Category: Property Market

A Blow To The Negative Gearing Bonanza

The AFR says Bankwest has changed its affordability calculators for investor loans, such that the tax benefits are now excluded from the assessment. This reduces the amount prospective investors can get in a loan, and it also may impact some existing customers.

The post-tax affordability assessment explains why on one hand some banks have been able to lend hard on investor loans yet on the other hand, on a pre-tax basis many investors have little wriggle room if rates raise, as we highlighted recently.

Note though that not all lenders were so generous in their handling of tax benefits, and Bankwest appears now to have revised their approach to meet APRA guidelines – see specifically APG 223 within the Residential Mortgage Lending prudential practice guide.

Another market change which will further rightly tighten investor lending.

The move was confirmed by The Real Estate Conversation.

Bankwest has confirmed it will remove the tax advantages of negative gearing when determining whether or not applicants are eligible for investor loans.

The changes will mean the amount investors can borrow will be lower, and could result in the bank, a subsidiary of the Commonwealth Bank, writing fewer investment loans.

The Commonwealth Bank is expected to announce similar moves.

The Australian Financial Review reports of speculation Bankwest and the Commonwealth Bank are close to breaching the Australian Prudential Regulation Authority’s 10 per cent growth cap for investor loans.

Mark Chapman, a director of tax accountants H&R Block, told The Australian Financial Review the change would be most dramatic for existing borrowers, who will have to deal with altered rules.

“The impact of Bankwest’s decision on new borrowers is not too bad – they can just borrow through another bank,” he said. But for existing BankWest borrowers, the change is retrospective he said.

“They borrowed in good faith from this bank under one set of rules, now they are having another set of rules imposed on them.”

Australian Broker said:

“For customers who operate their investment property at a loss, where the income of the investment property does not exceed the costs, the related tax benefit will no longer be included in Bankwest’s calculation for serviceability of the loan,” the spokesperson said.

The changes will impact all new applications involving an investment lending facility as well as any existing deals which may require a new serviceability calculation.

 

More First Time Buyers Open An Account At “The Bank of Mum and Dad”

We have updated our analysis of assistance first time buyers are getting from their families in a desperate effort to get into the housing market at a time when the entry barriers in terms of price and affordability are as high as ever they have been. In addition, high loan-to-value loans are less available, so first time buyers need a larger deposit, and first owner grants are harder to access. Savings interest rates are also very low.

We released analysis a few months back, which caused quite a stir as it highlighted the inter-generational  issues in play. We have now updated the quarterly analysis with data to December 2016.

First, more first time buyers are getting help from parents – up to 54% in the past quarter. This help varies from a loan for a deposit, a cash present, help with transaction expenses, or ongoing assistance with mortgage repayments or other household expenses.   Parental guarantees are falling out of favour.

Parents are able to assist, thanks to the wealth effect created by home price appreciation, which is still occurring in the eastern states, though more patchily elsewhere.

Just under half the assistance is going towards first time buyers in NSW (mainly Greater Sydney), where the affordability issues are most difficult, and home prices the highest. But other states are also, to some extent, also in the game.  Ignoring the volume growth, the percentage mix has been relatively stable.

But here is the volume picture, which shows the relative number across states (note the small counts in some states are less statistically robust), but the trends are clear.

Another cut on the data is looking at the type of property being purchased. In 2015, more investment property was is the mix, but now the growth is among owner occupied purchasers.

In terms of the value of the financial contribution, it varies. But for those making a loan or payment direct to assist in a purchase by way of a deposit, the average amount is now north of $85,000.

If parents bring forward payments to assist their offspring, it is worth asking whether this act of kindness may have unintended consequences.

  • First, are parents giving away some of their future financial security?
  • If it is a loan, is the basis of repayment clear, and documented?
  • When a bank assesses a mortgage application do they consider the source of the deposit – receiving a “seagull” lump sum is not the same as demonstrating a history of saving, and the risk profiles down the track are different.

