House Prices – Page 4 – Digital Finance Analytics (DFA) Blog

House Price Growth Set To Fall – Fitch

Fitch Ratings “Global Housing and Mortgage Outlook” suggests House price growth is expected to moderate across the Asia-Pacific region in 2015, driven by government regulatory pressures, tightened affordability and gradual interest-rate rises. The growth slowdown will be led by Australia, where national house prices are forecast to rise 4% in 2015, down from 7% in 2014, and in Hong Kong, where Fitch expects prices to be flat as compared to the 10% growth in 2014.

These forecasts are featured in Fitch’s latest Global Housing and Mortgage Outlook, published on 14 January. Of the six APAC countries included in the report, only Korea is expected to have price gains that exceed that in 2014; even then, it is forecast to be just 2%.

Australia will see house-price increases slow in 2015, down to 3%-4% in Sydney and Melbourne, and flat in Perth. Affordability pressures will remain in Australia’s largest cities, with price rises continuing to outstrip income growth, and home prices approaching the affordability ceiling. Lending volumes will continue to grow as investment activity is expected to remain high; investment loans are expected to continue to account for 50% of new lending. That said, as rental yields drop to less than 3.5%, Fitch stresses that housing investors’ buying sentiment could be vulnerable to weakening if other asset classes offer better returns.

Government policy action, pressured affordability and the likelihood of interest-rate rises in the long term will continue to be key themes for the housing and mortgage outlook in the APAC region. A gradual increase in mortgage rates is expected in 2015 and 2016 in Australia, New Zealand, Hong Kong and Singapore, all of which show relatively high interest rate sensitivity. At the same time, governments and regulatory authorities are targeting soft landings for the housing market in several economies including New Zealand, Hong Kong and Singapore, which have seen rapid price growth over the past decade.

Hong Kong is a case in point, where Fitch believes macro-prudential measures will lead to a marked slowdown in price growth. Home prices are forecast to be to be flat this year versus a 10% increase in 2014, and an average gain of 15% over the previous decade. The government’s cooling measures should stabilise affordability at current levels, though home prices already are highly stretched relative to incomes. Fitch maintains that Hong Kong does risk a downturn, considering the combination of the stretched affordability, rising rates, and the large involvement of speculative investments in the sector.

Similar macro-prudential measures in Singapore and New Zealand are having the desired impact on markets by dampening house price movements.

Singapore and Australia, Japan and South Korea are expected to see government measures to support the housing sector, in contrast to Hong Kong.

The State Of House Price Movements

The RPData CoreLogic Home Value Index for October shows an average increase in prices of 1% across the capital cities. However, there are major variations. Although combined capital city home values were up by 1.0 per cent over the month, only Sydney (1.3%), Melbourne (1.9%) and Brisbane (0.6%) actually recorded value rises over the month.

Dwelling values rose by 2.2 per cent over the three months to October 2014 however, only half of the capital cities actually recorded an increase in values. The greatest value falls over the last three months were recorded in Hobart (-2.8%) and Canberra (-2.4%).

IMF On Macroprudential – It Works!

In the just release IMF World Economic Outlook, as well as revising down growth estimates, they discuss macroprudential, highly relevant in the light of RBA comments. The main observations are:

there is evidence that macroprudential can assist in manage house price growth, and credit growth. Different settings should be applied to different types of purchases, e.g. differentiate first time buyers from multiple investors, but
it is less effective if the cause of extended price rises stems from overseas investors, who bypass local controls and credit policy, so specific separate measures may need to be used to target foreign investors
need to make sure business is not simply redirected to the non-bank sector, and
supply side issues also need to be addressed.

RBA please note! The comments in full from the IMF are below, and worth a read. In particular they cite a number of success stories, so macroprudential is perhaps more proven than many would like to admit.

Many countries—particularly those in the rebound group—have been actively using macroprudential tools to manage house price booms. The main macroprudential tools employed for this purpose are limits on loan-to-value ratios and debt-service to-income ratios and sectoral capital requirements. Such limits have long been in use in some economies, particularly in Asia.

For example, Hong Kong SAR has had a loan-to-value cap in place since the early 1990s and introduced a debt-service-to-income cap in 1994. In Korea, loan to-value limits were introduced in 2002, followed by debt-service-to-income limits in 2005. Recently, many other advanced and emerging market economies have followed the example of Hong Kong SAR and Korea. In some countries, such as Bulgaria, Malaysia, and Switzerland, higher risk weights or additional capital requirements have been imposed on mortgage loans with high loan-to-value ratios. Empirical studies thus far suggest that limits on loan-to-value and debt-service-to-income ratios have effectively cooled off both house price and credit growth in the short term.

