Home Price Expectations Held Up By Hot Air!

In the final part of our October 2019 Household Survey we look at the results through the lens of our segmentation models. What is clear is there is a disconnect between future home price expectations (much more positive) and proposed activity (lower demand for credit, and intentions to transact). This is at the heart of the weirdness in the market at the moment, and it helps to explain the low levels of listings and transactions (and hence the high auction clearance rates on those low volumes). There is nothing in the latest results however which flags significant momentum increases ahead.

We start with the cross-segment trends. First there is a significant hike in those expecting home prices to be higher in the next 12 months. It reached a low around the election, and has been rising since the cash rate cuts. Portfolio Investors (those with multiple investor properties are the most bullish). But the expectations are there across the board.

However, this does not necessarily translate into intention to transact. First Time Buyers and Down Traders (around 900k) are most likely to be in the market, the former aided by the extra incentives available and the latter by the need to pull equity from existing properties. Property investors remain largely on the sidelines. There is also a slight downward inflection in the past quarter.

Another lens is demand for credit which shows stubborn resistance other than from First Time Buyers ~around 150k actively looking) and Up Traders (around 550k actively looking). Refinancing is tracking at levels we have seen for some time. This suggests that banks will have to compete hard for meager pickings, and refinancing and first time buyers will be the targets for special deals.

Those Wanting to Buy say that availability of finance (40%) and costs of living (30%) are the main barriers, although high home prices at 16% still registers. Interest rates and fear of unemployment are low relatively speaking.

First time buyers are being driven by a range of factors including the need for shelter and a place to live (28%), greater security (14%), tax advantage (17%) and to take advantage of the FHOG (12%). But that said there are significant barriers as well.

Barriers include home prices too high (26%), availability of finance (39%) and costs of living (24%). On the other hand finding a place to buy and rising interest rates hardly registered.

Household seeking to refinance are being driven by reducing monthly repayments (50%), for a better rate (22%) and extra capital withdrawal 20%.

Down Traders are driven by the desire to release capital for retirement (50%), increased convenience (30%) and illness or death of spouse (11%). Interest in investment property has faded to 6%.

Up Traders are being driven by the desire for more space (41%), job change (16%), property investment (22%) and life-style changes 20%).

Turning to investors 45% are driven by tax benefits, better returns than deposits (25%) and appreciating property values (14%).

On the other hand, investors face a number of barriers including cannot getting finance (49%), and they have already bought (13%).

And finally across the segments the prime selection point is price, although it varies, and loyalty is not seen as significant or rewarded.

Standing back, it appears that property sector momentum is likely to remain patchy at best, with more action at the more expensive end of the value spectrum, and first time buyers remaining as the primary “canon fodder” with regards to new transactions. It will be interesting to see how the Government scheme due in January changes the picture.

Latest Household Research On Stress And Confidence [Video]

We have released two videos today which summarise our latest household research.

Note at the 3 min mark I misspoke on the stress data – should be “shows a further 7,000 household fell into stress taking the total to more than 1.07 million households or 32.2%”

Household Financial Confidence Erodes Some More

The bad news keeps coming, with the latest DFA Household Financial Confidence Index for October at the lowest ever of 83.7.

This continues the trends of recent months, since dropping through the neutral 100 score in June 2017.

The falls were widespread across our property segments, with investors still way down, under the pressure from low net rental yields, the need to switch to principal and interest from interest only, and worries about construction defects. Owner occupied households were less negative, but those renting continue to struggle with higher levels of rental stress.

Across the states there were significant falls in NSW and VIC, whilst other states continued to track as in recent months. The main eastern states are now lower than WA and SA, which is a surprising new development.

Across the age bands, the falls are mainly among lower aged groups, while those aged 50-60 are feeling more positive thanks to recent stock market rises.

This is also reflected across our wealth segments, with those holding property mortgage free and other financial assets more positive (though still below neutral) compared with mortgage holders and those not holding property at all.

We can then turn to the moving parts within the index, based on our rolling 52,000 household surveys. Employment prospects continue to look shaky, both in terms of under-employment and job security. Jobs in retail and construction and also finance are under-pressure, and the impact of the drought is also hitting some areas. 8% of household felt more secure than a year ago, the lowest read ever in this part of the survey. More households have multiple part-time jobs.

Income remains under pressure, with 51% saying their real incomes have fallen in the past year, while 5% reported an increase, often thanks to switching jobs or employers.

