Tag: The Property Imperative

Welcome to the Property Imperative weekly to the second of March 2019 – our digest of the latest finance and property news with a distinctively Australian flavour.   

We live in a weird world where the financial markets seem disconnected from the real economy, for example locally home prices data continue to fall, and future company earnings are under pressure, yet the market has shrugged this off. But we need to understand this breakdown, and why when a crash comes it will be more severe.

So, lets start with the latest data from CoreLogic. On a national basis, the CoreLogic Home Value Index dropped 6.3% year-over-year and 6.8% from its peak in October 2017. It’s now back where it had been in September 2016. That said, CoreLogic’s report points out that, despite the decline, the index remains 18% higher than it had been five years ago, “highlighting that most home owners remain in a strong equity position.” Only recent buyers are underwater.  But that, on our estimates is more than 10% of property owners and growing.  And of course, if households are forced to sell, then they will not command top dollar, and have to pay the transaction costs too. Plus, February being a short month, is one week less in terms of falls.

Across the metro area of Sydney, prices of all types of homes combined, according to CoreLogic’s Home Value Index, fell 1.0% in February from January or 10.4% from a year ago, and nearly 13% from its peak in July 2017. Just over the past four months, the index has dropped 5.5%. Plus, the volume of closed sales recorded in Sydney in February plunged 20.6% from the already weak sales in February last year, according to CoreLogic’s report. Units, generally the lower end of the market, is where first-time buyers are thought to have a chance, and they were considered the saving grace in this market. But prices continue to drop, and the industry’s hope that first time buyers would bail out this market is now fading. On average, House prices dropped 1.1% in February and 11.5% year-over-year. Unit prices dropped 0.8% in February and 8.8% year-over-year.

In the Melbourne metro, the second largest market in Australia, prices of all types of homes fell 1% for the month and 9.1% year-over-year, according to the CoreLogic Home Value Index. The index is now down nearly 10% from the peak in November 2017. Over just the past four months, the index for Melbourne dropped 5.0%. House prices in Melbourne dropped 1.2% for the month and 11.5% year-over-year. Condo prices dropped 0.6% for the months and 3.7% year-over year. CoreLogic estimates that closed sales in Melbourne plunged 22.1% in February from the already weak sales a year ago.

Of the bottom 10 sub-regions of Australia’s capital cities seven were in the Sydney metro and three were in Melbourne.

The metros of Sydney and Melbourne, due to their enormous size and high prices, dominate the national home values, but weakness is now spreading to other capital cities, with only Hobart and Canberra still showing year-over-year gains.

Westpac released their latest Housing Pulse. One chart tells the story – national housing turnover fell to the lowest level since 1987 in the final three months of 2018, while total listings have also increased significantly.

And CoreLogic also showed that vendor discounting is rising.  Across the combined capital cities – the median vendor discount is recorded at -6.3% which is the most significant discount since January 2009. In January 2018, discount levels were much less significant at -4.7% which highlights just how quickly housing market conditions have deteriorated in 12 months with discounting levels mirroring those seen during the financial crisis.

Across the regional markets – the deterioration in selling conditions has not been as substantial as it has been across the capital cities. Discounting levels are currently recorded at -5.2% compared to -4.5% a year ago. The worsening in discounting reflects the fact that dwelling values have begun falling in regional markets over recent months.

In Sydney properties in Sydney are seeing more substantial discounts now than they were during the financial crisis. The median vendor discount is currently -7.5% which has weakened from -4.8% a year ago. The last time it was larger than it is currently was all the way back in February 2006. The rate of deterioration of selling conditions in Sydney has been rapid.

Melbourne – vendor discounting has become more significant over the past year as dwelling values have fallen rapidly. A year ago, vendor discounting was -3.6%, having fallen to -7.0% currently which is its weakest level on record. Like Sydney, this highlights just how weak housing market conditions are and how few buyers there are.

And CoreLogic also released its final auction results, which reported a 4.7% decline in the final national auction clearance rate to 49.4% – below last week’s 51.2%. Sydney’s auction clearance rate fell by 8.4% to 50.2% whereas Melbourne’s fell 2.5% to 50.6%. Final auction clearances were still 14.9% (Sydney) and 20.0% (Melbourne) below the same weekend last year when dwelling values were also falling. Moreover, auction volumes were also down 36% and 30% respectively in both Sydney and Melbourne. 

I discussed the reliability of the auction clearance rates with property insider Edwin Almeida. See our post “Edwin Almeida – What Are The Numbers Really Telling Us?Do not believe the hype, there is nothing here to show the market is bouncing back.  Plus the indices are averages, and there are wide variations on the ground, with falls of up to 40% already evidenced in some areas.

And by the way, I get a lot of requests for more local, and regional data so I hope to start a series on this, when I can – but remember from a macroeconomic perspective the concentration of property in Melbourne and Sydney means they will drive the broader economic outcomes.

We expect prices to continue to fall, and as Wolf Street highlighted, there is a bitter irony to all this. For example, In February 2017, just months before the market in Sydney peaked, Anthony Roberts, New South Wales Minister for Planning and Housing, was promoting the launch of a 690-unit apartment development at Olympic Park, heaping praise on the developer for having reserved 60 units for first-time buyers. Roberts was hyping new incentives for first-time buyers, including a reduction of the down-payment to 5%, to lure them into the Sydney housing market. He said “This is about fairness, and this is about enabling people to get into the Sydney housing market. Once you are in the Sydney housing market, you’re pretty well set then for the rest of your life.”

This is now, at least a open question thanks to home prices in free fall, and of course more questions about the quality of construction, as typified by the Opal Building, and now a tranche of other questionable towers across the country.

Now, let me remind you again of what the RBA said in their recent minutes, as they maintained the cash rate at a low of 1.5% in their February meeting.  From a longer-run perspective, members assessed that, following such large increases in housing prices, the effect of the recent price falls on overall economic activity was expected to be relatively small. From a financial stability perspective, tighter lending standards, an improving labor market and low interest rates were all likely to support households’ capacity to service their debt. Few households were in negative equity positions despite the falls in housing prices, implying that banks’ losses would be limited even if household financial stress were to become more widespread.  I do not regard 450,000 households as Few!

