Welcome to the Property Imperative weekly to 7th July 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
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My interview with John Adams on the $1 trillion of foreign debt Australia is saddled with, was well received this week, with considerable interest not only from audiences in Australia, but also in the US. It’s worth noting that global debt, of all type stands at a record US$237 trillion and by the way the nonfinancial debt as a share of GDP in the US is also at a record 46%. We are drowning in debt. The discussion around how companies are borrowing more to boost shareholder returns in the short term and the risks ahead, resonated with many who watched our discussion. Our next one will focus on the apparently simple question of what is money and will touch on value destruction. So watch out for that.
We also covered household finance and mortgage stress this week, on a range of mainstream media outlets, including the ABC and Seven Sunrise; as more banks, including Macquarie, Bendigo and AMP Bank all lifted their mortgage rates in the week between 8 and 17 basis points depending on the bank loan type because of ongoing funding pressures. My headline of 1 million households in stress by September if the majors followed suite received significant attention, despite some analysts choosing to say there is no issue at all because rates are so low, or confusing stress with default, clearly the education must continue… To which I reply, look at the data, one third of owner occupied households have no wriggle room to accommodate rising rates. Even small increases – 10 basis points on an average $750,000 Sydney mortgage is another $60 each and every month. Given rising costs and flat incomes this is significant. It is also worth noting that CBA this week dropped the base rate on its NetBank Saver account by 30 basis points after Westpac last week also cut the return on its eSaver product by the same amount. Three of the major banks – CBA, Westpac and ANZ – are now offering annual rates of only 0.5 per cent on their online savings accounts. So depositors are also getting hit hard and this could in fact make banking funding costs in the capital markets go even higher as savers look for alternatives and withdraw funds from bank deposit accounts.
APRA reported the outcomes of their bank stress tests were fine, but our own analysis of the data using the same high risk scenario came out with a more worrisome result. You can watch our video “When Is A Test, Not A Test” for more. According to the Australian, CLSA analyst Brian Johnson said it was “a bit late for the regulator to acknowledge housing as a potential systemic risk” after it “watched from the sidelines” as household debt exploded and house prices reached “bubble-ish” territory. He also said Mr Byre’s speech was indicative of an “accommodative” stance that would let the banks continue to lend largely unrestrained. More evidence of the ongoing debt balloon.
The outgoing secretary of the Australian Treasury John Fraser warned in a speech at an economist’s forum published by Treasury, against lifting interest rates saying “considerable care” needed to be taken to unwind the extreme fiscal and monetary policy interventions of the past decade. “As we all know, these interventions have left fiscal and monetary policymakers with difficult legacies: structural balance deficits and high net debt levels and official interest rates at historically very low levels,” “Judgment is required, together with a healthy scepticism about what economic models alone might be telling us,” he said. My own view is we see more and more evidence of the politicisation of the Treasury, as reflected in their unrealistically optimistic forecasts.
The latest edition of NAB’s quarterly property industry survey contained data which showed that demand for property from foreign buyers has fallen to levels not seen since 2010. This is true of both new and existing properties, and is the result on tighter credit controls and higher transaction fees. Another reason why we think property prices will continue to fall. And data from NSW shows again the significant drop in the number of foreign buyers transacting at the moment.
CoreLogic’s home price indices continues to record weekly falls, with no state rising and Melbourne falling 0.2% on the prior week, followed by Sydney and Perth both down another 0.1%. Auction clearance rates have remained relatively consistent over the past 2 months; remaining within the low to mid 50 per cent range. Volumes have been trending lower over each of the last 4 weeks, and also tracking lower relative to volumes from the same period last year. CoreLogic says Melbourne’s final auction clearance rate fell to 56.1 per cent across 631 auctions last week, down from the 57.2 per cent across a higher 791 auctions over the previous week. Over the same week last year, 818 homes went to auction and a clearance rate of 72.9 per cent was recorded. Sydney’s final clearance rate has been fairly stable over the last 3 weeks, with last week’s final clearance rate coming in at 50.1 per cent across 552 auctions, compared to 49.7 per cent across 634 auctions the week prior. This time last year, 656 homes went under the hammer, returning a clearance rate of 68.6 per cent. There is noise in the data here because of the high number of unreported auctions, so in fact the true situation is considerably worse. We discussed this at length in our video “Auction Results Under the Microscope”.
The AFR reported that at the end of May, the average days on market in Sydney for houses has risen to 63 days up from about 45 days at the peak of the market last year. Days on market have been hovering around the 60s since March. For units, that number is now 64 days, rising from last year’s peak of 54 days. It takes an average of 48 days to sell a house privately, rather than through auction, in Melbourne. That number has remained fairly stable in 2017 and 2018 so far. For units, the average days on market in Melbourne has improved to 75 days down from nearly 100 days last year.