It also raises complex questions around equity between siblings, and a whole raft of questions relating to inter-generational finance.

It is also worth remembering that more first time buyers are going to the investment sector before purchasing their own home for owner occupation, as our first time buyer tracker shows.

Auction Clearances Are Running Hot

Today was a record heat-wave day down the east coast, and also a massive weekend for auction clearances according to the preliminary data from Domain.

Sydney achieved 84.2%, compared with 71.4% last week, and Melbourne hit 78.7% compared with 75.3% last week. Nationally, the clearance was 80.4%, compared with 68% last week, higher than a year ago also and a larger volume to boot!

Brisbane achieved 63% on 105 scheduled auctions, 79% in Adelaide on 73 listings, and Canberra reached 79% on 69 scheduled auctions.

So Just How Sensitive Are Property Investors To Rising Interest Rates Now?

Having looked at changes in investment loan supply, and the motivations of the rising number portfolio property investors, today we use updated data from our rolling household surveys to look at how property investors are positioned should mortgage rates rise. In fact, for many, rates have already been raised, thanks to lender repricing independent of any RBA cash rate move, some as much as 65 basis points. We think there is more to come, as loan supply gets tighter, international financial markets tighten and competitive dynamics allows for hikes to cover capital costs and to bolster margins.

To assess the sensitivity we model households ability to service mortgage debt, taking into account their other outgoings, and rental income.  We are not here looking at default risk, but net cash flow. How high would rates rise before they were under pressure? Where they also have owner occupied loans, or other debts, we take this into account in our assessment.

The first chart is a summary of all borrowing investor households. The horizontal scale is the amount by rates may rise, and for each scenario we make an assessment of the proportion of households impacted, on a cumulative basis. So as rates rise, more households would feel pain.

The summary shows that nationally around a quarter of households would struggle with a rate hike of up to 0.5%, and as rate rose higher, this rises to 50% with a 3% rate rise, though 40% could cope with even a rise of 7%.

So a varied picture. But it gets really interesting if you segment the analysis. Those who follow DFA will know we are a great believer in segmentation to gain insight!

A state by state analysis shows that households in NSW are most exposed to a small rate rise, with 36% estimated to be under pressure from a 0.5% rise (explained by large mortgages and static rental yields), compared with 2% in TAS.

Origination channel makes a difference, with those who used a mortgage broker or advisor (third party) more exposed compared with those who when direct to a lender. The pattern is consistent across the rate rise bands.  This could be explained by brokers knowing where to go to get the bigger loans, or the type of households going to brokers.

Households with interest only loans are 6% more exposed to a small rise, and this gap remains across our scenarios. No surprise, as interest only loans are more sensitive to rate movements. We have not here considered the tighter lending criteria now in play for interest only lending.

Our master segmentation reveals that it is Young Affluent and Young Growing Families who are most exposed, followed by Exclusive Professionals. Some of the more affluent are portfolio investors, so are more leveraged, despite larger incomes.

Finally, we can present the age band data, which shows that those aged 40-49 have the greatest exposure as rates rise, though young households are most sensitive to a small rise.  Note this does not reveal the relative number of investor across the age groups, just their relative sensitivity.

This all suggests that lenders need to get granular to understand the risks in the portfolio. Households need to have a strategy to prepare for rate rises and should not be fixated on the capital appreciation, at the expense of cash flow management, especially in a rising rate environment.

New Home Sales Grew In December – HIA

The HIA New Homes Sales Report – a survey of Australia’s largest home builders – highlights a relatively healthy end to 2016, said the Housing Industry Association.

New detached house sales fell by 2.3 per cent in the December 2016 quarter, while the sale of multi-units grew by 3.2 per cent.

The December update for the HIA’s monthly New Home Sales survey shows growth of 0.2 per cent in total seasonally adjusted new home sales in December 2016. This result follows faster growth of 6.1 per cent in November. Multi-unit sales increased by 6.4 per cent in December 2016. Detached house sales fell by 1.6 per cent, within which there was strong gains for New South Wales and Victoria.