Compare that with the recent IMF stress tests, when they said “the financial sector faces continued vulnerabilities from high household debt, still-stretched real estate valuations, and banks’ ongoing dependence on funding from global markets.” The assessment “recommended further steps to bolster financial supervision as well as to reinforce financial crisis management. We think that is an absolute requirement.

The latest data from the RBA and APRA showed that the credit impulse slowed again in January. The RBA lending aggregates shows that annual owner home lending now stands at 6.2%, investment lending at 1% and overall credit growth is 4.4%. There was a considerable drop off in personal credit, and a rise in business lending. But despite all the funnies in the numbers, lending from the non-bank credit sector is booming. Owner occupied non-bank lending is growing at an annualised rate of 17.2% and lending for investment housing is 4%. Both well above the bank sector. This is unsurprising, given the different funding arrangements, and restrictions between the banks and non-banks. Of course, both have responsible lending obligations, but evidence suggests non-banks are more willing to lend, at a price. APRA sort of has responsibility for the non-bank sector, but do not seem to be doing much to stem the tide.

Non-banks will fund their mortgage lending either from private investors, companies or hedge funds, rather than from deposits. They may also securitise their loan books (sell them off via the bond market). So, they are not under the controls which are applied to banks in terms of the capital they need to hold. This gives them greater flexibility.

But rightly tighter lending (the banks were too loose before) and falling home prices are going to hit the economy.  For example, UBS said this week that February’s auction bounce has given “false hope” to those seeking a housing recovery, and forecasted that price falls will double to 14%, with negative spill over effects for the broader economy.

Much has been made of the ‘bounce’ in auctions in Feb-19. However, it’s clearly a false sign of hope. The rise in auction clearance rates this year is 1) seasonal, & 2) based on a spike in under-reporting of failed auctions, with the ‘preliminary’ result massively revised down 5%-10%pts to the ‘final’. Indeed, while the national clearance rate rose to 48.6% in Feb-19, this remains very weak around prior cycle lows (after the late-2018 trend was a record low in the low 40’s). Furthermore, demand is weak as the number of auctions held in Feb dropped by ~30% y/y, & sales at auction collapsed by 50% y/y…

The UBS credit tightening thesis is still playing out, with accelerating weakness in home prices, sales, approvals, loans, & credit growth. The peak-to-trough decline in home prices is still ‘only’ 7%. Looking ahead, while the Royal Commission didn’t change any laws, with APRA & ASIC reinforcing ‘sound lending practices’, we expect price falls to double to 14%, making a negative household wealth effect on consumption likely. We remain non-consensus expecting GDP to clearly slow to a below trend 2.3% y/y in 2019, seeing unemployment rise, & the RBA cut in Nov-19, with risk of earlier easing.

And UBS has downgraded its Q4 GDP outlook following the “disastrous” 3.1% decline in construction activity. UBS now expect a GDP print of just 0.3% with risks tilted to the downside.

We suspect a per capita recession is a certainty, given per capita growth was negative in Q3. However, the risk of an aggregate recession is clearly on the rise too.

And as the ABC reported,    There’s a clear warning we should be alert, if not alarmed, about the state of the economy, and the risk that many jobs could be lost in coming month.  The roll call of big names with falling profits is a long one. Coles, Qantas, AMP, Caltex, Commonwealth Bank, Transurban, Telstra, Domain, Scentre Group, Flight Centre, REA and Fortescue are just a few.     “It’s pretty clear the Australian economy is moderating,” Perpetual’s Head of Investment Strategy Matt Sherwood said.  “The key question is, how much further does it have to go?”  According to AMP Capital, the number of companies reporting a fall in earnings has jumped by more than three-quarters to 41 per cent. “Those parts of the share market most exposed to the Australian economy, particularly housing and retailing, that’s where the weakness is,’ AMP Capital chief economist Shane Oliver said. “With around 1.1 million Australians employed in the construction industry, and others whose employment relates to residential construction, we can see that potentially there’s going to be a drop-off in hiring and potentially an increase in unemployment to come,” Ms Creagh said.     And that doesn’t auger well for the unemployment rate.  More than a quarter of the people employed in the construction industry received their jobs after the start of the building boom in 2012. If employment in the sector returned to pre-boom levels, around 240,000 jobs could be lost, sending the unemployment rate soaring to more than 7 per cent.

If that were to happen, then mortgage stress and defaults would rise, and home prices would drop further. We highlighted last week that delinquencies are rising, based on data from the banks and the S&P Spin index.

So Westpac has downgraded its outlook with housing-related weakness now expected to exert a more significant spill over drag on the wider economy. In turn, they now expect the RBA to lower the Cash Rate with two 25bp cuts in Aug and Nov.

So to the markets.

Across to the US, The S&P 500 and Dow snapped three-day losing streaks on Friday as optimism about the prospects for a U.S.-China trade agreement overshadowed downbeat U.S. and Chinese manufacturing data.

Despite the rally, the Dow finished down slightly — 0.02% — for the week, after nine-straight weeks of gains. The S&P 500 was up 0.4%, its fifth gain in a row and above 2,800 for the first time since November 2018. The Nasdaq added 0.9% on the week and has seen gains for nine-straight weeks.

As Wall Street got a new month underway, traders were reminded of headwinds that could hinder the path to swashbuckling gains. One of the biggest: The U.S. economy continued to show signs of a slowdown. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.5% in December. ISM manufacturing data for February missed expectations of 55.5.

The fall in personal spending was the largest since 2009,  and which serves to give more credence to the abysmal retail sales figure released a couple weeks ago. The downbeat data arrived after China’s economy showed a fall in factory activity for the third month in a row. However, the pace of the slowdown had moderated, raising hopes a bottom was forming. Sentiment on Wall Street was boosted by signs that U.S. and Chinese negotiators are closer to reaching a trade agreement.

“We made so much progress last week when the Chinese were here,” National Economic Council Director Larry Kudlow told Fox Business Friday. “The agreements made last week represent tremendous progress on IP theft, on forced technology transfer, on ownership, on cyber interference and, maybe most importantly, on enforcement.”

Beyond trade, the markets were powered by a rise in energy stocks despite a fall in oil prices on signs of weakness in China’s economy.

Bitcoin fell 2.89% this week but is up about 11 percent in February.

So to that question I posed earlier. How come the markets are so buoyant in the face of the weakening economic data both here and overseas?

