The New South Wales government is after a bigger slice of the overseas investment flooding into Sydney’s booming property market, with treasurer Gladys Berejiklian announcing today that next week’s state budget will include foreign investor surcharges on stamp duty and land tax on residential real estate.
A little over 20% of property in Australia is sold to foreign investors.
NSW is now the third east coast state to look at foreign investment to boost state coffers after Victoria increased the surcharge for foreign buyers of residential property from 3% to 7% in its April budget. The change comes into effect from July 1. Victoria also trebled its land tax surcharge on “absentee landholders” from 0.5% to 1.5%.
Treasurer Tim Pallas expects it will deliver an additional $486 million in revenue over the next four years. The move comes after the introduction of the 3% surcharge appeared to have no impact on demand, despite predictions to the opposite from the real estate industry.
Last week Queensland’s Labor government announced its own 3% transfer duty surcharge.
Treasurer Curtis Pitt says the move will generate around $25 million for the state annually, adding about $14,000 to the price of the average $475,000 price of a Queensland home.
NSW treasurer Gladys Berejiklian will add a 4% stamp duty surcharge on residential property bought by foreign purchasers, plus 0.75% land tax surcharge for foreign owners from the 2017 land tax year.
She expects the move to generate $262 million in total next financial year and more than $1 billion over four years.
“The Victorian experience has demonstrated that the measures have not had an adverse impact on the property market,” Berejiklian said.
“These new measures will ensure NSW’s property market continues to be an attractive destination for international investors while making sure that we are able to fund vital services into the future.”
Under the changes, foreign investors will no longer be entitled to the 12-month deferral for the payment of stamp duty for off-the-plan purchases of residential property and will not get the tax-free threshold for the land tax surcharge.
The move comes as developers are increasingly targeting the lucrative Chinese market with new residential sites in Australia.
The Property Council of Australia has been vociferous in its opposition to the surcharges, last week accusing the Queensland government of breaking its promise from 12 months ago not to introduce a surcharge, and turning its back on investors, claiming it would cost jobs.
Today, Scott McGill from Pitcher Partners Sydney claimed that Victoria was starting to see foreign investors pulling out of the market, and international developers scaling back on land acquisition.
Amid tightening lending restrictions, recent National Australia Bank data revealed foreign buyers of new property in Victoria in the March quarter slumped to their lowest since 2014.
McGill claimed the NSW decision would push up the price of property for everyone.
“Government can’t afford to come in with a knee jerk reaction to foreign investment without considering the downstream effects,” he said.
“You run the real risk of restricting supply and pushing up real estate prices – which is the last thing Sydney needs.”
McGill said it was “far too simplistic” to argue foreign investors were pricing local buyers out of the market.
“Higher taxes on foreign investors will not improve housing affordability, but rather it will undermine new supply coming on board,” he said.
Category: Property Market
Will Rates Fall Further?
The RBA statistical release shows the relative policy rates in US, UK, Canada, Japan, ECB and Australia. Looking at the rates from 1999, we see that since the GFC rates have been lower, thanks to unconventional monetary policy. In contrast to other countries, the Australian cash rate has remained higher, for longer, but is at a record low. Will it fall further?
Yahoo7News reports that according to 1300HomeLoan managing director John Kolenda, who last year accurately warned banks would lift their mortgage rates out-of-sync with the Reserve Bank, said the current official rate of 1.75 per cent would be the “new norm”.
The Reserve sliced rates to 1.75 per cent – the lowest level on record – last month over fears about the level of inflation. Prices have been dropping for several months across the country with deflation a real threat in Perth.
Mr Kolenda said consumers were now more sensitive to the impact of higher interest rates which meant taking them back to what was once considered normal was unlikely.
“We are unlikely to see official interest rates move to pre-global financial crisis (GFC) levels and the standard norm of the future will be lower than historical levels for the next decade,” he said.
“The monetary policy game has changed and the RBA has found cutting its cash rate is not necessarily an instant remedy for economic stimulus.
“Conversely, any time the RBA increases official rates in the future could have a disastrous impact on consumer confidence and the economy. Consumers are now very rate sensitive and when they rise they are likely to stop spending and revert to saving.”
