The HIA Housing Affordability Index shows affordability for home buyers eased back in the June 2016 quarter, according to the latest Affordability Report from the Housing Industry Association.
According to the HIA, affordability fell by 3.7 per cent during the June 2016 quarter and was 2.1 per cent less favourable than the same period a year earlier. The capital city housing affordability index fell by 4.3 per cent during the quarter, while regional market index experienced a 1.9 per cent improvement.
During the June 2016 quarter, improvements in affordability were observed in three capital cities with the largest improvement in Perth (+3.2 per cent), Darwin (+2.9 per cent) and Hobart (+2.2 per cent). Affordability worsened in the remaining five capital cities during the March 2016 quarter with the largest decline recorded in Melbourne (-7.4 per cent), followed by Canberra (-5.7 per cent), Sydney (-1.6 per cent), Adelaide (-1.3 per cent), and Brisbane (-1.0 per cent).
“Home price growth moderated in the early part of the year and the HIA Housing Affordability Index showed an improvement in affordability during the March 2016 quarter. However, in the June quarter dwelling price growth returned and the index reverted to the level we saw at the end of 2015,” explained HIA Economist, Geordan Murray.
“While there was a decline in the headline index tracking the national picture, there was substantial variation around the country – with substantial differences between states, and also differences between capital city markets and regional markets.”
“The geographic variation in affordability is most evident in the comparison between Melbourne and Perth. Over the last year, the median dwelling price in Perth has fallen by 4.7 per cent while Melbourne’s has grown by 11.5 per cent. This has seen the affordability index for Perth increase by 6.2 per cent over the last year, while the index for Melbourne has fallen by 6.2 per cent.”
“These differences in affordability align with the relative economic performance of these two states. The Western Australian economy is navigating the tail end of the mining boom which has seen conditions in the local labour market deteriorate and consequently the rate of population growth has fallen quite sharply. In contrast, Victoria has experienced a healthy level of growth in the labour force and continues to record the strongest rate of population growth in the country.”
The Reserve Bank has today released a consultation paper proposing changes to loan-to-value restrictions (LVRs) to further mitigate risks to financial stability arising from the current boom in house prices. The proposals simplify the current policy by applying two nationwide speed limits for owner-occupier and investor lending.
New Zealand house prices have increased by around 50 percent since 2010, driven by strong immigration, low mortgage rates and sluggish housing supply. With house prices becoming increasingly disconnected from underlying household incomes and rents, there is significant potential for house prices to fall very rapidly if the factors currently supporting the market reverse. Average house prices in New Zealand are now around 6.5 times average household income. When combined with the preexisting imbalance built up prior to the GFC, the house price-to-income ratio is further from its historical average than in almost any other OECD country
Rising investor defaults pose significant risks to the financial system, with a growing body of international evidence suggesting that loss rates on investor lending are significantly higher than owner-occupiers during severe housing downturns. There are caveats to applying evidence from other economies to New Zealand, including that mortgage origination standards can vary significantly across countries and time. These problems are mitigated by focussing on the differential between default rates for investors and owner-occupiers identified in international studies. Moreover, the tendency for higher investor default rates is consistent with a range of structural characteristics of investor loans in New Zealand. Direct evidence for New Zealand or Australia is limited as there has not been a severe housing downturn for many decades.
“The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending,” Governor Graeme Wheeler said.
Investor lending is growing strongly, rising from around 28 to 36 percent of overall mortgage lending over the past eighteen months. This suggests that the share of investor loans on bank balance sheets has increased significantly (especially given that more than half of investor loans have been on interest only terms in recent months). Despite tighter LVR restrictions, the investor share of sales has increased in both Auckland and the rest of New Zealand. This suggests that many Auckland investors have been able to increase borrowing capacity by
revaluing their existing properties.
Under the proposed new restrictions:
No more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 percent (i.e. a deposit of less than 40 percent).
No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).
Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.
These proposed new restrictions would take effect on 1 September 2016 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country.
Mr Wheeler said: “The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.
“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.
“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.
“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”
Consultation concludes on 10 August.
Mr Wheeler said that the Bank is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.
“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.”
The latest preliminary auction clearance data from CoreLogic shows the rate held above 70% across the combined capitals for the second week running, with more than three quarters of Sydney and Melbourne auctions returning a successful result.
