Category: Property Market

Weekend auctions litmus test of new first-home-buyer benefits

From The Real Estate Conversation.

The 1 July introduction of stamp duty concessions for first-home buyers in New South Wales and Victoria added some warmth to otherwise wintry auction market conditions on the weekend.

Across Australia’s seven capital cities, the clearance rate was 70.3 per cent. The final result for the previous week was 66.5 per cent, the lowest clearance rate since June 2016.

In Melbourne, 619 auctions were held on the weekend, with a preliminary clearance rate of 74 per cent recorded, according to REIV data.

Both figures were up on the same period last year, when 223 homes went to auction and a 70 per cent clearance rate was recorded.

Real Estate Institute of Victoria CEO, Gil King, told SCHWARTZWILLIAMS, “High auction volumes (in Melbourne) coincided with changes to government policy with new stamp duty concessions now available for first homebuyers purchasing under $750,000.”

From 1 July, stamp duty for first-home buyers purchasing properties worth less than $600,000 was abolished, and stamp duty concessions are available for first-home buyers purchasing property valued between $600,000 and $750,000. The exemptions and the concession will apply to both new and established homes.

The Victorian government also removed stamp duty concessions for off-the-plan investment properties, except for those who intend to live in the property or who are first-home buyers.

“This weekend saw a record number of homes go under the hammer for the first week of July with more than 615 auctions held – surpassing the previous 2010 record when 591 homes were auctioned,” said King.

Suburbs in Melbourne’s middle ring dominated, led by Reservoir with 14 auctions and 12 sales. Hoppers Crossing and Sunbury both recorded 100 per cent clearance rates from six auctions. The City of Darebin and Moreland recorded the highest volumes on the weekend, with 38 and 34 auctions respectively.

“Strong auction activity was also recorded in Greater Geelong, with 27 auctions held over the week,” said Gill.

John Cunningham, president of the Real Estate Institute of New South Wales, told SCHWARTZWILLIAMS, “Saturday 1 July was the first real test of the new first-home owners stamp duty concessions and the foreign investor stamp duty surcharge.”

In New South Wales, the government has scrapped stamp duty for first-home buyers for new and existing homes up to a value of $650,000, and delivered stamp duty concessions for first-home buyers for properties up to a value of $800,000.

The government has also doubled the stamp duty surcharge for foreign investors from 4 per cent to 8 per cent, and increased land tax for foreign buyers from 0.75 per cent to 2 per cent. Stamp duty discounts for foreign buyers purchasing off the plan have been removed.

Sydney’s initial clearance rate last week was 72.6 per cent.

Overall, said Cunningham, the market is cooling across NSW, where days on market is growing and price and reserve price discounting is very evident.

Cunningham said the auction reporting ratio of 63 per cent was one of the lowest he has seen. The auction reporting ratio was 74 per cent the previous week.

“Could it just be lazy agents, or is there more to hide than the 69 per cent recorded clearance rate?” asked Cunningham.

“We will have to wait until mid week to find the true result,” he said, referring to the release of the adjusted auction clearance rates.

Chris Wilkins, director of Ray White Drummoyne, told SCHWARTZWILLIAMS the Drummoyne market was “boring” last week.

“We’ve definitely noticed some lack of interest and intensity from buyers,” he said.

At one auction during the week, two buyers turned up, but neither registered to bid.

Wilkins said that rather than underquoting, which receives so much media attention, agents are sometimes overquoting in the current market. With inflated prices there is little buyer interest, and vendors are rushing to accept any offers they receive, rather than the more ideal situation where buyers are competing with each other for desirable properties.

Wilkins also said vendors are holding off selling during winter. “The good properties on the market just aren’t there,” he said.

CoreLogic data shows the stamp duty concessions for first-home buyers will have a bigger impact in regional areas of NSW than in Sydney.

Over the past twelve months, 45.4% of dwellings sold across NSW cost $650,000 or less, and 58% of dwellings were sold for $800,000 or less.

In Sydney, only 25.8% of real estate sales over the past twelve months were priced at $650,000 or less.

The proportions are also different between product types. In the past twelve months, 20.0% of Sydney houses sold for $650,000 or less, while unit sales were 33.5 per cent of all sales.

Auction volumes fall below 2,000 across the capital cities returning a preliminary clearance rate of 70.3 per cent

From CoreLogic.

