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The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Caveat Emptor : This is NOT specific property or finance advice, just my general analysis
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Welcome to the Property Imperative weekly to 24th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
More volatility on the markets this week, more home prices falls, and more revelations from the Royal Commission which put the spotlight on poor culture in the banks and regulators. It’s time to be very cautious in my view.
So let’s get started. Watch the video, listen to the podcast or read the transcript. Caveat Emptor! Note: this is NOT financial or property advice!!
Property listings are skyrocketing according to CoreLogic, with an 11.6% rise in total listings over the last year nationally, but with a 17.4% rise in Sydney and a massive 19.3% rise in Melbourne. New listings are down, so property is sitting on the market for longer and longer, and vendor discounts are rising. Darwin units are seeing discounts of 14.64% and Perth units 10.5%. All signs of a stalling property market.
Sydney has been one of the strongest markets for value growth over recent years however, a big spike in listings and tighter credit conditions has made selling much more difficult. At one point in mid-2015 more than three quarters of properties sold for more than the original list price. Fast forward to the current market and 83.3% of properties are selling for less than the original list price compared to 13.3% selling above the list price. Sydney vendors are now discounting their asking prices by 7.3% on average in order to make a sale, compared with only 5.4% a year ago.
Melbourne is currently seeing 76.3% of properties selling below the original list price which is the highest share in at least 12 years. As recently as April last year, when values were rising at a double-digit annual rate, 34.4% of properties were selling for less than the original list price. By comparison today, only 18.7% of properties have sold over the past three months for more than the original list price and vendors are, on average, discounting their prices by 6.1% to make a sale.
And CoreLogic’s latest home price update revealed their 5-city daily dwelling price index, which covers the five major capital city markets, declined another 0.27% last week, which is the biggest weekly decline of the past year. Prices fell across all the major markets, with Melbourne leading the way down, as expected, with a drop of 0.38%, Sydney down 0.31%, Perth down 0.29%, Adelaide down 0.04% and Brisbane down 0.01%. The falls in Sydney Melbourne and Perth this month are mounting, with Sydney down 0.91%, Melbourne 0.59% and Perth 0.63%.
Remember that Perth has been in the doldrums for years, and while many “property expects” claimed there were signs of a recovery in the West, this is just not true. Through Sydney and Melbourne prices are up compared with a couple of years back, the falls are likely to continue. The declines from the last peak are down 9% in Sydney, 5.4% in Melbourne and 14.7% in Perth.
ANZ said this week “The fall in Sydney housing prices is already the largest in many years. Prices are now 9% below the June 2017 peak, a larger correction than in 2010-11, 2008, 2004-05, 1994-95 and, by the end of this month, the fall will be larger than the 9% fall in 1988–91”. They now think housing prices in Sydney and Melbourne will fall around 15–20% from peak to trough. They link the falls to tighter credit availability, plus additional risks from changes to negative gearing and higher mortgage rates.
And the combined capital city final auction clearance rate saw further weakening last week, with 42 per cent of homes successful at auction; the lowest weighted average result seen since June 2012. The lower clearance rate was across a higher volume of auctions week-on-week with 2,745 capital city homes taken to market, increasing on the 2,386 held the week prior. Both volumes and clearance rates continue to trend lower each week this year relative to the same week’s last year.
Melbourne’s final clearance rate was recorded at 41.3 per cent last week, making it the weakest result the city has seen since June 2012. There were 1,401 homes taken to auction across Melbourne last week, increasing on the week prior when 1,127 auctions were held. One year ago, a much higher 1,732 auctions were held with 66.9 per cent selling.
Sydney’s final auction clearance rate was recorded at 42.8 per cent across 875 auctions last week, increasing slightly from 42.1 per cent across a lower 844 auctions over the previous week. Over the same week last year, 1,061 Sydney homes went to auction and a clearance rate of 54.8 per cent was recorded.
Across the smaller auction markets, Adelaide returned the highest clearance rate of 59 per cent, while Perth saw only 28 per cent of homes successful at auction
The combined capital cities are expected to see a slightly lower volume of auctions this week with CoreLogic currently tracking 2,571 auctions, down from the 2,745 auctions held last week.
Melbourne is the busiest city for auctions again this week, with 1,069 auctions being tracked so far. This week’s volumes are down from the 1,401 auctions held last week and significantly lower than the 1,736 Melbourne homes taken to auction this week one year ago.
Sydney has over 1,000 homes scheduled for auction this week. This is not only an increase on last week’s 875 auctions, but the highest number of auctions the city has seen since March this year. Last year there were a higher 1,215 auctions held across the city over the same week.
Adelaide and Canberra are both expecting a higher volume of auctions week-on-week, while the remaining auction markets have fewer scheduled auctions this week.
S&P Ratings said falling property prices triggered by tightened lending conditions are dominating Australian media headlines. The Australian residential mortgage-backed securities (RMBS) sector so far has been relatively resilient to pressure, with mortgage arrears remaining low and ratings performance stable. The RMBS sector is now facing more elevated risk than it was 12 months ago. Alongside high household debt and low wage growth are emerging risks such as lower seasoning levels in new transactions and increasing competition.
Meantime, looking in the rear-view mirror, Fitch Ratings said that their RMBS index 30+ days’ arrears fell by 4bp quarter on quarter to 1.04% during 3Q18. Fitch Ratings has observed a drop in third-quarter arrears for the previous decade. They say national dwelling prices continued to decline in 3Q18, led by falls in Melbourne, which dropped by 2.33% from the previous quarter, and Sydney, down by 2.11%. The price falls followed tighter lending standards, which restricted new loans and made refinancing more difficult, reducing demand in Australia’s property market. The peak-to-trough decline in Sydney is now 8.2%, which is the second-largest fall in the past 35 years. The largest fall was seen during the last recession in the early 1990s when prices fell by 9.2%.
RMBS transactions rated by Fitch continued to experience extremely low levels of realised losses and a rising lenders’ mortgage insurance (LMI) payment ratio since 4Q12. Excess spread was sufficient to cover principal shortfalls on all transactions during 3Q18.
This is starting to hit the broader economy now, as expected. Home price falls often lead broader economic falls by 12-18 months.
ANZ said momentum slowed further in the September quarter across most of Australia. All states and territories except Tasmania and the Northern Territory decelerated and recorded growth at below their trend rates. The loss of momentum demonstrated by the Stateometer is consistent with their forecast that the Australian economy will grow at a year-ended pace of 2.9% by the June quarter 2019, down from 3.4% in June this year. The slowing, brings into doubt the 3.25% year-ended growth rate forecast by the Reserve Bank for June 2019. Every state, except Tasmania, experienced a drag to momentum from the housing component of the index in the September quarter. The labour market also became less positive for all states and territories except Victoria and the Northern Territory. Trade was a highlight with the mining states of Western Australia and Queensland recording stronger positive contributions as resource prices, export volumes and the AUD/USD exchange rate moved in their favour. In New South Wales and Victoria, which are less commodity intensive but have large service sectors, trade momentum also picked up, suggesting a further boost to tourism and education exports. They concluded that tightening of credit market conditions remains a negative factor that together with a poorer outlook for house prices is pulling back demand in this important sector, especially in New South Wales and Victoria.
And the six-month annualised growth rate in the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 0.41% in September to +0.08% in October. With this latest slowdown, the Index growth rate continues to point to slowing momentum into the new year. Over the seven months from October last year to April this year the growth rate averaged 0.89%. In the six months since April the growth rate has averaged only 0.19% – a clear step down.
So to the Royal Commission. In Sydney this week, with most time spent on CBA (CEO and Chairperson) and ASIC (Chairperson). A few key areas came into focus including Broker remuneration, where CBA advocated a fix fee model, Front line staff and senior executive remuneration; how the boards looked at risk related issues (often seemingly myopically); the question of vertical integration – especially relating to the question of advice versus sales in wealth management, and oversight and enforcement by regulators.
The core issue was the question of misaligned incentives, which has led to the misconduct thrown into sharp relief in the inquiry. As a result, we would expect to see reform in the areas of broker commissions, front line remuneration, and vertical integration. All significant, and likely to crimp bank performance further.
On brokers, CBA estimated that the average remuneration for a broker writing an average loan would fall from $6,627 to just $2,310. And that CBA would save $197m on a cumulative basis over 5 years. So some would say they are talking their own book! At very least we expect trail commissions to go, and a best interest obligation introduced.