There was significant discussion from the analysts this week, with Morgan Stanley’s forward-looking housing model – MSHAUS – at a new historical low at -1.0 in the June quarter. Their model includes consideration of construction, credit availability and other factors including the Royal Commission. They conclude “National and Sydney dwelling prices are down ~2.3% and 4.8% from their peak, respectively, and auction clearance rates are tracking around 50%. As a result, consensus has turned negative on the market, but the debate now pivots on the extent of any decline. At this stage, we remain of the view that a price adjustment will be closer to 10%, while noting that deeper falls would bring a monetary or prudential policy adjustment into the debate. “Credit has tightened further, sentiment is slipping, and additional stock is hitting the market,” said Morgan Stanley strategists Daniel Blake and Chris Nicol.
Deloitte released its Australian Mortgage Report 2018, which forecasts that Australia’s housing correction will continue on the back of falling mortgage volumes. Australia’s leading lenders and mortgage brokers predict the nation’s housing settlement volumes will either remain flat or more likely decrease by up to 5% from the highs of previous years. “It is already appearing as if 2018 will be the second consecutive year since 2012 that settlement volumes (that is, the level of new mortgages issued in the market) either flattens off or reduces. Deloitte Access Economics’ Director Michael Thomas said: “Regulators aiming to restrain increasing property debt amid concerns of an overheating market, have targeted investor lending. Tighter lending standards and restrictions on the volume of ‘interest-only’ loans to total new residential mortgages, have pushed up rates for investors. Market activity has begun cooling, with house price growth slowing in the latter half of 2017 and continuing into 2018.”.
The ANZ-Property Council Survey for the September 2018 quarter shows that sentiment in Australia’s property sector worsened from last quarter’s record peak. The fall occurred across most states and territories, with only Queensland and South Australia recording mild increases. The latter has continued its impressive run and is now the country’s most optimistic region. The fall in sentiment is entirely due to the residential segment. In a sharp reversal from the stabilisation of previous quarters, the outlook for capital values in residential property has deteriorated markedly. Staffing levels, construction activity and the forward work schedule are all expected to ease in the residential space. Importantly, survey respondents expect the availability of debt finance to worsen. We believe this has been the main driver of the current weakness in the housing market. Any further tightening of credit will put more pressure on the industry.
This is all about credit tightening.
Chief executive of Aussie Home Loans, James Symond said that after banks have tightened credit standards “dramatically” in the last year, more customers Aussie was dealing with were falling outside the lending policies of banks, which have ramped up their scrutiny of customers’ living expenses. …”I’m hoping everyone is looking at it very, very carefully, because I’m seeing a credit marketplace tightening a lot, a real lot. And if we saw it tighten any more, I think that you mightn’t get the desired outcomes you want,” he said in an interview with Fairfax Media.
But CBA announced further expense checks on mortgage applicants, with to two rounds of detailed quizzing about their weekly spending on everything from school fees to gym memberships, children and pets. The formal categories cover: children; pets; clothing and personal care; communication; education; food and groceries; housing and property expenses; insurance; medical, health and fitness; recreation, travel and entertainment; and transport and auto. I doubt most households would have a clue, bearing in mind that according to our surveys half maintain no formal household budgets, so many will take a guess, and carry the liability of so doing. Further evidence of credit tightening, and importantly risk transference to the borrower, because once you sign the expenses declaration, the bank is insulated from “not unsuitable” liability.
HashChing, also said this week that lending regulations have gone overboard, and the tightening restrictions have, at times, become the reason for the unnecessary disapproval of loan applications.
Yet the credit data from the ABS this week showed that there was still some credit growth, despite investors falling off a cliff, especially in Sydney and Melbourne. The ABS data shows that total lending stock grew again in May. This is original data split between owner occupied and investment loans. Total housing loan stock rose 0.5% in the month to $1.66 trillion. Within that owner occupied lending rose 0.5% to $1.1 trillion and and investment lending rose just 0.1% to $563 billion. Investment loans fell to be 33.8% of all loans. Overall growth is circa 6% annualised. As for whether growth at 3 times income is “healthy” to quote Wayne Byers; well that’s another story. Remember debt has to be repaid, eventually. Growth has been strongest in owner occupied lending, but investment lending was also higher. If anything, further tightening is in order…
On the markets bank stocks did quite well this week, with the ASX 100 up to 5,155, despite the latest round in the trade wars. CBA up to 74.85 and Westpac ended at $29.60 but above the recent lows and a little lower on Friday. Clearly concerns about their mortgage books are not translating to share prices at the moment.
And the Aussie Dollar was a little stronger, although the drift down from the start of the year has continued, and many think it will go further.