The combined capital city preliminary clearance rate increased to 70.3 per cent this week, up from last week, when the final results saw the clearance rate fall to 66.5 per cent, the lowest clearance rate since June 2016. Auction clearance rates have been trending lower since reaching a peak at the end of February 2017 when the combined capitals clearance was recorded at 78.4%.

Considering the easing trend in clearance rates, as well as the fact that preliminary rates generally revise lower as more results flow through, it will be interesting to see how this week’s preliminary result compares with the final clearance rate which will be published on Thursday. Auction volumes were lower this week with 1,984 homes taken to auction across the combined capital cities, down from 2,355 last week however significantly higher than this time last year when auction volumes were quieter due to the Federal Election when only 841 homes were taken to auction. Melbourne had the highest number of auctions this week, with 866 properties going to market, followed closely by Sydney with 832 homes going under the hammer.

Hung Out To Dry – The Property Imperative Weekly – 1 July 2017

Data this week showed the impact of ever higher mortgages, with more households in debt for longer, and thanks to rising property prices, more households cannot get even into the market and are forced to rent. Welcome to this week’s edition of the Property Imperative.

This week we had the first look at the latest Census data, and it was a mixed bag. The Census counted 23.7 million people in Australia on the night. In the last 10 years’ average population has been 1.7% each year, compared with 1.4% in the prior decade. Strong migration is part of the story, with 1.3 million new migrants arriving since 2011, from some 180 countries.

Superficially, households appear to be more wealthy, but in fact the real issue is that there are more and more jobs being created which are not paying enough to live on. One-fifth of households in 2016 recorded a gross income, including all government benefits, of less than $650 a week. Many of these households are left behind by the skyrocketing housing market, stuck in the rut of under-employment, attacked as a drain on the budget or for not paying more tax, seeing their penalty rates cut, or forced to jump through undignified job-seeker hoops.

The census also suggested that housing supply is not the issue many are claiming it to be. The key myth-busting statistic is the average number of people per dwelling, which has not budged an inch in the five years since the last census. It’s staying at 2.6 which is where it was back in 2000 well before the house price boom began. Moreover, the number of unoccupied dwellings grew at 11.3 per cent over five years. That equates to 105,000 more empty dwellings since 2011, whereas the census shows the number of occupied dwellings increased by 6.8 per cent over five years, which is less than population growth over the same period: 8.8 per cent. That said, more households are renting, and more households have larger mortgages.

Other data also showed that rising mortgage debt is affecting everything from employment to spending, as Australians approach retirement. Australians are having to work for longer to pay off their mortgage, indeed many are expecting to take the debt into retirement. In addition, overall, the percentage of home owners aged 25 years or over who are carrying a mortgage debt climbed from 42% to 56% between 1990 and 2013.

More banks hiked investor loans and tightened underwriting standards this week. CBA changed their mortgage rates for owner occupied and investor mortgage holders. This included a significant hike for interest only borrowers, and they already tightened serviceability requirements a couple of weeks ago, whilst Principal and Interest Owner Occupied holders got a 3 basis point reduction! All this has, they say, nothing to do with the bank tax.  But it has everything to do with margin repair.

ME Bank lifted the rates for existing and new interest-only mortgages by 40 basis points, or 0.4%, whilst decreasing rates for lower LVR new owner-occupied loans by 10 basis points.

St George announced tighter serviceability requirements when borrowers seek to move to interest only mortgages

Bank profits will be bolstered thanks to ongoing mortgage growth, and the benefit of the recent mortgage repricing, under the alibi of regulatory pressure.

The latest RBA data showed that mortgage lending grew again in May to $1.67 trillion, up 6.6% in the past year, compared with 6.9% a year ago. Owner occupied lending rose $7.8 billion (up 0.72%) and investment lending rose $1.6 billion (up 0.28%), both seasonally adjusted. Surprisingly another $1.4 billion of loans were reclassified in the month between owner occupied and investor, taking total adjustments to an amazing $53 billion. We will probably never know how much of these switches related to legitimate changes of use, and how much is because of poor bank data or borrowers seeking out routes to cheaper loans.

The APRA data, which covers just the banks, also showed a rise in the value of their mortgage books, up $9.2 billion to $1.56 trillion.  Within this, owner occupied loans grew 0.7% to $1,010 billion and investment loans grew 0.42% to $550 billion (higher than the 0.39% last month). The proportion of loans for investment purposes stands at 35.4% on a portfolio basis. In fact, overall mortgage growth is accelerating – so much for the regulatory pressure to slow lending.