ASIC rightly copped flack, and as a result, we would expect them to be more proactive, demanding larger penalties, perhaps naming and shaming, and more litigation through the courts. Frankly ASIC was too close to the big banks, and has not met its regulatory obligations, and insufficient funding is not a valid excuse. The inquiry also questioned why ASIC needs to discuss the terms of “infringement notices” with banks before they are finalised. “The parking inspector doesn’t seek an indication from the person he’s giving a parking fine to as to whether they will accept and pay it. He just does it. Why don’t you just do that?” Ms Orr asked. “My understanding from the team is that if there is an unwillingness to accept an infringement notice we would just go straight to court,” Mr Shipton said rather weakly.
We will see more next week, when the Melbourne Banks and APRA are up.
As the AFR put it “Kenneth Hayne looks like reshaping the governance of Australia’s leading public companies judging from the line of questioning directed at Commonwealth Bank of Australia chairman Catherine Livingstone and chief executive Matt Comyn. Based on the lines of inquiry pursued by counsel assisting, Rowena Orr, QC, the Hayne governance era looks something like this: verbatim records of conversations held by board and sub-committee members, longer board meetings, more extensive board room information packs, intensive director induction programs, more robust challenging of management, and increased employment of lawyers and accountants as non-executive directors. This would go hand-in-hand with the increased rules and regulations such as those already pushed through parliament covering bank remuneration. The new laws have given greater intervention powers to the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, both of which will need significantly expanded budgets.
There was nothing here that suggested the lending tightening we have seen will be reversed, which then puts the acid back on the RBA, APRA and Treasury. As we discussed this week, Governor Lowe went public at CEDA with his concern that banks were becoming too risk adverse. See our post “The People’s Gold Will Not Be Kept Among the People”, which also covered the Governors comments on Australia’s gold. All the more reason for effective banking separation in my book!
But the more immediate point is the fact that home prices are tightly locked to accelerating rates of credit growth, – we call this the credit impulse. Even a slowing of the rate of credit growth is more than sufficient to lower home prices, precisely as we see now – so a fall to 5.2% or thereabouts as reported by the RBA is sufficient to drive prices lower. Most Central Bankers just do not understand this critical linkage, preferring to believe that as credit creates assets, increasing debt is a zero sum game – this is just plain wrong!
We updated our scenarios, and you can watch the replay of our recent live stream where we discussed our thinking – the probability of more significant home price falls is rising. Even in the smaller markets. Have no doubt this will have a significant impact on the broader economy. GDP will fall.
Locally, the markets, were all over the place this week, in volatile trading. The S&P ASX 100 rose 0.51% to 4,711, still reflecting recent lows on Friday. The ASX VIX eased a little on Friday down 2.41%, but at 16.55 is still in “fear” territory. The banks did better on Friday, with the S&P ASX 200 Financials up 1.08% to 5,731. AMP was up 1.65% to 2.46, still near the bottom, ANZ was up 2.29% to 26.34, Bank of Queensland was up 0.62% to 9.79, Bendigo was up 1.17% to 10.40, CBA rose 0.95% on Friday, to 71.30, NAB was up 1.03% to 24.48, Suncorp was up 0.67% to 13.49, Westpac was up 1.4% to 26.04, Mortgage Insurer Genworth was up 0.91% to 2.21 and continues in the doldrums. Macquarie Group was up 0.29% to 114.53.
The Australian Dollar US Dollar slid 0.25% to 72.36, still in its trading range, while the bitcoin Aussie fell 10.38% to 5,297 and the Aussie Spot Gold rate fell 0.11% to 1,691.
Stocks on Wall Street ended lower as another tumble in oil prices weighed on energy stocks. The Dow fell 0.73% ending at 24,286, while the broader S&P 500 index lost 0.66% to 2,632. The tech-heavy Nasdaq composite was down 0.48% to 6,939. The volatility index rose 2.74% to 21.37 as the gyrations continue. Trading was light after the Thanksgiving break. The S&P 100 was down 0.84% to 1,161.
The S&P 500 Financials was down 0.91% to 430.5 signalling more weakness in the financial sector, while Goldman Sachs fell 1.86% to 189.02.
Crude oil prices fell more than 7.7% as concerns persisted about a supply glut, down to 50.42. Dow components Exxon Mobil fell 2.7% and Chevron slumped 3.3%.
Helping the sinking sentiment, of course, was the notion that President Donald Trump would successfully prevent OPEC from slashing production when the cartel meets in Vienna on Dec. 6, by using his “no-sanctions trump card” for Saudi Arabia, which has admitted a premeditated murder of journalist Jamal Khashoggi, but denies any involvement by Crown Prince Mohammed bin Salman.
The energy sector has lost 16.5% since the beginning of October, making it the worst performing S&P sector during the period and putting it on pace for its biggest two-month drop since September 2011.
“If we get clarity on any of these – oil prices, trade war with China and the Federal Reserve’s rate of monetary policy tightening – we could go a long way towards making investors comfortable in investing in the market,” one analyst said.
Meanwhile, retail stocks were in focus with Black Friday sales underway. Discounts will continue through to Cyber Monday as investors will look to see if the companies can overcome an underwhelming retail earnings season. Walmart was up more than 1%, but Amazon.com dropped 0.96% to 1,502. Apple fell 2.54% to 172.20 and Intel fell 1.04% to 46.54. Google was also down 1.28% to 1.030.
Cryptocurrency prices slumped on Friday, with Bitcoin falling to a new 14-month low down 6.59% to $4,342, The digital currency is down more than 75% from its peak of $20,000 in 2017. Meanwhile, UK regulators warned investors against digital coin derivatives earlier this week. The Financial Conduct Authority (FCA) could ban some crypto-based derivatives, Christopher Woolard, executive director of strategy and competition at the FCA, said at a crypto event in London. “We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens … Given this, the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities,” Woolard warned.
The US Dollar index was up 0.26% to 96.96. The Euro USD was down 0.61% to 1.13 and the British Pound US Dollar was down 0.47% to 1.28, on more Brexit weakness. Deutsche Bank was down 0.84% to 8.18. Gold was down 0.37% to 1,223.
All this may slow the FED’s drove towards higher rates, with the 3-month rate down 0.02% to 2.41% and the 10-Year rate down 0.48% to 3.05. That said, I expect another couple of hikes, which will put the cat among the pigeons in terms of corporate debt, and funding costs more generally.
We believe there will be further market volatility in the run up to Christmas, and more home price falls locally. Thus we cannot think of any good reason why you would consider buying property in the current climate – best to ignore the spruikers, and so call great mortgage offers, and bide your time. Those with a current mortgage should check to see if better refinanced rates are available, but that will depend on your risk profile. But for some, there are savings to be made (though the Banks may like to hope you are not smart enough to find them!).
And by the way, if you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Please consider supporting our work via Patreon
Please share this post to help to spread the word about the state of things….
Caveat Emptor! Note: this is NOT financial or property advice!!
Welcome to the Property Imperative weekly to 17th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, listen to the podcast or read the transcript.
It has been a roller coaster ride on all fronts this week, with more market gyrations, larger predicted falls in home prices locally, and the first “unnatural act” from the Government to try and sustain the finance sector, ahead of next year’s election, expect more ahead.
And by the way you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
We start with the markets this week the Dow closed lower for the week, despite a rally on Friday that came despite the White House reportedly walked backed President Donald Trump’s upbeat comments on trade.
The Dow Jones Industrial Average rose 0.49% to 25,413 at the end of the week, the S&P 500 rose 0.22% to 2,736, but the Nasdaq Composite fell 0.15%.
After the falls earlier in the week, Wall Street went into rally mode Friday after Trump said he was hopeful the U.S. and China will reach a consensus on trade deal. Later the White House, however, peddled a more sombre narrative on trade in the wake of Trump’s comments, telling CNBC that a deal was not coming soon. Still, the broader averages held their gains, but that did little to avert a weekly loss following a rout in tech. The fear index, the VIX eased a little on Friday, down 9.21% to 18.14, but is still elevated, signalling uncertainty ahead.
In tech, Facebook fell 3% amid the fallout from a New York Times article detailing how the company conspired to cover up warnings that Russia had used the social media platform to disrupt the U.S. election in 2016. Apple moved higher after recent falls, up 1.11% to 193.53, while Alphabet fell 0.26% to 1,068. Intel was up 1.5% to 48.53.
