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Canada’s housing prices just stalled for the first time outside of a recession

Canadian real estate prices are acting a little skittish. The Teranet–National Bank House Price Index, shows real estate prices stalled across the country. In addition, the index is making moves we haven’t seen outside of a recession.

Tera-What?

If you’re a regular reader, feel free to skip this. For those that don’t know, The Teranet-National Bank HPI is a different measure of real estate data, that relies on property registry information instead of sales. Many misinformed agents refer to this as a “delayed” measure, but that’s not the case. The use of registry data means that the information is “late” compared to the MLS, but it’s more accurate.

Using registry information means only completed sales are included. In contrast, the MLS uses just sales. In a hot market, few sales fall through, so the MLS is definitely a faster read. In a cooling market, sales can start to fall through, as some buyers look for a way out while prices drop. This is often not reflected in MLS data, since a transfer occurs 30 to 90 days after a sale. They each have their trade offs, and neither is better or worse than they other. If you’re really into housing data, it’s best to check both to get a real feel for the market.

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Canadian Real Estate Prices Are Unchanged

Canadian real estate prices didn’t do a whole lot in March. The 11 City Composite index remained virtually unchanged compared to February. Prices are up 6.61% compared to the year before. National Bank analysts noted this is “the first time outside a recession when the March composite index was not up at least 0.2%” It was also the first time that only 4 out of the 11 markets saw an increase, outside of a recession. The unusual move is definitely worth noting from a macro perspective.

Toronto Real Estate Prices Are Flat

The Toronto real estate market has no idea what to do right now. The index showed prices remained flat from last month, and up 4.31% from last year. Prices are down 7.3% from the July peak when adjusted, and 7.9% when non-adjusted. This is the lowest pace of annual price growth since November 2013.

Funny thing to note is experts, including some bank executives, are saying the correction is over. Technically speaking, a correction hasn’t even begun according to this index. A correction is when prices fall more than 10% from peak, in less than a year, which we haven’t seen yet. If I didn’t know any better, it would appear that ~~mortgage sellers~~ bank executives are misinformed. How strange.

Vancouver Real Estate Prices Hit A New All-Time High

Vancouver real estate prices, driven entirely by condo appreciation, hit a new all-time high. Prices increased 0.5% from the month before, and are up 15.43% from the same month last year. Prices on the index showed monthly increases in 13 of the past 15 months. Teranet-National Bank analysts noted that gains are tapering, and this is “consistent with the Real Estate Board of Greater Vancouver.”

Montreal Real Estate Prices Drop 0.2%

The market brokerages have been attempting to rocket, appears to be a failure to launch. The index showed that prices declined 0.2% in March, and are up just 4.27% from the same month last year. Annual price increases peaked in December at just under 6%, and has been tapering ever since. Technically speaking, Montreal has yet to outperform the general Canadian market. Despite what you may have read in Montreal media.

Canadian real estate prices are acting unusual compared to movements typically made outside of a recession. However, they are moving in a typical real estate cycle. A gain as large as we’ve seen nationally, has never not been followed by a negative price movement. Try to act surprised when you see it. Bank economists will.

NSW Property Prices To “Correct” ~10% – Moody’s

As reported in the Business Insider, Moody’s Investor Services thinks there will be further declines to come, suggesting that Sydney prices will suffer a “correction” in the year ahead.

“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values,” Moody’s says, pointing to the chart below. “However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”

Westpac Says The Fed May Lift Rates Faster And Higher Than Markets Currently Expect

From Business Insider.

Now here’s an interesting paragraph from the minutes of the US Federal Reserve’s January FOMC meeting released on Wednesday.

Many participants noted that financial conditions had eased significantly over the intermeeting period; these participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields.

So we know the question you’re asking — what are “financial conditions” and why is this interesting?

According to the St Louis Fed, financial conditions indices “summarise different financial indicators and, because they measure financial stress, can serve as a barometer of the health of financial markets”.

Using short and long-term bond yields, credit spreads, the value of the US dollar and stock market valuations, it attempts to measure the degree of stress in financial markets.