Markets are pricing in another interest rate cut by the end of the year although economists believe the Reserve’s next move will be a rate increase.
Mr Kolenda said there was a real prospect the Reserve would cut rates again.
This despite stronger than expected GDP growth, reported recently. Inflation is below the RBA’s lower bounds.
Currently, lenders are heavily discounting their mortgage rates for new loans and refinanced transactions. Property transaction momentum appears to be increasing after a slow few months, and house prices are rising in most states.
So, on one hand, there are good reasons to expect the RBA to cut further, and keep rates low for a long time. On the other, the property market is alive and well, and will be a handbrake on further cuts.
We expect out of cycle rate hikes for many mortgage holders, once the election is passed as lenders attempt to repair their margins, and we are less convinced the RBA will cut again anytime soon, give the current property trends – in fact, we need more macroprudential controls, not lower interest rates. That said, the medium term outlook is for rates to stay low for a long time, and this does mean large mortgages will continue to be serviced as current levels. But any hike in rates would have significant negative impact on households and the economy, given the sky-high debt levels in place at the moment.
Latest Auction Clearance Rates Confirms Momentum
According to CoreLogic RP Data, the number of capital city auctions held this week was 1,053, falling significantly given most states and territories have a public holiday today. Preliminary results show that 67.2 per cent of auctions were successful this week, compared to 68.2 per cent last week across 2,008 auctions and 75.9 per cent one year ago, across 2,076 auctions. Since the end of March this year, the combined capital city auction clearance rate has been trending around the high 60 per cent mark, demonstrating an improvement when compared to the end of 2015, however consistently tracking lower compared to the same time last year when across the combined capitals, clearance rates were in the mid to high 70 per cent range.
Home Lending Sags, Or Does It?
The latest data from the ABS on home lending for April 2016 indicates that overall lending flow fell in trend terms by 0.3%. But within that, owner occupied lending fell 0.5% while investment housing commitments rose 0.2%. In other words, we are seeing a rotation back towards the investment sector. Since then, several banks have relaxed their investment lending underwriting criteria, and have started to offer bigger discounts. The picture is quite complex.
In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions fell 1.8%. But we will stick to the trend data, which irons out some of the bumps.
Looking at the overall stock of loans, it rose again to $1.49 trillion, we see that investment loans comprise 35.6% of all loans, still high
Looking at the monthly flows, we see a fall in owner occupied new loans by value, and a small rise in investment loans. The momentum in the refinance sector has slowed a little, but rose as a proportion of all loans.
Turning to first time buyers, we a rise in the number of new owner occupied and investor loans, together the show around 10,000 new first time buyers entering the market. This is an original, not trend data set.
The largest volume of owner occupied loans was for the purchase of established dwellings, and to total value fell. The proportion of loans refinance rose again, to nearly 35% of all loan values.
Looking at owner occupied loans, the purchase of new dwellings has risen a bit, but is still 4% lower whilst other types of borrowing are relatively static.
By state owner occupied loans grew the strongest in ACT and VIC, whilst TAS showed the largest fall.
Finally, looking at lender type, we see that the non-banks grew the strongest (up 0.8%), building societies lost momentum (down 7%), and banks lent slightly less thin month (down 0.7%).
Total returns show why housing investment remains so popular
From CoreLogic RP Data. Despite the recent slowdown, housing finance data highlights that investor activity in the housing market is starting to rise again and when you look at total returns from housing it’s no surprise.
The CoreLogic RP Data Accumulation Index which has been published since June 2009 highlights the total returns from residential property. The total returns include both the increase in values as well as gross rental returns.
The first chart shows the annual change in the total returns (accumulation) index over time. While combined capital city home values recorded longer and deeper falls during 2011-12, total returns were negative for only a short period of time thanks to the uplift from rental yields. More recently you can see that the annual change in total returns across the combined capital cities has remained quite strong.
Combined capital city annual changes in total returns for houses and units
Over the 12 months to May 2016, combined capital city home values have increased by 10.0% while total returns have been recorded at a higher 13.9%. Looking at the individual capital cities, all cities except for Perth have recorded positive total returns over the past year. Sydney and Melbourne which have been the most active investment markets have seen the highest total returns at 16.9% and 17.5% respectively over the past twelve months. It should be noted that gross rental returns in both of these cities are now at record lows highlighting that the majority of these returns have come via an increase in home values.