Across the combined capital cities, the preliminary clearance rate rose this week, up from 70.6 per cent the previous week to 71.6 per cent. The 70.6 per cent clearance rate over the week ending 10 July represented the first time in 15 weeks where the combined capital city clearance rate surpassed 70 per cent. The strong results are still being driven by Sydney and Melbourne, with all other capital city regions recording a preliminary clearance rate under 65 per cent. The number of auctions held across the capitals has remained fairly steady this week, with 1,378 auctions held, compared to 1,399 and remaining low compared to the same time last year, when 1,827 auctions were held, resulting in a clearance rate of 75.4 per cent.
The ANZ Property Council Survey was released last week and it has found that confidence is at its lowest level in over three years. This is the largest sentiment survey of its kind with almost 1,600 respondents. The survey canvassed the views of businesses in the property sector – including, owners, developers, agents, managers, consultants and government – across all major industry sectors and regions. Nationally the score fell 3 points, but is still above the neutral position, though with significant state variations.
Confidence levels
“The uncertainty created by the longest election campaign in half a century, and recent state government decisions to increase property taxes are taking a toll,” said Ken Morrison, Chief Executive of the Property Council of Australia.
“We are seeing significant negative shifts in sentiment in NSW, Queensland and Western Australia. We are seeing a strong positive move in sentiment in South Australia. There is a clear correlation between this improvement in outlook in South Australia and the aggressive approach of the Weatherill Government in lowering property taxes.
Forward work schedules
“We are seeing the forward work schedules in NSW, Queensland, Western Australia and the ACT come off the high level of previous quarters.
Construction Activity Expectations
“While all sectors are reporting net positive expectations for construction, there is concern about the trend in residential construction. In residential construction, we have witnessed a downward shift in sentiment of 36.5 points over the past 12 months.
Residential Capital Growth Expectations
“Nationwide, expectation for capital growth in residential property are neutral. However, the state by state differences are pronounced. Expectations are positive in all jurisdictions except Western Australia. However, it should be noted that we are witnessing significant falls in expectations in Victoria and Queensland.
Interest rates and finance
“All jurisdictions recorded expectations of lower interest rates in the coming 12 months.
“However, the sector is feeling the impact of a tightening in lending conditions by the banks and all states are reporting strong falls in expectations of debt finance, with the exception of SA.
State Government performance – for job planning and managing growth
“The Baird Government is the only state government with net positive performance. The survey was taken prior to the State Budget which dramatically increased property taxes on foreign investors.
“The survey reports a dramatic worsening in business confidence in the Queensland Government and a further improvement in the performance of the South Australian Government.
“Businesses also reported positive expectations for state economic growth in NSW, Victoria, South Australia and the ACT. South Australia moved back into positive expectations. Western Australia has negative but improving expectations for growth and Queensland shifted from positive to negative territory.
Federal Government Issues
“The survey, taken before the federal election, found that 35% believed the most critical issue facing the Federal Government was economic growth. This was followed by cities and infrastructure 24%, tax reform 19% and housing affordability 17%.”
The results from the APM PriceFinder residential auction activity for Saturday, 16 July 2016, shows continued strong momentum. Nationally, clearances were at 75.5%, compared with 69.8% last week, which is the same as a year ago, though on lower volumes. Melbourne was above 80% this week, higher than this time last year. In comparison, Adelaide was just 47% and Brisbane 51%.
In the first NAB Residential Property Survey since the RBA cut the official cash rate in May this year, housing market sentiment amongst property professionals softened.
The NAB Residential Property Index fell to +3, from +6 in Q1 2016, to remain below its long term average of +13.
Sentiment moderated in all states except SA/NT, which rose 19 points, albeit still in negative territory. New South Wales joined Victoria as the best performing state, followed by Queensland.
Confidence has however improved, with the national index rising to +29 next year, and +36 in two years’ time.
The NAB Residential Property Survey for Q2 2016 also found that respondents expect Victoria and Queensland to provide the best capital returns over the next one to two years.
“It’s still a mixed picture across Australia, with house price expectations for the next 12 months holding up well in the eastern states whilst staying flat in SA/NT and continuing to fall sharply in WA,” NAB Chief Economist Alan Oster said.
NAB Economics has also revised its national house price forecasts for 2016 upwards to 5.1% (from 1.5%). Unit price forecasts were revised up to 3.6% for 2016.
“Our upwards revisions in price forecasts reflects the strength in prices to date. Over the last six months, Sydney and Melbourne prices have increased by an annualised rate of nearly 19% and 12% respectively,” Mr Oster said.
