Social Trends – Page 134 – Digital Finance Analytics (DFA) Blog

Being middle class depends on where you live

Politicians are fond of pitching to the “average Australian” but judging by the income of Australians, whether you are middle class depends on where you live. And where we live tells a rich story of who we are as a nation – socially, culturally and economically.

Income is at the heart of access to services and opportunities, which are differing and unequal based on where you live.

Our ability to afford housing that meets our needs largely determines where we live. In turn, where we live influences access to other important features of our lives which shape lifelong and intergenerational opportunities. For example, student performance is associated with everything from where a student lives to their parent’s occupation.

Household incomes in capital cities are typically among the highest, with incomes declining the further you live from major cities. So it’s understandable why Australians living outside or on the fringes of cities might feel somewhat left behind.

The Australian Bureau of Statistics presents “average” income as a range based on where you live. This range is marked by a lower number (30% of incomes) at the beginning and the higher number (80% of incomes) at the top.

This “average” income varies substantially between different rural areas from A$78,548 – A$163,265 in Forrest (ACT) to A$10,507 – A$26,431 in Thamarrurr (NT). This is actually an equivalised household income which factors in the economic resources like the number of people and their characteristics, between households.

The difference between the top and bottom of this range of “average” household income also shows greater inequality within areas.

Even within the greater Sydney metropolitan area, there’s significant differences in household income between areas. The average household equivalised income in Lavender Bay is around A$40,000 – A$95,000 higher than it is in Marayong.

The difference in income is marked, and there are other differences too. People in Marayong are on average younger than Lavendar Bay. Family size is smaller in Lavendar Bay. Over half of the Lavendar Bay residents hold university degrees, compared to a more skill-based workforce in Marayong.

Why there is no one “average” Australian

Cities offer access to myriad employment options. Industries associated with relatively high incomes are typically concentrated in cities to take advantage of global connections.

Sydney, Melbourne and Canberra are notable standouts based on household income. So if you live close to these major cities you’d be getting the most opportunities in terms of employment and income, given the you’re the right candidate.

But not everyone wants to live in the centre of cities. Housing, lifestyle and neighbourhood preferences also play a role in where we live, but are still influenced by income and proximity to such things as employment and family and friends.

Also, infrastructure which supports social and economic wellbeing is essential in communities, regardless of where we live.

What politicians should be talking about instead

Improving the different and unequal access across areas requires better internet connectivity and advances in the way we work. Policies around housing and family-friendly workplaces go some way to supporting Australians in work.

Any measures to redress inequalities require understanding the needs and wants of communities. Proposed planning to reconfigure the greater city of Sydney around population and socioeconomic infrastructure offers an example of a data-driven approach to planning. Whether the proposed reconfiguration of Sydney leads to improvements or greater segmentation will be revealed in practice.

Politicians rarely reflect the characteristics of the people they represent, particularly when we consider the remuneration, entitlements and perks of political office. The longer politicians are in office, and somewhat removed from the people they represent, the further they potentially become from gauging their electorate.

Yet politicians profess to know what the average Australians they represent needs and wants. They apply this to a range of things from service delivery to representation on political matters. And this is within reason.

But without current experience we struggle to see things from perspectives other than our own. Take for example the way some have come to label themselves outsiders from the social and political elite to advance their credibility with average Australians.

Bringing politicians in touch with the diversity of needs and wants of Australians starts with a self-check and recognition of individual bias (conscious or unconscious). This is the first step toward really understanding and connecting with Australians – be it in the “average” or otherwise.

Author: Liz Allen, Demographer, ANU Centre for Social Research and Methods, Australian National University

Greater Melbourne Mortgage Stress Mapping – Nov 2017 – Pressure Is Mounting

Continuing our series on mortgage stress, we feature the results for Melbourne and VIC today. In fact more than half the post codes nationally in the top 10 are in VIC, so risks are rising fast here (and prices are still rising too!).

In November another 3,000 households in VIC slipped into stress, reaching a new high of 253,000. 13,000 of these risk default in the next 12 months.

Next, here is the overall listing of the top 10 most stressed post codes across VIC as at the end of November 2017. We also show the relative default risk ranking across the country. Cranbourne has the 2nd highest default ranking nationally this month.

