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Preliminary auction clearance results today from Domain show strong results again, though the preliminary result from Sydney last week stood at 83.1% compared with 80.2% this time around. Nationally clearance was 80.9% compared with 75.7% last week. This is higher than a year ago though on slightly smaller volumes. Melbourne stands at 82.4% compared with 76.1% last week on higher volumes.
Brisbane cleared 69% on 122 listed, Adelaide 81% on 90 listed and Canberra 77% from 79 listed.
We discussed housing affordability, negative gearing, household debt and interest rates on Weekend Breakfast, ABC News 24 today.
The statement delivered today by RBA Governor, Philip Lowe, to the House of Representatives Standing Committee on Economics contains the now familiar nod towards risks associated with high household debt. “Too much borrowing today can create problems for tomorrow, because debt does have to be repaid”. Exactly!
One area that we are watching closely is the cycle in residential construction activity, as the upswing has helped support the economy over recent years. The rate of new building approvals has slowed, but there is a large amount of work still in the pipeline, particularly for apartments, so we still expect some further growth in this part of the economy this year. There has, however, been some tightening in conditions for property developers in some markets.
In the broader housing market, the picture remains quite complicated. There is not a single story across the country. In parts of the country that have been adjusting to the downswing in mining investment or where there have been big increases in supply of apartments, housing prices have declined. In other parts, where the economy has been stronger and the supply-side has had trouble keeping up with strong population growth, housing prices are still rising quickly. In most areas, growth in rents is low. And recently we have seen a pick-up in growth in credit to investors, which needs to be watched carefully.
In terms of consumer prices, a year ago we had expected the inflation rate to remain above 2 per cent. It has turned out to be lower than this last year, at around 1½ per cent. Wage growth has been quite subdued, reflecting spare capacity in the labour market and the adjustment to the unwinding of the mining investment boom. We anticipate the subdued outcomes to continue for a while yet. Increased competition in retailing is also having an effect on prices, as is the low rate of increase in rents.
We do not expect the rate of inflation to fall further. Our judgement is that there are reasonable prospects for inflation to rise towards the middle of the target over time. The recent improvement in the global economy provides some extra assurance on this front. Headline inflation is expected to be back above 2 per cent later this year, boosted by higher prices for petrol and tobacco. The pick-up in underlying inflation is expected to be more gradual.
Since we appeared before this Committee last September, the Reserve Bank Board has kept the cash rate unchanged at 1.5 per cent.
At its recent meetings the Board has been paying close attention to the outlook for inflation as well as two other issues: trends in household borrowing and in the labour market.
One of the ways in which monetary policy works is to make it easier for people to borrow and spend. But there is a balance to be struck. Too much borrowing today can create problems for tomorrow, because debt does have to be repaid. At the moment, most households with borrowings do seem to be coping pretty well. But the current high level of debt, combined with low nominal income growth, is affecting the appetite of households to spend, and we are seeing some evidence of this in the consumption figures. The balance that is required is to support spending in the economy today while avoiding creating fragilities in household balance sheets that could cause problems for the economy later on. This is also something we need to watch carefully.
Trends in the labour market are also important. As in the housing market, the picture in the labour market varies significantly around the country. Overall, the unemployment rate has been steady now for a little over a year at around 5¾ per cent. In a historical context this would have been considered a good outcome, although, today, a sustainably lower unemployment rate should be possible in Australia. The other aspect of the labour market that is worth noting is the continuing trend towards part-time employment. Over the past year, all the growth in employment is accounted for by part-time jobs. There is a structural element to this, but it is also partly cyclical. We expect that the unemployment rate will remain around its current level for a while yet.
The Reserve Bank Board continues to balance these various issues within the framework of our flexible medium-term inflation target, which aims to achieve an average rate of inflation over time of 2 point something. Our judgement is that the current setting of the cash rate is consistent with both this and achieving sustainable growth in our economy. We will continue to review that judgement at future meetings.
Superannuation industry groups are warning the federal government to keep Australia’s $2 trillion retirement savings system away from addressing the nation’s housing affordability problems.
Earlier this week Federal Treasurer Scott Morrison said the government is likely to address housing affordability in its May Budget, and there have been several suggestions about how to deliver the best outcome.
New South Wales Minister for Planning and Housing, Anthony Roberts, recently mentioned the idea of unlocking superannuation for first home deposits.
Industry Super Australia believes the idea is bad policy as it could reduce retirement savings and drive up housing prices while doing nothing to address supply.
ISA chief economist Stephen Anthony said: “In the housing affordability debate, the focus should be on land release, regulation and tax subsidies that fuel investment in existing property rather than new buildings. Allowing first home buyers early access to their super will set back a retirement income system that is still struggling to fully deliver.”