“However, while there is significant amount of uncertainty over the outlook for prices, we expect that this renewed momentum in the housing market is unlikely to be sustained over the longer term.”
Looking out to 2017, NAB forecasts prices to be flat across most capital cities, with falls particularly in Perth, Melbourne and Brisbane.
While the declines in Perth largely reflect economic conditions, the falls in Melbourne and Brisbane can be partly attributed to added supply and weaker investor demand.
“NAB is forecasting a much softer residential property market, with 0.5% growth in house prices and nearly 2% decline in unit prices in 2017,” Mr Oster said.
NAB Economics continues to hold the view that residential property prices are unlikely to experience a sharp ‘correction’ without a trigger from a shock that leaves unemployment or interest rates sharply higher.
The Residential Property Survey series also measures foreign buyer activity in the Australian housing market.
Market share of foreign buyers in new Australian housing markets fell for the third straight quarter in a row – to 10.4%. A sharp fall in foreign buyer activity in Queensland was offset by growth in Victoria and a modest rise in NSW. Market share of foreign buyers in established markets was unchanged at 7.2%.
About 230 property professional participated in the Q2 Survey.
Paperless house sales are now a reality but it might be some time before we’ll all be buying and selling property online. The electronic system, Property Exchange Australia or PEXA, set up by financial institutions and a number of state governments, changes conveyancing of real estate in a way not seen since the introduction of title by registration in the mid-1800s.
What this transition achieves is a remote electronic based system for the buying and selling of land. The new process from contract to settlement can be paperless. The only physical aspect of the transaction involved the vendor moving out, the purchaser moving in, and the stakeholders, such as mortgagees and conveyancing agents entering keystrokes on a remotely maintained work space.
How PEXA works
Once the parties enter into a contract for the sale of real estate, an online work space is created through PEXA, whereby relevant information is populated by all stakeholders who retain password verified access to the site.
Instead of the buyer and seller signing forms to be lodged at land titles offices, agents on behalf of these parties (such as conveyancing agents) will digitally sign on their behalf. Overseeing this is the Australian Registrars National Electronic Conveyancing Council a regulatory agency providing guidance and oversight through operating and participation rules.
These rules govern the relationship between the PEXA operator and the land title registry, as well as the electronic lodgement operator and direct participants such as conveyancing agents and financial institutions.
At the moment only conveyancing agents and other subscribers such as financial institutions can lodge online and have direct access to PEXA. To facilitate the use of the system, some land contracts now require that the conveyancing be done through PEXA.
In the foreseeable future its unlikely that the consumers will be able to use PEXA themselves. The cost and impediments to obtaining access are only feasible for someone engaging in transactions on a routine basis.
In theory, the system should reduce costs and unintentional errors through embedding checks in the process of lodging these forms. Currently the paper-based system is arguably more prone to human error, though computer systems depend greatly on the security that sits behind them and the mistakes potentially made by the keystroke operators.
From the point of the real estate industry, it increases productivity and can provide simpler and easier access to real-time data in relation to the property and to the state of the transaction.
Because money is transferred electronically within moments of the settlement occurring, it reduces the current gap that occurs between settlement and registration within paper-based systems. The new system should streamline the complex legal problems that can sometimes occur in transactions.
It should help resolve a category of irreconcilable legal decisions around the priority between two unregistered interests, where there’s one interest in a property and a second interest is also created in the period between settlement and registration. At the moment, judicial bodies resolve these on a case by case basis, but with PEXA reducing the gap between settlement and registration, the opportunity for these sorts of conflicts should disappear.
Risks of paperless property exchange
The first sale using PEXA has already occurred with the five largest states already using the system.
But with any development comes risks. At its heart conveyancing requires that a purchaser be able to identify the vendor, verify that the vendor is indeed the owner of the land, and finally, confirm that this vendor has the right to deal with that land and is not constrained by others (such as a mortgagee). These requirements are key to preventing identity fraud.
PEXA’s response has been to impose significant identity verification requirements that can exceed the well-known 100 point requirements to open a bank account. Purchases by overseas parties have had significantly greater requirements for identity verification imposed upon them.
However identity fraud will continue to pose a threat in the PEXA environment if users are not vigilant in complying with these enhanced identity requirements. There may also be risks in the movement of funds at settlement. Because this occurs electronically, the capacity to cancel cheques paid in settlement before these cheques are cashed will disappear.
The risk of a person accessing the computer system fraudulently and altering multiple records is palpable.