Financials were mixed, with the S&P 500 Financials index up 0.06% on Friday to 443.45 but Goldman Sachs Group was down 0.8% to 202.12.
Sentiment on stocks were also lifted by easing concerns about steeper U.S. rate increases after Federal Reserve Vice Chairman Richard Clarida indicated that the U.S. central bank may stop at the neutral rate, rather than continue hiking beyond the neutral rate, which might be interpreted as an effective “rate cut,” JPMorgan said in a note to clients. The 3m bond rate slid 0.67% to 2.35, and the 10-year was 1.71% down on Friday to 3.065. Clarida does not expect a big increase in inflation this year. With that in mind, both central bankers are still confident enough in the domestic economy to proceed with a December rate hike, but there’s a good chance that it will be accompanied by a less hawkish outlook.
Energy added steel to the rally on Friday as oil prices settled flat, but slumped 6% for the week on concerns about a global glut in supplies. The WTI futures was up 0.66% to 56.83. Oil bears are back to taunting Saudi Arabia by pressuring the market again, just two days after giving a reprieve to the record sell off in crude.
In fact, West Texas Intermediate and Brent crude futures settled steady to slightly higher on Friday after rallying more than 2% earlier in the day on fears that the oil-rich kingdom and the OPEC cartel it leads could cut supplies substantially at a December 6-7 meeting. Friday’s s rebound didn’t help crude’s weekly loss of 6%, making it the sixth-straight week in the red.
Prices initially rose on an analysis from tanker-tracking firm ClipperData that showed Saudi Arabia was already loading fewer barrels on ships bound for the United States this month, continuing a trend that began in September. By sending fewer barrels to the United States, the Saudis hope to starve U.S. crude stockpiles, which have swelled by nearly 50 million barrels the past eight weeks. It’s a strategy the kingdom used last year while working alongside OPEC members, Russia and other producers to rescue oil prices from lows under $50 a barrel. But after the morning highs in New York trade, prices turned volatile before returning to positive territory just before the close. Adding pressure to the market was weekly U.S. oil rig data showing drilling activity at its highest in over three years, after an addition of two rigs this week.
In an extreme turn of events, the fire from Bitcoin Cash’s hardfork war has spread wildly across the entire crypto market, burning through virtually every cryptocurrency and leaving many investors burnt too. Bitcoin had more than $28 billion stripped from the market, as it fell beyond the support of its long-standing safety net at $5,800.
Gold was higher, up 1.9% to 1,222 on Friday, with some suggesting that the US$ bull run might be ending, as economic outperformance, rising interest rates, equity market pressure and trade policy all look suspect, and a switch to metals might make sense. But more likely it is the risks around Brexit, Theresa May could be fighting for her political survival, but the Brexit crisis she’s in has thrown gold bulls a lifeline. Initially resigned to losing the market’s $1,200 support level as the week began, fans of the yellow metal not only got to stay in their comfort zone but also saw their best weekly gain in five as hedgers rushed to the relative safely of bullion after the pounding taken by sterling from Britain’s EU-exit woes. Tory MPs may have enough votes – 48 are needed – for a letter of no confidence that would force a vote in Parliament. If the rebels within her ranks really do have the votes to force a no-confidence motion UK politics will be thrown into an even greater existential crisis.
Not that a change in leadership there would make much difference. U.K. Prime May on Friday reshuffled her minister team and took personal charge of the divorce talks with the European Union. The moves came at the end of an extraordinary week in which seven members of her government resigned and a push to force her from power gained momentum.
The pound gained 0.4% against the U.S. dollar on Friday, rebounding a bit from Thursday’s plunge. But sterling still suffered a loss for the week and volatility soared to a two-year high. The British Pound Dollar was up 0.48% on Friday to 1.2835, while the Euro USD rose 0.76% to 1.1414. The US Dollar index fell 0.51% to 96.43. Deutsche Bank, was down 0.06% to 8.59, not helped by recent Eurozone bank stress test results.
All 3 of the commodity currencies traded higher on Friday with the Australian hitting a 2-month high and the New Zealand dollar hitting a 4-month high. AUD and NZD ripped higher on the hope that President Trump will forgo another round of tariffs on China. Ever since the mid-term elections, his tone toward China has been softening. The Aussie ended up 0.76% to 73.32, helped by strong jobs numbers in October and bullish noises from both the treasurer and the RBA.
In the local market, the ASX 100 fell 0.17% to 4,711, reflecting similar weakness in US stocks. The ASX Financials was also down, 0.09% to 5,635.60 in bearish territory. Regional Bendigo bank was up 0.99% to 10.20, while Suncorp fell 0.15% to 13.54 and the Bank of Queensland was higher up 0.82% to 9.78. Macquarie who generates more than half of its business offshore, rose 0.16% to 119.00 whilst the majors were softer, with NAB down 0.46% to 23.77, Westpac down 0.28% to 25.27, then went ex. Dividend this week, ANZ was down 0.12% on Friday to 25.36 while CBA was up a tad to 68.90. Lenders Mortgage Insurer Genworth tracked lower down 0.91% to 2.18, not least because they are exposed to the housing sector and the investment markets, both of which look weaker. AMP continues in weak territory, although up 1.98% to 2.58. The Australian VIX index eased back, down 3.33% to 16.80, still will in the nervous zone. The Aussie Bitcoin dropped 2.76% to 7,492 and the Aussie Gold slid 0.06% to 1,666.43.
The property news continues south, with the latest CoreLogic average clearance rate down again last week, with only 42.7 per cent of homes successful at auction. And that excludes the large number of unreported results, so the true numbers in even worse. There were 1,541 auctions held across the combined capital cities, having decreased from the 2,928 auctions held over the week prior when a higher 47 per cent cleared. Both volumes and clearance rates continue to track lower each week when compared to the same period last year (2,046 auctions, 61.5 per cent).
In Melbourne, final results saw the clearance rate fall last week, with 45.7 per cent of the 266 auctions successful, down from the 48.6 per cent across a significantly higher 1,709 auctions over the week prior. Across Sydney, the final auction clearance rate came in at 42.6 per cent across a slightly higher volume of auctions week-on-week, with 813 held, up from 798 the previous week when 45.3 per cent cleared. Sydney’s final clearance rate last week was not only the lowest seen this year, but the lowest the city has seen since December 2008.
The only capital city to see more than 50 per cent of auctions successful last week was Adelaide (50.8 per cent), however this was lower than the prior week’s 57.6 per cent. Brisbane saw the lowest clearance rate, with only 30 per cent of homes selling.
Geelong recorded the highest clearance rate of all the non-capital city regions, with 57.1 per cent of auctions reporting as successful, while the Sunshine Coast region had the highest volume of auctions (55).
CoreLogic are expecting more auctions today, so we will see if this eventuate.
I discussed the latest household data at a UBS forum on Monday, other members of the Panel were included Tim Lawless from CoreLogic and Christopher Joye Coolabah Capital as well as Jon Mott Head of Banks at UBS and George Tharenou their Chief economist. You can watch my segment of the discussion “Some Thoughts About The Housing Market” via a scratch recording I made. Frankly demand for property continues to weaken, as supply rises, and sales volumes fall. First time buyers and investors are becoming more cautious. Jon Mott has been negative on the sector for some time and his new note proposes a worst case scenario in which Aussie house prices crash 30%, the RBA cuts rate to zero and launches quantitative easing, and banks are crushed by cascading bad debts, cut dividends and class actions. Smartly he has developed a range of different scenarios (scenarios will sound familiar to anyone following DFA, as we have been doing this for years, it’s the best way to communicate the intrinsic uncertainty in the system.
He thinks that his scenario 3 – housing correction is most likely, with a 10% drop in prices, and that the banks will be challenged in this environment. But if prices fall further, the banks get hit with class actions, and bad debts they will have to cut dividends.