On the US markets, Wall Street ended the week higher, with all the major indices closing in the green. The Dow ended at 25,019, still below the February highs. Tech stocks were winners for the week. The tech-heavy Nasdaq finished up more than 1%. Among the big winners in tech land was Amazon. The stock got a boost on a price target raise by Canaccord to $2,000 from $1,800 Thursday and again when S.G. Cowen raised its price target on the stock to $2,100 from $2,000 Friday. Alphabet’s Google, Apple and Facebook all closed up for the week. But Netflix, ended in the red, hurt by a Friday selloff ahead of their results. There are likely a few jitters about what numbers Netflix would have to report to spur more buying with the stock up around 100% year to date. The top 20 internet leaders highlight the concentration in a small number of the stocks, with Amazon and Alphabet right at the top.
Inflation data was paramount during the week, especially after last Friday’s employment report gave mixed signals of strong continued job creation but weaker-than-expected wage growth. The numbers grabbing the headlines were the levels in wholesale and retail inflation not seen for a while. The producer price index (PPI) was up 3.4% in June year over year, the highest level in 6-1/2 years. The June consumer price index (CPI) posted a year-over-year rise of 2.9%, the largest rise in six years. But the stock market tends to focus more on the month-on-month numbers and those figures were mixed. CPI was in line with expectations month over month, while core CPI, which excludes volatile food and energy prices, was up less than expected. PPI and core PPI came in just a little hotter than expectations. So, while prices are definitely rising, the US economy is so far avoiding the spikes that would fuel fears over interest rates rising quickly.
More significant for those zoned in on the Fed’s rate-hike path than the inflation data was likely the shift of Chicago Fed President Charles Evans comments in a wide-ranging interview with The Wall Street Journal that the economy could handle a move to neutral rates. That was interpreted to mean he’d support two rate-hikes this year. There is currently a more-than-80% of a rate hike in September and a more-than-55% chance of one in December. This would of course flow on to higher capital market funding costs. The 3 month US Bond rate was higher again on Friday,
The bank earnings were supposed be the highlight of the week. But the mixed results from Citigroup, JPMorgan Chase and Wells Fargo failed to spur anything but a muted reaction from the market Friday. Instead, Delta Air Lines likely offered the most insight for investors. Shares climbed Thursday after the airline beat second-quarter profit expectations thanks to fare increases. But it also highlighted a jump in fuel costs of nearly 40% in the quarter, a $2 billion increase. That’s trouble for the airline sector as whole, which is already struggling in 2018. The Dow Transports are off about 0.6% year to date. But there could be more weakness ahead if fuel costs remain high and companies like FedEx and UPS are hit by trade battles.
Until earnings arrived in earnest on Friday, the summer, low-volume market has been especially susceptible to the vagaries of trade tensions. The week started off with more saber rattling between the U.S. and its trade partners. The U.S. released a list on Tuesday of $200 billion more in Chinese goods that it would assess for tariffs of 10%. China again promised retaliation. That same day, ahead of his trip to Europe, President Donald Trump tweeted that the U.S. loses $151 billion on trade with the EU and that the single bloc charges the U.S. big tariffs and enacts trade barriers. But worries were reduced on Thursday when Treasury Secretary said there was a possibility that the U.S. and China could restart trade talks. And the president, while hammering allies of NATO spending, has not made any remarks about specific trade action against Europe. The rosier outlook on trade was reflected in the performance of Boeing, which is particularly sensitive to trade battles given the amount of its overseas business. Boeing was one of the best Dow performers for the week.
Oil prices fell for the week, but energy stock bulls will be heartened by crude oil’s ability to stay above $70 mark on Friday. Crude oil futures for August delivery settled at $71.01 per barrel, up 1% on the day. Oil did dip below $70 in morning trading, rose steadily through the rest of the day, then sold off late. For the week, mixed signals on supplies scaled back investor expectations for a global supply shortage as Libya resumed exports, U.S. supplies fell more than expected, while bets on a significant loss of Iranian crude were trimmed.
Gold prices resumed their decline and remained on track for their lowest settlement in nearly two weeks as easing trade-war concerns offset the dollar’s retreat against its rivals from a two-week high. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose by 0.01% to 94.58, but remained well below its intraday of high of 95.00.
Dollar-denominated commodities such as gold are sensitive to moves in the dollar. A rise in the dollar makes gold more expensive for holders of foreign currency, reducing demand for the precious metal.
So amid all the market noise the fragile US bank results and the prospect of higher interest rates ahead shine through as factors which could flow through into our own markets, which remain bullish, despite the warning signs of more downside risk from the finance and property sectors locally. As I said to the AFR on Friday, I have never seen so much interest in offshore investors seeking ways to short our market, given the next moves are likely to be lower as we move into spring. Expect further falls ahead.
Before I sign off, mark your diary. On the 17th July at 8 PM Sydney time I will be running our next live streaming session, where you can discuss in real time the issues in play. Judging by the previous session, it will be a lively event. This time we will be focussing on Financial Resilience. I have scheduled the event on our YouTube channel. Or send me questions beforehand via the comments section below.