Anthony also said the proposal is inconsistent with the federal government’s objective of super, being “to provide income in retirement to substitute or supplement the age pension.”
The Australian Institute of Superannuation Trustees (AIST) also warned against using superannuation to tackle the nation’s housing affordability challenge.
“The superannuation industry shares concerns about housing affordability for the young but superannuation is not the silver bullet,” AIST chief executive Tom Garcia said.
“Superannuation is about saving for retirement. It’s not a savings pool to be used for any other purpose as the government has made clear in its own proposed objective for super.”
Morrison said in a radio interview with Ray Hadley that he’s had good discussions with senior NSW government ministers about housing affordability issues for a long time.
“It is a big challenge particularly for people here in Sydney and particularly people down in Melbourne. Whether it is in Queensland or other places, particularly South East Queensland there are real challenges there. We want to look at ways that we can improve that situation. It is not just for people who are looking to buy their first home,” Morrison said.
From The Real Estate Conversation.
If re-elected, the Western Australian Liberal government will cut stamp duty for downsizing seniors by up to $15,000.
The discount will apply to new and already-established homes, and will affect more than 4,000 eligible seniors aged over 65 years, according to a statement from the Liberals Western Australia.
Eligible seniors will pay no stamp duty on property worth up to $440,000, and the tax will be roughly halved on a property worth $750,000. The initiative, which will be introduced for two years from the start of 2018, will include a requirement for the senior to sell their existing home.
The policy will also give a duty concession of up to $10,000 for vacant lots.
Premier Colin Barnett said, “It is important to support seniors in choosing housing that better suits their needs.”
Seniors Minister Paul Miles said, “Our actions will not only bring major benefits to seniors and their families, they will directly support jobs – whether it be the tradies building new houses, or the professions involved in the sale of established homes.
The Barnett government already has policies in place to stimulate the languishing WA property market, including the First Home Owner Grant Scheme and Keystart.
The Real Estate Institute of Western Australia and the Council on the Ageing welcomed the release of the Barnett campaign policy.
REIWA President Hayden Groves said he was thrilled the Barnett Government had committed to easing the burden of transfer duty for seniors if re-elected on 11 March.
“Transfer duty creates a significant barrier for seniors over 65 on fixed incomes who are looking to change their lifestyle or down size,” he said.
“The cost of transfer duty on a median house price of $520,000 is $18,715, which is almost equivalent to the entire annual standard aged pension of $20,745.40.”
“The $15,000 concession the government have committed to will make a substantial difference to those seniors looking to ‘right size’ into more suitable accommodation,” he said.
COTA WA CEO Mark Teale said one in three voters in WA are over the age of 60 and seniors make up 19 per cent of WA’s population.
“Our members, many of whom are on a fixed income, find the existing transfer duty arrangements to be a major barrier to ‘right sizing’, so this announcement is very positive news,” said Teale.
REIWA analysis estimates the policy reform could release 21,000 homes onto the market, making it easier for West Australians to “trade-up”.
“While the concession would cost the state government $303 million from the 21,000 senior households ‘right sizing’, the resulting trade-up activity would generate additional transfer duty revenue in the order of $393 million, leaving a net surplus of $90 million,” said Groves.
Ben Myers, Executive Director – Retirement Living at the Property Council of Australia, said the downsizing incentive for senior Western Australians will have broad-ranging benefits and should be examined by other states.
The peak body for retirement and seniors living has conducted its own research which shows that “downsizing to a smaller home can extend people’s capacity to live independently, delaying or reducing their need for formal care or support,” according to Myers.
Myers said the policy with “ensure senior Australians have housing choice and can downsize at low cost” but also has the benefit “of freeing up housing stock for first home buyers.”
We just got the results back from this week’s household surveys, and yes, we went straight to the investor intention to transact series. It is down again, now for the fourth straight week, and continues the trend we reported last week. Whilst “a swallow does not make a summer”, it could be a leading indicator of trouble ahead.
If the data is correct, the current home sales momentum is likely to slow in coming months.
The latest and updated edition of our flagship report “The Property Imperative” is now available with data to end February 2017. This eighth edition updates the current state of the market by looking at the activities of different household groups using our recent primary research, and other available data. It features recent work from the DFA Blog and also contains new original research.
In this edition, we look at mortgage stress and defaults across both owner occupied and investment loans, housing affordability and the updated impact of “The Bank of Mum and Dad” on first time buyers.
We also examine the latest dynamics in the property investment sector including a review of portfolio investors, and discuss recent leading indicators which may suggest a future downturn.
The overall level of household debt continues to rise and investment loans are back in favour at the moment, though this may change. Here is the table of contents.