SQM’s Louis Christopher also issued their latest Boom-to-Bust report, and guess what, he also used scenarios. SQM’s base case forecast is for dwelling prices to fall between -6% to -3%, which is a continuation of the current falls of 4.5% over the past 12 months. Sydney and Melbourne will drive the falls. Other cities will record mixed results with Hobart expected to have a third year of strong price rises of 5% to 9%. The base case forecasts assume no changes in interest rates, a Labor win at the next Federal Election with Negative Gearing repeal and CGT changes coming into effect 1 July 2020. If SQM Research is correct on the Sydney and Melbourne forecasts, it will mean by the end of 2019, the peak to trough declines will be at least in the order of 12% to 17% for these two cities. SQM Research believes that, presuming the RBA does not intervene in the market, 2020 could also record price declines due in part to the repeal of Negative Gearing which is a firmly stated Labor party objective. As such there is a risk that the total peak to trough declines could be in the order of 20% to 30% for our two largest capital cities. The range is dependent on: When, if and how the RBA responds to the downturn; How the economy responds to the downturn; Will the banks be required to lift rates out of cycle; Will negative gearing and capital gains tax concessions be repealed as per the Labor Party’s policy. Christopher said, “If the RBA does not respond and/or the bank lift interest rates again in 2019, it is possible the peak to trough falls in Sydney and Melbourne could be even more than this negative range. But we do take the view that the downturn in Sydney and Melbourne will be a significant negative for the overall economy, and so the central bank will eventually respond at some point and cut interest rates.”
Gareth Aird the senior economist at CBA discussed the drivers of dwelling prices, and identified four leading indicators that capture the momentum in the property market well. They are: (i) the flow of credit (i.e. housing finance); (ii) auction clearance rates; (iii) foreign residential demand; and (iv) the house price expectations index from the WBC/MI Consumer Sentiment survey. Presently all of these indicators are pointing to dwelling prices continuing to deflate over the near term (up to six months).
Indeed, credit and prices are strongly correlated, as we have discussed before. From a dwelling price perspective, the flow of credit matters more than changes in the stock. The annual change in housing finance has a close leading relationship with the annual change in dwelling prices by around six months. New lending is driven by the supply and demand for credit. The latest housing finance data indicates that the flow of housing credit continues to fall. And the pace of the decline has accelerated (chart 3). Credit to investors has been trending down for the past 1½ years. But it’s the shift downwards in lending to owner-occupiers that is behind the recent acceleration in the decline of credit.
Generally, auction clearance rates are a leading indicator of prices. Auction clearance rates tend to lead prices on average by two months. Auctions are more popular in Sydney and Melbourne as a means of selling a property. As such, the link between auction clearance rates and property prices is very much a Sydney and Melbourne story. As a rough rule of thumb, the annual change in dwelling prices tends to be negative when the auction clearance rate is below 55%.
Over the past two years, foreign investment in Australian property has waned. This is primarily due to a lift in state government stamp duties levied to foreign investors as well as tighter capital controls out of China. There is a decent relationship between the annual change in property prices against the share of sales going to foreign investors. Generally foreign purchases have led prices on average by around four months, although that lead time has shrunk more recently.
And finally on consumer sentiment, Aird says it has proved a very useful near term indicator of the annual change in dwelling prices. There is of course a self-fulfilling aspect at work. If households expect prices to weaken then demand for credit will fall and prices will correct lower. The reverse is also true when households expect price growth to accelerate. The WBC/MI house price expectations index is pointing to dwelling prices continuing to deflate over the near term.
The RBA’s Deputy Governor Guy Debelle summarised the Bank’s assessment of the various measures put in place to address the risks around housing lending. He argued risks are under control, though external shocks could still hit household balance sheets. Loose lending is not seen as a risk…. Hmmmm! Whilst the regulatory measures have significantly reduced the riskiness of new housing lending, we have masses of loans written under weaker regulation, which are still exposed.
He also again illustrated the fall in investor borrowing, the shift away from interest only loans, and a significant decrease in the maximum loan sizes now on offer – on average down 20%, though we think for some households the fall is significantly larger. He also showed some households were now paying higher rates, thanks to larger spreads over the P&I loan benchmark.
The trend unemployment moved a little lower according to the data from the ABS, from 5.2 per cent to 5.1 per cent in the month of October 2018. This is the lowest unemployment rate since early 2012 and the 25th consecutive monthly increase in employed full-time persons with an average increase of 20,300 employed per month. The trend underutilisation rate decreased 0.1 percentage points to 13.4 per cent and the trend participation rate remained steady at 65.6 per cent in October 2018.
But wages growth remains sluggish with the seasonally adjusted Wage Price Index (WPI) up 0.6 per cent in September quarter 2018 and 2.3 per cent through the year. The more reliable trend was 0.5% in the September quarter. Private sector wages grew by 0.55% over the quarter, whereas public sector wages grew by 0.61%. So Public Sector wages are growing more strongly, whilst the private sector continues to struggle. The weak wages growth will dent the budget projections and household budgets. Western Australia recorded the lowest through the year wage growth of 1.8 per cent while Tasmania recorded the highest of 2.6 per cent.
So no surprise that our household financial confidence index was lower in October The index measures households overall comfort level with their finances across a number of key dimensions. Recent home price trends, lower returns on deposits and share market gyrations have combined to take the index lower, despite strong employment trends. The wealth effect is now working in reverse, with a potential impact on future consumption. The index returned a result of 88.1, down from 88.4 last month. This continues the decline since late 2016, and is now approaching the lowest ratings from 2015. The convergence across the states continue as home price falls in NSW and VIC take a toll, with the southern state showing a significant slide. WA and QLD appear to be tracking quite closely. Across the age bands, younger households are under the most pressure (thanks to large mortgages, or renting) while those aged 50-60 years remain the most confident, thanks to lower net borrowing, and more savings and investments. For those aged 40-50 recent falls in property prices swamp any benefit from stock market performance. Those holding property for owner occupation remain the most positive, despite falls in paper values of their homes, but property investors are now registering significant concerns, thanks to flat or falling net income from rentals, falling capital values and concerns about the future of negative gearing and capital gains tax relief. More property investors signalled an intention to seek to sell property, as the switch from interest only to principal and interest loans continues. More than 41% of mortgage applications were rejected, compared with 5% last year, as more rigorous underwriting standards bare down. In fact those renting are in many cases more confident than property investors, significant turnaround. The great property investor decade in passing. You can watch our show “Household Financial Confidence Is In The Gutter”.
The use of the Household Expenditure Measure HEM may well be back in play, following the latest from the Westpac ASIC case. Given that at some banks HEM is still being used for around half of applications, and the Royal Commission commented specifically in the use of HEM, perhaps the law needs to be changed. The core of the argument is whether the loans were unsuitable, and that it seems would depend of the ultimate progress of the loan subsequently. In other words, it cannot be proved to be unsuitable until it falls over. ASIC would need to prove the loan was unsuitable! Actually we think the law says lenders have to verify expenses, and in other cases, for example in pay day lending specific inquiries are required as part of the assessment. But it’s as clear as mud at the moment! When is unsuitable lending to be demonstrated? This will have a significant impact on any potential class actions. And of course next week the Royal Commission start they next round, with senior bank executives and regulators on the stand. This should at very least be entertaining, and will perhaps get to the heart of the cultural issues in banking and finance. In this regard you should watch our recent show with John Dahlsen, business man and ex. ANZ Director, who has some important things to say about what has driven the poor outcomes from the sector and what needs to change. It’s a long piece, but highly relevant – “Thinking About Banking From The Inside”.
But for now, banks want more data on expenses, and the latest was ANZ who outlined new tighter rules from 20th November, where mortgage applicants will need to provide much more evidence, and history on income and expenditure. Any income from bonuses will be ignored and income shaded to 80% and evidence of continuous employment is needed. As well as more granularity and evidence on expenditure, they also will want more detail on potential changes to personal circumstances.
And finally, this week we saw the first “unnatural act” from the Government to support the banking sector, in an attempt to alleviate the home price falls and lending freeze ahead of the election next year. The proposed $2 billion funding pool is small beer in the estimated $300 billion SME lending sector. There is precedent a decade ago when the government’s $15 billion co-investment with the private sector into the residential mortgage-backed securities market during the GFC. So the federal government announced a new, $2 billion Australian Business Securitisation Fund to help provide additional funding to small business lenders. But this is lipstick on a pig in my view, and does not get to the heart of the matter at all. But I expect more such measures in the run up to the next election.
And if you want to understand what is ahead, then watch my recent interview with Harry Dent, as we discuss the limitations of central banks, and how QE has really created a monster which is still running rampant. And we are also extending our reach into the New Zealand market with the help of Joe Wilkes, see our latest Ireland V New Zealand – A Passion For Rugby & Property.
