ABS – Page 52 – Digital Finance Analytics (DFA) Blog

Construction Momentum Continues

The data from the ABS shows that the trend estimate of the value of total building work done rose 1.1% in the March 2016 quarter with new residential building work up 2.8%, whilst the value of non-residential building work done fell 1.2%. As a result, 66% of all building activity was for residential purposes, a record. Construction momentum continues therefore, despite falls in building approvals over the same period.

The trend estimate for the total number of dwelling units commenced rose 1.8% in the March 2016 quarter following a rise of 1.2% in the December quarter. Looking at the mix of residential activity, the value of work done on new houses fell 0.7% while new other residential building (units, apartments etc.) rose 7.1%. As a result, 47% of value in March 2016 was for dwellings other than housing, a record. The trend estimate for new private sector house commencements fell 1.4% in the March quarter following a fall of 1.5% in the December quarter. The trend estimate for new private sector other residential building commencements rose 5.5% in the March quarter following a rise of 4.9% in the December quarter.

Overall, 30% of all construction activity (including residential and non-residential) was for units and apartments, with more than 30,000 units in the quarter. This is another record and highlights again the risks in the system.

Finally, it is worth noting where the momentum lays, because there are significant state variations. Looking at the year March 2016, new dwelling commencements rose in ACT (44.1%), NSW (24.1%), QLD (13.1%), VIC (11.6%) and TAS (6.6%). On the other hand they fell in NT (-24.7%), WA (-19.0%) and SA (-3.1%).

Have We Passed Peak Mortgage?

The housing finance data from the ABS today shows that there has been a slight slowing in absolute mortgage lending flows in May. But the overall stock of housing loans held by ADIs rose 0.62%, or $9.3 billion (after taking account of new additions, repayments and refinance, as well as adjustments). Total loans on book were worth $1.5 trillion, another record. Within that, owner occupied loans rose 0.76% or $7.3 billion, and investment loans rose 0.37% or $2.0 billion.

We will concentrate on the more reliable trend data series. Overall new owner occupied lending flows fell, in trend terms by 0.56%, or $115 million. Withing that overall fall though, refinanced loans were static, at 34.3% of lending, as households took up the low rate offers available. Lending for construction was down 0.54%, or $9.9 million, whilst purchases of new property were down 3.5% or $34 million and purchase of establish property was down 0.4%, or $71.6 million. Remember we are looking at flows of new loans here, so in trend terms, the value of mortgages is still growing, just more slowly.

Looking across the various states, the weighted average was a drop of just 0.2%. ACT rose 1.2% and SA rose 0.8%, whilst all other states, other than NT fell around 0.2%. NT fell 1.4% on small volumes.

Looking at the original data for first time buyers, the number of loans jumped by 4.5% to 8,488, but comprised 13.9% of all transactions, down from 14.14% last month. The average loan size fell again by 1.3%, showing that tighter lending standards are biting, the average new loan for first time buyers is now $326,000, whilst the average loan to other borrowers also fell, to $362,000, down 1.2%. Using data from our surveys, we are able to identify those first time buyers going direct to the investment property sector. Investor loans grew 1.2% making 4,041 loans in the month, so total REAL first time buyers of all types rise by 3.4% to 12,529 during May.

Looking at the mix of lending for investment and owner occupation, the flow of investment loans fell by 0.1% in trend terms (down $6m) whilst owner occupied loans flows fell 0.6% or $115 million. $11.6 billion of investment loans and $20.5 billion of owner occupation loans were written. In total more than $32.1 billion of new loans were written, compared with $32.2 billion last month, an overall fall of 0.4%.

As a result, the mix of new loans for investment purposes rose to 36.2%. We continue to see a rise in investment lending, with a 1.9% lift in loans for new investment property construction, compared with a fall of 0.5% for construction for owner occupation.

Finally, we look at loan stock, remembering some reclassifications continue. The overall stock of housing loans held by ADIs rose 0.62%, or $9.3 billion (after taking account of new additions, repayments and refinance, as well as adjustments). Total loans on book were worth $1.5 trillion, another record. Within that, owner occupied loans rose 0.76% or $7.3 billion, and investment loans rose 0.37% or $2.0 billion.

So, we conclude that momentum is likely to drive home loan demand higher, even if the rate of growth is somewhat curtailed by tighter lending standards. Demand is still being seen from investors and first time buyers are still active. Refinance to new low rates is still in play. So, no we have not yet reached “peak mortgage”.