What the minutes conveyed in January was despite a lift in longer-dated bond yields, strength in stocks and decline in the US dollar suggest that financial conditions still improved.

So why is that important?

According to Elliot Clarke, economist at Westpac, it suggests the Fed may need to hike rates more aggressively than markets currently anticipate.

“That financial conditions have eased at a time when the FOMC is tightening policy will grant confidence that downside risks associated with further gradual rate increases and quantitative tightening are negligible,” he says.

“More to the point, this implies that risks to the FOMC rate view, and Westpac’s, are arguably to the upside.”

Adding to those risks, and even with the correction in US stocks seen after the January FOMC meeting was held, Elliot says in February “we have seen a further significant increase in government spending and signs of stronger wages”.

He also says the stronger-than-expected consumer price inflation in January — also released after the FOMC meeting was held — “will have also given the FOMC greater cause for confidence that inflation disappointment is behind them and that the risks are instead skewed to inflation at or moderately above target”.

As such, Elliot says the tone of the January minutes points to gradual rate rises from the Fed, mirroring what was seen last year.

However, the risk to this view, he says, is for more and faster hikes in the years ahead.

“In these circumstances, a continued ‘gradual’ increase in the fed funds rate through 2018 and 2019 — implying five hikes in total — is still the best base case,” he says.

“However, a careful eye will need to remain on financial conditions.

“Should they continue to move in the opposite direction to policy, a more concerted effort by the FOMC may prove necessary to keep the economy on an even footing.”

Why the RBA is unlikely to cut interest rates

From Business Insider.

Australia’s housing market is cooling after years of rollicking price growth.

Annual price growth has halved since May, auction clearance rates sit at multi-year lows in Sydney and Melbourne and investor housing credit is declining, coinciding with tougher restrictions on interest-only lending from APRA, Australia’s banking regulator, introduced in March.

The slowdown in the housing market, coming on top of weakness in Australia’s household sector seen in Australia’s recent GDP report, has got many people questioning whether the Reserve Bank of Australia (RBA) should hike interest rates given the current set of circumstances, especially with inflationary pressures close to non-existent.

Rather than hiking interest rates, some have even floated the idea that the RBA may consider cutting interest rates given the sharp deceleration in the housing market.

George Tharenou and Carlos Cacho, Economists at UBS, played devils advocate on that front earlier this month, pointing to the chart below to show that when house prices weakened by a similar amount in the past, it has almost always resulted in the RBA cutting official interest rates.

The pair note that national price growth on a six-month annualised basis is currently running at just 0.7%, an important consideration given that over the past 30 years “when house prices over a 6-month period weakened towards flat or negative, the RBA cut within a few months in 7 of 9 cycles”.

While that’s not UBS’ official call, forecasting instead that the RBA will hike rates in late 2018 with the risks slanted towards a later move, it does pose the question as to whether the current weakness in the housing market will see history repeat.

To ANZ Bank’s Australian economics team, led by David Plank, the answer to that question is almost certainly no.

“There has been quite a lot of focus on the current downturn in house price inflation, with some commentators pointing out that similar downturns in the past have been followed by RBA rate cuts,” the bank says.

“While this might be true, it ignores the key differences between this cycle and previous downturns.

“In particular, previous downturns in house prices followed a succession of RBA rate increases, which pushed mortgage rates sharply higher. Given that RBA tightening cycles typically impact a lot more across the economy than just house prices, we think it is difficult to argue that the slowdown in house price inflation was the primary reason for eventual rate cuts.

“We think a rising unemployment rate was far more important,” it says.

One look at the charts below adds credence to that view.

The first looks at the relationship between annual house price growth and mortgage rates. The latter, shown in orange, has been inverted and advanced by six months.

As opposed to what has been seen previously when house prices tended to decline following a series of interest rate hikes, in recent times, price growth has slowed despite mortgage rates remaining near the lowest levels on record, coinciding with tighter macroprudential restrictions on investor and interest-only lending from APRA.

“The current downturn in house prices has not come after a tightening cycle. Instead we think the most likely cause was the tightening in credit, though with a lag and interrupted by the impact of RBA rate cuts in 2016,” ANZ says.