Seasonally adjusted new detached house sales increased in two out of five mainland states in December 2016, compared to four out of five states in November. Detached house sales increased in the month of December by 2.4 per cent in New South Wales and by 5.8 per cent in Victoria. The monthly fall in detached house sales was 9.1 per cent in Queensland, 1.9 per cent in South Australia, and 9.0 per cent in Western Australia.

“New home sales hit a two year low in October last year, but recovered well in November and December,” said HIA Chief Economist, Dr Harley Dale. “The late 2016 results were strong for the sales of ‘multi-units’, while detached house sales remained in reasonable shape.”

“The strong finish to 2016 for new home sales admittedly follows a very weak month in October,” said Harley Dale. “Obviously it is better that new home sales bounced back rather than kept falling!”

“The overall profile for both HIA New Home Sales and ABS Building Approvals is consistent with the first stage of the down cycle in new home commencements being a mild one. We expect this down cycle to begin in 2017.”

“As has been the case all cycle, new home sales (and building approvals) highlights the large differences in new home building conditions between the five mainland states,” concluded Harley Dale.

Genworth FY16 Results Highlight Changing Market Conditions

Lender’s Mortgage Insurer Genworth released their results to December 2016 today. From it, we get insights into the changing nature of the housing market, and also a view of the pressure LMI’s are under.

Genworth reported a statutory net profit after tax (NPAT) of $203.1m, down 10.9% on prior year. After adjusting for the after-tax mark-to-market move in the investment portfolio of $9.1m, underlying NPAT was $212.2m down 19.8% on prior year. The loss ratio was 35.1%, compared with 24% last year. They remain strongly capitalised, and though claims are higher, they declared a final fully franked dividend of $14.00,  a FY16 payout ratio of 67.2%, but down from last half.

Banks are clearly writing less high LVR mortgages, thanks to APRA, and when households default, and are forced to sell, there is sufficient capital appreciation in most properties to avoid a LMI claim due to strong price rises.  The banks, can’t loose! (Remember the LMI protects the bank, not the borrower). However, in regions where prices are falling – for example in the mining belts of WA and QLD, and home prices are falling, claims are up. This does not bode well if home prices were to revere more widely.

Genworth was listed in 2014, but since then has completed share buy-backs to reduce the number of issued shares. Further restructure will simplify the corporate structure in 2017, with a view to driving efficiency. They are the only separately listed LMI in Australia, (the banks have their own LMI captives, and the other player in the market is less transparent).

We will look at the market data they provided first, then look at the drivers of their results more specifically.

Genworth had an in-force portfolio of approximately $324 billion at Dec 2016. Standard LMI accounted for 91% of the book, and Low Doc 5%. 26% of the book relates to Investment loans.

The seasoning picture is interesting.  This shows the evolution of Genworth’s 3 month+ delinquencies (flow) by residential mortgage loan book year, from issue.

The delinquency population by months in arrears aged buckets shows that over the past two years, the mortgagee in possession (MIP) as a proportion of total delinquency is trending down. This is because the strong property market has allowed stressed households to sell and release equity, with no LMI claim.

With regards to the current results, a range of factors influenced the lower outcomes.

New Insurance Written (NIW) fell 18.4% in FY16, to $26.6 billion. Moreover, NIW above 90% LVR decreased 39.8%, and 80-90% LVR fell 17.2%. This reflects changing appetite among lenders for higher LVR business, following regulatory intervention from APRA.

Lower Sales (Gross Written Premium – GWP) fell 24.8% compared to previous period due to the lower number of high loan-to-value (LVR) penetration in the market and a lower LVR mix of business.

The average price for Flow (GWP/NIW) decreased from 1.63% to 1.51% in FY16. However, they got some benefit from premium repricing in the second half.

Lower Revenue (Net Earned Premium) – NEP fell 3.6% reflecting lower earned premiums from current and prior book years.