But to sum up the state of play, the Bears are indeed in town, and we should prepare ourselves for more falls ahead. Our scenarios continue to play out as expected.
Finally, a quick reminder, our next live Q&A session is now scheduled for November 20th at 8 pm Sydney time. You can schedule a reminder by using the YouTube Link and join in the live discussion, or send in questions beforehand. If previous sessions are any guide, it should be a lively event!
Welcome to the Property Imperative weekly to 10th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Please consider supporting our work via Patreon
Please share this post to help to spread the word about the state of things….
Welcome to the Property Imperative weekly to 10th November 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Loads more data this week, all pointing to the impact that tighter credit conditions are having on the economy – that is unless you are the RBA, which seems to see everything as just fine and missing the debt bomb elephant in the room.
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We start with the latest lending stats from the ABS. Further evidence of the lending slow down came through in spades in their housing finance statistics to September 2018. Looking at the trend flows first, new lending for owner occupation fell 1.7% compared with last month, to $13.78 billion. Investment lending flows fell 0.8%, to $8.96 billion, and owner occupied refinanced loans were flat at $6.24 billion. Refinanced loans as a proportion of all flows rose to 20.8% and we continue to see this sector of the market the main battleground for lenders who are trying to attract lower risk existing borrowers with keen rates. Investment loans, were 39.4% of all new loans, up again from last month as owner occupied lending demand eases.
Looking at all the categories of loans month on month, we see lending for owner occupied construction down 1.2%, lending for the purchase of new dwellings down 2.2%, lending for the purchase of other existing dwellings down 1.7%, while investment lending for the construction of new property fell 2.5%, investment property for individuals fell 0.6% and investment lending for other entities, such as self-managed super funds, dropped 2.2%. As a result, total flows were down 1.1% compared with last month.
First time buyers were also down in number in September, falling by 8.8% to 8,693 new loans. This was 18% of all loans, up from 17.8% last month. As we highlighted in our recent post “Mortgage Lending Enters the Danger Zone”, household debt is still rising, home prices are falling creating a negative wealth effect, and this will drive prices lower still.
Yet according to the RBA’s latest statement on Monetary policy, all is well, as they continue to paint a picture of underlying momentum in the economy based on jobs growth, low unemployment, and a prospect of wages growth, but still down the track. “GDP growth is running above 3 per cent. The unemployment rate has declined noticeably, reaching 5 per cent in the month of September. GDP growth is now expected to be around 3½ per cent on average over 2018 and 2019, but to ease in the latter part of the forecast period as production of some resource commodities stabilises at high levels”. They of course left the cash rate unchanged on Tuesday.
They are now forecasting an unemployment rate down to 4¾ per cent by the end of 2020. That would normally be a catalyst for wage rises, but we are not so sure that logic works any more given the international evidence, and the different employment structures (e.g. gig economy, part-time work, zero hours’ contracts etc.).
GDP was helped by strong terms of trade thanks to higher commodity prices. “Global energy demand has supported oil, liquefied natural gas (LNG) and thermal coal prices, while ongoing strong demand for steel in China and, increasingly, India, has supported the prices of iron ore and coking coal; supply disruptions have also boosted coking coal prices in recent quarters. But later they warn of a potential slow down.
They argue that the housing slowing down, which is apparent in most areas across the country is inconsequential, and the housing debt burden (high by any standards), is manageable. But we note the debt ratio is as high as ever it’s been, the household savings ratio is falling, and household wealth is declining thanks to falling prices now. This could well crimp consumption down the track. And that has supported GDP growth for years.
So overall, they say the positives outweigh the negatives, and the next few quarters are looking fine, but we believe there are a number of clouds on the horizon. These include further interest rate rises in the USA, flowing through to higher funding costs in Australia for many mortgage holders, the risks from China slowing, and possibility that wages growth will remain stuck in neutral. High household debt remains a significant burden. Yet they cannot see the elephant!
So whilst the RBA still suggest the cash rate may rise higher later, we think there is a significant chance they will have to cut further, to levels never seen before. Our read is there are significant risks in their outlook, and they are mostly on the downside. But then the RBA does have a habit of wearing rose-tinted glasses.
In fact, there is panic in the air as tightening credit spills over into falling home prices and potentially impacts the broader economy. Indeed, the AFR reported today that Treasurer Josh Frydenberg has urged banks to ease their lending clampdown for the public good as the government seeks to head off a royal commission-inspired credit crunch just as the housing market hits the skids. He expressed concern that lending across the board – for homebuyers, small business and borrowers – could tighten further after Commissioner Kenneth Hayne releases his final report by February 1.
The early reappointment of Australian Prudential Regulation Authority chairman Wayne Byres sends a message that is both poorly timed and off-key, given the important questions that have been raised by the royal commission. See out post “Shock Announcement Collapses Confidence And Trust In Australia’s Financial System”. Commissioner Ken Hayne’s interim report was so incendiary that it’s easy to forget it only covered the first two-thirds of the commission’s hearings.
The Reserve Bank of Australia and Treasury have also privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and business.
This is remarkable given the high debt ratios and mortgage stress, and is one of the “un-natural acts” we have been warning about. Let’s be clear, the Royal Commission has shone a light on poor practice, but APRA had already been applying belated pressure on the banks for loose lending, especially to investors and we have been in a long-term forced upswing thanks to poor Government policy, and weak supervision. This is now being pulled back, finally, but to BLAME the Royal Commission for this outcome is nonsense. It’s the same category as the exaggerated claims that Labor’s negative gearing reforms would hit existing investment property holders. It is just not true.
I discussed the underlying trends in the housing sector and why this is not just a bubble, but a structural crisis, in an interview I did with Alex Saunders from Nugget’s News. We explored the question of whether housing is in a bubble, micro-markets, and the expectations for the future trajectory of home prices given tighter lending conditions. And where might block chain fit in? You can watch the programme on YouTube.
I also discussed the latest results from our Mortgage Stress surveys. Having crossed the 1 million Rubicon last month, across Australia, more than 1,008,000 households are estimated to be now in mortgage stress (last month 1,003,000). This equates to 30.7% of owner occupied borrowing households. In addition, more than 22,000 of these are in severe stress. We estimate that more than 61,000 households risk 30-day default in the next 12 months. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead. We discussed these results in our post “October Mortgage Stress Update”.
It’s also worth noting that the ABS data this week on costs of living showed that many households seeing their costs rise way faster than the official CPI data. Most households would not be at all surprised.
We now know that the Royal Commission will be interrogating the major banks and the regulators in the final series of hearings, and there are some hard questions to be asked, about poor culture, behaviour standards and practice. Yet we noted that the 300 or so documents released this week from a range of players, are following “party lines”. The major banks are arguing in their submissions that no significant changes to structure or regulation are required, some of the smaller players argue they are at a competitive disadvantage thanks to the current industry structure and regulation and the mortgage broker sector argues that no significant changes are required to remuneration and conflict of interest rules. On the other hand, consumer groups stress the current issues of poor selling, advice and supervision.
And the submissions from the industry also lay bare more of the criminal activity, fraud, and worse, which has beset the sector. We still believe significant change is required, and you can watch our segment on this “Our Royal Commission Submission”. The regulators need a shake-up as well. So the question is, will the Royal Commissioner stand firm, or wilt under the pressure from so many stakeholders. I hope he can see the elephant in the room!
And talking of regulators, APRA released a paper this week on Loss-Absorbing Capacity of ADI’s. It shows that currently major Australian banks are at the lower end of Total Capital compared with international peers. As a result of proposed changes, major banks (Domestic systemically important banks in Australia, D-SIBs) will see their funding costs rise – incrementally over four years – by up to five basis points based on current pricing. This is intended to build in more financial resilience by lifting the capital requirements, centred on tier 2. Other banks may also be impacted to an extent.
If the D-SIBs were to maintain an additional four to five percentage points of Total Capital they would have ratios more in line with their international peers. But not in the top 25%, and the banks overseas are also lifting capital higher… so some tail chasing here! Is this “unquestionably strong”? “The aim of these proposals and resolution planning more broadly is to ensure that the failure of a financial institutions can be resolved in an orderly fashion, which protects the interests of beneficiaries and minimises disruption to the financial system,” APRA Chairman Mr Byres said. Written submissions are open to 8 February 2019.