The most stressed post code in the state is 3805, which includes Narre Warren and Fountain Gate. This area is around 38 kilometers south east of Melbourne. Here 5,076 households are in mortgage stress. The average home price is $545,000 compared with $366,000 in 2010. There are more than 15,000 families in the area, and the average age is 34 years. The average household income is just over $7,000 a month, which is higher than the national average. 54% of homes are mortgaged and the average monthly repayment is $1,700 slightly below the national average of $1,755.

Next is 3806, Berwick and Harkaway which is around 40 kilometers south east of Melbourne, with 4,923 households in mortgage stress. The average home price is $625,000 compared with $451,000 in 2010. There are around 13,000 families in the area, with an average age of 36. More than 47% of households here have a mortgage and the average repayment is $1,850 compared with the average income of $7,600.

Next is 3810, Packenham, with 4,693 households now in mortgage stress and in the same position as last month. It is around 54 kms south east of Melbourne. The average home price is around $435,000 compared with $290,000 in 2010. According to the latest census the average age is 32 years and there are more than 12,600 families in the district. The average monthly household income is $5,900, below the average in the state as well as nationally. 46% of homes have a mortgage, compared with the VIC average of 35%. The average monthly mortgage repayment is $1,700.

Then comes 3064 Craigieburn, Mickleham and Roxburgh Park. It is about 24 kms North from Melbourne. Around 4,445 households in the area are in mortgage stress. There are about 19,300 households in the area and the average age is 30. The average home prices in 2010 was $335,500 and is now worth $489,400. The average income is around $6,400, which is slightly above the Victorian and Australian averages. 88% of properties in the area are separate houses, and most have three or more bedrooms. More than 56% of homes here are mortgaged and the average repayment each month is $1,733, which is close to the average in Victoria, but lower than the Australian average.

Next is post code 3350, which includes Ballarat and the surrounding area, It’s about 100 kilometres from Melbourne and is down one place from last month. In this region there are 4,429 households in mortgage stress. The average property value is $335,000, compared with $281,000 in 2010. There are more than 14,500 families in the area and the average age is 37, line ball with the average across the state. The average monthly income is $5,300, well below the national and state averages. Around 33% of households have a mortgage and the average repayment is $1,408 a month.

Finally is post code 3037, which includes areas around Delahey, Hillside and Sydenham; around 20 kms north west of Melbourne. Here around 4,268 households are in mortgage stress. Of the 13,000 households in the district, more than half have a mortgage and the average age is 33. The average home price is around $530,000, up from $365,000 in 2010. The average monthly income is around $7,200 and the average mortgage repayment is $1,730.

We continue to see mortgage stress still strongly associated with fast growing suburbs, where households have bought property relatively recently, often on the urban fringe. The ranges of incomes and property prices vary, but note that it is not necessarily those on the lowest incomes who are most stretched. Banks have been more willing to lend to these perceived lower risk households but the leverage effect of larger mortgages has a significant impact and the risks are underestimated.

Next time we will look at Brisbane.

Greater Sydney Mortgage Stress Mapping – Nov 2017

Having released our November Mortgage Stress analysis, we now look across the states in more detail. Today we look at NSW and Greater Sydney.

NSW has 251,576 households in stress, up 9,000 from last month, and we estimated there are around 13,900 households at risk of default over the next 12 month in the state.

Here is the stress mapping around Great Sydney of the count of households in difficulty. We see a swathe of issues across Western Sydney.

The post code with the highest count of stressed household is 2170, the area around Liverpool, Warwick Farm and Chipping Norton, which is around 27 kilometers west of Sydney. There are 6,807 households in mortgage stress here. The average home price is $803,000 compared with $385,000 in 2010. There are around 27,000 families in the area, with an average age of 34. The average income is $5,950. 36% have a mortgage and the average repayment is about $2,000 each month.

Next is the area around Campbelltown, 2560, which is around 43 kilometers inland from Sydney. Here 5,786 households are in mortgage stress. The average home price is $625,000, up from $320,000 in 2010. Around 20,000 households live in the area with an average age of 34 years. The average income is $6,100 a month. 37% have a mortgage and the average repayment is higher than the national average at $1,800.

