per cent. And for both investor and owner-occupier loans, adjusting for offset balances leads to only a small change in the share of loans with current LVRs greater than 80 per cent. This suggests that borrowers with high current LVRs have limited repayment buffers.
Oh, and note there was no analysis at all on the most critical metric – loan to income ratios, which as we have been highlighting is a more reliable risk assessment tool, but one which in Australia we appear loathe to discuss.
This becomes important when we consider that home prices continue to rise in most states. Separate analysis from CoreLogic showed that the cost of housing has continued to rise across most parts of the country over the past 12 months, pushing the proportion of homes selling for at least one million dollars to new record highs. Bracket creep should come as no surprise in markets like Sydney and Melbourne where dwelling values have increased by 77% and 61% respectively over the past five years. While the rise in housing values has been most pronounced in Sydney and Melbourne, most other capital cities and regional areas have also seen a proportional lift in home sales over the million-dollar mark.
The banks continue to lend strongly in the mortgage sector, with system growth still sitting around 6% over the past year. ANZ, who reported their third quarter results this week revealed that they had grown their owner occupied lending at 1.3 times system growth, whilst investor loans grew at 0.8%. Lenders are still banking on mortgage credit growth.
The RBA minutes were more muted this month, perhaps because of the reaction to the 2% rate lift to neutral last month, which was hurriedly walked back subsequently! They mentioned concerns about high household debt again, and that inflation is running below 2%. They also mentioned that the Australian Bureau of Statistics intends to update the weights in the CPI in the December quarter 2017 CPI release, to reflect changes in consumers’ spending behaviour over recent years. This is expected to lead to lower reported CPI inflation because the weights of items whose prices had fallen were likely to be higher, whereas the weights of items whose prices had risen were likely to be lower.
Underlying inflation was expected to be close to 2 per cent in the second half of 2017 and to edge higher over the subsequent two years. Retail electricity prices were expected to increase sharply in the September quarter. They said “ongoing low wage growth and the high level of debt on household balance sheets raised the possibility that consumption growth could be lower than forecast”.
The income data from the ABS confirmed low wage growth, with seasonally adjusted, private sector wages up just 1.8 per cent and public sector wages up 2.4 per cent through the year to June quarter 2017. So wages for those not fortunate enough to work in the public sector continues to be devalued in real terms. Also, whilst more jobs were created in July, the employment rate is still quite high, and underemployment remains a significant factor – one reason why wages growth is unlikely to shift higher.
So, what are the consequences of home lending rising 6%, inflation 2% and incomes below this? The short answer is more debt, and mostly mortgage debt.
To get a feel for the impact of this, look at our recent focus group results. Around two thirds of the households in the session held a basic assumption that high debt levels were normal. They had often accumulated debts through their education, when they bought a house, and running credit cards. Even more interestingly, their concern from a cash flow perspective was about servicing the debts, not repaying them. One quote which struck home was “once I am dead, my debts are cancelled, I just keep borrowing until then”.
Debt, it seems has become part of the furniture, and will remain a spectre at the feast throughout their lifetime. The banks will be happy!
So it is worth looking at some long term trends, as we did on Friday using RBA data.
The traditional argument trotted out is that household wealth is greater than ever, this despite low income growth and rising debt. But of course wealth is significantly linked to home prices, which in turn is linked to debt, so this is a circular argument. You get a different perspective by looking at some additional trends. And if property prices fell it would all turn sour.
But let’s start with the asset side of the ledger. Since 1999, superannuation has grown by 181.2%, and at the fastest rate. But it is arguably the least accessible asset class.
Residential property values rose 160.2% over the same period, and grew significantly faster than equities which achieved 135.8% growth, so no wonder people want to invest in property – the capital returns have been significantly more robust. Deposit savings grew 159.1% (but the savings ratio has been declining recently). Overall household net worth rose 151.2%. So the story about households being more affluent can be supported on this view of the data. But it is myopic.
Overall household debt rose 161.9%, a growth rate which is higher than residential property values, at 160.2% and above overall household net worth at 151.2%.
But the growth in income, which is a puny 60.5%, under half the asset growth. OK, interest rates are lower now, but this increase in leverage is phenomenal – and explains the “debt is normal” findings from our focus groups. I accept debt is not equally spread across the population, but there are significant pockets of high borrowing, as can be seen from our mortgage stress analysis – and it’s not just among battling urban fringe mortgage holders.
Finally, it is worth noting the growth in the number of residential properties rose by just 29.8% over the same period. So the average value of individual properties has increased significantly. On paper.
To me this highlights we have learned nothing from the GFC. Our appetite for debt, supported by the low interest rate monetary policy, significant tax breaks, and salted by population growth has created a debt monster, which has the capacity to consume many if interest rates were to rise towards more normal levels. Unlike Governments, household debt has to be repaid, eventually.
This data series shows clearly the relationship between more debt and home prices, they feed of each other, and this explains why the banks have enjoyed such strong balance sheet growth. But the impact on households is profound, and long term. Our current attitude to debt will be destructive eventually.
If you are interested in this debate, try to watch ABC Four Corners on Monday night, as they will be looking at the housing bubble and mortgage stress, and using some of our data in the programme.
And that’s the Property Imperative to 19th August 2017. If you found this useful, do subscribe to get updates, and check back for next week’s installment. Thanks for watching.
The cost of housing has continued to rise across most parts of the country over the past 12 months, pushing the proportion of homes selling for at least one million dollars to new record highs. Bracket creep should come as no surprise in markets like Sydney and Melbourne where dwelling values have increased by 77% and 61% respectively over the past five years. While the rise in housing values has been most pronounced in Sydney and Melbourne, most other capital cities and regional areas have also seen a proportional lift in home sales over the million dollar mark.
Over the 12 months to June 2017, 15.4% of all house sales and 8.8% of all unit sales nationally were at a price of at least $1 million. By comparison, 12 months earlier 14.4% of all house sales and 7.5% of all unit sales were at least $1 million in value.
Annual % of sales of at least $1 million,
National
The instances of dwellings selling for at least $1 million is much more prevalent across the combined capital cities. Over the 12 months to June 2017, 23.2% of all houses and 10.8% of all units sold in capital cities were sold for at least $1 million. The proportion of sales of at least $1 million has increased over the year from 21.5% of houses and 9.1% of units.
Across the combined capital cities this week, the number of homes taken to auction rose to 2,011, compared with 1,857 over the previous week. This was the largest number of auctions held since the last week of June 2017 and approximately one third higher compared with the same week a year ago.
The preliminary auction clearance rate of 70.5 per cent has increased relative to last week’s final clearance rate, up from 68.2 per cent. However as more results are collected it is expected that the final auction clearance rate will revised lower to remain within the high 60 per cent range where it has tracked since the first week of June.
Over the corresponding week last year, the clearance rate was 75.0 per cent and 1,471 auctions were held. In Sydney, the preliminary clearance rate rose to 72.0 per cent, which was higher than Melbourne’s preliminary clearance rate of 71.0 per cent. Afar Melbourne has remained the stronger performer for many weeks it is possible that Melbourne’s final clearance rate could drop below the 70 per cent mark for the first time since July last year.