Home Loan Churn Up, But Not Away

Currently more than 26 percent of the home loan lending book is being churned each year, reflecting strong refinance demand, low rates and massive marketing campaigns. So it is interesting to look at the trend data, especially in the light of the New Zealand Reserve Bank data we discussed yesterday, which indicated 35 per cent of loans there are churning annually.

Data from the ABS enables us to analyse the proportion of the home loan book which, by value is churned each year. To do this we compare the loan stock data, with the loan flow data, by total value pools. Here are the result for the ADI’s.

The stock figure takes account of new loans written, refinanced and repaid. The flow data shows us the new loans written. So we see a rise in churn from 2012, moving from about 20 per cent to more than 26 per cent. We also see a slowing turn in recent months, suggesting perhaps that the refinance drive has peaked. That said, there are a number of marketing campaigns suggesting that borrowers should refinance now if their mortgage rate does not have a three in front of it! On average, households with a loan of more than a year old would do well to check their rate.

All things being equal, you could say that the average loan is under four years, though in the real world, there is diversity, with some loans turned over every one to two years, and others retained for a much longer term.

What is also striking though is that in the 2000’s churn moved up from around 13 per cent to reach a peak of 39 per cent prior to the 2007/8 GFC. This rise in churn can be mapped to the rise of mortgage brokers in Australia (whilst the correlation could be coincidence, we suspect there is a link) as many brokers were on commission structures without claw-backs, with upfront commissions more generous that tail commissions. Changes in regulation and commission structures made the churn harder to execute later.

Still a quarter of the book turning over annually is pretty amazing, considering all the activity (and fees etc.) which are generated. It also suggests to me that bank’s should be thinking much harder about retention strategies.

Retail Turnover Rose 0.2% in May

Australian retail turnover rose 0.2 per cent in May 2016, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

This follows a rise of 0.1 per cent in April 2016.

In seasonally adjusted terms, there were rises in food retailing (0.7 per cent), other retailing (1.4 per cent) and cafes, restaurants and takeaway food services (0.3 per cent). Department stores (0.0 per cent) was relatively unchanged. There were falls in household goods retailing (-1.1 per cent) and clothing, footwear and personal accessory retailing (-1.2 per cent) in May 2016.

In seasonally adjusted terms there were rises in New South Wales (0.7 per cent), Victoria (0.6 per cent) and South Australia (0.3 per cent). Tasmania (0.0 per cent) was relatively unchanged. There were falls in Western Australia (-0.7 per cent), Queensland (-0.4 per cent), the Northern Territory (-0.6 per cent) and the Australian Capital Territory (-0.3 per cent) in May 2016.

The trend estimate for Australian retail turnover rose 0.2 per cent in May 2016 following a 0.2 per cent rise in April 2016. Compared to May 2015, the trend estimate rose 3.3 per cent.

Online retail turnover contributed 3.2 per cent to total retail turnover in original terms.

Dwelling approvals continue to rise in trend terms

The number of dwellings approved rose 0.9 per cent in May 2016, in trend terms, and has risen for six months, according to data released by the Australian Bureau of Statistics (ABS) today.

Dwelling approvals increased in May in the Northern Territory (18.7 per cent), Australian Capital Territory (8.2 per cent), New South Wales (2.0 per cent), South Australia (1.9 per cent) and Victoria (1.8 per cent), but decreased in Western Australia (2.6 per cent), Queensland (1.8 per cent) and Tasmania (1.2 per cent) in trend terms.

In trend terms, approvals for private sector houses rose 0.2 per cent in May. Private sector house approvals rose in South Australia (1.9 per cent), New South Wales (1.5 per cent) and Victoria (0.2 per cent), but fell in Western Australia (2.2 per cent) and Queensland (0.5 per cent).

In seasonally adjusted terms, dwelling approvals decreased 5.2 per cent, driven by private sector dwellings excluding houses, which fell 11.3 per cent. Private sector house approvals rose 0.1 per cent in seasonally adjusted terms.

The value of total building approved rose 1.0 per cent in May, in trend terms, and has risen for five months. The value of residential building rose 1.5 per cent while non-residential building fell 0.2 per cent.