It is also worth noting that some lenders are still well above the 10% speed limit for investor loans.  We think further steps need to be taken to cool the mortgage market – too much debt is being loaded on to households in a rising interest rate, low/no income growth environment.  This also suggests home prices will continue to rise, after recent slowing trends were reported. We saw quite good auction clearances last week, and after a dip, home prices might indeed be on the up again.

The Productivity Commission’s review of Financial Services competition kicked off this week, with APRA arguing that financial stability and banking competition are not mutually exclusive. The peak body for Customer Owned Banks made the case that the competition landscape is really tilted in favour of the big banks, thanks to the implicit Government Guarantee, and more generous capital rules. The banking sector is an oligopoly, they say.

Big deals were announced by online real estate platforms and mortgage lenders. Domain Group has announced it is expanding into home loans broking with the launch of ‘Domain Loan Finder’ in partnership with digital home loan platform Lendi.

Realestate.com.au and NAB are building a realestate.com.au-branded mortgage broking business and will launch later this year. All Choice Home Loan brokers will be invited to join the new business, which will benefit from realestate.com.au’s near 5.9m unique visitors a month. Separately Realestate.com.au acquired an 80.3% controlling stake in Smartline mortgage brokers.

These deals highlight the digital transformation underway, as consumers use online tools to search for real-estate, and then can apply for a loan within the same environment. Essentially, this disruptive play is really just another plank in the end-to-end lending value chain, and such vertical integration may not, in the long term, be good for consumers.  We wonder if the Productivity Commission have this type of deal on the competition radar.

Finally, the spectre of eight, yes eight rises in the cash rate ahead were flagged by a former RBA board member this week. But in fact it was mis-reported by many. What he said was, if the economy started to track in line with RBA projections, they would be able to lift the cash rate.

The truth is, the economy is bumping along, with too little investment by the business sector (which can create real growth), and too much flowing into the overpriced housing sector. Until more radical action is taken, as for example the Bank of England did this week, we think future growth will be significantly below forecast, so the cash rate will only rise slowly.

But we still think mortgage rates will go higher, and so pressure on households will get significantly worse.

If rates were to rise by 2%, the number of households in mortgage stress would nearly double and, again – as the Bank of England highlighted – this would translate to significant dampening on future growth. We are in an uncomfortable position, with no easy way out, thanks to poor policy settings in recent years, and housing affordability reduced to a spurious debate about property supply.

And that’s the Property Imperative week to 1 July 2017. Check back next time for the latest update.

What the realestate.com.au–Smartline–NAB love triangle means for brokers

From Mortgage Professional Australia.

The deal announced yesterday is a vote of confidence in broking and a new frontier for vertical integration

Property search giant realestate.com.au will be entering broking, it was announced yesterday.

Realestate.com.au and NAB are building a realestate.com.au-branded mortgage broking business and will launch later this year. All Choice Home Loan brokers will be invited to join the new business, which will benefit from realestate.com.au’s near 5.9m unique visitors a month.

Tracy Fellows, CEO of owner REA Group, portrayed the move as a vote of confidence in broking: “we’re excited to be partnering with NAB to build a new mortgage broking solution. The way people want to look for and buy property is changing. We want to make it easier for Australians to access the help and experience of a mortgage broker through the digital channels they’re already using to find their new home.”

Asked by MPA, REA Group claimed consumers would have access to a “broad panel of lenders, including NAB home loans and a realestate.com.au branded white label product.” Aggregation support will come from Choice Aggregation Services.

It is unclear what options are available to Choice Home Loans brokers who don’t wish to become part of realestate.com.au Home Loans.

How does Smartline fit in?

Yesterday also saw realestate.com.au acquire an 80.3% controlling stake in Smartline.

This deal was separate to that between NAB and REA Group. Smartline will keep its branding and continue to operate under its current management, who retain a 19.7% share in the business for at least the next three years.

Commenting on the move, REA Group’s Executive Director of Financial Services Andrew Russell noted: “We’re delivering on our promise to simplify property search and financing by offering genuine choice when it comes to finding the right home loan.”

