The evidence is mounting that the property cycle is on the turn, and the question now is – will it be a gentle retreat or a blood bath? In this week’s edition of the Property Imperative we consider the evidence.
At the start of the week we got the latest auction clearance rates which showed the trend of lower volumes but high clearance rates continued. Momentum however is slowing. This long week, the number of auctions will be lower but Domains data shows a national clearance rate around 70%.
We released our latest Household Finance Confidence index to the end May, with a lower overall score of 100.6, down from 101.5 last month. This is firmly in the neutral zone, but households with mortgages are feeling the pinch and the index is set to go lower in the months ahead. Both property investors and owner occupiers are now more concerned about rising mortgage interest rates, and potentially falling property prices. Sentiment in the property sector is clearly a major influence on how households view their finances, but the real dampening force is falling real incomes. This is unlikely to correct any time soon, so we expect continued weakness in the index as we go through winter.
We also released our latest mortgage stress and default modelling. This analysis uses our 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. Across the nation, more than 794,000 households are now in mortgage stress compared with 767,000 last month; with 30,000 of these in severe stress. This equates to 24.8% of households, up from 23.4% last month. We also estimate that nearly 55,000 households risk default in the next 12 months. Check out our good coverage in Reuters.
The main drivers are rising mortgage rates and living costs whilst real incomes continue to fall and underemployment is on the rise. This is a deadly combination and is touching households across the country, not just in the mortgage belts.
ABS data showed that overall lending flows fell 0.4% in April, to $32.8 billion. This is the first month following APRA’s latest intervention. Owner occupied loans fell 0.1% to $19.9 billion and investment lending fell 1% to $12.6 billion. Refinanced loans fell significantly, and the proportion of loans for investment purposes also fell. In addition, investment in new housing fell by 4.4 per cent in the March Quarter 2017 which brings the sector down from a record high investment in December 2016 and back to levels similar to those experienced at the start of 2016.
The number of new first home buyer loans decreased by 17.5% to 6,547 in April from 7,939 in March, though we still see more going direct to the investor sector.
According to a report from UBS, first time buyers are pretty much locked out of the property market. ‘Typical’ first home buyers are facing ~11 years to save; and ~40 years in Sydney! UBS already ‘called the top’ of housing, a key reason being that affordability is stretched, as the house price to income ratios surged to a record high of 6.5x, up sharply from 4.5x in 2012 (and more than doubling from 3x in 1996). While interest rates have fallen to a record low, the mortgage repayment share of income still lifted to a near decade high, and the key issue for first home buyers is the ‘deposit gap’ even before buying.
The March quarter edition of the Adelaide Bank/Real Estate Institute of Australia Housing Affordability Report also shows that whilst affordability improved across the country, the number of first home buyers decreased in all states and territories.
Then in a housing market update, ANZ Research said it expects “prices to slow sharply this year and next” and flagged the potential oversupply of apartments – particularly in Melbourne and Brisbane – as a key concern. The bank said. “Household debt is at record levels, which increases vulnerability to future shocks.
Bendigo announced that they have made a change to the accounting treatment of their Homesafe business with cash earnings now to exclude any unrealised income or losses and associated funding costs. Given Bendigo had a 6% long run home price growth assumption; in the current environment this looks like a smart move even though cash earning will be hit as a result.
There was a raft of further hikes in mortgage rates and changes in lending policy this week. For example, ING Direct eliminated interest-only repayments on new applications for its owner occupied fixed rate loans. On the other hand, the bank lowered rates on some principal and interest fixed rate loans. Several surveys have highlighted that households are considering moving to fixed rate mortgages to try and alleviate the pressure of ongoing lifts in variable rates.
Adelaide bank ditched their commercial low doc loans and Suncorp added 12 basis points to investor loans, but reduced some fixed rates for owner occupied loans and maintains its offer to first time buyers.
ANZ lifted variable interest-only home loan rates for investors and owner-occupiers by 30 basis points, whilst cutting five basis points off their variable interest rates for customers paying principal and interest on their home loans. This takes the bank’s standard variable rate for owner-occupiers to the lowest of major banks at 5.20%pa. So the competition for owner occupied loans is hotting up as pricing continues to be used to slow investment loan growth.
The RBA held the cash rate, and stressed the risks from high household debt once again. Also, on the economic front, the seasonally adjusted current account deficit fell $403 million (11 per cent) to $3,108 million in the March quarter 2017. This was not as good as expected. The pace of growth of the Australian economy slowed in the March quarter to 0.3 per cent and through the year, GDP grew 1.7 per cent. There were falls in exports and dwelling investment. The long term trend also highlights a slowing, so we need new growth engines if we are to keep the growth ball in the air! Household consumption just won’t do the job, and household savings fell in the quarter as they struggle to pay the bills.
So, it is clear the momentum in home lending is declining, and more households are struggling with high debts in a rising interest rate environment. It seems certain now, despite the banks targeting first time buyers, demand will slacken, and this will drive prices lower. Whilst the consensus view appears to be there will be an orderly decline, there are more risks now apparent which suggest prices may well fall further and faster than previously anticipated. We are indeed past the peak, so now its a question of how steep the downhill gradient becomes. Prepare for a bumpy ride!
