RBA Warns on Housing – Sort of…

Hidden away at the end of the 62 page Statement on Monetary Policy is a gem of a paragraph relating to housing. I think this is the first warning I can remember on the subject, as up to now the RBA has been remarkable bullish. Will this mean the regulators efforts to control the risks be accelerated?

Housing prices have picked up over the second half of 2016, most notably in Sydney and Melbourne. This could see more spending and renovation activity than is currently envisaged.

On the other hand, a widespread downturn in the housing market could mean that a more significant share of projects currently in the residential construction pipeline is not completed than is currently assumed. While this is a low-probability downside risk, it could be triggered by a range of different factors.

Low rental yields and slow growth in rents could refocus property investors’ attention on the possibility of oversupply in some regions.

Although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall. Softer underlying demand for housing, for example because of a slowing in population growth or heightened concerns about household indebtedness, could also possibly prompt such a reassessment.

Now, you can read this a couple of ways, first it is a low-probability – they say, so not to worry. Or could it be that this is a way of getting housing expectations reset.

We have been highlighting potential risks in housing thanks to low income growth, sky-high debt and rapid growth in the investment sector at a time when rental yields are under pressure.

At very least it seems the housing expectation sails are being trimmed, and should things go bad later, the RBA can point back to the “I told you so” paragraph.

Lets see if the regulators get their act together now, though it is late in the day!

 

Rates on hold, but housing affordability remains ‘hotly debated’

From The Real Estate Conversation.

The Reserve Bank has left interest rates at historic lows as economic conditions improve, but the property industry says other measures are required to improve housing affordability.

The Reserve Bank of Australia left interest rates on hold at its first meeting of 2017, with rates held at a record low of 1.50 per cent.

Governor Philip Lowe noted in his statement that growth in China was stronger in the second half of 2016, that global business and consumer confidence is improving, and that global inflation is rising. He also said recent rises in commodity prices are increasing Australia’s national income.

Lowe said the RBA expects Australian economic growth in the final quarter of 2016 to firm, and re-affirmed the RBA is forecasting growth to pick up to “around 3% over the next couple years”. Lowe said Australian inflation is heading back towards the target range.

In his November 2016 statement, Lowe said cutting rates further may not be in the “public interest” if it further increased household debt.

Real Estate Institute of New South Wales President John Cunningham said the central bank’s decision was no surprise, but said he expects housing affordability to be “hotly debated” this year.

“An emphasis will again be placed on first homebuyers and there will be much debate this year on ways to improve their plight,” he said.

“A review of stamp duty is urgently required and should focus on first homebuyers and older Australians,” said Cunningham.

The RBA cut interest rates twice in 2016, first in May and then in August. However, banks are independently increasing interest rates for investors as increased global economic uncertainty raises their borrowing costs.

Laing+Simmons managing director and REINSW president-elect Leanne Pilkington echoed Cunningham’s sentiment, saying rate cuts are not the answer to improving housing affordability. Further rate cuts are not required in the current housing cycle, she said.

“Obtaining housing finance at attractive terms is already possible for those with the means,” said Pilkington.

“It’s those without the means – stuck in the rental cycle or unable to accumulate a suitable deposit – that face the greatest challenge in the market,” Pilkington said.

“Further rate cuts are not a solution to the problem. Between government and the industry, we need to table some alternative solutions to help people buy their first home,” she said.

“From a housing industry perspective,” said Pilkington, “rates are already low and have been for some time, so that piece of the affordability puzzle is in place.”

Like Cunningham, Pilkington believes changes to stamp duty are necessary to address housing affordability problems. “It’s through other avenues like stamp duty reform that improvements in affordability need to be addressed,” she said.

Pilkington also said making downsizing more viable for older Australians, introducing a Government-backed savings scheme to help people save for a deposit, and minimising the cost of mortgage insurance could all alleviate housing affordability problems in Australia.

The Property Council of Australia welcomed the statement by Lowe on interest rates, saying it was a sober assessment of housing markets.

The governor’s statement said “conditions in the housing market vary considerably around the country”.

Ken Morrison, chief executive of the Property Council of Australia, said the statement confirms the current situation of “prudent lending practices and the best environment for renters in a generation with consistent low rental growth.”

“The deterioration in housing affordability is a serious problem in a number of our major cities, but is not an Australia-wide problem,” said Morrison.

1300 HomeLoan managing director John Kolenda said the RBA will remain on the sidelines until uncertainty about the economic impact of US president Trump becomes clearer.

“The RBA will stay on the sidelines and assess the impact on the global economy although our domestic economy appears stable with no need to adjust interest rates,” said Kolenda.

Kolenda said while the RBA’s cash rate is unlikely to change in the short term, confusion could arise from varying mortgage rates, and reinforced his recommendation to use a mortgage broker.