Next, here is the overall listing of the top 10 most stressed post codes across New South Wales as at the end of November 2017. We also show the relative default risk ranking across the country. We will explore risk of default further in a later post, not least because we get different distributions depending on whether we look at the number of defaults, or the absolute value at risk.

Meanwhile, in our next stress-related post, we will look at Victoria.

Mortgage Stress Continues On a High Plateau In November

Digital Finance Analytics has released the November mortgage stress and default analysis update. Across Australia, more than 913,000 households are estimated to be now in mortgage stress (last month 910,000) and more than 21,000 of these in severe stress, the same as last month. Stress is sitting on a high plateau. This equates to 29.4% of households. We see continued default pressure building in Western Australia, as well as among more affluent household, beyond the traditional mortgage belts across the country. Stress eased a little in Queensland, thanks to better employment prospects.

We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points.

We discuss the findings from our analysis and count down the top 10 post codes, to identify the most highly stressed post code currently in the country.

As continued pressure from low wage growth and rising costs bites, those with larger mortgages are having more difficulty balancing the family budget. As a result, risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. These stressed households are less likely to spend at the shops, which will act as a further drag anchor on future growth, one reason why retail spending is muted. The number of households impacted are economically significant, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at three times income. This is not sustainable. The latest household debt to income ratio is now at a record 193.7.[1]

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end November 2017. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. Households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home. Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

The forces which are lifting mortgage stress levels remain largely the same. In cash flow terms, we see households having to cope with rising living costs whilst real incomes continue to fall and underemployment remains high. Households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres. While mortgage rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises. We expect some upward pressure on real mortgage rates in the next year as international funding pressures mount, a potential for local rate rises and margin pressure on the banks. We revised our expectation of potential interest rate rises, given the stronger data on the global economy and the recently announced Finance Sector Royal Commission.

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes. We have also extended our Core Market Model to examine the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households.

Gill North, Joint DFA Principal and Professorial Research Fellow in the law school at Deakin University, said “the numbers of households in mortgage and financial stress in Australia are at record levels and the consequential risks and likely adverse impacts are difficult to overstate. When external events and or the personal circumstances of these highly indebted households deteriorate, the number of people who cannot afford to rent or purchase a home is likely to increase exponentially, leaving many more households without adequate accommodation. In extreme instances, other households may lose the residential property they presently live in due to rental defaults or a forced sale or foreclosure.”

While there have been numerous inquiries into housing affordability and homelessness in Australia, the issues involved are complex, and real progress has been limited (at best). For policy options to make any meaningful difference to the nature and scale of housing affordability and homelessness, policy makers and others need to acknowledge the sheer magnitude of the problem, and respond accordingly.

One of the options that policy makers have considered to address affordable housing issues and to provide housing for the most vulnerable sections of the community is the use of social impact investment. Gill North was part of a team that reviewed the potential for impact investment models to provide housing for the vulnerable and reported to the Australian Housing and Urban Research Institute (AHURI). The report on “Supporting Vulnerable Households To Achieve Their Housing Goals: The Role Of Impact Investment” is available from https://ssrn.com/author=905894. The report authors acknowledge and thank AHURI for the funding that allowed this important research”.

By the Numbers

Regional analysis shows that NSW has 251,576 households in stress (242,399 last month), VIC 253,248 (250,259 last month), QLD 157,019 (162,726 last month) and WA 123,849 (121,393 last month). The probability of default rose, with around 9,800 in WA, around 9,600 in QLD, 13,000 in VIC and 13,900 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion from Owner Occupied borrowers) and VIC ($870 million from Owner Occupied Borrowers, which equates to 2.1 and 2.7 basis points respectively. Losses are likely to be highest in WA at 4.9 basis points, which equates to $682 million from Owner Occupied borrowers and $108 million from Property Investors over the next 12 months.

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[1] RBA E2 Household Finances – Selected Ratios June 2017

BIS Special Feature On Household Debt

The Bank for International Settlements has featured the issues arising from high household debt in its December 2017 Quarterly Review. They call out the risks from high mortgage lending, high debt servicing ratios, and the risks to financial stability and economic growth. All themes we have already explored on the DFA Blog, but it is a well argued summary. Also note Australia figures as a higher risk case study. Here is a summary of their analysis.

