Property Market – Page 186 – Digital Finance Analytics (DFA) Blog

Auction Results Today Higher Once Again

The preliminary auction clearance results from Domain continues the strong trends seen in recent weeks. Nationally, the clearance rate was 76.6% on 2,620 listed, with Melbourne achieving 80.7% on 1,372 and Sydney 76.2% on 908. All higher than last week, and higher than those listed a year ago, when 2,462 were scheduled and 58.9% cleared nationally.

Brisbane listed 139 and achieved 47%, Adelaide scheduled 109 and achieved 61% and Canberra listed 92 and achieved 61%. So clearly the momentum is strongest in the major markets of Sydney and Melbourne.

Stock levels remain well below average across the hot housing markets

Nice piece from CoreLogic’s Tim Lawless. Stock levels remain well below average across the hot housing markets, but are close to record levels in Perth and Darwin.

With the spring ‘selling season’ done and dusted and Christmas rapidly approaching, it is worthwhile having a look at how stock levels have tracked over the season and year relative to previous years. One of the key facets of the housing market over the last year has been the shortage of advertised stock that has created urgency amongst buyers. This has likely been one of the primary reasons why clearance rates have been high and the average selling time has been short.

CoreLogic counts listing numbers over a rolling 28 day period, updating the results each week. The listing counts are the summation of collecting listing numbers from online sources as well as print sources. Advertised listings are matched against property records, duplicates are removed, and listings are counted. New listings (ie those listings that we have not seen advertised previously over the past six months) are counted separately, while total listings is the sum of relisted stock (ie those properties that have been advertised at least once previously over the past six months) and new listings.

The graphs below track new and total listings across the combined capital cities. They show the number of property advertisements is highly seasonal and has varied substantially from year to year. Throughout spring 2016, new listing numbers have been tracking well below the highs of 2014 and 2015, however with the summer slowdown now in full swing, the number of new listings being added to the market is tracking almost 5% higher than last year across the capital cities.

The total amount of advertised stock shows a more substantial divergence over the years. Total stock levels have actually been tracking higher than a year ago across the combined capitals region and are currently 1.4% higher than a year ago. This trend seems to fly in the face of the argument that stock levels are in short supply, driving growth in prices. However, when we drill down into individual capital city trends it becomes very clear that the very ‘hot’ markets are where the shortage of stock is most pronounced.

The shortage of advertised stock is most pronounced in Sydney where fresh stock being added to the market has been consistently and substantially lower than the past two years. Total advertised stock levels are currently 10.2% lower than a year ago and there is approximately half the number of advertised properties in the market compared with the 2011 peak which was above 40,000.

The listings trend in Brisbane is very different. New listings being added to the market are on par with the highs of 2014 and substantially higher compared with last year and earlier periods in the cycle. Total advertised stock is higher than the past two years which is likely contributing to the softer pace of capital gains across the Brisbane housing market, as well as longer selling times and higher rates of vendor discounting compared with the larger capitals.

The weakness across the Perth housing market can be seen in a range of indicators. Dwelling values have been trending lower, rents are down almost 10% over the past year, properties are taking a long time to sell and vendors are showing large rates of discounting in order to sell their properties. The high number of total listings relative to previous years highlight that Perth is well and truly a buyer’s market. New listings are tracking higher than last year but remain well below the highs achieved when the market was much healthier in between 2012 and 2014. As buyer demand has slowed, total stock levels have trended significantly higher and are currently 14.2% higher than at the same time last year. Such a wide range of stock to choose from and little in the way of urgency amongst buyers is unlikely to create upwards pressure on prices until stock levels reduce substantially.

Investment Loans Stronger In October

The latest housing finance statistics from the ABS, to October 2016 shows continued growth in investment mortgage lending, whilst owner occupied momentum slowed. In the month and in trend terms, $32 billion on new loans were written, up 0.25%. Within that, owner occupied flow fell 0.5% to $19.7 billion, whilst investment loans grew 1.5%, to $12.5 billion. Investment lending comprised 33.8% of all loans, up from 33.3% the previous month.