Household budgets are under pressure as costs of living rise, with 91% reporting higher real costs that a year ago, this is a record in our survey. Expenses rose across the board, from child care, health care, school fees and rates. Food costs were higher partly thanks to the drought. There was a small fall in the costs of power, and fuel, but not enough to offset rises elsewhere. Mortgage interest rate falls were blotted up quickly, and the tax refunds where they were received were much lower than people had been expecting.

Some households are deleveraging (paying down debt) , while others are more concerned about the amount they owe from mortgages to credit cards and on other forms of credit. 48% of households are less comfortable than a year ago. Lower interest rates are only helping at the margin.

Savings are under pressure from several fronts. Some households are tapping into savings to keep the household budget in check – but that will not be sustainable. Others are seeing returns on term deposits falling away, yet are unwilling to move into higher-risk investment assets. Those in the share markets are enjoying the current bounce, but many expressed concerns about its sustainability. 49% of households are less comfortable than a year ago, while 47% are about the same. Significantly around 27% of households have no savings at all and would have difficulty in pulling $500 together in an emergency. Around half of these households also hold a mortgage. Worth reflecting on this with 32.2% of households in mortgage stress as we also reported today!

And finally, we consider net worth (assets less liabilities). Here the news is mixed as some households are now convinced their property is worth more citing the recently if narrowly sourced data on rises in Sydney and Melbourne. However other households reported net falls. 24% of households said their net financial position was better than a year ago (up 1.3%), while 45% said they were worse off (down 1.6%). There are also significant regional differences with households in Western Australia and Queensland significantly worse off, while some in inner city areas of Sydney and Melbourne claimed significant advances.

So, overall the status of household confidence continues to weaken, which is consistent with reduced retail activity, and a focus on repaying debt. Unemployment is lurking, but underemployment is real. We also see weaker demand for mortgages ahead, and we will discuss this in more detail in our upcoming household survey release. Without significant economic change, these trends are likely to continue for some time. If the RBA and Government is relying on households to start spending, they will need a very different strategy – including a significant fiscal element. Lower interest rates alone will not cut the mustard.

Hold Your Horses! RBA Does Too…

The RBA held rates today, as expected, but their explanation is turning pretty sour as reality bites. Expect more downgrades and rate cuts ahead, just a matter of time.

I also find it amazing that unlike UK, USA, and NZ there is no streamed press conference nor questions from the media after the announcement. The RBA continues to be more covert than its peers and less exposed to questions about its policy.

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.

Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back over the past month and financial market sentiment has improved a little. Even so, long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at the lower end of its range over recent times.

The outlook for the Australian economy is little changed from three months ago. After a soft patch in the second half of last year, a gentle turning point appears to have been reached. The central scenario is for the Australian economy to grow by around 2¼ per cent this year and then for growth gradually to pick up to around 3 per cent in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.

Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high. The unemployment rate has remained steady at around 5¼ per cent over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth remains subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected, with headline inflation at 1.7 per cent over the year to the September quarter. The central scenario remains for inflation to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Official Letter of Complaint against the Australian Treasury

5th November 2019

Dear Secretary Steven Kennedy,

I am today making an official complaint about the behaviour of the Australian Treasury relating to disclosures as a result of a Freedom of Information request (FOI 2580 – Document 1) relating to Economy Wide Cash Payment Limit (CPL). 

The basis of good Government is effective consultation and engagement with the public. The evidence suggests this has been actively avoided in this case to drive a specific agenda.

The Submission provided Minister Sukkar and the Treasurer Frydenberg with a briefing on the outcomes of the public consultation Treasury facilitated concerning the Currency (Restrictions of the Use of Cash) Bill 2019, the Currency (Restrictions on the Use of Cash – Excepted Transactions) Instrument 2019 and other associated documentation. The public consultation was conducted by Treasury from 26 July 2019 to 12 August 2019.

Specifically, in the advice, Treasury informed the Minister and the Treasurer that:

“Treasury has received over 3,500 submissions during the two-week public consultation period. Over 3,400 of these submissions are part of a campaign by the Citizens Electoral Council.”

This is a factually incorrect statement, in that I have evidence that many of the submissions, whilst they might echo some of the sentiments voiced by the CEC, were not directly or indirectly associated with the CEC or their campaign.

Indeed, Digital Finance Analytics, a boutique research and consulting firm made a direct submission, and we are also aware of a significant number of other individuals and firms who also made submissions. I have not financial or political alignment with the CEC.