Central banks are increasingly concerned that high household debt may pose a threat to macroeconomic and financial stability. This special feature seeks to highlight some of the mechanisms through which household debt may threaten both macroeconomic and financial stability.

Australia is put in the “High and rising” category. The debt ratio now exceeds 120% in both Australia and Switzerland. Mortgages make up the lion’s share of debt (between 62 and 97%). In Australia mortgage debt has risen from 86% of household debt in 2007 to 92% in 2017.

High household debt can make the economy more vulnerable to disruptions, potentially harming growth. As aggregate consumption and output shrink, the likelihood of systemic banking distress could increase, since banks hold both direct and indirect credit risk exposures to the household sector.

They say the size of household debt burdens matters too. This is best measured by the ratio of interest payments and amortisation to income – the debt service ratio (DSR). They say that rising household debt can reflect either stronger credit demand or an increased supply of credit from lenders, or some combination of the two. In Australia, for instance, heightened
competition among lenders seems to have resulted in a relaxation of lending standards. In addition, the interest rate sensitivity of a household’s debt service burden is likely to matter. High debt (relative to assets) can make a household less mobile, and hence less able to adjust by finding a new or better job in another town or region. Homeowners may be tied down by mortgages on properties that have depreciated in value, especially those that are underwater (ie worth less than the loan balance).

These household-level observations have implications for aggregate demand and aggregate supply. From an aggregate demand perspective, the distribution of debt across households can amplify any drop in consumption. Notable examples include high debt concentration among households with limited access to credit (ie close to borrowing constraints) or less scope for self-insurance (ie low liquid balances).

Since poorer households are more likely to face these credit and liquidity
constraints, an economy’s vulnerability to amplification can be assessed by looking at the distribution of debt by income and wealth. In Australia, households in the top income brackets tend to have substantially higher debt ratios than those at the bottom of the distribution (eg in 2014, the top two quintiles had debt ratios of about 200%, while the bottom two had ratios of about 50%. [Note this is based on OLD 2014 HILDA data, and debt to higher income households has risen further since then!]

In countries where household debt has risen rapidly since the crisis, and where the majority of mortgages are adjustable rate, DSRs are already above their historical average, and would be pushed yet further away by higher interest rates.

From an aggregate supply perspective, an economy’s ability to adjust via labour reallocation across different regions can weaken if household leverage grows over time. In such an economy, a fall in house prices – as may be associated with interest rate hikes – would saddle a number of households with mortgages worth less than the underlying property. A share of these “underwater” homeowners might also lose their jobs in the ensuing contraction. In turn, their unwillingness to realise losses by selling their property at depressed prices may prolong their spell of unemployment by preventing them from taking jobs in locations that would require a house move.

Elevated levels of household debt could pose a threat to financial stability, defined here as distress among financial institutions. These exposures relate not only to direct and indirect credit risks, but also to funding risks. There is some evidence that this may be occurring in Australia, where high-DSR households are more likely to miss mortgage payments.

The indirect exposure to household debt arises from any increase in credit risk linked to households’ expenditure cuts. These are bound to have a broader impact on output and hence on credit risk more generally. Deleveraging by highly indebted households could induce a recession so that banks’ non-household loan assets are likely to suffer. Financial stability may also be threatened by funding risks . The network of counterparty relationships could become a channel for the transmission of stress, as any decline in the value of one bank’s cover pool could rapidly affect that of all the others.

They conclude:

Central banks and other authorities need to monitor developments in household debt. Several features of household indebtedness help to shape the behaviour of aggregate expenditure, especially after economic shocks. The level of debt and its duration – as well as whether debt has financed the acquisition of illiquid assets such as housing – all play a role in determining how far an individual household will cut back its consumption. Aggregating up, the distribution of debt across households can amplify these adjustments. In turn, such amplification is more likely if debt is concentrated among households with limited access to credit or less scope for selfinsurance. Since these households are also likely to be poorer households, keeping track of the distribution of debt by income and wealth can help indicate an economy’s vulnerability to amplification.

What The Royal Commission Means For Home Prices – The Property Imperative Weekly 2nd December 2017

The Banking Royal Commission is on, Housing credit is still growing strongly, and home prices in Sydney are slipping. So plenty to discuss in this week’s Property Imperative weekly to 2^nd December 2017.