33.8% of owner occupied loans were a refinance of existing loans. 12.8% of loans were fixed rate, up from 11.2% last month – reflecting the low rate fixed offers which were available at the time.

Looking at the segmentals, owner occupied lending for construction rose 0.06% to $1.8 billion, purchase of new dwellings fell 0.17% to $1 billion, refinance of established dwellings fell 0.74% to $6.6 billion and purchase of established dwellings fell 0.5% to $10.2 billion.

On the investment side of the ledger, construction of new investment dwellings fell 0.46% to $842 million, purchase of property for investment by individuals rose 2.11% to $10.6 billion and purchase by other investors rose 0.45% to $1 billion.

Looking at ADI loan stock, in original terms, total loans grew by 0.61% in the month, up $9 billion. Investment loans rose 0.5% or $2.7 billion and owner occupied stock rose 0.67% or $6.7 billion.

Turning to first time buyers,the volume of new owner occupied loans to first time buyers remained around 7,300, but because the number of non-first time buyers fell, it rose to 13.7% of all loans, up from 13.1%. The average loan size for first time buyers rose to $327,000, up 1% from last month, whilst the average non-first time buyer loan is $380,000, up 1.6%.

Looking at the DFA survey data we saw a slight fall in the number of first time buyers going directly to the investment sector, but another 4,000 joined the property investor ranks in the month.

Finally, looking at the state-based data in trend terms, the largest falls in owner occupied loans were in NSW (down 1.2%) and ACT (down 2.1%). Tasmania was the only state to see a rise – up 0.7%.

First Time Buyers Caught In The Property “Jaws”

Compared with 12 months ago, First Time Buyers are caught in the jaws created by a combination of tighter mortgage underwriting standards and higher property market prices. Together these forces make the prospect of a purchase significantly less likely. This conclusion is drawn from our updated our household surveys. Looking in detail at the survey results:

Compared with 12 months ago, 56% of first time buyers still have the same appetite to enter the market, just 5% has a stronger appetite now, whilst 39% have a lower appetite than a year ago.

The fall is driven partly by prices continuing to accelerate out of reach, with 51% saying their target was now more out of reach than a year ago, whilst 43% said there was no real change and 6% said prices has fallen. There were considerable state and regional variations. Prices in WA and areas of QLD are lower, whilst prices in NSW, VIC and ACT are significantly higher.

Finally, the combination of flat incomes, and tighter mortgage underwriting standards means that more than half – 58% – said they borrowing capacity had effectively been reduced. Around 40% said there was no change, and just 2% said their borrowing capacity had risen. Once again first time buyers in NSW and VIC were the most under pressure, thanks to high prices, and static incomes.

No surprise therefore that the latest ABS statistics shows the number of first time buyers continuing to languish.

Caution as interest-only mortgages continue to rise

From News.com.au.

Has Australia gotten too swept up in our great love affair with property?

And they have been consistently rising for close to a decade, since the Australian Prudential Regulation Authority (APRA) started releasing this data in 2008.

According to APRA’s latest quarterly property exposure statistics, released last week, interest-only home loans increased by almost $8 billion in the September 2016 quarter. These types of mortgages now make up 39 per cent of all residential home loans.

But with evidence that house price growth is easing — capital gains recorded over November were the softest they have been since December 2015 — and with mortgage rates on the way back up, the rise in interest-only lending is beginning to ring alarm bells.

“In slow growth markets, which most markets in Australia currently are, if you’re not paying down the principal loan amount and there is a market event that leads to a drop in property prices, a homeowner with an interest-only loan could be left dangerously exposed,” the CEO of HomeStart Finance, John Oliver said.

“Even in current high-growth markets such as Melbourne and Sydney, there is speculation about a potential bursting of the property bubble. If this happens, it could lead to a lot of homeowners losing their properties.

“Australia’s property market is littered with periods when the value of properties actually fell, such as the Sydney market between 2004 — 2007 where prices fell by 8 per cent and Adelaide between 2010 — 2013 where prices fell by 4 per cent.”