In the eurozone the weakness is evident and more pronounced than even the most pessimistic expected. Both industrial production, consumer confidence and indicators such as the trade surplus have deteriorated sharply.  Despite the bad data, the Italian recession and the fact that the European Commission has had to revise down by more than 30% its own estimates from a month ago, Europe will likely grow in 2019.

China continues to slow down under the weight of its indebted and inefficient model, but it also grows. The United States showed poor retail sales data, but both employment and gross capital formation show that the economy continues to expand. The emerging countries have worsened their prospects, but have navigated the monetary imbalances that deactivated the mirage of synchronized growth in 2018.

Yet markets are strongly up from that December dip. Why?  The answer is Central Bank intervention.

U.S., China, the euro zone and Japan shows their aggregate money supply peaked at $73.1 trillion in April, before dipping to $69.8 trillion in mid-November and then rebounding to as much as $72.6 trillion at the end of January.

Since the end of December stock markets have rebounded strongly because the data, although poor, is not as bad as feared, and mainly because the Federal Reserve changed its tone on the number of rate hikes, the ECB announced that it would be much more accommodative and the Central Bank of China introduced the largest injection of liquidity in five years.

 It’s this growth of the global supply of money by central banks looking to first combat the financial crisis and then keep their economies from falling into recession has been a key reason for the stellar performance in riskier assets. That growth is evident in the more than doubling of the money-supply index from $35.3 trillion in late 2008, just a few months before global stocks embarked on a rally that would see the MSCI more than double itself by early 2018 before last year’s rough patch.

In other words, the global markets are reacting the cash sloshing around in the financial system looking for a home, but its all artificial. Expect more ahead, as the central banks try to manage the massive debt burden which underpins the expansion, and lower rates later. But as a result, the crash when it comes will be deeper and more significant.

And the truth is central bankers are stacking the deck to support the financial system, despite the spill over effects on many individuals and households. Equality has been banished in favour of expediency. As you know, I do not expect this to end well… but the rate of money supply growth may mean its later and more extreme.  And Australia appears to be leading the way down now. We will see.

We have released a shorter than normal edition today looking at the market in the US overnight, and the latest from Australian Property and Finance.

The BBSW rise is a indicator of significant pressure on the local banks ahead!

Welcome to the Property Imperative Weekly to the first of December 2018, our digest of the latest finance and property news with a distinctively Australian flavour.

Read the transcript or watch the video show.

This week, the Royal Commission completed its hearings, the credit impulse is lower, home prices are falling and The Fed may blink.   Yet still the property spruikers are trying to talk the market higher in the new year, and applying the art of misdirection, our political leaders would prefer we looked at distracting shiny things over there.  But here we simply reprise the latest data.  We are, it seems, in a pickle.

And by the way if you value the content we produce please do consider supporting our efforts. You can make a one off donation via PayPal, that’s a new facility or consider joining our Patreon programme. We really appreciate those who are contributing to help us continue to make great content.

The last of more than 60 days of hearings by the Royal Commission into Financial Services Misconduct finished on Friday when the hearings adjourned at 1.15pm. And now unlike other rounds, the Commission won’t be accepting further submissions or identifying any particular findings as being open on the evidence. Commissioner Kenneth Hayne and counsel assisting Rowena Orr made their closing remarks

The 68 days of hearings saw 134 witnesses take the stand in Melbourne and Sydney. More than 400 witness statements and over 6500 exhibits were tendered by counsel assisting. Witnesses included the top line-ups at banks, mortgage brokers, advice groups, superannuation trustees, insurers, regulators, external dispute resolution bodies, consumer groups and industry bodies.

But Orr singled out consumers who came forward to give evidence about their experiences. “I would particularly like to thank this last group of witnesses, the consumers who agreed to come and give evidence in the Commission’s public hearings.  Many of them travelled long distances and gave evidence about their private financial affairs in a very public forum.  I know that they did not always find that easy, but their willingness to give evidence about their experiences has greatly assisted the work of the Commission, and I am grateful to them,” Orr said.

Making his closing remarks, Commissioner Hayne recognised the intensity of work that has been required of those acting for the entities whose conduct has been the subject of examination.

He also made the point that the Commission has not sought to influence how the media has reported. We’ve not backgrounded, we’ve not provided the media or anyone with any information about what witnesses are to be called or subjects covered except by posting what we have on the website. We’ve not commented on what has occurred in the course of evidence,” Hayne said.

“It has been for the media and for the media alone to decide what will be the subjects of their reports, and what, if any, comments they may choose to make about what the Commission has done.  And that, again, is as it should be. But it is also right that I recognise the role that the media has played in this being a public inquiry by reporting on the work of the Commission.”

The barristers will be working closely with the Commissioner over the next 62 days, as he prepares the final report for a February 1 release. So what might we expect to see?  A key focus will be the cultural norms which encouraged greed across the financial sector, at the expense of customers, which resulted in poor sales outcomes, fees for no service and misaligned incentives. We can expect changes in the role and responsibilities of for example mortgage brokers. Ms Orr asked several pointed questions (“Do you agree that changes need to be made to address conflicts?”, “Why could they not be replaced with a fixed fee?”), which reiterate the commission’s line of questioning regarding trail and upfront commissions. And there was intense focus on cultural change across corporations. But as The Chair of NAB highlighted this is questioning the very basis of capitalism – that companies are responsible to their shareholders first and foremost; the emphasis on customer outcomes will change the game.

Regulators were also shown to be too weak, too close to their targets, to the point they were ineffective, and consumers were the victims.   ASIC’s and APRA’s poor testimony this week confirmed the need for substantive regulatory change.  Myopic, Captured and Ineffective are words that come to mind.

There is the possibility of further legal action as many laws were broken, such as responsible lending, as well as class actions later. And remember this inquiry was forced on the Government despite the fact that those in the sector were fully aware of the issues under the waterline.

But I want to make two points here. First, the case studies were largely self-reported by the banks, so they already knew about their own poor behaviour, yet did nothing to deal with the root cause issues, and in many cases simply chose to ignore, or slow down the progress of resolution. Billions of dollars have been written off financial sector shares, and more than one billion of remediation will be required.  But understand that more recent issues such as poor lending practice – where loans have yet to go bad – were not covered – as the debt bomb explodes, this will add yet more pressure on the sector.