Watch the video, or read the transcript.

In this week’s review of finance and property news we start with the announced $75 million Royal Commission into Financial Services, which after lots of wrangling was announced this week. I will leave the politics alone, but as Fitch Ratings said, the inquiry into alleged misconduct adds challenges to the financial system and the findings could weaken the reputation of individual players, or possibly expose wider structural weaknesses.

So we think uncertainty about whether there will be an inquiry, and what scope it would cover, has been replaced by potential uncertainty of outcome. OK, the scope has been crafted to include a wide gamut of players, from banks, insurers and superannuation funds, but it is narrow because it will only look at misconduct against community expectations. It will touch on culture and governance (and this poses the question of the relationship between misconduct and culture) and it is tasked to make recommendations (but steering around other parallel work including the vertical integration which the Productivity Commission is looking at, and ACCC’s work on pricing). So it will likely focus on the well-trod paths of poor financial advice, bad insurance policy outcomes and inappropriate handling of SME’s when they get into financial difficulty. We hope the inquiry will specifically look at the various conflicts of interest which currently exist across the sector.

Credit and lending policies appear to be in scope, but we will have to wait and see whether they are explored, along with the role of financial advisers and mortgage brokers. The scope does not touch on broader policy or regulatory issues (such as macroprudential) but could conceivably cover lending standards and “liar loans”. One potential outcome could be to lift the lid on “not unsuitable” lending. It will not consider the disruptive intrusion from digital or Fintech.

What we can say is the banks and the Government clearly decided to cut their losses in the light of a potentially broader and more detailed scope which was being discussed on the back bench. This way they are controlling the agenda, at least to some extent. An interim report is expected next September.

Lots of economic news came out this week. The ABS Dwelling approvals for October were stronger than expected, reaching more than 19,000, the highest since August 2016. Growth in Victoria drove approvals higher up 3.8% – whilst there was a fall in New South Wales, down 0.3%. We are still seeing the strongest demand for property in VIC, thanks to strong migration, though supply and demand is patchy as the recent ANU study highlighted. Overall this suggest more property will continue to come on the market for sale, putting further downward pressure on prices.

The RBA’s Credit Data for October showed that lending for housing rose 0.5% in the month, and 6.5% for the past year (three times inflation!). Lending to business rose 0.3% to 4% over the past year and personal credit was flat, and fell 0.9% over the past year. Another $1.2 billion of housing loans were reclassified in the month, making $60 billion in total, this is more than 10% of the total investment loan book! The proportion of investor loans fell slightly again, down to 34.2% of portfolio. Total mortgage lending is now above $1.7 trillion, with owner occupied loans up 0.6% or $6.6 billion to $1.12 trillion, and investor loans up 0.2% or $1.2 billion to $584 billion. Comparing this with the APRA data, we see continued relative growth in the non-bank sector.

The parallel ADI data from APRA to end October 2017 shows that banks continue to lend strongly to households. The overall value of their mortgage portfolios grew 0.5% in the month to $1.57 trillion, up $7.3 billion. Owner occupied loans grew 0.6% to $1.03 trillion, up $6.4 billion and investment loans rose 0.15% to $816 million. The proportion of investment loans continues to drift lower, but is still at 34.8% of all lending (too high!!). CBA reduced their investment portfolio this month, whilst Westpac grew theirs. Investor lending market growth is sitting at around 3% over the past year, though some smaller lenders are well above the APRA 10% speed limit.

There is simply no excuse to allow home lending to be running at more than three times inflation or wage growth at the current dizzy price and leverage levels. There is still too much focus on home lending and not enough on productive growth enabling business lending. This is something which the Royal Commission is unlikely to touch, as it is a policy, not a behavioural issue.

The OECD report on Australia said things are looking better. As a result, they recommend rate hikes next year to help cool the housing market. But they call out a number of risks to economic growth and says macro-prudential measures should be maintained. Also their growth rates are lower than latest from the RBA! They also said Australia is vulnerable to “too big to fail” risks, due to its highly concentrated banking sector.