In comparison, this next chart shows the relationship between the annual change in Australia’s unemployment rate to movements in the cash rate.

While not perfect by any stretch, when unemployment starts to lift, the RBA tends to cut the cash rate, and vice versus.

Australia’s unemployment rate has recently fallen to 5.4%, leaving it at the lowest level in close to five years, going someway to explaining why ANZ is forecasting that the RBA will lift the cash rate to 2% by the end of next year despite the slowdown in the housing market.

“In our view, a [housing] cycle driven by credit is likely to play out very differently from one driven by higher interest rates,” it says.

“Expecting the current housing cycle to play out like those caused by movements in interest rates, strikes us as likely to end in disappointment.”

Indeed, outside of the recent price deceleration caused by credit rather than mortgage rates, ANZ points to a variety of other housing market indicators that suggest there’s little need for the RBA to cut rates.

“The most recent data on auction clearance rates suggest some stability after a period of decline. If this broadly continues then we would expect house annual price inflation to stabilise in the low-to-mid single digits in 2018,” it says.

“Our forecasts have nationwide house price inflation slowing to zero in 2018, but this also includes the impact of the two RBA rate hikes we expect in 2018. If these don’t take place then we would expect less of a slowdown in housing inflation, probably to the low-to-mid single digits mentioned above.”

ANZ says recent strength in Australian building approvals data, supporting the view that credit cycles play out differently from rate hike cycles, provides further evidence why RBA rate cuts are not required on this occasion.

“In late 2016, when approvals were falling sharply, there were a number of dire predictions about what that would mean for housing construction and employment. But it has been clear for some time that the downturn in building approvals was shallower than in previous cycles,” it says.

“We think this is because this cycle was not triggered by higher interest rates. Instead, we think a more likely cause was the tightening in credit that began in 2015.”

According to the ABS, Australian building approvals rose by 0.9% to 19,074 in seasonally adjusted terms in October, leaving the increase on a year earlier at 18.4%. Private sector approvals for houses and other dwellings stood at 10,063 and 8,683, up 6.2% and 37.6% respectively from 12 months earlier.

Given the absence of weakness in other areas of the housing market, differing it from periods in the past when interest rates were cut, it helps explain why ANZ and the vast majority of forecasters believe that the next move in the cash rate will be higher, albeit not for many months.

The RBA may have to lift rates to manage debt risk

From Business Insider.

Financial stability risks have taken on increased importance in monetary policy deliberations of Reserve Bank of Australia (RBA) Governor Philip Lowe – far more than under his predecessor, Glenn Stevens.

The importance of managing those risks, especially in the household sector, were scattered, yet again, through the RBA’s November monetary policy statement this week.

“Household incomes are growing slowly and debt levels are high,” Lowe said, elaborating on the uncertain outlook for household consumption given recent weakness in retail sales.

And, on household debt specifically, he said that “growth in housing debt has been outpacing the slow growth in household income for some time,” repeating the warning he issued in October.

Clearly, managing these risks, in his opinion, are of utmost importance.

Despite persistently low inflationary pressures, weak economic growth, softening household spending levels and strength in the Australian dollar, Lowe has left interest rates unchanged since his took over as Governor in September last year, a distinct shift in mindset to what was seen in prior years.

Gone are the days of rates moving like clockwork in the month following a quarterly consumer price inflation (CPI) report, replaced instead by a broader focus that appears to place less emphasis on the inflation outlook and more on what could happen in other parts of economy should rates be lowered again, especially the east coast property market.

The era of continually lowering rates to bring inflation back into the bank’s 2-3% target in a more timely manner now appears to be over.

Lowe, as many Australians are acutely aware, knows all too well what happened in 2016 when the RBA cut rates twice in an attempt to boost inflationary pressures.

Property prices in Sydney and Melbourne surged again, thanks largely to a pickup in investor activity. Household debt levels, as a response, rose from already elevated levels, far outpacing growth in household incomes.

Household leverage, therefore, continued to increase, helping to explain why Lowe has been reluctant to cut interest rates further, pouring even more fuel on an already hot east coast property market.