CoreLogic figures showed Melbourne house prices dropped by 1.5 per cent in November while Sydney prices rose by just 0.8 per cent. The combined capital city index grew by just 0.2 per cent over the month.

A SLEEPING PROBLEM

Interest-only home loans have typically been popular among property investors because it minimises mortgage repayments in the short-term while investors bank on capital growth in the long-term. So with property investors such a strong force in the Australian property market, Martin North, Principal of Digital Finance Analytics said the increasing popularity of interest-only isn’t surprising.

“We need to understand who are getting those interest-only loans. There is a very strong correlation between interest-only loans and greater investment lending,” Mr North told news.com.au.

“In the last three or four months we have seen investors come back and investor loans are driving the market again.”

But this love affair with property investment, and the subsequent rise in interest-only lending, could now start to cause real headaches at a time when interest rates are starting to rise.

“We have got two issues. The first issue is we have got this continued growth with investor loans and my research tells me investors are still pretty keen on the market … and therefore interest-only loans are being sold,” Mr North said.

“The second issue is we have got interest-only loans with people currently and when they come up for renewal, with interest rates rising, the bank will be asking harder questions about whether they can refinance and repay the capital. And some of those [investors], from my surveys, would indicate they don’t have a plan to repay the capital. That means there is a sleeping problem for those with interest-only loans currently.”

Research from Digital Finance Analytics shows more than eight in ten existing interest-only loan holders expect to refinance their loan to another interest-only loan and more than a quarter had no firm plans as to how they were going to repay if they couldn’t enter another interest-only agreement. Banks, who don’t want borrowers on interest-only terms for long periods, offer fixed-terms on interest-only mortgages, with the average term lasting five years.

This leaves us with a significant amount of investors who have taken advantage of interest-only mortgages, and are “ill-prepared” to switch to principal-and-interest.

They have assumed that price growth will continue at stratospherical levels so they will be able to sell their property and repay the loan, said Mr North, or they have assumed they will be able to continue to roll their loan over on interest-only terms. But house price growth is cooling and banks are tightening interest rates and loan approvals.

“It creates a series of small earthquakes. Those might be tremors that don’t go anywhere but if you think about it in the context of interest rates rising, house price growth slowing going forward, and people who own investment properties who are already underwater in terms of rental yields, and they now find they can’t actually refinance the loan under interest-only terms …

What I’m feeling is people are going to have a nasty shock,” Mr North said.

“If [investors] do run to the exit, they still have got to repay the loan they have got on the property … But if you have a situation where there is a significant downturn, and property prices drop dramatically, then you could be in a situation where some of the interest-only borrowers won’t be able to repay their loans and that could be a significant downward force on the market.”

A WIDER PROBLEM

APRA’s data shows the concern extends beyond property investors. While interest-only home loans are mostly used by investors, owner-occupiers are resorting to this type of structure too, at higher levels than ever.

At the end of the September 2016 quarter, the value of interest-only loans exceeded the value of investment loans by almost $60 billion, compared to just $18 billion a year earlier. At the end of the September 2014 quarter, two years ago, the value of interest-only mortgages was $26 billion less than the value of mortgages to investors. That’s a turnaround of $86 billion in two years.

“At a time when living costs continue to rise there’s no doubt that home buyers, and in particular first-time buyers, see interest-only loans as a quick fix to get into their own home sooner, while also managing everyday costs,” Mr Oliver said.

A sobering thought given a fifth of young borrowers already can’t make their mortgage repayments when rates are at record lows.

So if the market does drop and rates rise, it is not just investors who are headed for trouble.

“If they are not paying any money off the home, no headway is being made on the overall mortgage. By paying off the interest for up to 10 years, no equity will be built up in the home if property prices aren’t rising,” Mr Oliver said.

“If housing prices drop or there is a downturn in the economy then they could be forced to sell the property at a loss, or the banks may repossess the property.”

As its economy changes, China is starting to export its real estate ideas too

From The Conversation.