At its heart, what this new era does is reallocate risk. Lawyers, conveyancing agents, mortgagees, assurance funds and land title registries have for close to 150 years of private law jurisprudence on title by registration developed a complex series of rules governing this allocation.
The new dawn of electronic conveyancing will inevitably provoke new jurisprudence with the stakeholders jousting for position. Whoever emerges with the least amount of risk attached to them will be a powerful player in this new paperless property market.
Authors: Lynden Griggs, Senior Lecturer, Faculty of Law, University of Tasmania; Rouhshi Low, Lecturer, QUT Business School, Queensland University of Technology
In major cities across the globe – from London to Manila, Auckland to Los Angeles – housing is becoming less and less affordable. This has caused a great deal of angst over house prices. But so far, politicians and the media have been much more effective at whipping up public anxiety, than putting in place actual solutions.
Over-inflated house prices are caused by more than just supply and demand. Policy changes often focus too narrowly on increasing housing supply, by opening up more land for development and speeding up the planning process. Of course, supply is important. If more people want to buy houses than there are houses available then prices may be forced upward.
But it is not enough to address only one cause. Another major driver of price increases is a housing market “bubble”. A bubble can be detected when property prices increase significantly faster than rents. In investment terms, this means you’re buying a more expensive asset, but it doesn’t give a higher return from rental income.
When prices are rising rapidly, buyers tend to anticipate that this will continue, guaranteeing a tidy profit when they eventually sell the property. Add record low interest rates and the resulting abundance of low-cost debt means that house prices can easily become over-inflated, relative to people’s incomes.
The 2013 Nobel Prize-winner Robert Shiller theorised this buyer behaviour and called it “irrational exuberance”. Housing markets in many cities across the globe are stubbornly following Shiller’s theory. As a bubble grows, more people are priced out of the market for buying property, while the apparent urgency to get onto the property ladder increases. Even if housing supply is increasing, the expectation of increasing property values will continue to drive this kind of behaviour in the market.
It is thought that London alone requires 42,000 new homes each year, based on population estimates. Between 2001 and 2011, Greater London’s population increased by 12.6%, while housing supply grew only 7.5%. It is only physically possible to meet this demand by putting more people into existing houses, leading to overcrowding, which is harmful to health and well-being.
So, building more houses won’t discourage irrational investment on its own. In fact, it might encourage more people to take on debt and invest in an over-valued housing market. If the bubble bursts – which would most likely be caused by a recession, or an increase in the cost of debt – prices will undergo a “correction”. Whether this correction is large or small, the financial impact on households and the threat to the stability of the national economy are significant.
How to rent a home
To diffuse this situation, we need to question our common assumptions about housing. The key role of housing is to meet the basic human need for safe and secure shelter. Housing policies mostly assume that home ownership is the only way to do this.
This idea has its roots in the post-war era, when governments promoted the idea of owning your own home, as the mark of financial security. Home ownership is not wrong – although households should seriously consider the risks of taking on large, long-term debts. But arguably, it isn’t an appropriate one-size-fits-all solution for cities in 2016.
Not ideal.from www.shutterstock.com
So, what other options do we have? For starters, better rental regulations could allow for long-term tenure and provide better protection for tenants. In Germany, only 39% of the population owns their own home, compared with roughly 60% in the UK.
But they also rent under very different conditions to people in the UK. Local governments can limit the rate of rent increases, and tenants have more rights to occupy a property over a long-term period. These arrangements make renting a viable option for people looking for long-term accommodation, which frees up household income to invest in other assets, with lower risk.
The real crisis
There are even more inventive ways to emphasise the importance of access to shelter, over and above home ownership. For one thing, there are some creative and forward-thinking design solutions on show at this year’s “Home Economics” display, at the Venice Biennale.
But we also need to rethink the way we plan our cities. In reality, the housing crisis stems from the fact that house building is left largely to the private market. Private developments don’t always include smaller, more modest homes for low-income households as well as expensive homes for the wealthy (the latter are usually more profitable). A survey of developments between 2014 and 2015 found that only 20% of the total number of homes built were deemed to be “affordable”.
Local governments require a certain share of new houses to cater to those on low incomes, but these affordable housing requirements are notoriously weak, too. In London, as little as 12% of dwellings in new developments need to be “affordable” – a classification which allows rents as high as 80% of market rate. In some cases, the price of a home deemed “affordable” was equal to 30 times the average UK wage.