Annual change in capital city total returns, 12 months to May 2016
The third chart highlights the total returns over the past five years across all capital cities. Again, Sydney in particular, has seen far superior total returns compared to all other capital cities. Melbourne has also experienced relatively strong total returns over the past five years. Again this highlights why these two cities in particular have remained so popular with investors. In all other capital cities returns from residential property have been positive. In many of these cities the total returns have been driven more so by the rental returns rather than the capital growth which has been the key driver in Sydney and Melbourne.
5 year total change in total returns, to May 2016
Despite the recent rebound in value growth, the mature capital growth cycle and record low rental returns in Sydney and Melbourne, total returns are unlikely to be as strong in these cities over the coming years. A more balanced investment approach which focusses on moderate capital growth and relatively strong rental returns is likely to be a superior housing investment profile over the coming years. This data also highlights why housing investment has been so popular. In a low interest rate and subsequently low return environment housing has, over recent years, offered attractive returns. Whether this continues to be the case remains to be seen.
Changes to foreign student visas will boost property market
New rules affecting foreign student visas, which go into effect from 1 July 2016, will be a boon for the property market, especially in Sydney and Melbourne.
The Simplified Student Visa Framework (SSVF) aims to “support the sustainable growth of Australia’s international education sector” by reducing red tape. Key changes under the SSVF include reducing the number of student visa subclasses from eight to two and introducing a simplified single immigration risk framework for all international students.
The head of Australia for Chinese property portal, Juwai.com, Gavin Norris, said the new framework is positive for the Australian housing market.
“Six out of every 10 Chinese property buying inquiries made in Australia last year were related to education,” Norris said.
“Juwai.com sent about AU$1.6 billion of property buying inquiries to Australian vendors last year, and almost $1 billion of that value came from families who wanted to buy homes for their children to live in while studying here.
“Anything Australia does to increase the number of Chinese students will also increase investment in strategic areas of the real estate market that generates more construction jobs, more new housing being built and more economic growth.”
Last year, Chinese students made up 1 out of every four international students in Australia, and international students support about 130,000 jobs, according to research from Juwai. Norris said these statistics demonstrate the invaluable contribution foreign students have on the Australian economy.
“When Australia wins a foreign student, it gains tens of thousands in education fees, additional tens of thousands in retail and services spending, hundreds of thousands in a potential real estate investment and – most important of all – the possibility that highly educated individual will decide to stay and work here and contribute to our economy over the long term,” he said.
“Every student who might have come here, but doesn’t, could represent substantial lost benefits.
“The reverse is also true. Anything that discourages international property investment also risks causing adverse impacts the education industry.”
Norris has also praised other SSVF changes, which include trialling visa applications in Mandarin and trialling 10-year student visas.
“These visa changes are smart, and help Australia catch up to nations like the US, which offer similar visa terms.
“The most important elements are the Mandarin language applications, the 10 year validity pilot and the simplified paperwork.
“For the most part, these changes are about avoiding the loss of our privileged place as a destination of choice for overseas students, rather than beating the competition,” Norris said.
Auctions Surge Into Winter
According to CoreLogic RP Data, the preliminary auction clearance rate nudged higher over the first week of winter, however the number of auctions dipped compared with the previous week. There were 1,953 auctions held over the week, down from 2,480 last week, however higher than one year ago when 1,201 auctions were held and auction volumes were low due to the Queen’s birthday public holiday in all cities with the exclusion of Perth. Preliminary results show that 70.4 per cent of capital city auctions held this week were successful, rising from a final result of 67.7 per cent last week. One year ago, across the lower number of auctions, 78.5 per cent sold. Melbourne and Sydney, the two largest auction markets have maintained strength this week, while across the remaining, significantly smaller auction markets, results have been more varied.
Climate Risks For Property Owners And Their Bankers
Mortgage underwriting is all about correctly assessing risks. How much is the property worth? How big is the loan? How well placed are the borrowers to repay the loan? What is the credit risk? But, according to a new discussion paper There goes the neighbourhood: Climate change, Australian housing and the financial sector by the Climate Institute, banks and their customer need to be more alert to risks associated with Climate Change.