When it comes to discussions about Chinese real estate investors, we tend to focus on the idea that they are buying up property in places like Australia, pushing up prices – even if that is somewhat questionable. But it also ignores the other side of the equation. The number of properties built by Chinese developers outside of China has grown significantly, even as residential construction within China slows.

The expansion of Chinese residential development outside China has impacts on a number of levels, from property prices through to regional diplomacy.

The shift to Asia

Country Garden, a property development company based in Guangdong, China, is constructing apartment buildings that would add more than half-a-million homes and house 700,000 people in Johor Bahru, in southern Malaysia. This project goes far beyond constructing apartment buildings, however. It is part of an even bigger project named “Forest City” that Country Garden plans to build on four artificial islands.

The idea is that Forest City will be equipped with schools, shopping malls, parks, hotels, office buildings and banks. All ensconced in rich greenery, clean water and a quiet transportation system.

This grand project is just one example of the recent surge of overseas investment by Chinese property developers. Total investment in the Chinese real estate sector was growing at a rate above 10% until 2014, then dropped to less than 1% in 2015. This indicates a significant shift in Chinese real estate investment.

All the while, Chinese investment in the real estate sector overseas has picked up strongly. It has grown from $US0.6 billion in 2009 to US$30 billion in 2015. Several Chinese property developers have identified overseas investment as their main business growth strategy.

Two reasons for the pivot

Chinese investors have begun looking offshore for a couple of reasons.

Chinese buyer demand for overseas properties is growing. Since China reformed its economy and started growing at a fantastic rate, households have accumulated significant wealth. They now want to diversify their investment portfolios, and so are seeking property elsewhere.

Volatility in domestic housing prices has intensified this trend, despite various government policies aimed at smoothing out price fluctuations. An oversupply of properties in third and fourth-tier cities such as Ordos and Qinhuangdao created “ghost towns” where property isn’t desirable. In first and second-tier cities, however, prices have skyrocketed. House price-to-income ratios of these cities are ranked highest in the world, making it difficult to invest in properties in China.

In recent years there has been a huge expansion of production capacity. In 2015, China produced 51.3% of the cement and 49.5% of the crude steel in the world. As production capacity grows beyond the demand from the domestic market and runs into overcapacity, it is natural that firms will seek returns overseas.

The impact of it all

Taking Country Garden as an example, it is worth noting that the developer is not just building residential property, but designing and constructing the entire infrastructure for a city. Transport, greenery, water and noise control are all being put in place. These are beyond the scope of a conventional property developer.

Therefore, one potential positive impact of this project is to help boost the quality of infrastructure in Johor Bahru and so nurture more business activities in the future. The economic and geographic relationships between Johor Bahru and neighbouring Singapore may develop into one similar to that between Shenzhen and Hong Kong.

It is, however, critical that the local government monitors and enforces strict environmental protection and regulation to ensure the project won’t damage the natural environment or disrupt the local market.

The huge influx of newly built apartments has resulted in the value of residential sales dropping by almost one-third in in Johor Bahru last year. Whether this is a short-run phenomenon and housing prices will rally in the long run depends on whether more business activities and job opportunities can attract population inflow to the city and hence create higher demand for housing. In the short run, the fall in housing prices may lower the cost of living and attract firms and workers into the city.

For the Chinese government, it will be important to nurture more talent with legal and financial expertise to help Chinese property developers go out and invest overseas. This expansion by developers is just one, early facet of China’s new diplomatic efforts to develop infrastructure overseas.

Author: Yixiao Zhou, Lecturer in Economics, Curtin University

Capital city clearance rate remains strong

CoreLogic confirms the combined capital city preliminary clearance rate rose this week to 75.0 per cent, up from last week’s final clearance rate of 73.0 per cent. This week’s auction market results indicate that clearance rates are maintaining strength coming into summer, a trend that is very different compared with last year’s performance when auctions clearance rates were tracking in the high 50 per cent to low 60 per cent range. The number of properties taken to auction this week fell across the capital cities, with 3,173 reported auctions, down from 3,398 last week, which was the second busiest week for auctions this year. In Melbourne and Sydney, the number of auctions held have decreased (1,410 and 1,158) while across the smaller capital cities, auction volumes have increased over the week. Auction activity is expected to slow over the remaining weeks of December, however the strong trend in clearance rates is showing no signs of easing.