However, at this stage, it is not confirmed whether Smartline brokers will actually get access to leads from realestate.com.au. REA Group could only tell MPA that “we will be working with Smartline to explore how both businesses can leverage each other’s scale and capability for the longer term.”

Vertical integration mk.ii

Given broking has recently experienced not one but two reviews, a major brand name such as realestate.com.au entering broking can be seen as a major vote of confidence.

Just as interesting is the role of NAB. Vertical integration was covered by ASIC’s Review of Mortgage Broker remuneration, Proposal 4 of which recommended clearer disclosure of ownership structures and realestate.com.au has been clear about NAB’s involvement.

ASIC also found that vertical integration through white labelling can raise a lender’s market share. NAB and Advantedge’s share of FAST, Choice and Plan loans was significantly higher than their overall market share (22.3% compared to 13.2%). However, NAB’s share of FAST, Choice and Plan was just 12.7% without Advantedge.

NAB will not own realestate.com.au’s home loan business but may be hoping that providing its white label products could have a similar effect as vertical integration.

Also in question is whether other online property groups – specifically Fairfax-owned Domain.com.au – will now decide to enter broking.

The census confirms Australia’s great housing swindle

From The New Daily.

The new census data released on Tuesday should infuriate young Australians because it shows definitively how the housing market is being rigged against them.

It dispels for good the myth that a shortage of dwellings is what’s causing house prices to rocket beyond their reach.

The key myth-busting statistic is the average number of people per dwelling, which has not budged an inch in the five years since the last census. It’s staying at 2.6 which is where it was back in 2000 well before the house price boom began.

Breaking down that number, the census shows the number of occupied dwellings increased by 6.8 per cent over five years, which is less than population growth over the same period: 8.8 per cent.

However, the number of unoccupied dwellings grew at 11.3 per cent over five years. That equates to 105,000 more empty dwellings since 2011.

Those numbers explain the apparent paradox of ‘people per dwelling’ remaining static, while renters and home buyers experience a tightening market.

And it is getting tighter, as shown by the rental data. Median rents increased by 17.5 per cent over the period, outstripping average income growth of 13.7 per cent over the same period.

That pushed more people into ‘rental stress’, defined as requiring them to spend more than 30 per cent of their disposable income on rent. In 2011 the proportion was 10.4 per cent, but that has now risen to 11.5 per cent.

Home rage

So the dwellings are there, but either not on the market or increasingly unaffordable if they are.

What’s maddening about those two problems is that they are caused by politicians, not ‘the market’ as the pollies always try to pretend.

There are two categories of market participants that have led to this situation.

One is overseas property investors, dominated by buyers from mainland China. They are permitted to buy only new dwellings – a rule that is supposed to stimulate housing supply and put downward pressure on prices.

In reality, there are two major exemptions. They can buy homes for their adult children to live in during periods of study in Australia, and, more recently, to house children as young as six who enrol in Australian primary schools.

But the investors who are leaving properties vacant aren’t interested in accessing education. They buy off-the-plan apartments as a store of wealth, much like giant gold bars.

If China suffers an economic or geopolitical collapse, which many commentators think likely, some of their fortune will be sitting in high-rise towers in Sydney, Melbourne or Brisbane.

The second class of market participants operating in a decidedly non-free-market way are local investors seeking to minimise tax through negative gearing and profit from the 50 per cent discount that applies to any capital gains they make.

Those investors are subsidised by other taxpayers to outbid would-be owner-occupiers.

Over time, the toxic combination of negative gearing and the capital gains tax discount have returned tens of billions of dollars to generally older, wealthier Australians, thereby increasing the tax bills of younger Australians.

Oh yes, and pushing property prices way out of reach.

That is turning younger Australians into a generation of renters. Tuesday’s census figures confirm this ongoing trend, with the percentage of Australians renting rising from 29.6 to 31 per cent since 2011.

Put together, these numbers are absurd, inequitable, and a drag on the economy because of the ever-increasing proportion of wages being handed by young Australia to the bank-share-owning and cash-deposit-holding older Australians.

If young Australians weren’t furious before the census data came out, they should be now.

REA Group to acquire a majority stake in Smartline

From Australian Broker.

REA Group announced today that realestate.com.au has entered into an agreement to acquire a majority stake in mortgage broking franchise business, Smartline and has also entered into a strategic mortgage broking partnership  with National Australia  Bank (NAB).