Commenting on the results, HIA Senior Economist, Shane Garrett said

Multi-unit approvals tend to bounce around a lot from one month to the next, but it’s been clear for some time that activity on this side of the market has peaked. Interestingly, the RBA cut interest rates during May and today’s result indicate that this move may have helped contribute to steadier conditions for detached house approvals. The decline in approvals during May was quite widespread in geographic terms, with Victoria being the only major state to experience an increase during the month. Today’s figures fit closely with our view that new home building activity is in the process of declining from last year’s record peak to more modest levels as the end of the decade approaches. The contraction in activity is predicted to be concentrated on the multi-unit side, with a more measured reduction in detached house building.

Income, Credit and Home Prices Out of Kilter

In this post we combine the latest data from the RBA and ABS, and our own analysis to look at the relationship, at a state level, between income growth, home price growth and credit growth. These three elements should logically be closely meshed, yet in the current environment, they are not. We think this is an important leading indicator of trouble ahead as these three factors will come back eventually to a more normal relationship, signalling potential falls in home values and credit volumes in a low income growth environment.

The latest data from the ABS shows that home prices fell slightly in the past quarter. The Residential Property Price Index (RPPI) fell 0.2 per cent in the March quarter 2016, the first fall since the September quarter 2012. Attached dwellings, such as apartments, largely drove price falls in the RPPI. The attached dwellings price index fell 0.8 per cent in the March quarter 2016. Falls were recorded in Melbourne (-1.3 per cent), Sydney (-0.6 per cent), Perth (-1.1 per cent), Canberra (-1.1 per cent) and Adelaide (-0.4 per cent). Brisbane (+0.7 per cent), Hobart (+2.3 per cent) and Darwin (+0.1 per cent) recorded rises. Established house prices for the eight capital cities was flat (0.0 per cent). The total value of Australia’s 9.7 million residential dwellings increased $15.4 billion to $5.9 trillion. The mean price of dwellings in Australia is now $613,900.

The RBA minutes also out today had a couple of interesting comments.

Dwelling investment had continued to grow strongly over the year, consistent with the substantial amount of work in the pipeline noted in previous meetings. Members observed that private residential building approvals had increased strongly in April, to be close to peaks seen earlier in 2015. Although these data are quite volatile from month to month, the trend for building approvals had been stronger than expected of late and the pipeline of residential work yet to be done had remained at high levels. This implied that growth in new dwelling investment would continue to add to the supply of housing over the next year or so, particularly in the eastern capitals.

In established housing markets, prices increased significantly in Sydney and Melbourne over April and May and, to a lesser extent, in a number of other capital cities. Auction clearance rates and the number of auctions increased in May, but remained lower than a year earlier. At the same time, the monthly data available for April showed that there had been a further easing in housing credit growth and the total value of housing loan approvals, excluding refinancing, had fallen in the month. Members noted that the divergence in the trends in housing price and credit growth was not expected to persist over a long period of time.

We already know that income growth is static.

So this got us thinking about the relationship between income, home price growth and credit growth. To look at this, we drew data from our surveys, and also the ABS and RBA data-sets, to map the relative cumulative growth of average household income, home price growth and credit growth. The results are interesting. We used 2006 as a baseline and measured the relative cumulative growth since then, by state.

First, here is the average across Australia. The growth of credit since 2006 (the yellow line) is significantly stronger than home prices and income. Income is notably the slowest. This is course confirms what we know, households are more leveraged (highest in the western world), and home prices are higher relative to income, supported by credit availability and more recently low interest rates. Note also the recent slowing in credit growth.

Looking at the state variations is really insightful. In the ACT credit growth is very strong, but home prices and incomes are moving at a similar trajectory. This is partly because of the micro-economic climate supported by well paid public servants.

In NT, home price growth is higher than credit and income growth, but the growth is beginning to slow, in response to the mining slow down. Home prices are significantly extended relative to incomes.

In TAS, home prices are tracking incomes, whilst credit has been growing more slowly, thanks to lower price growth and local demographics.

In WA, we see significant home price momentum through the mining boom years, but it is now adjusting, and credit which has been strong has been easing in the past 12 months. Home price growth is now tracking income growth.

In SA, credit is quite strong now, and we are seeing home prices moving ahead of incomes, as they did in 2010, but only slightly.

In QLD, credit is growing faster now, and home prices are moving faster than incomes, there is an interesting dip in 2011-12, thanks to some “local political difficulties!”

VIC holds the award for the strongest credit growth in recent time, and as a result we see home prices moving ahead of income growth, a trend which can be traced back to before the GFC.

Finally, in NSW, we see a dramatic run up in credit and home prices, especially since 2013. Both are growing faster than incomes. Prior to this, income growth and home prices were more aligned.