The Deadly Embrace Of Housing

The latest RBA Chart pack, out today, with data to early February 2017 really highlights the critical role housing plays in household finances. If the home price growth music were to stop, things would get tricky.

Overall net wealth continues to lift, supported by rising dwelling prices, (and fully priced financial assets).

Everyone seems to benefit from high home prices.

Investment loan flow is now as large as owner occupied flow, as investors continue to bet on housing for future growth, in a low interest rate environment.

House prices continue to rise following slower growth earlier in the year.

Household debt continues to grow, whilst ultra-low interest rates make interest repayments manageable – though of course there are mortgage rate rises in the works.

 

RBA Rate Decision – Hold

The RBA has left the cash rate on hold this month.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth was stronger over the second half of 2016, supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia’s national income.

Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Long-term bond yields have also moved higher, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of further monetary easing in other major economies. Financial markets have been functioning effectively and stock markets have mostly risen.

In Australia, the economy is continuing its transition following the end of the mining investment boom. GDP was weaker than expected in the September quarter, largely reflecting temporary factors. A return to reasonable growth is expected in the December quarter.

The Bank’s central scenario remains for economic growth to be around 3 per cent over the next couple of years. Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end. Consumption growth is expected to pick up from recent outcomes, but to remain moderate. Some further pick-up in non-mining business investment is also expected.

The outlook continues to be supported by the low level of interest rates. Financial institutions remain in a position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Labour market indicators continue to be mixed and there is considerable variation in employment outcomes across the country. The unemployment rate has moved a little higher recently, but growth in full-time employment turned positive late in 2016. The forward-looking indicators point to continued expansion in employment over the period ahead.

Inflation remains quite low. The December quarter outcome was as expected, with both headline and underlying inflation of around 1½ per cent. The Bank’s inflation forecasts are largely unchanged. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time. Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent, with the rise in underlying inflation expected to be a bit more gradual.

Conditions in the housing market vary considerably around the country. In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for a couple of decades. Borrowing for housing has picked up a little, with stronger demand by investors. With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.

Taking account of the available information, and having eased monetary policy in 2016, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Credit Growth Strong In December; But By How Much?

The RBA released their Credit Aggregates to December 2016 today.  Total housing was a new record at $1.62 trillion.

The headline statement from the RBA says housing grew 0.5% in the month and 6.3% annually, personal credit fell 0.1%, down 1.3% annually, and business credit role 1.1% in December, making 5.6% annually. All these are well above inflation, and wage growth.

Within housing, investment lending continued to grow up 0.8%, compared with 0.4% for owner occupied lending, making annual changes of 6.2% and 6.4% respectively.  So, once again we see growth in the investment sector moving up, which is in line with our surveys.

The monthly data shows the spike in both investment lending for housing and other business lending. This dataset, says the RBA has been adjusted for series breaks, to reflect as accurate picture as possible.

Now, things get interesting if we look at the more detailed data, which does not include series adjustments, although they are seasonally adjusted. Clearly there was further switching between loan categories.

Total lending for housing rose to $1.62 trillion, up $14 billion in the month. This is a new record and is up 0.88% from last month. On these figures, owner occupied loans grew 0.9% ($9.4 billion) and investment loans grew 0.84% ($4.68 billion). We see variations in the personal credit series too, with borrowing up 0.1% in the month, by $0.15 billion to $144 billion; business credit rose by 1.29% or $11.2 billion to $879.8 billion. But there is no way we can reconcile the two data series, so actually, we just have to take the RBA’s word on the figures – hardly open and transparent. Perhaps they prefer to paint the lower “adjusted figure” to support their view all is well in the housing lending sector, but it is mighty strange to have such varied outcomes.

We also see the proportion of housing lending for investment purposes remained at 34.8% of all lending, still too high in our view and the proportion of lending to business rose a little to 33.2% of all lending. We are still over leveraged into housing generally, and to investment housing in particular.

The RBA noted:

All growth rates for the financial aggregates are seasonally adjusted, and adjusted for the effects of breaks in the series as recorded in the notes to the tables listed below. Data for the levels of financial aggregates are not adjusted for series breaks. Historical levels and growth rates for the financial aggregates have been revised owing to the resubmission of data by some financial intermediaries, the re-estimation of seasonal factors and the incorporation of securitisation data. The RBA credit aggregates measure credit provided by financial institutions operating domestically. They do not capture cross-border or non-intermediated lending.

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $48 billion over the period of July 2015 to December 2016, of which $0.9 billion occurred in December 2016. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes”.

We will discuss the APRA monthly banking stats later.

Property investors could force RBA’s hand

From InvestorDaily.

A resurgence in residential property investor lending could see the Reserve Bank lift the cash rate earlier than expected, according to a market analyst.

The latest ABS figures show that the value of investor housing finance increased by 4.9 per cent over November.