Smartline is a leading Australian mortgage broking franchise group with over 300 advisers nationally, settling more than $6bn in loans annually with a total loan book of approximately $25bn. realestate.com.au will acquire an 80.3% stake in Smartline, with the remaining 19.7% shareholding to be retained by the existing management team. This team will continue to be led by executive director and co-founder Chris Acret and will operate under its current structure and brand.

The purchase consideration of $67m will be funded from existing cash reserves. The minority shareholders hold a put option to sell the remaining 19.7% of shares which can only be exercised after three years, at a price dependent on the financial performance of Smartline. If not exercised, REA will acquire the remaining shares at the end of four years. The transaction is expected to complete in late July 2017.

realestate.com.au and NAB have also agreed to build a mortgage broking solution which adds to the strategic partnership announced in December 2016 to create an Australian-first end-to-end digital property search and financing experience. To help achieve this, NAB will provide an opportunity for its Choice Home Loans brokers to join this new broking solution.

The strategic partnership with NAB enables REA to offer a realestate.com.au broking service at the launch of realestate.com.au Home Loans later this year. The acquisition of Smartline will give the REA Financial Services segment greater scale and capability for the long term.

With an average monthly audience of  5.9 million, realestate.com.au has the largest audience of property seekers in Australia. This investment and partnership further strengthens REA’s move into financing, an integral part of buying a property. The home loan market in Australia is worth approximately $400bn a  year, of which more than 50% are obtained through mortgage brokers. The share of mortgages originated through broker channels continues to increase.

It is expected that REA’s entire Financial Services segment will contribute revenue, net of broker commissions, of between $26m to $30m and EBITDA between $7m to $11m in FY18.

REA group CEO Tracey Fellows commented: “Building a strong presence in the broker market channel is an important part of our financial services strategy. These investments allow us to enter a new market with two of the industry’s most trusted and successful mortgage broking operations.

“Providing a broker solution will complement the digital search and finance experience we are building in partnership with NAB on realestate.com.au. It’s about giving people greater choice when selecting the right home loan for them, ” said Fellows.

Smartline executive director and co-founder, Chris Acret commented: “This investment is a great strategic fit for both businesses. It’s born from a shared vision to build a market-leading home loan offering, marrying our trusted network of brokers with realestate.com.au’s leading digital capability.”

Clearance rates continue to trend below 70 per cent across the combined capitals

From CoreLogic.

There have been 1,840 capital city auction results reported to CoreLogic so far this week, resulting in a preliminary auction clearance rate of 69.1 per cent across the combined capital cities. There were a total of 2,323 capital city auctions held this week, down from the 2,444 held last week. This week’s preliminary result indicates that clearance rates are continuing to soften, after last week saw the final clearance rate surpass the previous week as the lowest recorded over the year to date across the combined capitals (66.7 per cent).  With results still being collected, it is likely that the final clearance rate this week will revise even lower again. However, compared to results from one year ago clearance rates are relatively similar with the 67.4 per cent rate of clearance across a slightly lower volume of auctions (2,183).

Older Australians face housing crisis

From The New Daily.

Australian retirees will face a housing crisis within 15 years unless urgent action is taken, according to the Council on the Ageing.

The lobby group for seniors hosted a policy summit in Canberra in recent days where it drew attention to the impact on older Australians of rising prices, rising rents, huge mortgage debt and the scarcity of suitable homes.

The assumption that Australians retire in a home they own underpins the nation’s superannuation and pension systems, but summit attendees heard this could be under serious threat in as little as 10 to 15 years.

Keynote speaker John Daley, CEO of the Grattan Institute, warned that the looming housing crisis is a “ticking time bomb” for this demographic.

“We must address these issues immediately if we want to stand a fighting chance to mitigate the severity of the looming housing affordability crisis and to safeguard the future of older Australians before it is too late,” Mr Daley said.

The summit heard a key threat is that more Australians are entering retirement with mortgage debt, which they typically pay off in a lump sum from their superannuation.

Others enter retirement while still renting, which radically increases the amount of disposable income they need to cover monthly expenses.

The Association of Superannuation Funds of Australia, which represents both for-profit and non-profit funds, has estimated that couples who rent for life in the eight capital cities will need at least $1 million to retire comfortably.

In Sydney, a renting couple would require a lump sum at retirement of $1.16 million, almost double the $640,000 a couple who own their home debt-free would need, ASFA found.