The Bank reporting season revealed weaker profits, pressure on net interest margins, a rise in 90+ mortgage delinquencies, and more provisions for customer remediation. Yet, the banks managed to tweak their provisions to maintain capital levels. The earnings of Australia’s four major banks are likely to fall further in the near term due to slowing credit growth, especially in the residential mortgage segment, and further remediation and compliance costs associated with inquiries into the financial sector, including the Royal Commission, says Fitch Ratings. They said “Slower growth puts pressure on the banks to increase lending margins to maintain profitability. However, intense regulatory and public scrutiny of the sector, as well as strong competition, may make it difficult for the banks to reprice loans and pass on the recent increase in wholesale funding costs, as evidenced from the latest financial results. Net interest margins are therefore unlikely to improve in the short term”.
Jonathon Mott from UBS, one analyst I rate very highly, said: (1) ‘Underlying’ revenue fell -1.3% (h/h); (2) NIM was down 7bp to 199bp; (3) Average Interest Earning assets grew just 1.4% as the banks further tightened underwriting and continued to run off low yielding institutional assets; (4) Fee income and markets revenue were weaker; (5) ‘Underlying’ costs rose 1.9% (h/h) given ongoing investment, compliance and regulatory spend, which more than offset productivity savings; (6) This left ‘Underlying’ Pre-Provision Profits down 3.6% (h/h); (7) Credit impairment charges fell to just 11bp – the lowest ever recorded.
Oh and NAB this week finally moved to protect their Net Interest Margin, saying it would be changing the special offer on its base variable rate, available for new owner occupier principal and interest customers, from 3.69 per cent to 3.87 per cent. The change, which comes into effect from this Friday, November 9, reduces the discount on the advertised rate from 48 basis points to 30 basis points. It will only affect new customers taking out the product. The announcement comes nearly two months after the fourth-largest lender said it would not join the rest of the Big Four in raising mortgage rates in a bid to “rebuild trust” with customers.
So to property. Home prices are still falling according to the CoreLogic index, with year to date declines on average of 6.12% in Sydney, 4.79% in Melbourne and 3.5% in Perth. Brisbane is up 0.04% and Adelaide up 1.7% making a 5 capital average fall of 5%. In fact, the rate of decline appears to be accelerating.
Macquarie has joined the bearish view of home prices, saying they now expect national dwelling prices to fall for at least another 12 months, with a peak-to-trough correction of around 10 per cent. They expect prices in Sydney and Melbourne to fall by 15-20 per cent. They suggest it is a housing correction rather than being the result of a macro correction, in that falls have so far been orderly, with little evidence of distressed selling, even among investors affected by changes in prudential policy and lending standards. A disorderly housing price correction is unlikely, absent a major global economic downturn. They see declines, even a 20 per cent peak-to-trough decline would merely take prices back to April/May 2015 levels. They see no evidence of a severe credit curtailment, which is interesting. We do not agree.
The number of properties coming on the market continues to skyrocket, as more are forced to sell, or are confronted with the fear of not getting out, as the Sydney listings shows from Domain. There are more than 27,000 listed which seems to be some sort of record, our property Insider Edwin Almeida is tracking the results.
CoreLogic says the weighted average clearance rate saw further softening last week, with only 42.7 per cent of homes successful at auction. There were 1,541 auctions held across the combined capital cities, having decreased from the 2,928 auctions held over the week prior when a higher 47 per cent cleared. Both volumes and clearance rates continue to track lower each week when compared to the same period last year (2,046 auctions, 61.5 per cent).
In Melbourne, final results saw the clearance rate fall last week, with 45.7 per cent of the 266 auctions successful, down from the 48.6 per cent across a significantly higher 1,709 auctions over the week prior.
Across Sydney, the final auction clearance rate came in at 42.6 per cent across a slightly higher volume of auctions week-on-week, with 813 held, up from 798 the previous week when 45.3 per cent cleared. Sydney’s final clearance rate last week was not only the lowest seen this year, but the lowest the city has seen since December 2008.
The only capital city to see more than 50 per cent of auctions successful last week was Adelaide (50.8 per cent), however this was lower than the prior week’s 57.6 per cent. Brisbane saw the lowest clearance rate, with only 30 per cent of homes selling.
Geelong recorded the highest clearance rate of all the non-capital city regions, with 57.1 per cent of auctions reporting as successful, while the Sunshine Coast region had the highest volume of auctions (55).
This week, the number of auctions scheduled to take place across the combined capital cities is expected to rise, with 2,276 currently being tracked by CoreLogic, increasing from the 1,541 auctions held last week, although lower than results from one year ago (2,907). Across Melbourne, auction activity is expected to rise considerably after the slowdown seen preceding the Melbourne Cup festivities last week, with the city set to host 1,074 auctions this week, up from the 266 auctions held last week. In Sydney, 817 homes are scheduled to go to auction this week, increasing slightly from the 813 auctions held last week. Across the smaller auction markets, the number of homes scheduled for auction this week is lower than last week across all cities.
So to the markets, where the ASX 100 fell 0.09% on Friday to 4,874, whilst the ASX 200 Financials rose 0.23% to end at 5,911 and the local fear index rose 1.45% to 14.09.
AMP bumped along the bottom at 2.67, up 2.30 on Friday, ANZ moved up to 27.13, or 0.3%, the Bank of Queensland rose 0.61% to end at 9.92, while Bendigo and Adelaide Bank rose 0.57% to 10.55. CBA rose 0.47% on Friday to 70.95 while Mortgage Insurer Genworth was up 2.2% to 2.32. Macquarie recovered to 123.64 up 0.45%. National Australia Bank slid 0.12% to end the week at 24.90, Suncorp was up 0.64% to 14.08, and Westpac was up 0.07% to 27.70.
The Aussie, which reacted positively to the US mid-terms, ended the week at 72.25, but was down 0.44% on Friday. The Aussie Bitcoin rate was 8,566, down 0.54% and the Aussie Spot Gold fell 0.71% to 1,674.
Across to the US markets. U.S. stocks were lower after the close on Friday, as losses in the Technology, Basic Materials and Industrials sectors led shares lower. At the close in NYSE, the Dow Jones Industrial Average fell 0.77%, while the S&P 500 index fell 0.92% to 2,781, and the NASDAQ Composite index fell 1.65% to 7,407. The CBOE Volatility Index, which measures the implied volatility of S&P 500 options, was up 3.83% to 17.36. Gold Futures for December delivery was down 1.30% or 15.90 to $1210.30 a troy ounce. Elsewhere in commodities trading, Crude oil for delivery in December fell 1.37% or 0.83 to hit $59.84 a barrel. The US has just become the largest oil producer. Generally, a 20% drop from high close to low close defines a bear market. We are entering that territory!
Banks were off, with the S&P500 Financials down 0.93% to 449.49. On the whole, consumer discretionary stocks are slightly outpacing the S&P 500 since early October. The outlier might be Apple, which is actually a tech stock but obviously can have a huge impact on shopping season. The stock has made it back a bit after falling below $200 a share last week, but remains a long way from recent highs of around $230 as investors continue to debate what the company’s holiday quarter guidance and decision to stop reporting iPhone unit sales might mean moving forward. It ended at 204.5, though down 1.93 on the day.
A weakening Chinese economy helped affirm the bearish narrative of slower global growth. The FED kept the cash rate on hold, but the narrative confirms the view that further hikes are likely, with the 3-month bond rate flat at 2.36, and the 10-year rate back a little off its highs, down 1.44% to 3.19. The Fed said it expects “further, gradual increases” in rates as the economy continues to thrive. It’s a bit hard to understand any panic about these words, because they didn’t tell investors anything that most didn’t already know.
The European Commission tangled with Italy over the Italian government’s budget forecasts, which the EC said looked too optimistic on deficits. Moving west, debate raged about whether a Brexit deal might be getting close, and the U.K. government is holding meetings on the issue this weekend, media reports said. A Brexit breakthrough, if it comes, might give European markets a boost. But it’s unclear how close it might be. Deutsche Bank was down 1.75% on Friday to 8.97, and we are watching this as a bellwether for more trouble ahead.
Bitcoin was down 1.45% to 6,415.
So to conclude, the big debt question still remains the elephant in the room, and many are choosing to look past it, though as interest rates continue to push higher in the US, this will be harder to do. Locally, we expect more unnatural acts to try and keep the credit balloon in the air, but we believe that tighter standards are set to lurk in the shadows, meaning that the stage is set for more home price falls ahead.