20161205-capital-city

Auctions Still Stratospheric … But

The preliminary auction results for today are out from Domain. Another strong set of results, with clearance rates at 76.1%, though on 2,382 listings compared with 2,640 last week.

Melbourne listed 1,173 and cleared 79.9% compared with 76.2% last week. Sydney listed 874 and cleared 75.8%, compared with 74.5% last week. Brisbane listed 148 and cleared 47%, Adelaide listed 106 and cleared 62% whilst Canberra scheduled 81 auctions and cleared 61%.

We expect momentum to sag as we approach the summer break, and with mortgage interest rates on the rise.

Home Prices Up Again

The CoreLogic November Hedonic Home Value Index results out today show a rise in dwelling values across every capital city excluding Melbourne over the month. Capital city dwelling values rose by 0.2% in November as the housing growth cycle clicked over 4.5 years of growth.

Darwin was the best performing capital city: +3.7%, whilst the weakest was Perth, down -1.1%.

The soft performance across the combined capital city reading was attributable to a 1.5% fall in the Melbourne index, while all other capital cities recorded a positive month-on-month result.

The combined regional areas of Australia showed a weaker result with house values falling by 0.2% over the month.

On an annual basis, every capital city except for Perth is now showing a positive annual trend in dwelling value growth. The highest annual growth rate is evident in Sydney and Melbourne where dwelling values are now 13.1% and 11.3% higher respectively, reflecting a steeper upwards trajectory in growth over the second half of the year. The Hobart and Canberra markets have also seen some acceleration in growth rate trends with dwelling values up 8.5%, and 8.4% respectively over the past twelve months.

Currently the national growth cycle has been in play for 4.5 years, with capital city dwelling values rising by 42.2% over the cycle to date.

Disaggregating this growth figure highlights the diversity in market conditions with Sydney and Melbourne at one end of the spectrum experiencing an increase in dwelling values over this period of 67.3% and 46.3% respectively, while at the other end of the spectrum, Perth and Darwin values have broadly declined since 2014. Perth values are 6.9% higher since the cycle commenced in June 2012, while Darwin values are 13.8% higher over this period.

It appears that higher unit supply is progressively weighing down the capital gains across Melbourne’s unit sector, with annual capital gains tracking at 3.9% for Melbourne units compared with a 12.2% annual gain in Melbourne house values. A similar trend can be seen in Brisbane, where the supply of units across key inner city regions is also high. Brisbane house values were up 4.3% over the past twelve months compared with a 0.9% fall in unit values.

Rental yields reached a new record low in November across the combined capitals index due to dwelling values continuing to rise at a faster pace than weekly rental rates.The average gross rental yield across combined capital city dwellings is now recorded at 3.2%,down from 3.5% a year ago and 4.1% five years ago.

Sydney and Melbourne share the lowest yield profile for detached housing, with an average of 2.8% in both cities, while the gross yield on Sydney units has fallen well below Melbourne’s at 3.8%.

Changes for off-the-plan foreign buyers rely on a broken supply argument

From The Conversation.

The government is proposing changes to the foreign investment framework that will allow a foreign real estate investor to purchase an off-the-plan dwelling when another foreign investor has failed to reach settlement.

In announcing the changes, Treasurer Scott Morrison deployed a familiar narrative about foreign investment increasing housing supply and making “housing more affordable for more Australians”.

This idea is in keeping with property development lobbyists, who are focused on getting government to release more land to solve the complex long-term housing affordability problem in cities.

However, researchers have debunked this idea before (see here and here). Their conclusion is that government cannot supply its way out of the housing affordability problem in major Australian cities.