The Reserve Bank NZ has been more proactive on managing risks in the housing sector. They announced a slight reduction in tight loan to value lending controls, in response to slowing housing demand and new Government policies. The loan-to-value ratio (LVR) policy was first introduced in October 2013, with progressively tighter restrictions for investors introduced in November 2015 and October 2016. From 1 January 2018, the LVR restrictions will require that:

No more than 15 percent (currently 10 percent) of each bank’s new mortgage lending to owner occupiers can be at LVRs of more than 80 percent.
No more than 5 percent of each bank’s new mortgage lending to residential property investors can be at LVRs of more than 65 percent (currently 60 percent).

They had previously parked their Loan to Income initiative, in the light of easing momentum.

The Gratton Institute published a report which showed rising housing costs are hurting low-income Australians the most. Those at the bottom end of the income spectrum are much less likely to own their own home than in the past, are often spending more of their income on rent, and are more likely to be living a long way from where most jobs are being created. in 1981 home ownership rates were pretty similar among 25-34 year old’s no matter what their income. Since then, home ownership rates for the poorest 20% have fallen from 63% to 23%. Home ownership rates also declined more for poorer households among older age groups. Home ownership now depends on income much more than in the past.

They say that reducing demand – such as by cutting the capital gains tax discount and abolishing negative gearing – would reduce prices a little. But in the long term, boosting the supply of housing will have the biggest impact on affordability. To achieve this, state governments need to change planning rules to allow more housing to be built in inner and middle-ring suburbs.

So now to home prices. According to ME Bank, in a study of 1500 Australian adults, 43% of respondents said they were reliant on future house prices to achieve future life / financial goals, with 10% completely reliant. But it’s a tug-of-war as to which way we want prices to go: 38% want prices to increase while 37% want them to fall. Where you sit largely comes down to your property ownership status: 39% of those who own the home they live in and 47% who own an investment property indicated they are ‘reliant’ on future prices, presumably increasing, while 48% of those who don’t own a property also say they are reliant, presumably wanting prices to fall. Most tellingly, the survey indicates more Australians would benefit from property prices falling than rising, with only 28% indicating they’d benefit by selling if prices continued to rise compared to 47% who said they’d benefit by buying in if property prices fell.

But then again, according to CANSTAR nearly four out of five Australians don’t see house prices falling in their state over the next two years. CANSTAR surveyed 2,026 consumers on their views on property prices and home buying. Nationally, 47% of respondents expected steady growth in house prices, with a further 8% predicting prices would ‘skyrocket at some point’. Just 11% of respondents thought prices could fall in the next two years. Sydney was the most pessimistic city, with 16% predicting values would fall.

CoreLogic’s home price index reported a 0.1% fall nationally in November, with Sydney recording a 0.7% falls, along with falls across Darwin and regional Northern Territory, down 0.4% over the month. For the remaining broad regions of Australia, dwelling values were relatively steady, or experienced a subtle rise, over the month. However, the averages hide significant variations, with for example more expensive homes sliding further relative to cheaper ones. National dwelling values tracked 0.2% higher over the past three months and have increased 5.2% over the twelve months ending November. The national annual growth rate has now halved since reaching a recent peak in May 2017, when dwelling values rose 10.4%.

CoreLogic also says there were 3,409 homes taken to auction across the combined capital cities last week, returning a preliminary auction clearance rate of 66.9 per cent, overtaking the previous week as the third busiest for auctions so far this year. Last week, based on final results, 60.9 per cent of the 3,390 auctions held recorded a successful result, the lowest clearance rate since late 2015/early 2016.

But auction clearance rates may be lower than the CoreLogic figures suggest according to John Cunningham, president of the REINSW. Cunningham said that 40 per cent of results have not been reported, and if those results represent a no sale, then the clearance rate for Sydney could be a lot lower than the 66 per cent being reported by CoreLogic. With an initial clearance rate again in the mid 60 per cent range, the lack of clear data from the 40 per cent of unreported results fails to provide us with the real picture of the market,” he said.

More evidence of tighter lending standards, with CBA revealing a raft of changes including LVR caps and restrictions to rental income for serviceability that will impact mortgage brokers and their clients from next week. CBA will be introducing a new Home Loan Written Assessment document called the Credit Assessment Summary (CAS) for all owner occupied and investment home loan and line of credit applications solely involving personal borrowers. Meanwhile, CBA confirmed that it will introduce credit policy changes for certain property types in selected postcodes from Monday 4 December. They will reduce the maximum LVR without LMI from 80 per cent to 70 per cent, reducing the amount of rental income and negative gearing eligible for servicing and changing eligibility for LMI waivers including all Professional Packages and LMI offers for customers financing security types in some postcodes. “We continue to lend in all postcodes across Australia,” CBA said.