Implementation of these tools has costs as well as benefits, so each needs to be designed carefully to target risky segments of mortgage loans and minimize unintended side effects. For instance, stricter loan-to value limits can be applied to differentiate speculators with multiple mortgage loans from first-time home buyers (as in, for example, Israel and Singapore) or to target regions or cities with exuberant house price appreciation (as in, for example, Korea). Regulators also should monitor whether credit operations move toward unregulated or loosely regulated entities and should expand the regulatory perimeter to address the leakages if necessary. For example, when sectoral macroprudential instruments are used to limit mortgage loans from domestic banks, they can be circumvented through a move to nonbanks (as in, for example, Korea) or foreign banks or branches (as in, for example, Bulgaria and Serbia). Macroprudential tools may also not be effective for targeting house price booms that are driven by increased demand from foreign cash inflows that bypass domestic credit intermediation. In such cases, other tools are needed. For instance, stamp duties have been imposed to cool down rising house prices in Hong Kong SAR and Singapore. Evidence shows that this measure has reduced house demand from foreigners, who were outside the loan-to-value and debt-service-to-income regulatory perimeters. In other instances, high house prices could reflect supply bottlenecks, which would need to be addressed through structural policies such as urban planning measures.

SMSF Property Investment Continues – DFA Survey

We updated our household surveys with the September data. Today we focus in on SMSF property transactions, which is a small, but rising factor in the market. We start by looking at the reason why trustees for SMSF’s are considering retail property. The strongest incentives are the tax efficient nature of the investment, and appreciating property values. Low rates also have part to play. I have excluded commercial property from the analysis.

We also asked where the trustees were getting advice from regarding retail property investment. Most interesting is a fall in advice from financial planners (maybe a reaction to FOFA, CBA etc?), and a rise in advice from real estate agents. Mortgage brokers also figure in the mix, alongside internet sources and own knowledge. We wonder how well qualified these sources are to provide the right advice, bearing in mind the long term nature of super.

Finally, we looked at changes in relative distribution of property in super funds, and of those who were investing in property (about 3% of all funds are investing in retail property, and another 3% are considering it). We see retail property making up quite a significant share of superannuation savings for some. The blue bar is last year, the orange bar is to September 2014.Others can decide if this a good or bad thing, but it does highlight the linkages between property and super, and demonstrates that if house prices fall, then some super funds will be impacted, just at the time house valves are also falling. The impact of the double whammy is potentially significant and concerning.

RBA Comments On Housing Have Impact – DFA Survey

We have updated our household surveys with the results for September. This forward-looking research revealed some significant changes in sentiment amongst households thinking of transacting, and many of these changes can be traced to recent comments made by the RBA in respect of investment housing. Our approach to household segmentation and our surveys is described in an earlier post. Today we will discuss some of the most important recent findings, which updates the results from our Property Imperative report.

So first we look at which segments are most likely to transact in the next 12 months. The changes over time are significant, with first time buyer ever less likely to purchase whilst investors, especially portfolio investors, more likely to buy. The impact of down-traders (remember there are more than one million households in this category) are also significant.

Demand for mortgage funding sits firmly with certain segments, especially investors, first time buyers and up-traders. Note that the bulk of down-traders do not need to borrow. This goes some way to explaining why house prices are moving faster than loan growth, and why investment loans are making up a large proportion of lending, especially in Sydney.

We found that first time buyers are still saving hard, though chasing ever higher prices, want-to-buys are saving less now, seeing the aspiration of owning a property evaporating fast.

We found that across the board, there was a little less certainty on house prices growth, though generally investors remain more bullish.

The want-to-buys find the biggest barrier relates to the high price of housing. No change here.

This barrier is also echoed in the first time buyer segment, with 50% seeing price as the main issue, the highest result in recent times.

Many refinancers will have now locked in at low rates, as the main reason is to reduce monthly outgoings. The proportion locking in at fixed rates is down a little.

We found that up-traders are still active, and there was an increase in those in this segment who are motivated by the prospect of capital appreciation, which is now running ahead, just, of buying to get more space. As shown above, the proportion of up-traders ready to transact is down a little.

Down-traders continue to seek to sell and buy smaller, driven by a quest to release capital for retirement, and for increased convenience. They were slightly more likely to incorporate an investment property in their strategy. We think the impact of down-traders on the market is understated by many observers, but the continuing release of capital from larger property, and buying smaller, plus investment, aligns with the growth in investment property demand, and yet lower rates of financing elsewhere.

Looking at investors, we see continued interest, driven by the tax-efficient nature of investment lending (a.k.a negative gearing, and SMSF investing). They remain confident about capital appreciation into the future, though less strongly than previously.

Finally, we looked at the potential barriers to investors, and we see a significant change. We ask about a range of barriers. One related to RBA warning, which this month have reach a new, high pitch. Investors are responding, and a proportion are concerned about potential regulatory changes. We also saw a tick up in the concerns about interest rates rising in coming months.

Overall then we still see demand strong, and focused in particular segments, especially investors and down-traders. However, the RBA warning are having an impact, even before they actually do anything to intervene further in the market. We do not believe that words alone will address the underlying systemic issues, but they can have a short term impact on sentiment, and may make some prospective purchasers think again – we therefore expect to see some small slowdown in coming weeks. That said, the market remains hot, and stoked by investors, and we believe there is a case for more direct intervention by the regulators. We also expect the RBA to keep up the verbal barrage.