Finally, a quick reminder, our next live Q&A session is now scheduled for November 20th at 8 pm Sydney time. You can schedule a reminder by using the YouTube Link and join in the live discussion, or send in questions beforehand. If previous sessions are any guide, it should be a lively event!
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Please consider supporting our work via Patreon
Please share this post to help to spread the word about the state of things…
Welcome to the Property Imperative weekly to 27th October 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, read the transcript or listen to the podcast.
As we approach the end of October, which is often a volatile month, the markets are down and the outlook globally and in Australia to my mind looks increasingly uncertain. Property and Stocks, and other asset classes are looking distinctively wobbly, as does the banking sector. I fear that money printing will become back on the agenda sooner than many are expecting to try to stop the rot, and “maintain” the wealth effect created as real money loses its true value.
We start with the markets which had one of the worst weeks this year. Let’s start in the US, before looking at the local Australian markets. And later we will look at the latest property data too.
The Dow tumbled on Friday, shrugging off data showing ongoing U.S. economic growth as high-flying tech companies were punished in the wake of downbeat reports from Google and Amazon.
The Dow Jones Industrial Average fell about 1.19% to 24,688, though remember it hit 23,500 back in April. The S&P 500 fell 1.73% down to 2,659, while the Nasdaq Composite fell 2.07% ended at 7,167 on Friday. The three indexes are on track for their worst month in years. The narrower S&P 100 was down 1.82% to 1,189. Technical correction or not, these are significant falls, and we expect more volatility ahead. The fear index, or volatility index ended the week at 24.16, near its recent highs, but still below the February 18 spike.
The pair of downbeat reports overshadowed data showing the U.S. economy grew 3.5% in the third quarter, above economists’ estimates for a 3.3% increase, though analysts said a deeper look into the data revealed signs of a possible slowdown. In fact, it was buoyant consumer spending which helped to prop up the numbers.
Disappointing business investment suggested “the boost in capex from tax cuts and deregulation was likely front-loaded and fading quickly,” BNP Paribas said. “We continue to expect growth to slow from here as the sugar high in consumer spending turns into a sugar low.”
Investors grappled with wild swings on Wall Street amid growing concerns U.S. corporates were approaching peak profit growth after tech heavyweights Google and Amazon delivered underwhelming quarterly reports and signalled a softer patch of growth for the fourth quarter.
Alphabet fell 1.80% to 1,083 after it posted third-quarter revenue that fell short of expectations. Amazon shares, meanwhile, dropped 7.38% to 1,643 as its third-quarter revenue also fell short, while its weaker-than-expected guidance for the key holiday season exacerbated concerns.
On the other hand, Intel did better, up 3.11% to 45.69, despite some trade war concerns. The S&P 500 tech sector closed about 2% lower, while the communication services sector, which includes Netflix, Facebook, Alphabet and telecom companies sunk more than 2%.
More broadly you can list out some of the underlying concerns which are driving the market lower.
First, it’s the tightening policy of the Federal Reserve. Interest rates in the United States go up and the Fed let the market know that it will continue hiking rates next year. Higher interest rates mean that borrowing will become more expensive for US companies. Hence, the negative impact on stocks.
The trade tensions. So far, no end of the mutual tariff blows between the United States and China is in sight. This creates uncertainty and is bad for business.
Then the bumpy earnings season. Investors had high expectations for the financial reports of American companies. As well as result so far, concerns are now spreading about the fate of earnings in 2019. Interest rates rises would crimp consumers spending.
Then we cannot overlook the political tensions in America. The US midterm election will take place on November 6, and the pressure is rising. Will the Republicans retain power in the Congress?
Add to that more weak housing data as we discussed last week. There are worries that rising prices will hamper US economic growth.
And more broadly consensus is rising that global growth is heading south in 2019. This could hit China, Europe and other centres, Of course the quest for perpetual growth is unrealistic and stupid, but no-one is wanting to change tack, and drove towards a more sustainable path.
Banks are right in the middle of this, with the S&P 500 Financials down 1.39% on Friday to 419.21. Bitcoin slide a little, down 0.24% to 6,553, while Gold was up 0.51% to 1,235 and Oil was up 0.43% to 67.62.
The 3 Month yield was steady at 2.33, and the 10-year yield was down to 3.077, 15 basis points off its recent highs, though given the FED’s stance that may be temporary.
One International Bank to watch is Deutsche Bank, which has been taking a bath recently. Bank in January 2014 it was at around 30.00 Euros, but now its languishing at 8.51 and was down 3.56% on Friday. The plunge in shares for the German lender comes after mixed quarterly figures were released this week which showed Deutsche Bank profits had dropped by 65 percent in the third quarter. Deutsche Bank revealed net profit of €229 million, a decline from the €649 million seen in the same period in 2017. But despite the steep decline, Deutsche Bank officials declared they were still on track to swing to a profit this year, its first since 2014. The German lender has been restructuring under a new leadership as it struggles to rebound after three consecutive years of losses. Chief Executive Christian Sewing said: “We have our costs under control and sufficient capital to grow. “We are on track to be profitable in 2018, for the first time since 2014.” Revenue in the third quarter fell 9 percent, to €6.175 billion. Deutsche Bank is currently in the middle of a mass restricting, with 2,800 jobs already cut to bring headcount to 94,717. The aim is to drag this number to below 90,000 by the end of this year. The bank predicts a saving of €900 million by 2022 through restructuring, including the merging of the head office and infrastructure. But the bank has very large exposures to derivatives, especially interest rate related, and given the uncertainly around Brexit, the FED and other factors, its risk on at the moment.
So to the local markets. Among the banks, most were up a little on Friday, having dropped the day before. CBA was up 0.83% to end at 65.81, NAB was up 0.69% to 24.70, Westpac was up 0.46% to 25.96 and ANZ was up 0.44% to 24.91. The Regionals also bounced a little with Bendigo and Adelaide Bank up 1.42% to 9.90, Suncorp up 0.28% to 13.65 and the Bank of Queensland up 1.17% to 9.54, after it had dropped significantly the previous day thanks to going ex. Dividend. Macquarie was also high, up 0.94% to 111.17, but AMP continues to fall as it reported the loss of more customers, despite a fire sale. It ended down another 7.72% to 2.36. Frankly it’s hard to know that value remains there.
The ASX 200 Financials remains down, well down, though did rise by 0.35% yesterday to 5,554. The local volatility index was down 9.68% on Friday at 20.12, but is still elevated. The Aussie ended at 70.92, at the lower end of its recent range and most commentators expect more falls ahead. Fitch, for example said “We are bearish on the Australian dollar over the near term due to a neutral RBA”, but suggested that may change later. They only expect a 25bps rate hike from the RBA by end-2019, in contrast with 100bps worth of hikes from the US Fed over the same period. The ASX 100 ended up just a little at 0.12% to 4,666, but we might expect more downward moves next week. At very least trading will remain choppy.
To understand why, its worth looking at the ABS data on The Australian Annual National Accounts which show that the size of the economy has reached over $1.8 trillion, reflecting a 2.8 per cent increase in 2017-18. This is up from the $1.2 trillion in 2007-08 in nominal terms.
But household consumption is a large part of the story, contributing 1.6 percentage points, though with incomes and the savings ratio falling, while investment in property is the standout. Households borrowed an additional $981 billion over the 10-year period from 2007-08, while the value of land and dwellings increased by $2,957 billion over the same period. No wonder the regulators want to maintain the credit bubble. Household gross disposable income plus other changes in real net wealth decreased $634 billion, or 33.3%, in 2017-18, thanks mainly to falling property values. Expect more falls ahead. This shows that our economic settings are just plain wrong. Yet I suspect more of the same ahead. And note this, The Annual National Accounts also include labour productivity by industry estimates, which are only available annually. Australia’s labour productivity rose by 0.2 per cent, recording the lowest rise since recording a fall in 2010-11. Agriculture, mining and utilities industries all recorded falls in labour productivity while services industries such as finance, professional, scientific and technical services as well as administrative support services were more productive.
So the property market. CoreLogic reported that last week, the weighted average clearance rate came in below 50 per cent for the 3rd consecutive week with 47 per cent of capital city homes selling. There were 1,851 homes taken to auction, having increased on the 1,817 auctions held over the week prior when the clearance rate was 49.5 per cent. One year ago, 67.1 per cent of capital city homes cleared at auction, when volumes were considerably higher (2,525).