But we all hold the firm view that the bill as presented eroded our civil liberties, did not provide factual justification for the $10,000 cash limit, and the connection with monetary policy and negative interest rates – as articulated for example by the Black Economy Taskforce itself as well as agencies such as the IMF – was not discussed in the explanatory memorandum.

This appears to be a blatant attempt to dilute the very strong community concerns about the propose bill, whilst displaying a strategy like that executed a couple of year ago when the revisions to APRA’s powers were nodded though in the Senate. In each case the CEC was used as an excuse to ignore very real community concerns.

So, I am seeking a formal apology for this error, confirmation of the true count of independent submissions and specifically that my own submission was NOT bucketed into the CEC campaign count.  When will the submissions be made public so I can confirm this?  Clearly your advice would also need to be updated.

It is no wonder that public trust in Government is at an all time low.

I will be making the same point as part of my submission to the current Senate Inquiry.

Martin L North, Principal Digital Finance Analytics

Mortgage Stress Tracks Higher Yet Again

After talking a breather last month, thanks to rate cuts and tax refunds (minimal those these were in practice), the results from our surveys for October shows a further 7,000 household fell into stress taking the total to more than 1.07 million households or 32.2%

Household debt is at record highs, and while costs are still rising, incomes are not in real terms. There was a spate of refinancing which helped some households but the bulk of these were NOT in stress in the first place. The rejection rates for those in mortgage stress are and remain consistently higher.

Mortgage stress is assessed on a cash flow basis, where, based on our 52,000 household rolling annual survey we measure income and outgoings for households, including mortgage repayments. Where the cash flow is net negative, households are in stress. They are required to draw down on savings, put more on credit cards or hunker down – one reason the retail sales data yesterday at o.2% in September was so weak. Stress is based on current circumstances.

We also model the probability of default ahead over the next 12 months, which is a predictive estimate and we expect defaults to continue to rise – we are seeing worrying signs in both New South Wales and Victoria now as economic conditions in these states weaken. Job losses in retail and construction are leading the downturn. But underemployment is widespread. On the other hand, Canberra, with higher public sector wages, is more insulated from the reality elsewhere.

Across our household segments more than half (56.5%) of Young Growing Families are in stress, accounting for more than 166,000 households; followed by Battling Urban at 48.9% or 76,000 households and Disadvantaged Fringe at 48%, with nearly 300,000 household. Rural households are under pressure thanks also to the drought, with 25.6% in mortgage stress, or 78,500 households and even the most affluent segment – Exclusive Professionals are 24% in stress with 54,600 households. In other words mortgage stress is appearing in every sector of society.

Across the states the highest proportion of households in stress are located in Tasmania (39%) and Northern Territories (36.9%), although the number of households is relatively low. New South Wales now has nearly 300,000 households in difficulty or 28.3% of households, and Victoria has 296,000 households in stress or 33.1%. We have been tracking the spike in Victoria in recent months. However, Western Australia has 34.3% of households in stress, or 145,000 households and conditions continue to deteriorate there with more foreclosures in train, as banks speed up their resolution processes.

We analyse stress to post code level, and can identify those postcodes with the largest count of stressed households. Post code 2560 – the area around Campbelltown has the highest count, with 7,300 in stress or 63% of households. Next is Melbourne post code 3805, including Fountain Gate and Narre Warren with 6,600 stressed households representing 57.8% of households. Third is Toowoomba in Queensland with 6,500 households, representing 44% of households in the district, and fourth is 2170 around Liverpool in New South Wales with 6,300 in stress or 44.8% of households. A common characteristic are areas of high urban expansion on the fringe, with many new builds competing with existing property, and many recently purchased. That said, stress can take several years to emerge, and there are pockets of pain from purchases made several years ago.

Finally, we also examined the expense drivers of stress from our surveys. These vary across the segments with power prices, school fees and child care, all significant, as well as housing costs overall.

This is likely to drive stress higher unless real wages start to improve, but given the current economic outlook that appears unlikely for now.

Corrupt Canberra says your Freedom is Out of Scope

Economist John Adams and Analyst Martin North discuss the recent Treasury FOI response relating to the Cash Restriction legislation which was open (briefly) for public comment.

https://treasury.gov.au/sites/default/files/2019-11/foi-2580.pdf

https://www.adamseconomics.com/post/official-letter-of-compliant-against-the-australian-treasury

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019