Higher Net Claims Incurred – Net claims incurred increased by $46.1 m to $158.8m due to an increase in the number of delinquent loans relative to a year ago, and a higher average claim amount.  The performance in QLD and WA is “challenging”, reflecting increased delinquencies, especially in resource exposed regions. NSW and VIC were better performers.  Overall, the delinquency rate rose from 0.38% to 0.46%.

Whilst financial income (interest income and realised and unrealised gains/losses) increased by $18.1 m, to $126.0 m in FY16, the yield on the investment portfolio dropped 3.69%.

Regulatory capital fell from $2,600 m in 2015 to $2,213 m in 2016. CET1 decreased in FY16 mainly reflecting the $250 m of dividends, $202 m capital reduction and $86 m decrease in the excess technical provision, offset by $203 m NPAT. Tier 2 capital decreased following the redemption of $50 m of the $140 m notes issued. The PCA coverage ratio was consistent with FY15.

Do Investment Property Investors Also Use SMSF’s?

We recently featured our analysis of Portfolio Property Investors, using data from our household surveys. We were subsequently asked whether we could cross correlate property investors and SMSF using our survey data. So today we discuss the relationship between property investors and SMSF.  We were particularly interest in those who hold investment property OUTSIDE a SMSF.

To do this we ran a primary filter across our data to identity households who where property investors, and then looked at what proportion of these property investors also ran a SMSF. We thought this would be interesting, because both investment mechanisms are tax efficient investment options.  Do households use both? If so, which ones?

We found on average, around 13% of property investors also have a self managed super fund (SMSF). Households in the ACT were most likely to be running both systems (17%), followed by NSW (14%) and VIC (12.8%).

Older households working full time were more likely to have both an SMSF and Investment Property, but we also noted a small number of younger households were also using both tax shelters.

We found a significant correlation between income bands and use of SMSF among investment property holders (this does not tell you about the relative number of households across the income bands, just their relative mix). Up to 30% of higher income banded households have both a SMSF and Investment Property.

Finally, we look across our master household segments. These segments are the most powerful way to understand how different household groups are behaving.  The most affluent groups tend to hold both investment property and SMSF – for example, 30% of the Exclusive Professional segment has both.  Less affluent households were much less likely to run a a SMSF.

This shows that more affluent households are more able and willing to use both investment tax shelter structures. It also shows that any review of the use of negative gearing, investment properties and the like, needs to be looked at in the context of overall tax planning. Given the new limits on superannuation withdrawals, we expect to see a further rotation towards investment property, which as we already explained has a remarkable array of tax breaks and incentives. We expect the number of Portfolio Property Investors to continue to rise whilst the current generous settings exist.

Foreign investors forced to sell $100m of property

From Australian Broker.

The government has forced a number of foreign nationals to sell 15 Australian residential properties after breaching the foreign investment framework.

 

“We’ve taken further action on ensuring that Australian home buyers get a fair go when it comes to buying whether it’s their first home or subsequent home by ensuring that our rules on foreign investment are enforced,” said Treasurer Scott Morrison in a doorstop interview yesterday (6 February).

In 2015, the government announced an amnesty for foreign investors who had purchased property illegally. From 2 May to 30 November, investors could notify the government and, although they would be forced to sell, would suffer no penalties as a result.

Since the end of the amnesty, the total number of forced sales has reached 61 with a combined total of $107 million. The 15 most recent properties were all located in Victoria and Queensland and have a combined purchase price of over $14 million, according to the Treasurer’s office.

“Over $100 million worth of residential real estate assets, owned and illegally acquired by foreigners, have been forced to divest. Another 15 properties today. And it’s not just at the high end of the market, it’s the low end of the market as well where many Australians are trying to get into the market,” Morrison said.

The foreign nationals – who come from countries such as China, India, Indonesia, Malaysia, Iran, the United Kingdom and Germany – purchased their properties without approval from the Foreign Investment Review Board (FIRB).

In some cases, foreign nationals held multiple investment properties in breach of regulations. These breaches were uncovered through data matching programs as well as information gathered from the public.