1 Introduction. 2 The Property Imperative – Winners and Losers. 2.1 An Overview of the Australian Residential Property Market. 2.2 Home Price Trends. 2.3 The Lending Environment. 2.4 Bank Portfolio Analysis. 2.5 Broker Shares And Commissions. 2.6 Market Aggregate Demand. 3 Segmentation Analysis. 3.1 Want-to-Buys. 3.2 First Timers. 3.3 Refinancers. 3.4 Holders. 3.5 Up-Traders. 3.6 Down-Traders. 3.7 Solo Investors. 3.8 Portfolio Investors. 3.9 Super Investment Property. 4 Mortgage Stress and Default. 4.1 State And Regional Analysis. 4.2 Stress By Household Profile. 4.3 Stress By Property Segments. 4.4 Stress By Household Segments. 4.5 Post Code Level Analysis. 4.6 Top 100 Post Codes And Geo-mapping. 5 Interest Rate Sensitivity. 5.1 Owner Occupied Borrowers. 5.1.1 Sensitivity by Loan Value. 5.2 Cumulative Sensitivity. 5.2.1 Owner Occupied Borrowers. 5.2.2 Investment Loan Borrowers. 5.2.3 Owner Occupied AND Investment Loan Borrowers. 6 Housing Affordability And Hot Air.
Request the free report [61 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.
Note this will NOT automatically send you our ongoing research updates, for that register here.
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The combined capital city preliminary clearance rate remained in the high 70 per cent range over the week, despite auction volumes reaching the highest level so far this year. There were 2,280 dwellings taken to auction this week, significantly increasing from 1,591 over the previous week, with 77.0 per cent of auctions reported as successful. The larger number of auctions was driven by a substantial rise across the Sydney and Melbourne markets, while the number of auctions held actually saw a decrease across the smaller capital cities over the week. The strongest clearance rates, based on preliminary data, were in Sydney and Canberra, where 83.5 per cent and 81.5 per cent of auctions returned a successful result. Melbourne also recorded a strong preliminary clearance rate, with 76.7 per cent of auctions clearing. The preliminary combined capital city clearance rate was higher this week than what was seen over the same period last year, however, the number of auctions held was lower, with 2,347 auctions held over the same week last year, returning a 71.8 per cent clearance rate.
The preliminary data from Domain shows that nationally auction clearances were 79.3% with 1,812 listed. Sydney cleared at 83.1% on 675 listed whilst Melbourne cleared 79% on 719 listed. All higher than last week and total volumes higher than a year ago – so no signs of slowing momentum so far.
Brisbane cleared 52% on 94 listed, Adelaide 71% on 70 listed and Canberra 79% on 65 listed.
Brilliant speech from Alex Brazier UK MPC member on macroprudential “How to: MACROPRU. 5 principles for macroprudential policy“.
He argues that whilst macroprudential policy regimes are the child of the financial crisis and is now part of the framework of economic policy in the UK, if you ask ten economists what precisely macroprudential policy is, you’re likely to get ten different answers. He presents five guiding principles.
There are some highly relevant points here, which I believe the RBA and APRA must take on board. I summarise the main points in his speech, but I recommend reading the whole thing: This is genuinely important! In particular, note the limitation on relying on lifting bank capital alone.
First, macroprudential policy may seem to be about regulating finance and the financial system but its ultimate objective the real economy. In a crisis, the financial system may be impacted by events in the economy – for example credit dries up, lenders are not matched with borrowers. Risks can no longer be shared. Companies and households must protect themselves. And in the limit, payments and transactions can’t take place. Economic activity grinds to a halt. These are the amplifiers that turn downturns into disasters; disasters that in the past have cost around 75% of GDP: £21,000 for every person in this country. So the job of macroprudential policy is to protect the real economy from the financial system, by protecting the financial system from the real economy. It is to ensure the system has the capacity to absorb bad economic news, so it doesn’t unduly amplify it.
Second, the calibration of macroprudential should address scenarios, not try to predict the future but look at “well, what if they do; how bad could it be?” In 2007, he says it was a failure to apply economics to the right question. There was too much reliance on recent historical precedent; on this time being different. And, even more dangerously, they relied on market measures of risk; indicators that often point to risks being at their lowest when risks are actually at their highest.
The re-focussing of economic research since the crisis has supported us in that. It has established, for example, how far: Recessions that follow credit booms are typically deeper and longer-lasting than others; Over-indebted borrowers contract aggregate demand as they deleverage; While they have high levels of debt, households are vulnerable to the unexpected. They cut back spending more sharply as incomes and house prices fall, amplifying any downturn; Distressed sales of homes drive house prices down; Reliance on foreign capital inflows can expose the economy to global risks; And credit booms overseas can translate to crises at home.