I spoke to the author, Kate Mackenzie, about the paper which highlights important issues for lenders and prospective purchasers. She says banks should be undertaking detailed portfolio modelling to analyse the current and future risks in their property loan portfolios (after all their insurers have the data), and prospective purchasers should be exploring the impacts from floods and other natural forces before purchase (there are tools available, or try getting online insurance quotes for a prospective property). She says that Local Authorities may sometime grant planning approvals on land which is or will become risk prone, and buyers should beware.
The report says that some of the homes built, bought and sold in Australia are vulnerable to flood, cyclone and bushfire, as well as growing risks such as storm surge, landslip and coastal erosion. Australia is highly exposed to climate change and this will exacerbate many of these risks. Whilst It is often possible to “defend” or “adapt” housing to some of these risks, not all are adaptable, and some only at a prohibitive expense.
Unsurprisingly, individual buyers and residents are often unaware of risk levels, particularly rising levels of risk or emerging risks. Even when public authorities, financial institutions and other stakeholders possess information about current and future risk levels, they are sometimes unwilling, and sometimes unable, to share it with all affected parties.Thus, foreseeable risks are allowed to perpetuate, and even to grow via new housing builds. The full scale of the risk may only be recognised either through disaster or damage, or when insurance premiums become unaffordable. Any of these events can in turn affect housing values. Damaged, destroyed or devalued housing has social costs – either to individuals, or to the broader public via government. Australia’s housing stock is expanding, and with continuing gaps in policy, regulations and industry, it is highly likely that some of this new stock is more vulnerable than buyers, residents and other stakeholders would assume.
Virtually all banks, in every year, clearly identified risks of climate impacts to their own operations, and describe measures taken to ameliorate this. Most banks, in most years, cited indirect risk via institutional financing, in particular to the agricultural sector. In some cases, banks described developing and deploying screening methods to ameliorate this risk.
However, references to climate impacts via residential property were far patchier. Several banks, for example, referred to material risks via their customers’ ability to repay mortgages, and even referred to studies of the aggregate exposure of Australian housing to climate impacts. Moreover, the banks’ own industry group, the Australian Banking Association, has been relatively silent on this matter.
Industry has tended to defend its position, but the paper offers some important commentary on their arguments.
1. Property value in land: The assertion that the property’s value is solely in the land rather than the building will be irrelevant in several scenarios, particularly when we consider climate change. For example, there are limitations to measures that can mitigate the effects of coastal erosion. Land that is at increasingly frequent risk of flooding may be still suitable for dwellings, but the increasing cost will reduce the value of the properties. This has been seen in bushfire prone areas.
2. Full-recourse loans protect banks: Australian mortgages are almost universally issued on a “non-recourse” basis. This means that, in contrast to some US states, borrowers cannot simply “hand back the keys” to their lender, thereby offloading their obligations. In Australia, the risk of property devaluation remains with the individual, while the banks are relatively protected from a scenario in which borrowers default on properties that become worth less than the amount of the outstanding loan.
3. Already incorporated into credit risk practices: A review of big four bank submissions to CDP (formerly Carbon Disclosure Project) reveals a broad range of approaches to physical climate risk in the residential mortgage portfolio. While all banks discuss climate impact resilience measures for their own property portfolio (bank branches etc.), and two banks mention incorporating physical climate risk into their commercial lending practices, there is little mention of incorporating physical climate risk into residential property lending risk assessments.
4. Size and distribution of property portfolios mean this couldn’t be material for big banks: Several banks have already disclosed exact amounts of provisioning following natural disasters. In fact, at least three of the big four banks have individually acknowledged there is some risk. Westpac has acknowledged in several CDP submissions that increased flood risk from climate change represents a risk to its mortgage and other loan assets, ANZ in 2007 said it would begin to devise a method to analyse this risk and NAB states that it is exposed to the physical effects of climate change to its customers, not only in residential property, but also as an agri-business lender.