The Australian Taxation Office (ATO) has detected over 570 foreign nationals who have breached the rules, resulting in forced sales, self-disposals, amendments to previously approved FIRB applications and retrospective approvals with strict conditions.

Breaches result in civil penalties or criminal prosecution with the 388 penalty notices given to foreign nationals attracting penalties of more than $2 million.

Criminal penalties were increased on 1 December 2015 to $135,000 or three years imprisonment for individuals and $675,000 for companies. Additional civil penalties of up to 10% of the market value of the property can apply to foreign owners who purchased their property without FIRB approval after this date.

For those who purchased their property before 1 December 2015 without FIRB approval, criminal penalties include an $85,000 fine or two years imprisonment for individuals or $425,000 for corporate entities. Civil penalties of up to 25% of the market value of the property can also apply.

This new regime allows for a graduated approach to penalising foreign investors – ranging from issuing infringement penalties through to civil and criminal penalties. This lets the ATO match the penalty to the behaviours found.

“We’re trying to ensure, I think with some success, that our foreign investment rules are enforced on every occasion and for those who think they can creep in, and snatch away some property from the hands of Australian home buyers, well, we have got news for you, you will be forced to sell it and to do that forthwith,” Morrison said.

 

6 astonishing features of Australia’s current house price boom

From Business Insider.

The Australian housing boom, which has seen Sydney and Melbourne prices climb to record levels, is very different from previous cycles. This time around speculation has played a bigger role, which coupled with near record low interest rates and dropping rental yields, should produce red flags galore.

Home values, particularly in Sydney and Melbourne has defied expectations and climbed. Sydney home prices have doubled since 2009 and also soared in Melbourne by 85% in that period and there are no signs of prices reversing course. Landlords have driven up the market, leaning on the tax breaks of negative gearing.

Prices have risen so much that the amount required for a 20% home deposit has jacknifed on savers in recent years.

Here are six reasons why the boom is different this time:

1. Investors continue to fuel the price rally: Investor housing credit jumped by 0.8% in December, the largest monthly increase since June 2015, the Reserve Bank of Australia said. That followed data from the ABS which revealed investor housing finance jumped by 4.9% to $13.269 billion in November, also the largest increase seen since that time. Lending to investors has has now increased in six of the past seven months, with the November figure up 21.4% on a year earlier. While investor activity tempered last year after regulators urged banks to limit the growth in the segment to under 10%, in order to preserve financial stability, it is rearing its head again.

2. Not one or two, but multiple properties owned by a single investor: The number of investors with multiple properties continues to soar. From less than 10% of all investors five years earlier, it is around 16% nationally now, and on the east coast, about 18%, according to Digital Finance Analytics, a research firm that produces a mortgage report with JPMorgan. That isn’t wrong, per se but therein lies the problem. A large number of landlords lean on rapid rises in the value of their exiting assets to fund the next one. Put simply, they revalue the properties regularly and borrow more and more. That’s not a problem right now, but it could come back to haunt investors, banks and the broader property market if and/or when price falls and interest rates turn.

Digital Finance Analytics

3. Flipping properties: Another trend this time around is that investors are increasingly offloading properties sooner. As rental yields diminish, investors are resorting to the only available avenue to keep total returns up. They buy a property and in a year or so sell at a profit and then start again. In past cycles, about 95% of landlords bought a house and held it for many years. Now that number has shrunk to less than 90% and continues to slip, according to Digital Finance Analytics. This could also point to the build up of stress among investors as investment doesn’t pay for itself thanks to soaring home prices. As such risks associated with monthly cash flow will continue to rise, Martin North, principal at the research firm says.

Digital Finance Analytics

4. Stress building: Figures from ratings agency Standard & Poor’s show a two basis point lift in the number of mortgages more than 30 days in arrears to 1.16% — the second straight monthly rise, bucking a trend of steady falls between April and November 2016. Digital Finance Analytics goes a step further and warns that if homeowners are able to meet to loan repayments in an era of ultra-low interest rates, than an increase in mortgage costs could push one in five into severe stress and a big jump in defaults.