When all appears bright – as real estate prices rise, credit flows, foreign capital inflows increase, and the last thing on people’s minds is a downturn – our stress scenarios get tougher.
Third, feedback loops within the system mean that the entities in the system can be individually resilient, but still collectively overwhelmed by the stress scenario.
These are the feedback loops that helped to turn around $300 bn of subprime mortgage-related losses into well over $2.5 trillion of potential write-downs in the global banking sector within a year. Loops created by firesales of assets into illiquid markets, driving down market prices, forcing others to mark down the value of their holdings. This type of loop will be most aggressive when the fire-seller is funded through short-term debt. As asset prices fall, there is the threat of needing to repay that debt. But even financial companies that are completely safe in their own right, with little leverage, and making no promise that investors will get their money back, can contribute to these loops.
The rapid growth of open-ended investment funds, offering the opportunity to invest in less liquid securities but still to redeem the investment at short notice, has been a sea change in the financial system since the crisis. Assets under management in these funds now account for about 13% of global financial assets. It raises a question about whether end investors, under an ‘illusion of liquidity’ created by the offer of short-notice redemption, are holding more relatively illiquid assets. That matters. This investor behaviour en masse has the potential to create a feedback loop, with falling prices prompting redemptions, driving asset sales and further falls in prices.
And in a few cases, that loop can be reinforced by advantages to redeeming your investment first. Macroprudential policy must move – and is moving – beyond the core banking system.
Fourth, prevention is better than cure.
Having calibrated the economic stress and applied it to the system, it’s a question of building the necessary resilience into it. The results have been transformative. A system that could absorb losses of only 4% of (risk weighted) assets before the crisis now has equity of 13.5% and is on track to have overall loss absorbing capacity of around 28%. Our stress tests show that it could absorb a synchronised recession as deep as the financial crisis.
And if signals emerge that what could happen to the economy is getting worse, or the feedback loops in the system that would be set in motion are strengthening, we will go further.
But bank capital is not always the best tool to use to strengthen the system and is almost certainly not best used in isolation.
We have applied that principle in the mortgage market. Alongside capitalising banks to withstand a deep downturn in the housing market, we have put guards in place against looser lending standards: A limit on mortgage lending at high loan-to-income ratios; And a requirement to test that borrowers can still afford their loan repayments if interest rates rise.
These measures guard against lending standards that make the economy more risky; that make what could happen even worse. Debt overhangs – induced by looser lending standards – drag the economy down when corrected. And before they are, high levels of debt make consumer spending more susceptible to the unexpected. So they guard against lenders being exposed to both the direct risk of riskier individual loans, and the indirect risk of a more fragile economy. This multiplicity of effects means there is uncertainty about precisely how much bank capital would be needed to truly ensure bank resilience as underwriting standards loosen.
A diversified policy is also more comprehensive. It guards against regulatory arbitrage; of lending moving to foreign banks or non-bank parts of the financial system. And by reducing the risk of debt overhangs and high levels of debt, it makes the economy more stable too.
Fifth, It is that fortune favours the bold.
The Financial Policy Committee needs to match its judgements that what could happen has got worse with action to make the system more resilient. Why will that take boldness? Our actions will stop the financial system doing something it might otherwise have chosen to do in its own private interest – there will be opposition. The need to build resilience will often arise when private agents believe the risks are at their lowest. And if we are successful in ensuring the system is resilient, there will be no way of showing the benefits of our actions. We will appear to have been tilting at windmills.
As the memory of the financial crisis fades in the public conscience, making the case for our actions will get harder. Fortunately, we are bolstered by a statutory duty to act and powers to act with. And whether on building bank capital or establishing guards against looser lending standards, we have been willing to act. Just as building resilience takes guts, so too does allowing the strength we’ve put into the system to be drawn on when ‘what could happen’ threatens to become reality. Macroprudential policy must be fully countercyclical; not only tightening as risks build, but also loosening as downturn threatens. Without the confidence that we will do that, expectations of economic downturn will prompt the financial system to become risk averse; to hoard capital; to de-risk; to rein in. To create the very amplifying effects on the real economy we are trying to avoid.
A truly countercyclical approach means banks, for example, know their capital buffers can be depleted as they take impairments; Households can be confident that our rules won’t choke off the refinancing of their mortgage. And insurance companies know their solvency won’t be judged at prices in highly illiquid markets. We must be just as bold in loosening requirements when the economy turns down as we are in tightening them in the upswings. Boldness in the upswing to strengthen the system creates the space to be bold in the downturn and allow that strength to be tested and drawn on. Macroprudential fortune favours the bold.