Investor lending is now up 21 per cent year-on-year, which is the fastest growth rate since the first half of 2015, which saw the implementation of APRA’s macroprudential regulations.

“I have a feeling that this is probably a bit of a wake-up call for the RBA,” Digital Finance Analytics (DFA) principal Martin North said.

“I think they will lift rates sooner rather than later because I think it has gotten out of hand. All indicators suggest that rates will rise.”

Mr North added that there are considerable proportions of households that are exposed to even small rate rises.

“Some of these are the more affluent households. They have such large mortgages and flat income growth,” he said. “The market could be up for a bit of a transformation in 2017.”

HSBC Australia chief economist Paul Bloxham believes most of the revival in investor activity is being driven in Sydney and Melbourne, where house prices posted strong gains in 2016.

“It has a number of implications, the first of which is, this is likely to make the RBA somewhat uncomfortable. This firms up our already held view that the RBA is unlikely to cut interest rates any further,” said Mr Bloxham.

“Our central case is that the RBA is on hold through 2017 and that they start to lift interest rates in 2018.”

Household Debt Higher, Yet Again

Given the recent data, no surprise the latest RBA chart pack includes the updated household finances data to December 2016, and shows a further rise in the debt to disposable income ratio. Given that lending growth is around 6.5% over the past year and income growth much lower, this trend is likely to continue.

However, the debt has to be repaid at some point. Also worth noting that the interest paid now reflects the lower effective interest rates following the RBA cash rate cut. However, we expect effective rates to rise in coming months.

Housing Credit Jumps Again

The RBA has released their credit aggregates to end November 2016.  Total credit for housing has now risen to $1.607 trillion, seasonally adjusted, up 0.5% in the month and 6.3% in the past year. Within that, investment lending was 35% of the total, up 0.68% whilst owner occupied loans rose 0.4%. So we see investment lending continuing to regain momentum and total credit growth is still running ahead of inflation and wages – so expect the household borrowing ratio to continue to climb.

Business lending was up 0.5% in the month, or 4.9% in the year, whilst personal credit continued to fall (ahead of Christmas) down 1.2% in the year to end November.

We see that share of investment mortgages on the rise, whilst the proportion of lending to business, to the total continues to fall.

There is still noise in the data. The RBA says:

All growth rates for the financial aggregates are seasonally adjusted, and adjusted for the effects of breaks in the series as recorded in the notes to the tables listed below. Data for the levels of financial aggregates are not adjusted for series breaks. Historical levels and growth rates for the financial aggregates have been revised owing to the resubmission of data by some financial intermediaries, the re-estimation of seasonal factors and the incorporation of securitisation data. The RBA credit aggregates measure credit provided by financial institutions operating domestically. They do not capture cross-border or non-intermediated lending.

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $47 billion over the period of July 2015 to November 2016, of which $0.9 billion occurred in November 2016. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

 

Fears rise as mortgage stress strikes bush, city

From The Australian.

In Lamington, a country area of Western Australia covering mining towns such as Kalgoorlie, 2600 households are suffering “mortgage stress”.

The pain is more severe in Harris­town in Queensland, about 130km west of Brisbane, where more than 4500 households are in difficulty.

For the banks, more than 370 in these areas alone are likely to default, or fall more than 30 days ­behind on repayments, according to data from Digital Finance Analytics.

Research covering the top 20 postcodes with the greatest mortgage stress features many country areas but Melbourne’s Essendon and Preston each have around 2500 households in difficulty, as does western Sydney’s Bossley Park.

Despite record low interest rates and unemployment below 6 per cent, Standard & Poor’s yesterday said arrears ticked higher in October and the proportion of “non-conforming” borrowers behind on payments was near record levels.

DFA’s data, based on a rolling survey of 2000 households a month, suggests the trend will worsen. It also suggests first time home buyers who received help from the “bank of mum and dad” were more likely to default.

“The issue will be what happens to interest rates. If interest rates don’t go up, then some of this won’t flow through, but I think all the expectations are that interest rates will rise,” said DFA analyst Martin North, who is factoring in a 50 basis point increase in rates next year.

Banks in recent weeks have hiked mortgage rates for many customers out of sync with any RBA changes, which analysts said could put customers under greater pressure amid meagre income growth.

Mr North said: “My own models predict a higher rate of loss than they (banks) are currently predicting themselves.”

The RBA yesterday signalled borrowers were unlikely to win any imminent reprieve on their debt repayments early next year.

After cutting rates since late 2011, the RBA’s minutes of its monthly board meeting revealed greater concern about the “balance” between low rates supporting economic growth and the “potential risks to household balance sheets”.

“Members recognised that this balance would need to be kept under review,” the RBA said.

Westpac chief economist Bill Evans said the RBA was concerned the benefits to spending from lower rates were not compensating for the instability in asset markets, heightened by record high household debt.