5. Falling rental yields: Rapid house price growth, combined with an increase in housing supply, slower population growth and weak rental growth mean gross rental yields have tumbled to fresh record lows in Sydney and Melbourne, according to CoreLogic. In Sydney, gross rental yields for houses now sit at just 2.8%, and 3.8% for units. It’s a similar story in Melbourne with houses yielding 2.7% and units 4%. While gross rental yields plumb new lows, investor activity in the Sydney and Melbourne property markets continues to increase and Tim Lawless, head of research at CoreLogic, reckons there’s a simple answer: investors are speculating that house prices will continue to rise.

6. Interest only: Investors have increasingly relied on banks offering interest only loans for up to five years.

Under these loans, the principal remains intact and the borrower only needs to cover the cost of the interest component. That’s fine only for as long as rates remain low and the interest only period remains in place. From as low as a third of all mortgages, interest only loans make up about 40% of home loans, according to data from the banking regulator, the Australian Prudential Regulation Authority.

Strong capital gains drive a surge in the number of million dollar suburbs during 2016

CoreLogic says over the five years to December 2016, the number of suburbs nationally with a median value of at least $1 million has increased by 176%. The gap between property owners and those wanting to buy has never been wider.

There was a time in which having a dwelling worth $1 million or more meant that the property was exclusive and rare.  Today dwellings with a $1 million valuation are becoming much more common.  At the end of 2016, there were 760 suburbs nationally that had a median value of at least $1 million.  This figure has increased from just 275 suburbs nationally five years earlier. Units have been the big mover with the number of $1 million suburbs increasing by 479% over the five years compared to a 160% increase for houses.

No. of suburbs with median value of at least $1 million, by state, Dec -11 vs. Dec-16

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87% of the suburbs nationally that had a median value of at least $1 million were located in either New South Wales (70.3%) or Victoria (16.7%) up from 75.6% in New South Wales (60.4%) and Victoria (15.3%) five years earlier.

The combined capital cities accounted for 93.5% of all the $1 million suburbs in 2011 and this increased marginally to 93.6% in 2016.  This is representative of the higher cost of housing in capital city markets.  It also highlights the relatively weaker value growth performance of regional housing markets throughout recent years.

No. of suburbs with median value of at least $1 million, by capital city, Dec-11 vs. Dec-16

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Escalating dwelling values in Sydney, and to a lesser degree Melbourne, have resulted in an increasing proportion of the suburbs with a median value of at least $1 million over the past five years.  At the end of 2011, 57.8% of the suburbs nationally with a median value of at least $1 million were in Sydney, by the end of 2016 the proportion had risen to 65.4% of suburbs nationally.  The proportion of $1 million suburbs in Melbourne has increased to 16.4% of suburbs nationally at the end of 2016 from 15.3% at the end of 2011.

Further highlighting the rapid increase in values over recent years is the data for suburbs with a median value of at least $2 million.  At the end of 2011, 39 suburbs nationally had a median value of at least $2 million.  By the end of 2016, this figure had risen to 136 suburbs nationally, an increase of 249% over five years.  At the end of 2011, 30 of the 39 suburbs were located in Sydney and by the end of 2016, 115 of the 136 suburbs were located in Sydney.

Nation’s most expensive suburbs based on
median value, December 2016

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While rising housing values increase the asset wealth of owners, it is also reflective of the fact that for those who don’t yet own a home it is becoming increasingly difficult to save a large enough deposit in order to purchase a home.  This is particularly the case in Sydney and Melbourne where over the past five years, dwelling values have increased by a total of 68.1% and 43.3% respectively.  Meanwhile, wages are increasing at their slowest pace on record and housing affordability is once again a central them in the political debate.  The rise in suburbs with a median value of at least $1 million over recent years is reflective of the growing chasm between those that own homes and those who don’t.