So a few observations. Incomes and home prices, and credit are disconnected, significantly. This is a problem because credit has to be repaid from income, in some way, at some time. Next, there are strong correlations in some states between credit growth and home prices, in other states it is less clear. NSW and VIC have the largest gaps between income and prices. So it reconfirms the property markets are not uniform. Finally, and importantly, we think that home price and credit growth will have to come back to income growth – and as incomes will be static for some time, downward pressure on home prices and credit will build, especially if the costs of borrowing were to rise.

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%).

Retail turnover rises 0.2 per cent in April

Australian retail turnover rose 0.2 per cent in April 2016, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

This follows a rise of 0.4 per cent in March 2016.

In seasonally adjusted terms, there were rises in cafes, restaurants and takeaway food services (1.0 per cent), household goods retailing (0.3 per cent), clothing, footwear and personal accessory retailing (0.5 per cent), other retailing (0.2 per cent) and department stores (0.4 per cent). Turnover in food retailing fell 0.3 per cent in April 2016.

In seasonally adjusted terms, there were rises in New South Wales (0.3 per cent), Western Australia (0.6 per cent), South Australia (0.5 per cent), Tasmania (1.0 per cent), the Australian Capital Territory (0.9 per cent) and the Northern Territory (0.7 per cent). There were falls in Victoria (-0.3 per cent) and Queensland (-0.1 per cent) in April 2016.

The trend estimate for Australian retail turnover rose 0.2 per cent in April 2016 following a 0.2 per cent rise in March 2016. Compared to April 2015, the trend estimate rose 3.4 per cent.

Online retail turnover contributed 3.0 per cent to total retail turnover in original terms.

GDP 3.1% But…

Latest ABS data shows that growth in the quarter was a strong 1.1% making an annual seasonally adjusted rate of 3.1%. However, the Net National Disposable Income (NNDI) measure shows another fall.

In other words, whilst we are exporting more volume – and this quarter liquid natural gas was a stand-out, this greater activity did not translate to national or household income. In fact, this continues to fall, as previously shown by the stagnant growth in real incomes. The Australian economy may be running fast, but is not creating more wealth for its residents. Not a pretty picture.

Standing back, you have to question whether GDP is a very useful measure in the current environment. I am sure there will be many who will use it to “prove” the economic miracle continues, but the truth is much more complex. In addition, GDP is decoupled from inflation when the main driver is exports, so this gives the RBA a headache as well. Cutting rates further is unlikely to address this problem.

The ABS said that the March quarter 2016 National accounts show the Australian economy growing by 1.1% in seasonally adjusted chain volume terms. The major driver of economic growth this quarter came from Exports which contributed 1.0 percentage point and Household final consumption expenditure contributing 0.4 percentage points.

The increase in Exports is reflected in the growth observed in Mining production (6.2%). Growth was also observed in the service industries of Financial and insurance services (1.8%), Accommodation and food services (1.5%), and Arts and recreation services (0.9%).

The largest detractor from growth was Private gross fixed capital formation which fell 2.2%, this was driven by falls in New engineering construction (-6.4%) and New buildings (-6.9%).

The Terms of trade fell by 1.9%, reflecting a fall in the price of exports relative to the price of imports.

Upside To GDP Likely

Latest data suggests that the GDP number will be higher than expected – with a 1.1% growth, compared with an expected 0.7%. If so, then momentum is stronger than many thought, and it may require some revisions to expectations.

The current account deficit decreased $1,837 million (eight per cent) to $20,794 million in the March quarter 2016 in seasonally adjusted, current price terms, according to latest figures from the Australian Bureau of Statistics (ABS).

Exports of goods and services fell $578 million (one per cent) and imports of goods and services fell $3,402 million (four per cent). The primary income deficit rose $979 million (nine per cent).

In seasonally adjusted chain volume terms, the net goods and services surplus rose $4,731 million (60 per cent) to $12,611 million in the March quarter 2016. This is expected to contribute 1.1 percentage points to growth in the March quarter 2016 volume measure of Gross Domestic Product.

Australia’s net International Investment Position was a liability of $1,012.1 billion at 31 March 2016. This was an increase of $51.4 billion (five per cent) on the revised 31 December 2015 position of $960.8 billion. Australia’s net foreign debt liabilities increased $9.2 billion (one per cent) to a net liability position of $1,027.8 billion. Australia’s net foreign equity assets decreased $42.2 billion (73 per cent) to a net asset position of $15.7 billion at 31 March 2016.