As he told parliamentarians earlier this year, further rate cuts “would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing.”

Instead of hiking rates to mitigate financial stability risks as was usually the case in the past, the RBA, working with other members of Australia’s Council of Financial Regulators — APRA, ASIC and Treasury — decided to go down another path, introducing tougher macroprudential restrictions on interest-only lending earlier this year, building upon the 10% annual cap on investor housing credit growth introduced by APRA in late 2014.

On the early evidence, it’s succeeded in helping to cool the rampant Sydney and Melbourne property markets.

According to data from CoreLogic, Sydney house prices have fallen in each of the past two months, coinciding with auction clearance rates falling to the lowest level since January 2016.

Price growth in Melbourne has also slowed, logging the smallest quarterly increase since mid-2016 in the three months to October. Clearance rates there have also fallen from the highs seen earlier this year.

With prices in Sydney going backwards and those in Melbourne, it saw national house prices, on a weighted basis, remain unchanged last month.

As Lowe said earlier this week, “housing prices have shown little change over recent months”, partially attributing the slowdown to tougher macroprudential measures introduced in late March.

“Credit standards have been tightened in a way that has reduced the risk profile of borrowers,” he said.

However, while this, along with other factors such as affordability constraints and out-of-cycle mortgage rate increases for some borrowers, has undoubtedly helped to slow the housing market without having to resort to rate hikes, Lowe still has a problem that remains unaddressed.

No only is growth in housing debt outpacing household incomes, it’s actually widened further this year despite tighter lending restrictions.

This excellent chart from ANZ shows the quandary facing Lowe.

Source: ANZ

It shows Australia’s household debt to income ratio, expressed as an annual percentage change.

“The most recent RBA data on private sector credit showed that in the year to September housing credit was up 6.6% year-on-year,” says David Plank, Head of Australian Economics at ANZ.

“The annual growth rate has been steady since May, though it has accelerated marginally since this time last year and is still significantly outpacing income growth.”

So even with the slowdown in the housing market and increased scrutiny of borrowers, household leverage has still continued to increase, adding to financial stability risks should an unexpected economic shock occur.

Plank suggests that unless income growth accelerates substantially, or growth in housing credit slows, household leverage will likely increase further.

He doesn’t hold out much hope that an acceleration in income growth will be able to achieve this in isolation.

“We very much doubt that an acceleration of income growth will completely close the gap,” he says.

“For this to happen, we need to see a further slowing in the growth rate of housing debt. “We think it unlikely that the gap can be closed without additional policy action.”

While Plank doesn’t think the RBA or APRA will rush into tighter restrictions on housing lending anytime soon, noting that annual housing credit growth has slowed marginally since APRA changes were introduced earlier this year, he says that other measures will likely be required to slow or reduce household leverage.

And that list includes rate hikes.

“We think the RBA and APRA will wait to see how things unfold, especially with house price inflation continuing to slow,” he says.

“We are sceptical, however, that the gap between debt and income growth will close without more direct policy action.

“This may initially be in the form of further macro-prudential policy, but ultimately we think it will take somewhat higher interest rates, at the very least, to bring household debt growth in line with that of income.”

ANZ is forecasting that the RBA will lift interest rates twice in 2018 — once in May and again in the second half of the year — making it one of the more hawkish forecasters in the market at present.

“We think it will opt to raise rates around the middle of next year, so long as it is confident that inflation is not moving lower and the economy is on track to deliver a falling unemployment rate,” Plank says.

The question, he says, is how will the RBA balance its inflation and financial stability objectives?

Attempting to address financial stability risks while at the same time ensuring the fledgling economic recovery isn’t derailed before it is truly self-sustaining will not be an easy task for the RBA.

Indeed, one could easily argue that higher interest rates or tighter macroprudential measures to reduce household leverage could actually heighten financial instability risks.

Given the pressure on households from high levels of indebtedness, weak wage growth and increased energy costs, along with the slowdown in the housing markets that’s already underway, any further measures could place even further pressure on household balance sheets, creating additional headwinds for household consumption that already exist.

As the most important component in the Australian economy, weaker consumption levels would almost certainly lead to slower economic growth and softer labour market conditions.

