Tag: The Property Imperative

Turning The Screws On Mortgage Lending – The Property Imperative Weekly 17th Feb 2018

Listen, You Can Hear the Screws Tightening On Mortgage Lending.  Welcome to The Property Imperative Weekly to 17th February 2018.

Watch the video, or read the transcript.

In this week’s digest of finance and property news we start with Governor Lowe’s statement to the House of Representatives Standing Committee on Economics.  He continued the themes, of better global economic news, lifting business investment and stronger employment on one hand; but weak wage growth, and high household debt on the other. But for me one comment really stood out. He said:

it would be a good outcome if we now experienced a run of years in which the rate of growth of housing costs and debt did not outstrip growth in our incomes in the way that they did over the past five years.

This is highly significant, given the fact the lending for housing is still growing faster than wages, at around three times, and home prices are continuing to drift a little lower. So don’t expect any moves from the Reserve Bank to ease lending conditions, or expect a boost in home prices. More evidence that the property market is indeed in transition. The era of strong capital appreciation is over for now.

There was lots of news this week about the mortgage industry. ANZ and Westpac have tightened serviceability requirements.  Westpac recently introduced strict tests of residential property borrowers’ current and future capacities to repay their loans. The change is said to be intended to identify scenarios that might affect borrowers’ capacity to pay back their loans. These scenarios include having dependents with special needs that might require borrowers to spend on long-term care and treatment. ANZ has added “a higher level of approval for some discretions” used in its home loan policy for assessing serviceability, reducing approvals outside normal terms.

Talking of lending standards, APRA released an important consultation paper on capital ratios. This may sound a dry subject, but the implications for the mortgage industry and the property market are potentially significant.  As part of the discussion paper, APRA, says that addressing the systemic concentration of ADI portfolios in residential mortgages is an important element of the proposals. They have FINALLY woken up to the risks in the system, just years too late!  We have significant numbers of loans in the system currently that would now not pass muster. More about that next week.

Their proposals, which focus in on mortgage serviceability, would change the industry significantly, as lower risk loans will be more highly prized (so expect low rate offers for lower LVRs), whilst investment loans, and interest only loans are likely to cost more and be harder to find. Combined this could certainly move the market!  The proposals introduce “standard” and “non-standard” risk categories.

As well as increasing the risk weights for some mortgages, they also continue to close the gap between the advanced (IRB) internal approach used by large lenders, and the standard approach used by smaller players. Those in transition (e.g. Bendigo Bank) may find less of an advantage in moving to advanced as a result. You can watch our separate video on this important topic.

Whilst the overall capital ratios will not change much, there is a significant rebalancing of metrics, and Banks will more investment and interest only loans will be most impacted.  So getting an investment loan will be somewhat harder and this will impact the property market. The proposals are for consultation, with a closing data 18 May 2018.

Another data point on the property market came from a new report by Knight Frank which claims that in 2017, one-third of Australian residential development sites were sold to Chinese investors and developers. The share of sales to Chinese buyers has tripled since 2013, but decreased from the 38 per cent recorded in 2016. The level of Chinese investment in residential development sites varied from state to state: in Victoria, 38.7 per cent of residential site sales were to Chinese buyers; in New South Wales, 35.6 per cent of residential site sales were to Chinese buyers, and in Queensland, Chinese buyers comprised 7.4 per cent of total residential site sale volumes. So this is one factor still supporting the market, though in Australia, the Australian Prudential Regulatory Authority has encouraged local financial institutions to impose stricter controls, while in China the government has attempted to moderate capital outflow with China’s Central Bank imposing new rules for companies which make yuan-denominated loans to overseas entities.

The data from the ABS on Lending Finance, the last part of the finance stats for December, really underscores the slowing momentum in investment property lending, especially in Sydney (though it is still a significant slug of new finance, and there is no justification to ease the current regulatory requirements.) The ABS says the total value of owner occupied housing commitments excluding alterations and additions rose 0.1% in trend terms, total personal finance commitments fell 0.2%. Revolving credit commitments fell 1.4%, while fixed lending commitments rose 0.5%. There was a small rise in lending for housing construction, but overall mortgage momentum looks like it is still slowing and the mix of commercial lending is tilting away from investment lending and towards other commercial purposes at 64%, which is a good thing.