Second, we can expect to see big changes, if the Royal Commission recommendations come out as expected, yet of course the Government can resist their recommendations, slow implementation or chose to ignore the results. The industry is lobbying hard, and hoping for minimal changes. Yet it’s clear we need a radical restructure of the finance sector, changes to culture and regulation. My concern is we will be asked to look the other way on a promise the banks will reform themselves – but we need so much more. There is a once in a generation opportunity to get finance to work for the benefit of the community. The risk is there; the whole thing will be hooked to the long grass.  We will need to hold the powers that be to account.

So to the latest data.

The RBA and APRA both released their statistics yesterday to end of October. The data clearly shows the mortgage flows are easing, which is a key indicator of weaker home prices ahead. Remember it is the RATE of credit growth, or the credit impulse we need to watch. Essentially, for home prices to rise, the rate of credit growth needs to accelerate, and the reverse is also true as can be clearly seen.

The RBA credit aggregates shows that overall credit rose by 0.4% last month, or 4.6% over the past year. Housing credit rose by 0.3% in October, or 5.1% over the past year. Business credit rose 4.7% over the past year and 0.6% in October. Personal credit fell 1.6% over the year, and broad money rose by 1.9%, compared with 6.8% last year – the credit impulse is easing!

Total housing lending rose by 0.28% to $1.78 trillion. Within that owner occupied lending rose 0.42% or $5 billion to $1.2 trillion while investment lending rose by just 0.1% to $593.6 billion.  Investment loans fell to 33% of all loans, down from 38.6% in 2015. Business lending was 32.7% of all lending, lower than 2015.

The annualised figures show the fall in housing lending across the board.

Turning to the APRA banking stats, we can look at individual lender portfolios.  We see that Westpac and ANZ both reduced their investor loan portfolios between September and October, while NAB and CBA grew theirs.

Macquarie Bank is still growing its investor pools (well above the now obsolete APRA 10% speed limit). ADI portfolios hardly moved overall with CBA still the largest owner occupied lending, and Westpac the largest investment lender. We can still plot the annualised movements of investor loans, and we see a small number of lenders well above the 10% speed limit (which was removed a few months ago). Significantly many lenders are well below that rate. At an aggregate level, lending by ADIs was up 0.3% in the month, with investor loans flat, and owner occupied loans at 0.46%.

The proportion of investor loans fell again in stock terms to 33.6%. Total ADI lending rose to $1.66 trillion, up 0.3% of $5 billion. Owner occupied loans rose 0.46% to $1.1 trillion and investor loans rose 0.004% to $557.4 billion. In fact, some smaller banks, and non-banks are growing their portfolio faster than the majors, thus the rotation across the sectors continues. We expect credit to continue to grow more slowly ahead, and this will lead home prices lower.

CoreLogic reported that in November home price values decreased another 0.98% across the 5 capital cities.  Sydney fell 1.43%, Melbourne 0.97% and Perth 0.73%. Brisbane rose a little up 0.26% and Adelaide rose 0.06%, but in these smaller markets the data will be less accurate.

The year to date movements continues the story, with Sydney down 7.19%, Melbourne 5.63% and Perth down 3.78%. Brisbane has risen 0.59% and Adelaide 1.12%. The five city averages were down 5.15%.  And just remember Perth is down 14.8% from the previous peak, and Sydney is down 9.5%, on average. There are significant local variations, and regional markets are falling less, but all the signs are more falls ahead.

So we cannot reconcile this with Domain’s claim this week that after a free fall in prices over the past four years, house values in Perth are expected to grow faster than any other capital city in 2019. Perth house prices are expected to hit rock bottom by the beginning of 2019 and then grow 5 per cent next year, slightly more than Brisbane and Canberra, according to Domain’s economist Trent Wiltshire. Prices in Perth will have fallen 13 per cent from their peak – of $616,000 in 2014 – to trough, he said.  “This outlook is underpinned by better economic conditions: new mines are being built, commodity prices are higher, population growth is increasing and employment prospects have improved. The latest consumer data from the West just not chime with Domain’s optimistic view!

CoreLogics auction clearance rates continue to show weakness (there are more sales done privately now by the way which are under reported).  They say that the combined capital city final auction clearance rate came in at 41.9 per cent last week, slightly lower than the previous week’s 42.0 per cent; the lowest results since June 2012.  Last week marks the 9th consecutive week where less than 50 per cent of the homes taken to auction have sold.  Last year, 61.1 per cent of homes sold at auction when volumes were significantly higher (3,438).

Across Melbourne, auction volumes fell with 1,132 auctions held, returning a final auction clearance rate of 41.4 per cent. Over the week prior, 1,401 Melbourne homes were taken to auction returning a final clearance rate of 41.3 per cent. One year ago, 1,215 auctions took place, returning a much higher clearance rate of 65.5 per cent.

In Sydney, the final auction clearance rate rose to 44.8 per cent last week, from 42.8 per cent the previous week. There were 1,035 auctions held last week, increasing from the 875 the previous week, however lower than the 1,215 Sydney auctions held last year when a higher 56.8 per cent sold.

While volumes increased across Adelaide, Brisbane and Canberra last week, clearance rates fell across all of the smaller auction markets.

Auction activity across the combined capital cities is expected to remain relatively steady week-on-week, with a total of 2,610 homes scheduled for auction this week, down only slightly on last week when 2,701 auctions took place.

Days on market is quite a good test of the property market. CoreLogic released data on this, and shows that in Sydney, the median days on market was 31 days a year ago but has increased to 50 days currently which is much higher than the recent low of 24 days in April 2017. Across regional NSW, days on market currently sits at 64 days compared to 52 days a year ago and a recent low of 48 days in May 2017.

In Melbourne, the median time on market is currently recorded at 38 days and in regional Vic it is recorded at 41 days. In Melbourne, the days on market is trending higher, it is much higher than the 23 days a year ago and the highest it has been since March 2016.

Add in higher vendor discounting to the mix as we discussed last week, and we conclude prices will drop further ahead.

The ABS released data on median incomes this week, in its annual Characteristics of Employment report. In 2018, the median weekly earnings of all Australians was $1,066. This means that half of all Australians earned less than $1066 per week.

In fact, they reported that median weekly earnings grew by a strong 5.4% in the year to August 2018, with full-time earnings growing by 4.7%.  As at August 2018, that median weekly earnings of $1,066 represents $55,432 per year, whereas median full-time weekly earnings were $1,320 ($68,640 per year).  But in inflation adjusted terms, the median Australian worker’s weekly earnings are still 0.4% below the level that existed in August 2012, despite this year’s bounce. No wonder our household surveys continue to highlight issues, especially as mortgages today are so much bigger than in 2012.