The huge disparity is due solely to the ongoing costs of renting. For example, a 65-year-old Sydney couple who own their home will spend — if they live comfortably — about $60,000 a year, compared to almost $80,000 for a renting couple.

The problem is even worse for age pensioners. The 2017 Rental Affordability Snapshot report by Anglicare Australia found only 6 per cent of the market was affordable for a single older person living on the age pension.

The forum also discussed the growing incidence of homelessness among older people, especially women; and the implications for age pensioners of unaffordable rental properties in the cities.

COTA chief executive Ian Yates said older Australians are increasingly disadvantaged by the lack of supply of affordable housing that meets the physical needs of older residents.

“Older Australians are increasingly falling through the cracks in the growing housing affordability and supply challenge, with a growing number of older Australians needing to rent, rather than owning a home outright,” Mr Yates said.

“We are already starting to see rates of home ownership by older Australians decline, and this is forecast to drop even further in the next 10-15 years.

“This trend is already exerting extra pressure on the rental market and on many older Australians who are struggling to pay their rent, while also juggling other rising expenses like energy.

“There is a whole group of people currently in their 50s and 60s who will be retiring as renters, or if they are lucky enough to own a house, facing the prospect of retiring with a mortgage.”

An Australian researcher has estimated that anyone who doesn’t have a mortgage by the age of 45 will probably be renting in retirement, due to price growth outpacing savings, the risks of sickness and unemployment, and the difficulty of convincing a bank to provide a home loan.

The COTA summit also heard from Dr Ian Winter at the Australian Housing and Urban Research Institute; Judith Yates from the University of Sydney; Jeff Fiedler from Housing for the Aged Action Group; and Paul McBride from the Department of Social Services.

Many of the same themes were covered in a recent report by consulting firm KPMG. It confirmed that it will be very difficult for older Australians to be debt free in later years, largely because of housing costs.

Auction Results 24 June ’17

The preliminary auction results are out from Domain.  Sydney cleared 69.5% with 382 sold, compared with 464 last week and 406 last year. Melbourne sold 72.7% with 506 cleared, compared with 641 last week; so nationally, 70.3% cleared with 963 sold, compared with 66.3% last week when 1,197 sold, or last year when 65.2% cleared with 1,085 sold. So still life in the property market yet, with demand looking strong (at a time when some think first time buyers will wait for the 1 July grants and stamp duty relief).

Elsewhere Adelaide cleared 74% of 72 listed, Canberra cleared 70% of 53 listed and Brisbane cleared just 40% of 88 listed.

The Property Imperative Weekly – 24 June 2017

More pain for property investors this week, with lenders continuing to lift mortgage rates and trim maximum LVR’s. And more pain for banks as their credit ratings are trimmed, the federal bank tax becomes law; and South Australia imposes an additional levy on the big five. Welcome to the Property Imperative Weekly to 24th June 2017.

The regular pattern of mortgage interest rates hikes continued, with NAB lifting interest rates for all interest only loans by 35 basis points or 0.35%, whilst cutting principal and interest owner occupied loans by 8 basis points.  Westpac lifted interest only loans by 34 basis points reduced principal and interest loans by 8 basis points. The impact of these changes according to Macquarie will be net positive in terms of bank returns. AMP Bank also lifted investor rates by 35 basis points and reduced the maximum LVR on investor loans to 50%.

These changes are making life difficult for some property investors currently with interest only loans. Do they switch to a principal and interest alternative, thus lifting their monthly repayments, or wear the lift in rates on their current loans, thus lifting their repayments? It’s a prisoner’s dilemma. Either way, it is less likely the current rental on the property will cover the costs of the loan repayments and we know from our surveys about half of all investment properties are underwater when it comes to covering the repayment flows.

More data this week to show that some major lenders are dialling back investor loans via brokers to try and manage their portfolios to within the current APRA guidelines. This trend, which we have highlighted before, was confirmed in the AFG Competition Index.

Mortgage stress was in the news again, with surprising results from Roy Morgan’s survey which showed that from their 10,000 mortgaged household sample, in the three months to April 2017, 16.8% or 666,000 mortgage holders can be considered to be ‘at risk’ or facing some degree of stress over their repayments. This compares favourably with 18.4% or 744,000 mortgage holders 12 months ago. It is worth noting their definition of stress though – “Mortgage stress is based on the ability of home borrowers to meet the repayment guidelines currently provided by the major banks. The level of mortgage holders being currently considered ‘at risk’ is based on their ability to meet repayments on the original amount borrowed. This is currently 16.8%, which is well below the average over the last decade”.