The government’s focus on the concerns of the property industry renders invisible a broader set of interested parties and a much more nuanced suite of contributing factors and solutions.

The current foreign investment rules are a blunt set of regulatory tools, held captive to the housing supply and global competitiveness debates.

Not all foreign real estate investors are the same

There are important differences between individual foreign real estate investors, which are regularly conflated in foreign investment policy and the public debate.

In broad terms, there are four investor groups. A class-based distinction defines people from the expanding middle class in countries like China. They are called the new middle class.

A disposable asset distinction, which excludes primary residences, separates the three remaining groups. High net worth individuals have disposable assets that exceed US$1 million. Ultra high net worth individuals have asset holdings in excess of US$30 million. Ultra, ultra high net worth individuals have a minimum of US$50 million in disposable assets in a wealth management fund.

In the absence of fine-grained data about which groups are investing and their differential impacts on cities and housing, the treasurer has opted to protect the development industry rather than the people and places within cities.

A regulatory environment that is sensitive to various investor groups is important in Australia because different investors impact their host cities in diverse ways.

Regulating foreign investors, sales or capital

How foreign capital intersects with local real estate markets depends on on who is investing capital, the properties in which the capital is being invested and the investment vehicles through which the capital is being transferred.

The arrival of foreign capital is not always accompanied by the arrival of new permanent residents for the city. Therefore, the investors interact with local infrastructure and shape housing supply in diverse ways.

There is a big difference between the impacts of new middle class and high net worth investors in cities compared to ultra and ultra, ultra high net worth investment.

Ultra, ultra high net worth individuals can be “free-floating” investors who travel around the world, purchasing real estate in various global cities. Rowland Atkinson argues this group has little allegiance to the host neighbourhoods.

Ultra high net worth investors might move between multiple residences and have attachments to the neighbourhoods their properties are in. The new middle class and high net worth investors might live in, or send their spouse and/or children to live in, the house they have purchased. They often have an allegiance to the cities or neighbourhoods their properties are in.

The personal motivations of foreign investors are important too. They can extend far beyond financial considerations.
An exhibitor of luxury properties in Spain speaks to a potential investor during the Luxury Property Showcase (LPS) Beijing. Ultra high net worth individuals can shop globally for investment properties. HOW HWEE YOUNG/EPA
Foreign investors are motivated by the opportunities that exist in Australia and how these relate to their own migration plans, their children’s education and the financial security that Australian real estate supposedly guarantees.

Therefore, who is investing and their residency status will shape the neighbourhood, city and perhaps even the country into the future.

Neighbourhoods with high concentrations of ultra high net worth investors in London appear to be (or may be) devoid of people. Local businesses in these suburbs have become untenable as local patronage declines.

New middle class and high net worth investors might change the social fabric, educational institutions or employment landscape of a neighbourhood or city through habitation, for good or ill.

International evidence shows that some investors will occupy their property, others place it on the rental market, some buy multi-million-dollar trophy homes, while others increase the housing supply in a neighbourhood of absentee owners and fading businesses.

Therefore, the impact of foreign investors on housing supply is related to the investment practises of each investor, the amount of capital they bring into Australia and how they invest it.

More dynamic foreign investment rules needed

Housing supply and global competitiveness arguments have captured the foreign real estate investment debate. Both are too simplistic and need to be augmented with additional voices, policies and data.

Governments justify their pro-foreign investment and business immigration policies through “financial benefits” arguments in times of prosperity and “economic necessity” arguments in times of hardship.

These top-down narratives position foreign real estate investment as good for the local economy, with secondary benefits such as increasing housing supply and jobs growth through targeted skill migration and business development.

The government needs to understand how foreign investment is shaping cities from the ground up. This includes: how foreign investment impacts people in the local neighbourhoods where these properties are located; how developers change the dwellings they build to suit foreign investors; how changing educational institutions are shaping foreign student investment; and the experience of first homebuyers who are looking for a home in the same property markets.

Author: Dallas Rogers, Urban Studies Researcher: Institute for Culture and Society & Urban Research Program, Western Sydney University