There are also significant regional variations. In 2018, the Australian Capital Territory was the region with the highest median earnings for employees at $1,300 per week, followed by the Northern Territory at $1,204. South Australia and Tasmania had the lowest median earnings for employees at $1,000 and $961 respectively. Of the state capital cities, Perth held the highest median weekly earnings for employees at $1,167 per week, ahead of Sydney and Brisbane with $1,100. Regional South Australia had the lowest overall median earnings for employees at $922.

The top three industries with the highest median weekly earnings for employees were Mining ($1,950), Electricity, Gas, Water and Waste Services ($1,500), and Financial and Insurance Services ($1,434). The industries with the lowest median weekly earnings for employees were Retail Trade ($700) Arts and Recreation Services ($699), and Accommodation and Food Services ($500).

And the HIA reported that the tight lending environment has put a squeeze on the housing market prices particularly in Sydney and Melbourne are responding accordingly. The combined impact of falling home prices and restricted access to credit are now being felt in the home building market. HIA New Home Sales fell by a further 0.8 per cent during October 2018 and sales are 13.9 per cent lower than the same time a year ago. They say that the decline in new home sales was driven by New South Wales (down by 4.9 per cent) while South Australia (down by 5.6 per cent) and Western Australia (down by 10.7 per cent) also detracted from the total. These falls were partially balanced by offsetting improvements in monthly sales in Victoria (up by 4.9 per cent) and Queensland (up by 2.5 per cent). Private sector approvals fell 2.7 per cent during September with a total of 9,266 for the month.

Finally, on the data front, Damien Boey of Credit Suisse suggests that the recent retail sales, construction and trade data all point to a weaker GDP result ahead. He says that the initial estimates of the pulse of growth are surprisingly weak, especially when compared with RBA forecasts. Granted there is more data to come, but the signs are not good. This aligns with our view that a clear sighted view of the economy reveals considerable issues, centred around debt. Yet the official story fixates on low unemployment and the planned budget surplus. John Adams and I discussed this in our provocatively titled “Australia Has “Stage 4 Economic Cancer” and why it is the case that the Government is engaged in significant misdirection.

So to the markets.  The Banks had a down day on Friday, perhaps reflecting the uncertainty ahead after the Royal Commission hearings. CBA was down 1.66% to 71.23, NAB was down 1.08% to 24.64, ANZ was down 1.29% to 28.80 and Westpac was down 1.7% to 25.97. Macquarie was down 2.05% to 114.42.  Regionals also followed lower, with Bank of Queensland down 1.88% to 9.93, Suncorp down 1.7% to 13.32, and Bendigo was down 1.29% to 10.68. AMP who disclosed potentially more customer remediation ahead, ended down 0.41% to 2.43. They are probably the company most hit by the Royal Commission.

Lenders Mortgage Insurer Genworth moved higher against the trend on Friday, ending up 3.69% to 2.25.

The ASX 100 was down 1.67% to 4,660, in lows not seen for more than a year and the ASX financials index was down 1.58% to 5,742, again at the low end of the range over the past year.  The Aussie dollar slide 0.15% down to 73.08 as the USD weakened a little, a little better than earlier in November. The local fear index was higher on Friday up 12.6% to 17.26.  To round out the Australian market data, the Aussie Bitcoin ended down 0.34% to 5,553 and the Aussie Gold cross rate was down 0.10% to 1,671.

Overall on Wall Street stocks rose on Friday as investors hoped for progress on trade in a critical U.S.-China meeting over the weekend, with the S&P 500 up 0.81% to 2,759. Of the 11 major sectors in the S&P 500, all but energy ended the session in positive territory. The S&P 100 rose 0.95% to 1,225 and the volatility index, the VIX eased back 3.83% to 18.07.

The worst performers of the session were Goldman Sachs Group which fell 2.13% or 4.16 points to trade at 190.69 at the close.  BofA Merrill Lynch downgraded the stock to Neutral from Buy with a $225 price target, slashed from $280, citing the uncertainty around the 1 Malaysia Development Board investigation. The Federal Reserve is ramping up its investigation into how executives dodged the bank’s internal controls while helping Malaysian authorities raise billions of dollars that later went missing, according to people briefed on the matter. The probe examines the actions of Goldman Sachs as well as individuals and has been gaining momentum in recent weeks.

While GS’s decline means the shares already are discounting “most of the potential negative scenarios” related to the issue, limited information means that more bad news could emerge, with lingering uncertainty ahead at the least.

GS “could face fines, penalties and other sanctions, but as of now, we don’t expect it to have a long-term impact on the business,”. Some are saying the bank could face as much as a $2B penalty at the high end, “so it appears to us that the stock has more than discounted the outcome.” Morgan Stanley had downgraded GS last week, also citing uncertainty over the 1MDB scandal.

But overall, The S&P Financials Index was higher up 0.6% to 446.83.

The Nasdaq posted their biggest weekly percentage gains in nearly seven years, and up 0.79% to 7,330.  This despite Apple sliding 0.54% on Friday to 178.58.  Intel had a strong run, up 3.38% to 49.31 and Alphabet (Google) was also up 1.38% to 1,109.65. Amazon was up 0.99% to 1,690.17.

The Dow saw its largest weekly advance in two years, up 0.79% on Friday to 25,538. Investors were encouraged this week by comments by Federal Reserve Chair Jerome Powell and subsequent minutes from the central bank’s latest meeting that suggested that the Fed will take a data-driven rather than ideological approach to future rate-hikes. In other words, lower rate rises ahead than expected.

The US 3-month benchmark rate fell 0.46% to 2.355 and the US 10-Year bond was 1.43% to 2.992.  However, the important 1 Year LIBOR rate is still at 3.12% signalling that the price of interbank funds is still climbing. This is important especially in the less regulated Eurobond market, something which we will revisit in a future post.

With regard to trade, a Chinese official said “consensus is steadily increasing” in trade negotiations between the U.S. and China as the G20 meeting got underway in Buenos Aires, sparking hopes there would be a positive resolution in the ongoing tariff dispute between the world’s two largest economies. U.S. President Donald Trump is set to meet with his Chinese counterpart Xi Jinping on Saturday and the outcome could swing stocks for the rest of the year.