The DFA approach to mortgage stress, which looks at total household cash flow, not the theoretical repayment profile, indicates that mortgage stress is continuing to rise as incomes are crushed in real terms, costs of living rise, underemployment stalks many, on top of a series of mortgage rate rises. Data from Canstar showed that basic variable rates jumped by almost 30 basis points as increasing number of borrowers go for fixed rate loans so trying to control these escalating mortgage costs, but of course, many fixed rates already have higher costs wired in.

We looked at the correlation between mortgage stress and bank loan losses, which we expect to rise in coming months. Indeed, the latest data from Standard and Poor’s showed that home loan delinquencies underlying Australian prime residential mortgage backed securities (RMBS) increased from 1.16% in March to 1.21% in April. They link the rise to higher mortgage rates.

But whether you take the 666,000 households from Roy Morgan, or 794,000 from DFA, both are big numbers! There are many households in mortgage pain, and all the indicators are things will get worse in the months ahead.

We expect APRA will demand the banks hold more capital, US rates were lifted by the Fed, and Moody’s downgraded the long-term credit rating of 12 banks including Australia’s big four, after pointing to surging home prices, rising household debt and sluggish wage growth. They said “elevated risks within the household sector heighten the sensitivity of Australian banks’ credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years”.

There were state budgets in NSW and SA. In NSW Stamp duty makes up a huge proportion of the State’s income, at $10 billion, with revenues jumping 10% over the past year and are expected to grow 6% each year for the next three years. From July 1 stamp duty for FHBs will be abolished for new homes up to $650,000 with discounts on properties of up to $800,000. Additionally, grants of $10,000 will be available for new homes of up to $600,000 and for FHBs who build their home. Stamp duty will no longer be charged on lenders mortgage insurance.

South Australia surprised by adding a local bank tax to the big five. They plan to charge a levy on the major banks bonds and deposits over $250,000 but will exclude mortgages and ordinary household deposits. The tax, to be introduced 1 July, is expected to raise $370 million over four years. The banks responded, including threats to pull jobs from SA, but then the banks are easy targets, and we would not be surprised if other states followed suite.

Meantime the federal bank tax was passed after a brief senate review. Now the Treasurer has announced plans to change the way eligibility for a credit card is assessed, shifting it from the ability to pay the minimum repayment to being able “to repay the credit limit within a reasonable period”.

Australians’ wealth is overwhelmingly in our housing. Our housing stock worth valued at $6.6 trillion. That’s nearly double the combined value of ASX capitalisation and superannuation funds.

Housing is strongly linked to financial stability as highlighted in excellent speech by Fed Vice Chairman Stanley Fischer. He said there was a strong link between financial crises and difficulties in the real estate sector. In addition to its role in financial stability, or instability, housing is also a sector that draws on and faces heavy government intervention, even in economies that generally rely on market mechanisms.

Australian Housing and Urban Research Institute (AHURI) published a report this week on housing policies across the nation. They argue, rightly, that Australia needs a federal minister for housing, a dedicated housing portfolio, and an agency responsible for conceptualising and co-ordinating policy. The current fragmented, ad-hoc approach to housing policy seems poorly matched to the scale of the housing sector and its importance to Australia.  There is no clear systematic policy framework for housing across the nation, just piecemeal bits of policy, which are not fit for purpose.

Finally, the ABS released their residential property price data to March 2017. They said overall, prices rose on average 2.2% in the quarter. The price rises in Sydney (3.0 per cent) and Melbourne (3.1 per cent) were partially offset by falls in Perth (1.0 per cent) and Darwin (0.9 per cent).

Through the year growth in residential property prices reached 10.2 per cent in the March quarter. Sydney recorded the largest through the year growth of all capital cities at 14.4 per cent, followed closely by Melbourne at 13.4 per cent.

This ongoing rise may go counter to some recent data, although we note the CoreLogic data this week also shows rises in most centres, after recent softer data. The next ABS series, due out in 3 months will be the one to watch.  Auction clearances last weekend were quite strong, if on lower volumes, so as yet, signs of a real slow-down remain muted.

And that’s it for this week. Check back next week for the next installment.