More rate cuts were announced this week, with Heritage Bank cutting the rate on new owner occupied loans by up to 50 basis points, and 30 basis points on new investment loans. They want to build and keep attracting new customers to the bank as part of a nationwide growth strategy. This will put more pressure on margins.

KPMG released their 2017 Mutuals Industry Review. Under the hood, the sector is under pressure, despite asset growth. COBA said they welcome the backing from KPMG, which highlighted strong financial performance. We are not so sure. Sure, assets are growing, but at what cost? KPMG says: profits before tax declined by 4.3 percent to $605.7 million. This compares to the major banks which saw profits grow by 7.6 percent. The net interest margin (NIM) continued to tighten and decreased to 2.03 percent, down 11 basis points. The increasing pressures on net interest margin is a result of historically low interest rates and increasing competition in the marketplace. Mutuals have sacrificed margins to maintain and grow the membership base. The average capital adequacy ratio dropped 30 basis points to 17.2 percent in 2017, representing a decline in capital levels for the fourth consecutive year. This reflects the increasing prioritisation of effective capital use by mutuals. As limited equity funding is inherent within the mutuals’ current business model and capital growth through new profits have been constrained this year, mutuals have looked to existing capital bases to fund balance sheet growth.

We think the Royal Commission will tend to drive international funding costs higher (they were already going higher), and as banks have around 30% of their books funded offshore, this will put more pressure on margins and local mortgage rates. In addition, we are still forecasting a cash rate hike next year, so more pressure on mortgage rates there. At the same time lending standards continue to be tightened, so borrowers will need a larger deposit especially in some higher risk areas. Mortgages are set to become more expensive and harder to get. Also, more new property is set to come onto the market, and as home price momentum eases, this will tend to push prices lower. So we can suggest several reasons why prices will go lower, but non to make them rise. So on that basis, the 80% of households expecting prices to keep rising are in for a rude awakening.

And that’s the Property Imperative weekly to 2^nd December 2017. If you found this useful, do leave a comment or subscribe to receive future updates. Check back next week for our latest update, which will include November Mortgage Stress results. Many thanks for taking the time to watch.

Many Households Think Property Values SHOULD Fall

According to ME Bank, in a study of 1500 Australian adults, 43% of respondents said they were reliant on future house prices to achieve future life / financial goals, with 10% completely reliant.

But it’s a tug-of-war as to which way we want prices to go: 38% want prices to increase while 37% want them to fall.

Where you sit largely comes down to your property ownership status: 39% of those who own the home they live in and 47% who own an investment property indicated they are ‘reliant’ on future prices, presumably increasing, while 48% of those who don’t own a property also say they are reliant, presumably wanting prices to fall.

Younger respondents indicated they are more reliant on future house prices than older: 51% of Millennials (25 to 39 year olds) said they are reliant compared to 30% of Baby Boomers (55-74 year olds).

Most tellingly, the survey indicates more Australians would benefit from property prices falling than rising, with only 28% indicating they’d benefit by selling if prices continued to rise compared to 47% who said they’d benefit by buying in if property prices fell.

A quarter of home owners happy to see house prices to fall

ME home loan expert, Patrick Nolan, said he was surprised to find 37% of respondents want property prices to fall, including 24% of those who own a home and even 20% of those with an investment property, compared to 38% of who want prices to continue rising 38%.

“Traditionally Australians fall into two camps when it comes to property prices: owners, who want them to rise, and non-owners, who want them to fall.

“But with high prices disrupting the dream of home ownership and the benefits that brings, views are changing.”

“That property owners were willing to see asset values fall is a sure sign house prices had reached heights many think are unfair,” Nolan said.

When asked why they want prices to fall, the overwhelming reason given was to help address the housing affordability issue (57%), a sentiment expressed by 97% of those with property.

The bulk of those wanting house prices to continue rising are property owners: 49% of home owners and 55% of investors.