“This observation is signalling that the hurdle to even lower rates which would be aimed at boosting demand is very high,” he said. As house prices soared more than 65 per cent in Sydney in the past four years while floundering in other areas, some hedge funds and analysts have flagged overgeared households and a sagging real economy were increasing the risks of a housing correction.

US-based asset manager AllianceBernstein yesterday warned that potential “disorder” in the housing sector in the second half of next year clouded the outlook for Australia’s investment markets. Former Commonwealth Bank chief David Murray this month said all the signs of a housing “bubble” were prevalent, such as “people’s behaviour … and ­defensiveness about any correction”.

Mr Murray told Sky Business that investors owning multiple properties that were cross-collateralised who could become forced sellers were the “risk to the system”. But the big banks have repeatedly tried to ease fears about the risks, citing relatively low unemployment and most customers being ahead on their loan repayments.

Westpac last month reported actual mortgage losses after insurance eased to $31 million, or just 2 basis points of its loan book. The number of consumer properties in possession rose to 262, from 253 in March.

ANZ and Bank of Queensland, however, recently flagged concerns about stagnant wages, underemployment and the apartment glut in eastern cities.

According to DFA’s survey, around 80 per cent of households were travelling well and only 20 per cent were under stress, struggling to make repayments or having to cut back on spending.

Mr North said low wages growth and rising education and healthcare costs suggested borrowers’ financial situations would not improve. He predicted the banking industry’s loss rates would rise to about 4 basis points of mortgage loans, varying among lenders’ portfolios.

He said banks concentrated in troubled areas, such as WA, would be harder hit.

After the pick-up in bank stock prices since last month, CLSA analysts yesterday reminded investors that all were at risk of favourable loan-loss trends of recent years reversing and that CBA was more exposed than peers to WA.

WA has the largest proportion of stressed households at 26.4 per cent, just ahead of Victoria, but off a smaller population base, according to DFA’s survey.

Mr North said: “I’m theorising there is more risk in the mortgage book than I think the RBA recognises and more risk than some of the risk models used by the banks. It’s not dramatic … I’m not saying the world is caving in. 80 per cent of the book is fine.

“But it’s enough to at least be aware of.”

RBA Minutes Reaffirms A Holding Stance

The latest minutes from the December meeting reinforces the view that further rate cuts are not likely.  They also mentioned the stronger property market, other than in WA.

In considering the stance of monetary policy, members discussed the policy decisions made throughout the easing phase since late 2011, during which the cash rate had been lowered in aggregate by 3¼ percentage points. The lower rates had helped support the economy in the transition following the mining investment boom and, more recently, had been in response to lower-than-expected inflation. Members discussed the effect of lower interest rates on asset prices and the decisions by households to borrow, particularly given the already high levels of household debt. Over recent years the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognised that this balance would need to be kept under review.

Turning to the policy decision for the December meeting, members noted that the international environment had been more positive in recent months, while observing that significant risks to the outlook for global activity persisted. The Chinese economy had remained resilient, supported by expansionary fiscal policy and rapid growth in financing. International financial markets had interpreted the outcome of the US election, specifically the implications for infrastructure spending, as being positive for growth and inflation in the United States. At the same time, there were increased expectations that the Federal Reserve would increase policy rates at the next meeting of the FOMC. Rising commodity prices had also contributed to an assessment that the outlook for global inflation was more balanced than it had been for some time, although inflation remained below most central banks’ targets.

Domestically, data that had become available over the previous month indicated that GDP growth in the September quarter was likely to be lower than the forecast at the time of the November Statement on Monetary Policy. Year-ended growth was expected to decline before picking up to be above potential later in the forecast period, supported by low interest rates and the lower exchange rate since 2013. Members noted that these factors had assisted the economy in its transition following the mining investment boom and that an appreciating exchange rate could complicate the adjustment. Falls in mining investment were expected to subtract less from GDP growth over time and resource exports were expected to continue to make a substantial contribution to growth.

There was still considerable uncertainty about the momentum in the labour market. The unemployment rate had declined over the past year, as had measures of excess capacity that accounted for the number of additional desired hours of work. Part-time employment had grown strongly over the previous year, but employment growth overall had slowed. Members noted that there was expected to be excess capacity in the labour market for some time, which was consistent with further indications of subdued labour cost pressures. This suggested that inflation would remain low for some time before returning to more normal levels.

Housing market conditions had strengthened overall over preceding months, although there was considerable variation across the country and between houses and apartments. Housing credit growth had picked up a little, particularly for investors. The supervisory measures that had strengthened lending standards in the housing market had led some lenders to take a more cautious attitude to lending in certain segments. At the same time, the increase in global bond yields had led some lenders to increase their rates on fixed-interest rate loans.

Taking into account the information that had become available over the previous month, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.