Melbourne’s final auction clearance rate showed further softening last week, returning a 50.4 success rate, surpassing the previous week as the lowest recorded since December 2012 (50.6 per cent). Volumes across the city were relatively stable week on week, with 912 homes taken to auction; only 8 more than the prior week. Clearance rates across the city are now down around 20 per cent on last year, when over the same week a higher 1,223 homes were taken to auction and 73.2 per cent cleared.
In Sydney, the final clearance rate fell last week, with 45.1 per cent of the 647 homes taken to auction selling, down from the 46.1 per cent over the week prior when 611 auctions were held. One year ago, a higher 928 Sydney homes were taken to auction with 63.3 per cent successful.
Across the smaller markets, Canberra came in with the highest clearance rate last week with 59.6 per cent of the 67 auctions held returning a successful result. Brisbane saw the highest number of homes auctioned, with 117 held, however only 28.6 per cent sold.
There are 2,009 capital city homes set to go under the hammer this week, increasing on last week’s 1,851 auctions held as at final figures, however, lower than the 2,519 auctions held over the same week last year. Melbourne will see 1,020 homes auctioned this week, rising from the 912 auctions held last week, and lower than the 1,251 homes taken to market one year ago. Activity is set to remain steady across Sydney this week, with a total of 640 properties scheduled for auction, down only 7 auctions from final figures last week. One year ago, 823 Sydney homes went to auction. Across the smaller markets, Adelaide will see the most notable increase in weekly volumes, with 124 scheduled auctions this week, increasing from the 72 held last week. Canberra and Perth are also expected to see a higher volumes of auctions take place this week, while Brisbane and Tasmania will see fewer auctions held.
More are getting twitchy about the property sector, with both Mirvac and Stockland now selling off land sites in Sydney and Melbourne, to reduce risks, according to a report in the Australian. Then there was the latest HIA-CoreLogic land report, which on one hand reported that there was a 15.5% annual increase in the median capital city lot price to an all-time high $336,124, despite a 22% slump in sales volumes and broader housing market weakness. Land supply is clearly an issue, but with demand weakening, these high prices may not be sustainable. This was brought home in the latest from Ernst and Young, which warns that developers are in for a bumpy ride. the combination of falling prices and tightening lending standards has had negative implications for not only developers but also builders and lenders, noting slowing project and land sales may affect the timing of cash flows and payments, leaving developers vulnerable in the medium-to-long term. Thus, declining land values may impact loan-to-value ratios and require developers to generate more or new equity to get new projects off the ground while declining sales and revenues from projects may not cover returns to equity and debt holders. This could lead to an increase in ‘fire sales’ which will re-set the market and cause further concern from a finance perspective.
Meantime both Domain and CoreLogic reported more price falls. CoreLogic said their weekly index has dropped 0.05%, across the main centres, but with Melbourne down 0.12%. We think Melbourne is at risk now. Domain released its State of the Market Report for the September quarter of 2018, which revealed that Sydney and Melbourne house prices fell, down 3.1% and 3.9% respectively over the quarter. Nationally house prices were down 2.6%. But of course there are variations by post code and property type. Averages tell you very little. And remember it’s the “equity” being eroded, if you have an 80% Loan to value, last year, you could easily have lost half now. The banks benefits, home owners with a mortgage do not!
S&P’s latest SPIN index, the measure of defaults on Residential Backed Mortgage Securities for August was mixed. The read was 1.36% in August, down from 1.38% in July. Arrears have typically decrease month on month in August for the past five years. At 1.36%, however, arrears are noticeably higher than the August average for the past five years of around 1.13%, though they remain low overall. They say there has been an ongoing increase in home loans that are more than 90 days in arrears. Loans more than 90 days past due reached 0.74% in August, making up around 54% of total arrears. This is up from 42% five years ago. This is consistent with our mortgage stress data, more households getting into more financial difficulty. Regional bank mortgage originators reported the highest percentage of loans more than 90 days in arrears in August, at 1.33%, followed by the major banks, at 0.99%. Some of the increase is due to geographic influences. This is most evident in the regional bank portfolios, which have a 35% exposure to Queensland, compared with 28% for the entire RMBS prime portfolio, and 18% exposure to Western Australia, compared with 11% for the entire portfolio. The downturn in the mining sector and an ongoing drought in agricultural areas are placing pressure on mortgage payments in Queensland and Western Australia.
They concluded “We expect falling house prices to put further pressure on mortgage arrears in coming months. Borrowers with higher loan-to-value (LTV) ratios are more likely to be affected by softening property prices because they have not had time to build up equity or accumulate mortgage buffers. This could tip some borrowers into a negative equity position, which would significantly impede their refinancing prospects in the current lending environment. Across all RMBS loan portfolios we expect borrowers with LTV ratios of 80% and higher to be most at risk. These loans account for around 13% of RMBS loan portfolios.
Negative Equity could become a big issue if prices do continue to fall. We ran some modelling for the AFR reported today, with 350,000 households at risk if prices fell peak to trough by 20% (which is not our worst case scenario). They even created an interactive tool, using our data. “Comparison site RateCity illustrates the impact of a 20 per cent fall during the two years to December 2019 depending on when a property was purchased. A median-priced Sydney house of $745,000 bought in 2013 with a 10 per cent deposit would have an estimated value of $836,000 in December 2019, a profit of nearly $44,000 and estimated loan to value ratio (LVR) of 71 per cent, according to RateCity. A median-priced house in Sydney worth $930,000 in December 2015 with the same deposit would by the end of next year be worth $836,000 –a loss of more than $154,000 if sold or a LVR of 93 per cent. The same property purchased for $1.05 million in December 2017 would on these numbers sell next December for a loss of $278,000. These estimates do not include interest paid, loan mortgage insurance, stamp duty, moving costs, marketing and legal expenses, which can add another 10 per cent to the cost of purchasing a property.
This week there was a silly report from the Master Builders, claiming to model the impact of Labor’s proposed changes to negative gearing. They claimed it would cause major falls in home prices, and rises in rents, and kill the construction sector, but failed to model in the “minor” fact that Labour would grandfather existing gearing arrangements, and still provide support for new developments. In fact, Macquarie debunked the modelling in short order, and concluded there would be but a small impact, following through to GDP. In fact, we think this is the ideal time to bring in such a reform, when property investors are on the side lines. In fact it might well stimulate new builds.
And more poor arguments, were abroad this week, as people tried to head off the Royal Commission outcomes before they are delivered. We made a submission on the interim report, and you can watch our Video on this.
But, amazingly, Treasury secretary Philip Gaetjens told a Senate estimates hearing in Canberra on Wednesday that a key risk to Australia’s strong economy is banks cutting their lending too much in response to the Royal Commission into financial services and tougher credit rules imposed by the prudential regulator. Amid complaints from small business and home buyers that they are finding it harder to attain finance, Mr Gaetjens said a tightening of credit conditions could constrain household consumption and business investment. “There is also some evidence of a modest tightening in lending standards by banks which could be limiting access to credit for some borrowers who may previously been able to borrow,” he said.
And the RBA is at it too “The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and business.”
And in the minutes of its October meeting on monetary policy, the Reserve Bank notes that members discussed the release of the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. “The report contains many questions covering a broad range of issues, but at this stage provides relatively little indication of the recommendations that are likely to be made in the final report,” the minutes said “Members observed that while the regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the commission’s findings, it was possible that banks could tighten lending conditions further given the issues raised in the report. “Members noted that it would be important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported.”
Now let’s be clear, a decade of too lose lending has to be brought under control. The Royal Commission has done a great job in shining a light into the dark places, and it’s not pretty. And yes the banks are now tightening their lending criteria. Rightly. The last think we need is a reversion to this bad practice. Loans need to be suitable and fit for purpose, and affordable.
This does put pressure on the overall economy though, because this poor lending which drove household consumption and home prices plus construction, will ease, and we do not have a Plan B for economic success in an uncertain world. But reverting to Plan A, just ease lending restrictions is NOT the answer, and we hope the Royal Commission remains true to its focus on Community Expectations. We should demand more from Treasury and the RBA, but then they are caught in a trap of their own making.
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The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
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The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Please consider supporting our work via Patreon
Please share this post to help to spread the word about the state of things….