It is true that all amounts of costs incurred to date are small relative to the banks’ overall balance sheets – for example, NAB reported a $76 million provision for bad and doubtful debts associated with the 2011 floods in Queensland and Victoria. However the nature of climate change means these risks will increase – particularly if urban, coastal development continues to grow without adequate resilience standards.
5. Use of mortgage insurance removes risk to banks: Mortgage insurance is taken out by banks to protect against loss from mortgage defaults, particularly where the loan-to-valuation ratio is high, or when the borrower is deemed high risk. Lenders mortgage insurers (LMIs) are the providers of this cover. In terms of financial risk, LMIs will specifically not cover loss due to natural hazards. There is also debate around the role of LMIs in Australia, in terms of their own financial stability and their role in the broader financial system. An RBA report in 2013 noted that while industry practices have mitigated some risks related to LMIs, they are highly correlated to the broader mortgage market. Therefore, in a credit market downturn, LMIs could be procyclical, or at least fail to be counter-cyclical. Another limitation of LMIs is that they only cover about a quarter of all mortgages. The limitations of LMIs as a hedge against mortgage losses are illustrated by mortgage-related losses suffered by several banks due to natural disasters. Finally, Australia’s prudential supervisor, APRA, has explicitly limited the amount of protection that banks can assign to LMI, by placing a floor of 20 per cent for “loss given default” on internal risk-based (IRB) models. This is the same whether or not the mortgage is covered by LMI.
6. Average mortgage duration: Average mortgage age in Australia is thought to be around 4.5 to 5 years. However this is an average from a market that has, in aggregate, grown every year for decades. Although definitive data is not collected on non-securitised mortgage age, it is likely a proportion is due to owners “cashing out” as prices rise. This is unlikely to be a mitigating factor for banks with up to 25-year mortgage exposures on risky properties.
The paper recommends Australian banks should:
- examine climate risk to their own mortgage books and ensure it is integrated into their risk assessment processes
- use their role as the predominant providers of property development finance to support good policy – both through individual commercial lending decisions and through submissions to and engagement with policymakers
- work with other stakeholders – in the public, private and civil society sectors – to research and develop ways to minimise climate impact risk to housing, and to address losses that will occur in an equitable way
- actively support the development of: an open and accessible platform for natural peril data, including both historical incidence and projected or emerging risks due to climate change and policy to achieve this outcome
- make information publicly available so that market expectations can adjust gradually, avoiding sudden, detrimental impacts.
The Climate Institute is Australia’s leading climate policy and advocacy specialist. Backed primarily through philanthropic funding, the Institute has been marking solutions to climate change happen, through evidence based advocacy and research, since 2007.
New Home Sales past their peak for the cycle – HIA
The HIA New Home Sales Report, a survey of Australia’s largest volume builders, shows that total new home sales declined in April following a strong rise in March, said the Housing Industry Association.
Total seasonally-adjusted new home sales declined by 4.7 per cent in April 2016. The decline in total sales was reflected in both detached house sales (-3.0 per cent) and sales of ‘multi-units’ (-10.8 per cent).
The monthly decline in detached house sales was widespread, with four out of the five mainland states recording reduced sales in April. Victoria bucked the trend – monthly sales of detached houses increased by 14.3 per cent due to broad-based strength in large volume builder activity in the state during the month.
In the month of April 2016 detached house sales declined in four of the five mainland states: Western Australia (-19.8 per cent); New South Wales (-8.1 per cent); Queensland (-7.8 per cent) and South Australia (-1.3 per cent). Only in Victoria did detached house sales increase (+14.3 per cent).
Sydney Auctions Still Hot
According to CoreLogic RP Data, this week 2,419 auctions were held across the combined capital cities, representing a substantial 26 per cent rise in auction activity compared to the previous week when 1,920 capital city auctions were held. This was the fourth highest number of weekly auctions held over the year to date. The rise in activity was coupled with a slight fall in preliminary combined capitals clearance rate, from 68.9 per cent last week, to 68.0 per cent this week. Much of the strength in the combined capitals clearance rate can be attributed to the two largest auction markets (Melbourne and Sydney), where clearance rates remained the strongest nationally. One year ago, however, both Sydney and Melbourne recorded a clearance rate in excess of 80 per cent, and the combined capital city clearance rate was 78.5 per cent across 2,792 auctions.