For highly indebted households, a slowdown in the both the housing and labour markets — especially at the same time — would do little to mitigate financial stability risks.

One suspects it would be the exact opposite outcome, in fact.

You can see the dilemma facing Lowe, trying to solve one problem without creating an even larger one in response.

Given how influential the property market has become on the Australian economy, a policy misstep now could have significant ramifications, both now or in the future.

The cost to rent in Australia is still falling

From Business Insider.

The cost to rent in Australia continues to fall, according to new data released by CoreLogic.

In the group’s latest rent review, released monthly, average rental rates fell by 0.3% across Australia’s capital cities in August, leaving the decline on a year earlier at 0.5%.

The decline registered in August was identical to that seen in July.

In dollar terms, the average weekly rent now stands at $481, the lowest level seem since November 2014. From the record high of May last year, the average rent has fallen by 1.4%.

By type of dwelling, the average combined capital city house rent now stands at $484 per week, slightly ahead of units at $466 per week.

Over the past year housing rents have fallen by 0.8%, while those for units have increased by 0.7%. Both sit at record lows.

Source: CoreLogic

The annual fall in the headline index reflects the fact that there are currently more houses than units available for rent in Australia.

This table from CoreLogic shows the change in rents seen across individual capitals over the past month, quarter and year. It also shows current rental yields, comparing them to the levels of a year earlier. Like the annual change in rents, they too sit at record lows.

Though combined capital city rents have fallen over the past year, it’s clearly not uniform in nature.

“Melbourne, Hobart and Canberra have each recorded stronger rental growth over the past year compared to the previous year,” notes CoreLogic. “At the same time, we are experiencing the weakest annual changes in rents on record in Sydney, Brisbane and Perth.”

To Cameron Kusher, research analyst at CoreLogic, the weakness seen over the past year looks set to continue for some time yet.

“As long as wages growth continues to stagnate, coupled with historically high levels of new dwelling construction and slowing population growth, landlords won’t have much scope to increase rents,” says Kusher.

“On the flipside, renters are now in a much better position to negotiate,” he adds.

Has housing in-affordability in Australia’s capitals peaked?

From Business Insider.

Australian housing affordability deteriorated over the past 12 months, but the worst may now be over.

That’s the view of Natsumi Matsuda, an analyst at Moody’s Investor Services, who notes that Australian two-income households spent an average 27.6% of their monthly income on mortgage repayments in the 12 months to March, up from 27.0% a year earlier.

“Affordability deteriorated in all capital cities, except Perth,” said Matsuda. “Sydney (35.6% of income) is the most unaffordable city, followed by Melbourne (30%).”

The chart below, supplied by Moody’s shows the percentage of household income spent on mortgage repayments in Sydney, Melbourne, Brisbane, Adelaide and Perth over the past decade.

“Nationally, affordability remains better than the average for the past 10 years. However, homeowners in Sydney are paying 1.7 percentage points more of their monthly incomes towards mortgage repayments than the average for the past 10 years,” notes Matsuda.

Despite the improvement over the past 12 months, he believes that housing costs may have peaked due to a pullback in housing prices (something that subsequently reversed in April according to Corelogic RP Data) along lower mortgage rates courtesy of the Reserve Bank of Australia’s rate cut earlier this week which took the official cash rate to a historic low of 1.75%.

She explains:

Although housing affordability deteriorated year-on-year, conditions began to improve in the three months to 31 March 2016, suggesting that repayment costs may have peaked for the time being. In fact, affordability improved in all Australian capital cities during this period, although the degree was not enough to head off the year-on-year deterioration.

The improvement over the three months to 31 March 2016 was driven by a pullback in housing prices. The Reserve Bank of Australia’s (RBA) cut to official interest rates on 3 May 2016 will have a further positive influence on housing affordability, though the extent of this impact will ultimately depend on whether there are any flow-on effects to the housing market, where lower rates can put upward pressure on prices.

The debate over housing in Australia — something of a constant nowadays — has intensified in recent weeks as both the Coalition and Labor debated negative gearing, with the government arguing that any changes could lead to a dramatic fall in house prices.