Oil was knocking around 50 during the week and ended down 1.59% to 50.63. Oil achieved a massive 22% drop for November. That was the price West Texas Intermediate crude paid after the Russians stalled again on a production cut, sending the oil market to its biggest monthly loss in a decade. U.S. crude futures finished with their worst month since 2008 after Russian Energy Minister Alexander Novak told domestic news service TASS that producers and consumers were comfortable with current prices. It was the clearest sign that Moscow saw little or no need to contribute to production cuts when it joins Saudi Arabia and other major oil producers at the OPEC+ meeting in Vienna on Dec. 6. But falling oil prices boosted airlines stocks. The Dow Jones Airlines index rose 2.8 percent.

Gold was down 0.25% on Friday to 1,227 but the gold market is betting that President Donald Trump will at least suggest he has one down the road with China. And that was enough for the yellow metal to end a second-straight month in the green and stay above its key $1,200 perch. But there’s no clear indication of what a U.S.-China trade agreement could do for gold. Some analysts think it’ll be good for physical demand of bullion in China as consumers there, spurred by a feel-good sentiment, could splurge on jewellery. Others are betting gold will fall as a contrarian trade to equities, which are almost certain to ramp up on any sign of an end to the bitter acrimony between Washington and Beijing that has already led to hundreds of billions of dollars of duties imposed on bilateral trade.

The US Dollar Index was up 0.46% to 97.22. The Euro Us Dollar was down 0.68% to 1.132 and the British Pound US Dollar was down 0.28% to 1.275, as the Brexit negotiations moved to their final Parliamentary voting stage in the UK in a few days. The results are by no means clear, and the Bank of England said a disorderly Brexit would hit economics performance more than an orderly one but any time of exit would dampen future UK growth.  Deutsche Bank was down again, falling 3.07% to 8.10.

And finally Bitcoin continues in the doldrums at 4,011 on Friday, down 5.98%, after the recent fork, The “big block” project that itself forked away from the Bitcoin blockchain in August 2017 fragmented into “Bitcoin Cash ABC” and “Bitcoin Cash SV”. However, by the beginning of this week — some 10 days after the split — CoinGeek published a press release announcing support for a permanent split. As the publication is owned by online gambling tycoon and major Bitcoin SV miner Calvin Ayre, this declaration was considered an “official” end to the hash war. Technical director of the Bitcoin SV project Steve Shadders even committed to implementing replay protection (ensuring that users don’t accidentally spend coins on both chains), while Ayre acknowledged he would let go of the name “Bitcoin Cash” and instead adopt “Bitcoin SV.” Hash power on both coins has dropped significantly since (with Bitcoin Cash ABC still ahead). The two coins will now compete with one another and the market, as all cryptocurrencies do. But again this highlights the inherent risks in the crypto sector.

So in summary, the stresses and strains in the market here and abroad are working out, but people are preferring to look away from the debt burden, instead looking towards other shiny things in the hope that we will not notice the truly breathtaking risks in the system.

Misdirection is a wonderful thing, but eventually truth will out.

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Welcome to the Property Imperative weekly to 20^th October 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.

As you approach a Black hole, gravity increases exponentially, to the point where it is impossible to escape. Recently we have started to see signs that as credit is rationed, prices and sentiment are falling, and I suspect we have now reached the event horizon, where the only way is down. And this will suck in households, banks, the construction sector and the broader economy. It is becoming increasingly hard to chart an escape route now, and very soon we will be dragged in.  Let’s look at the latest data.

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Last week CoreLogic said they were tracking 1,725 auctions across the combined capital cities, which is slightly lower than the previous week. But the final results are shocking.  They reported a large 3.7% decline in the national auction clearance rate to 47.0%, with Sydney’s auction clearance rate diving 6.9% to just 45.1%.  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. One year ago, 67.1 per cent of capital city homes cleared at auction. 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). 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. There is also an increasingly large number of unreported auctions, meaning the real success rate is even lower. I had the chance to watch half a dozen auction south of Sydney, and none, not one, was sold.  A real “on the ground measure” of how much trouble the housing market is in.

As we discussed on our live stream event on Tuesday – You Can Watch the Replay On YouTube -there are a bunch of reasons why the property market’s fall is different this time around. It all centres on availability of credit. It is worth repeating the underlying drivers.

Tighter Lending Standards with a focus on income AND expenses, not HEM. Mortgage Borrowing Power dropped up to 40% Foreign Buyers dropped 35%, and significant hike in extra fees and taxes. SMSF borrowing restricted. Interest Only Borrowing Restricted ($120 billion for reset each year). Investors less likely to transact, as capital growth reverses. Tighter returns on rentals (half under water in cash flow terms). Higher interbank funding costs. Rising mortgage costs and rates. Plus, risk from Class Actions and the Royal Commission. I could go on…. None of this suggests a mild fall.

This is why we have updated our scenarios modelling showing potential greater falls in value ahead and we introduced a more severe Scenario 5, which I discussed with Economist John Adams in Our Video “Scenario 5 – Hell On Earth”.  Arguably there is also a Scenario 6, which involves hyperinflation, but I have not found a way to model this in our Core Market Model, as yet.  Prices are we think on their way down!

CoreLogics’s weekly price indices also reinforce the falls.  Since the start of the year Melbourne is sliding more than Sydney, further evidence that the Victorian property market is in trouble. But reflect on this, the Perth market as dropped on average 13.6% since its peak. I discussed the dynamics of the Western markets with Tony Locantro from Alto Capital, and you can watch this video “Despatches From The Investment Managers Front Line”.

And another data point, is the falling number of homes selling.   Research by CoreLogic analyst Jade Harling shows that the number of properties selling within a given year account for a very small portion of the overall market with the trend even lower over recent years; over the 12 months to July 2018, 4.6 per cent of national dwellings transacted, down from 5.3 per cent a year ago. The more pronounced decline in turnover rates over the year to July is hardly a surprise given current market conditions, with dwelling values softening each month now for the past 12 months; coupled with the lowest levels of new stock being added to the market seen since 2012 over the past 6 months, as confidence wanes and homes take longer to sell. However, the long-term trend can be attributable to a variety of factors and will differ between each of the regions.