Policies focused purely on expanding supply, without catering to different income groups, ignore the fact that cities depend on people who earn many different levels of income to provide key services. There are wider costs to society if cleaners, bar staff, creatives, cashiers and nursery assistants cannot afford to live in urban areas. Even if cheaper accommodation is available on the outskirts, this won’t offer a solution if commutes are long and costly.
We don’t know how or when the UK’s housing market bubble will burst, or how much prices might fall when it does. For the moment, those who don’t own property can take comfort in the fact that they aren’t taking on a mortgage in an overvalued property market. Meanwhile, leaders need to consider more innovative housing options, which focus on access rather than ownership. They need to provide meaningful alternatives for people on low incomes – or risk driving them out of our cities altogether.
Data from CoreLogic shows that of the 1,365 capital city auctions held this week, 1,110 results have been reported so far with a preliminary clearance rate of 72.0 per cent. This week’s preliminary clearance rate is higher than last week, when final results showed that 67.0 per cent of auctions were successful. The number of auctions held this week was much higher than last week, when 841 auctions were held, with activity lower than usual given the Federal Election. However, auction activity this week remains substantially lower than over the two weeks leading up to the election, when across the combined capital cities, more than 2,000 auctions were held each week. At the same time last year, 1,704 capital city auctions were held with 74.9 per cent clearing.
According to Moody’s last Thursday, Canada’s Office of the Superintendent of Financial Institutions (OSFI) notified the country’s regulated mortgage lenders that it will intensify its supervisory oversight of their residential mortgage underwriting practices.
In the past 10 years home prices in Canada have lifted more than in Australia, although the debt to disposable income ratio at around 155% is still lower than Australia (175%) but higher than the UK (~130%). The Canadian market is also exposed to the impact of future interest rate rises.
Moody’s says that Canadian housing prices have risen faster than most other industrialized countries, resulting in house price levels increasing substantially over the past 10 years to be among the highest in major industrialized countries (see Exhibit 2), and raising the risk of a price correction. Over the past 25 years, house prices in Canada have steadily increased, primarily in urban centres such as Toronto, Ontario, and Vancouver, British Columbia.
The regulator vowed a heightened focus on income verification, mortgages with loan-to-value ratios of less than 65% (which OSFI indicated was a category in which underwriting practices are often less rigorous), stress assumptions related to debt-service ratios and the reliability of property appraisals. OSFI’s announcement is credit positive for Canadian banks because heightened regulatory scrutiny will force them to maintain or enhance existing residential mortgage underwriting controls and practices amid growing concerns about increasing household debt and elevated housing prices.
Residential mortgage debt, including home equity lines of credit (HELOCs), has doubled over the past decade. Canadian conventional mortgage debt, excluding home equity lines of credit (HELOCs), has grown at a compound annual rate of 7% over the past decade. Almost CAD1.6 trillion in mortgage debt, including HELOCs, was outstanding as of 31 March 2016, more than double the amount outstanding for the same period 10 years ago (see Exhibit 1).
Over the past 25 years, Canadian consumer debt-to-income levels, which include mortgage debt, almost doubled and are at a record high. As a result, housing indebtedness has tracked closely to house price increases as borrowers take larger loans, while at the same time, incomes have not kept pace. These higher debt levels make Canadian consumers vulnerable to an employment or interest rate shock that would exacerbate their debt-servicing burden (see Exhibit 3).
Of note, OSFI specifically indicated its interest in debt service ratios because current underwriting requirements may not adequately capture the stress effect of refinancing a mortgage into one with a higher mortgage interest rate. This is important because of the unique characteristic of a Canadian mortgage. A Canadian mortgage is structured as a balloon loan whereby the term (typically five years) is shorter than its amortization (typically 25 years). This means borrowers must periodically refinance their mortgages (see Exhibit 4), exposing them to changes in interest rates over the life of the mortgage. This refinancing risk is greatest for recent borrowers with high loan-to-value mortgages in a rising interest rate environment. OSFI noted that a rapidly rising interest rate environment would place considerable stress on existing debt service ratios, particularly on investment properties with rental income.
During the June 2016 quarter, improvements in affordability were observed in three capital cities with the largest improvement in Perth (+3.2 per cent), Darwin (+2.9 per cent) and Hobart (+2.2 per cent). Affordability worsened in the remaining five capital cities during the March 2016 quarter with the largest decline recorded in Melbourne (-7.4 per cent), followed by Canberra (-5.7 per cent), Sydney (-1.6 per cent), Adelaide (-1.3 per cent), and Brisbane (-1.0 per cent).