But yesterday prime minister Malcolm Turnbull appeared to suggest that if younger generations are locked out of the housing market, then it’s up to their wealthy parents to help them out, telling ABC radio presenter Jon Faine “you should shell out for them; you should support them, a wealthy man like you”.

While prices continue to trend higher, building approvals have also risen for two months in a row and now new home sales have bounced.

Housing Industry Association (HIA) figures released today show new property sales surged by 8.9% in March after seasonal adjustments, rebounding strongly following a 5.3% contraction in February. It was the largest percentage increase since January 2010.

Australian Major Bank Credit Metrics Under Pressure – Moody’s

From Business Insider.

Australia’s asset cycle has peaked, according to credit rating agency Moody’s Investor Services. And that means the risk weight capital our major banks hold will come under pressure.

The agency also says that the looming increase in risk weightings on the average mortgage risk weights as a result of the Australian banking regulator’s, APRA, edict that “risk weights for IRB banks will rise to at least 25%, from the current 15-18% level” will also put downward pressure on the majors CET1 (Common Equity Tier One) ratio’s.

The good news for the banks, their shareholders, and the Australian financial system is that Moody’s believes, based on its scenario and sensitivity analysis, that “the potential decline in the banks’ capital metrics as a result of changes to risk weights will be limited”.

Ilya Serov, Moody’s senior vice president, added in the report that:

Even in a highly stressed scenario, and before factoring in any potential for organic capital generation, the major banks’ CET1 ratios will remain above 8.0%, a level which is the combination of the regulatory minimum CET1 plus Capital Conservation and Domestic Systemically Important Bank (D-SIB) buffers.

That doesn’t guarantee the banks won’t have to raise more capital at some point. But it certainly suggests the work they have already done in raising capital in preparation for the changes in regulation will keep them above the 8% trigger level.

Under each of the scenarios Moody’s ran a comparison of the impact of the upper end of Australian banks 2009 experience when the corporate “impaired and past due exposure ratio” hit 2.5%. In the second scenario Moody’s took the average of the banks 2009 experience – as opposed to upper-end of experience as it’s base input. It then included the increase in mortgage weights into this scenario.

Moody’s says: “The key cyclical pressure on risk-weighted capital ratios will come from an upward revision in credit risk weights as asset quality weakens. This is a reversal of the situation which has existed since the GFC’s nadir in 2008/09 which with the ‘decline in the major banks’ CRWA, as asset quality improved after the global financial crisis, has been the primary organic driver of their improving risk-weighted capital ratios.”

While Moody’s stressed this was not a credit rating note in the end though the company still sounds pretty upbeat on the big banks capital positions.

“The moderate degree of deterioration in capital levels indicated by our sensitivity analysis is in line with our view that Australia’s major banks remain in a strong position to maintain their strong credit profiles against a likely weakening in their asset performance” Moody’s said.

Three Reasons Why RBA Might Hold Off Cutting Interest Rates Next Tuesday

From Business Insider.

Capital Economics has joined other major investment houses in deciding it believes the RBA is likely to cut the official cash rate to 1.75% next Tuesday.

There are a host of takes from economists here following this game-changing piece of data, but CE has the following dead-right summary of the handbrakes for the RBA board:

There are three plausible reasons why the RBA could ignore the plunge in underlying inflation and leave rates on hold at 2.0% at next week’s meeting, or perhaps even beyond. First, the Bank could continue to interpret low inflation as giving it the scope to cut rates in the future if demand falters. Second, lingering concerns about financial stability and the health of the housing market may mean the RBA is reluctant to cut rates again. Third, the RBA may want to wait to see what is announced in the Federal Budget, which will be released just five hours after the RBA’s decision.

The view that cutting interest rates might do more harm than good is starting to gain traction among many commentators. And senior people in central banks don’t work in an ideas vacuum.

Cutting rates again would send a very blunt signal that there are concerns about the health of the economy — not helpful when property prices in pockets of Australia are now starting to reverse as investment fever takes a reality check.

Then there’s the budget. Maybe Scott Morrison has something that will stir demand in store.