Based on the findings, it’s likely that housing affordability has delivered a large impact on the broader downward trend in turnover rates and where the likes of Sydney and Melbourne would have weighed heavily given the high growth seen across these larger markets relative to only mild growth in household incomes. Fifteen years ago the dwelling price to income ratio as a national figure showed that dwelling prices were 5.1 times as high as the gross household income, while recent data shows this has increased to 6.8. In Sydney and Melbourne, where affordability has been a challenge for prospective buyers for some time, the price to income ratio sits at 9.1 and 8.1 respectively. In turn, what can be seen as housing has become less affordable across some capital city markets, regional areas have benefitted from the flow-on effect for being the more affordable option.

In addition, the high transactional cost to both purchase and sell property has likely added a further barrier to housing market participation. From the sell side there are marketing costs, agent fees and commission, legal costs and potentially some costs associated with getting the property ready to present to market. From the buy side, stamp duty costs as percentage of the purchase price are a major barrier to entry, especially in the more expensive markets as well as the costs associated with building and pest inspections and conveyancing.   More recently, they conclude, credit rationing has provided an additional dampening effect on housing activity.

The headline employment figure of 5% released by the ABS this week may seem to be good news, although the more dependable trend remained at 5.2%, but this was mainly thanks to more people not seeking employment.  Damien Boey at Credit Suisse said that results were mixed, and they do not move the needle for the RBA.

He said that the September labour market report was mixed. Headline employment came in below expectations, rising by only 5.6K in September. However, the composition of jobs growth was actually quite favourable, with full-time employment rising strongly by 20.3K over the month. Part-time employment fell by 14.7K. Aggregate hours worked rose by 0.4% in September. But partly because of unfavourable comparables, year-ended growth slowed to 1.9% from 2.1%. By state, hours worked fell by 0.7% in NSW, but rose solidly in all other regions. The biggest surprise from the release was the sharp fall in the unemployment rate to 5% from 5.3%. The unemployment rate is now at its lowest level since June 2011. The decline in the unemployment rate was not so much due to job creation, but rather, a sharp fall in the labour force participation rate to 65.4% from 65.7%.

He went on to say that RBA Deputy Governor Debelle argued that labour market conditions are strong – but notwithstanding the Bank’s expectation for continued solid job creation, it is quite likely that the unemployment rate can fall further before wage inflation comes back in earnest. The September labour market data fits into this story. Job creation has continued at a solid pace, but it is hard to read too much into the apparent erosion of labour market slack, because: first unemployment rates have reached very low levels in developed economies, but yet there is not compelling evidence that wage inflation is breaking out. The international experience suggests that it may take a while for inflation to pick up, even after full employment is reached. And second there are technical factors at work supressing the official unemployment rate.

For what it is worth, Boey says their proprietary measure of slack in the economy, based on NAB survey capacity utilization, and male full-time equivalent employment as a share of the “active” labour force suggests that not much has changed over the past few months. The output gap is more or less at the same level as it was in 2Q. Moreover, they note that the state of the labour market may not be the dominant consideration in RBA policy setting at the moment. In Q&A time, Debelle suggested that Bank officials are paying very close attention to what is happening in the housing market.

More are calling lower home prices ahead. The latest was AMP’s Chief Economist Shame Oliver has revised up the expected falls. Only in August had he said he expected price falls in Sydney and Melbourne to max out at 15% from peak to trough. He has upped this to 20% thanks to tighter credit conditions, supply rises and a negative feedback loop from falling prices”. Plus, auction clearances in recent weeks have been running around levels roughly consistent with a 7-8% price decline. We discussed this scenario in our post “Does Negative Equity Loom?”  We estimated that based on his data, close to 600,000 households will fall into negative equity.  And Macquarie suggests that home owners with negative equity might claim the banks broke their responsible lending obligations, and could be up for as much as $6 billion in legal costs and remediation. We think that could be a conservative estimate.  Later we disclose which post code has the

Others are calling for RBA action to reduce rates. The Kouk is one of the latest, suggesting in a recent piece that the RBA could cut the official cash rate to 0.5 per cent and on the back of that, the unemployment rate drops to 4.75 per cent on a sustained basis, underlying inflation hits the mid-point of the 2 to 3 per cent target range and annual wages growth lifts to 3.25 per cent. This is what a range of credible economic models suggest would happen with such a simple and transparent monetary policy move from the RBA. And what’s more, it is free to implement! It would be, on all measures, a good economic outcome. So why is the RBA not going to do it? What kind of monetarist poltergeist has possessed them it is now a bad idea to try and hit their inflation target, put tens of thousands more Australians into work, and stoke a much-needed rise in wages growth?  Why is the RBA the only central bank on the world seemingly obsessed with peripheral issues when the inflation target has been missed so comprehensively for so long? He suggests Protests about ”house prices” and “household debt” cloud the debate. He says these refrains highlight the other critical error of the RBA – its reluctance to embrace macroprudential policies to address these specific issues when they were needed several years ago.  Those problems, to the extent house prices and household debt are problems, could be easily addressed with policies other than interest rates.

Well, my view is that the debt bomb is the most critical issue to manage, and cutting rates will do very little, other than removing options from the RBA later. So I think they will stick for some time to come.   The Kouk does not seem to read the debt bomb the same way. Pity he won’t debate it with me!

But the stakes are getting higher. For example, recent comments from the Lafferty 500 (a comparative study of 500 banks globally) put three of the four major Australian banks in in the sub-standard category, and CBA came out a little better with an average score. Lafferty’s conclusion was that all of [the four majors] preferred to talk about some other version of their results, rather than the statutory figures they report in the audited financials. And “none meet our target of 10 per cent equity to assets or 4 per cent cash to assets”

Among the other damning conclusions that Lafferty drew were that the strategy statements of all four majors “are fluff and fail to set out credible actions”. He said failure to explain clearly to their shareholders what they were doing had led to the ratings of zero for “culture” and zero for “digital dependency”.  This analysis fed into a list of 19 separate metrics. Westpac: only scored four out of 19 metrics, with 15 no-scores, ANZ: six positive scores out of the 19 metrics, with 13 no-scores, NAB: six out of 19 metrics, with six no-scores and CBA: positive scores on 10 out of the 19 metrics, with nine no-scores.

This all underscores the repair job the banks need on them – including in our view structural and regulatory changes, as I discussed with Robbie Barwick this week in our Video “What Does Glass-Steagall Really Mean?”.

Yet we know that 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 others again are calling for a dial-back of the recent tightening. This week Robert Gottliebsen wrote “    It’s true that Australia needed a correction in the housing market and the banks, which were key drivers of the boom, needed to return to proper lending practices.   …Bank analyst Brett Le Mesurier from Shaw and Partners says the confessions of the banks will cost the industry an incredible $7.4 billion. If the payouts are anything like that figure the Big Four banks will be badly damaged and their credit rating will be dumped. To that you can add housing bad debts.  The underlying problem is all the above groups are busily doing what they believe is right but the end result is that our banking system is being drained of capital, the executives are scared and the end result is a severe credit squeeze that looks like intensifying. He concludes … unless all the above regulators (including the royal commission) start stepping back and looking at the combined effect of what they are doing we will see the building industry (plus other areas of employment) badly damaged and that damage will last for years.

But the point is we are now normalising lending standards to more logical and sustainable levels. You do not solve a credit and property boom by allowing it to continue for ever. We had better get used to the new situation, and yes Bank profitability will be impacted long term.  And yes, construction will take a hit. Time for the RBA to take a new stance.  Less credit, and tighter standards is the New Normal!

So to the markets. Locally, the banks recovered a little towards the end of the week, with CBA ending up 1.04% to 67.90, ANZ up 0.62% to 26.04, Westpac up 0.6% to 26.85 while NAB fell 0.27% to end at 25.67, perhaps because of the profit warning issued this week that additional costs of $314 million after tax would be taken in connection with its customer remediation programme.  This will reduce 2H18 cash earnings by an estimated $261 million and earnings from discontinued operations by an estimated $53 million. All the CEO’s of the major banks have now admitted to Parliament they did wrong, and should not have resisted the Banking Royal Commission. But talk is cheap, we need to see real change.

The smaller banks also did a little better, with the Bank of Queensland up 0.85% to 10.65 and Bendigo was up 0.68% to 10.34, though, Suncorp fell 0.42% to 14.07.

Macquarie was up 0.51% to 116.87, still well off its recent highs, and AMP was up 2.21% to 3.24. The Financial Index overall was up 0.43% to 5,810, while the ASX 100 fell 0.04% to 4,885, after another volatile week. This was reflected in the local VIX or Fear Index, which was up 1.29% to 16.45 on Friday. And the Aussie ended up 0.27% to 71.18, still in the lower end of its recent trading ranges.  The Aussie Bitcoin was down 0.35% to 8,840.

So to the US markets, which also had a volatile week. US stocks experienced their worst selloff since last week on Thursday, as they ricocheted back and forth on the US-China trade spat, compounded by a Fed bent on tightening rates along with an added bonus in the form of the Italian debt crises. And as if investors didn’t already have enough to worry about, earnings shortcomings from industrial companies and Bank of America’s move to downgrade the housing sector brought already fraught nerves to a breaking point.

But on Friday, The S&P 500 closed just below the flatline at 2,768 as upbeat earnings from corporates helped ease investor jitters about global growth. The US VIX index was down a little, – 0.85% to 19.89, on Friday but is still elevated. The S&P 100 was up 0.26% to 1,236 on Friday, while the Dow was up 0.26% to 25,444.  But the NASDAQ was down 0.48% to 7,449, with some of the big technology stocks being sold off.

The 3 month US bond rate was flat at 2.309, but the 10-Year bond continues in higher territory following the release of the Fed minutes this week, which underscored higher US rates ahead as they continue their normalisation strategy. Expect more hikes ahead.  US mortgage rates continue higher.

Oil was lower across the week, ending up a tad on Friday to 69.37, Gold was flat at 1,230, having move up during the week, in reaction to the increasing market risks.

Bitcoin ended down 1.3% on Friday to 6,539, and continues in the doldrums, But there may be signs of that changing. Certainly the volume of the Bitcoin futures trading at the CME Group has increased by 41% in the third quarter and the community may be expecting an increase of the negative dynamics before the next expiration of futures. But this was smaller than crypto-community initially thought. And a number of factors indicate the preparation for a second wave of “Wall Street invasion” on the cryptocurrency market.

The world’s largest holding company Fidelity Investments, with $7.3 trillion of assets under management, announced the launch of custodian crypto services within a separate company Fidelity Digital Asset Services. Goldman and other investment banks have similar plans. The intentions of such giants are difficult to overestimate.

In conjunction with the race of the largest crypto exchanges to obtain regulatory approval through the introduction of tools such as “Know Your Transaction” to track user transactions, it can be assumed that in the near future crypto assets can attract substantially bigger institutional liquidity compared to the “grey” retail investments in 2017. However, the strategy of large capital is unknown to anyone and usually everything happens against the expectations of the masses, therefore, we should be cautious.

The spread between borrowing costs for 10 years in Italy and Germany widened to the most since 2013 on Thursday as Italian yields rose 14 basis points. The move came after the EU delivered a letter to Italian officials that draw a line in the sand on the budget. It said the budget had a ‘significant deviation’ from the rules and was ‘unprecedented’, calling it serious non-compliance. They said planned spending next year increased 2.7% while the max allowed under EU rules is 0.1%. The ball now is in Rome’s court as it an explanation is expected from Brussels. But first, Italy’s 2 coalition parties have to resolve an internal spat with regards to tax sweeteners to the wealthy initiated by the Northern League.

The risks are high no matter which side backs down. If the EU chooses to dig in and wins the battle, it may further alienate and inspire voters outside the mainstream and lead to significant anti-EU sentiment at a sensitive time. If Italy’s government wins, which is what most expect, then it will further undermine EU rules. Next Friday ratings agencies are also scheduled for an update on Italy. That will be a major risk event. Conte touched on it Thursday saying he thinks a downgrade can be avoided. The market increasingly thinks it’s inevitable, with the risk of two-notch downgrade to junk.

And finally in case you were asking, the post code across Australia with the expected highest proportion of households in negative equity, according to our latest analysis is Victorian post 3030, which includes Derrimut, Point Cook and Werribee. This happens to be one the post codes with some of the highest levels of mortgage stress. Stress and Negative Equity are related. But did you also know there is a clause in the mortgage contract which essentially allows a bank to make a margin call in the event of negative equity.  You may consider this a futures contract on housing – but at very least it’s another issue to consider – at some point, some households may be asked to make a capital reduction. Now, that would be an very inconvenient request!