There is an air of desperation from the construction sector, as sales momentum continues to ease, this despite slightly higher auction clearance rates last week. CoreLogic said the final auction clearance rate was 63.7 per cent clearance rate across almost double the volume of auctions week-on-week (1,470). Over the week prior, a clearance rate of 62.0 per cent was recorded across 790 auctions. Both auction clearance rate and volumes were lower than what was seen one year ago, when a 73.2 per cent clearance was recorded across 1,591 auctions. There is significant discounting going on at the moment to shift property, and some builders are looking to lend direct to purchases to make a sale. For example, Catapult Property Group launched a new lending division that will help first home buyers get home loans with a deposit of only $5,000. The Brisbane-based company encourages first home buyers in Queensland to enter the real estate market now by taking advantage of the state government’s $20,000 grant that is ending on 30 June 2018. This is at a time when lenders are insisting on larger deposits, and are applying more conservative underwriting standards.

Economic data out this week showed that according to the ABS, trend unemployment remained steady at 5.5%, where it has hovered for the past seven months.  The trend unemployment rate has fallen by 0.3 percentage points over the year but has been at approximately the same level for the past seven months, after the December 2017 figure was revised upward to 5.5 per cent. The ABS says that full-time employment grew by a further 9,000 persons in January, while part-time employment increased by 14,000 persons, underpinning a total increase in employment of 23,000 persons. The fact is that while more jobs are being created, it is not pulling the rate lower, and many of these jobs are lower paid part time roles – especially in in the healthcare sector. In fact, the growth in employment is strong for women than men.  A rather different story from the current political spin!

In a Banking Crisis, are Bank Deposits Safe? We discussed the consequences of recently introduced enhanced powers for APRA to deal with a bank in distress this week. There were several well publicised Government bail-out’s of banks which got into problems after the GFC. For example, the UK’s Royal Bank of Scotland was nationalised. This costs tax payers dear, so there were measures put in place to try to manage a more orderly transition when a bank gets into difficulty and raises the question of “Bail-in” arrangements.  Take New Zealand for example. There regulators have specific powers to grab savings held in the banks in assist in an orderly transition in the case of a failure, alongside capital and other bank assets.  And, given the New Zealand position (and the tight relationship between banking regulators in Australia and New Zealand), we should look at the position in Australia.  Are deposit funds in Australia likely to be “bailed-in”? Well, the Treasury confirmed that because deposits are not classified as capital instruments, and do not include terms that allow for their conversion or write-off, they cannot be ‘bailed-in’. But we have a catch all clause in APRA’s powers that says they can grab “any other instrument” and deposits, despite the Treasury reassuring words, is not explicitly excluded. So I for one cannot be 100% convinced savings will never be bailed-in. And that’s a worry! I recall the Productivity Commission comment last week, that financial stability had taken prime place compared with competition (and so customer value) in financial services. The issue of bail-in of deposits appears to be shaping the same way. You can watch our separate video discussion on this important topic.

The first round of public hearings for the Banking Royal Commission will focus on lending, including mortgages, credit cards and car loans; we heard during the opening session. The Commission highlighted the large size of the lending market, and the significant number of submissions they have already received on misconduct in this area, including relating to intermediaries, commission and advice. In addition, as part of the opening address, we were told that some of the major players were unable to provide the full range of misconduct information that Commission requested. Some players offered a few case studies, and were then asked to provide more detail over the past 5 years (as opposed to 10) but said they could not meet the required deadline. Based on the opening round, Banks are going to find this a painful process. Not least because The Commission is publishing information on the sector. In its first release, it pointed to declining competition in the banking sector, with the number of credit unions falling due to consolidation and the major banks holding 75 per cent of total assets held by ADIs in Australia. The paper noted that five of the 20 listed companies that make up the ASX20 are banks, noting that the major banks have “generally achieved higher profit margins than other types of ADIs” with a profit margin of 36.4 per cent in the June quarter 2017. They also underscored that Australia’s major banks are “comparatively more profitable” than some of their international peers in Canada, Sweden, Switzerland and the UK.

We expect to hear more from the Royal Commissions on unfair and predatory practices. To underscore this there was some good news for Credit Card holders, with new legalisation passed in parliament to force Credit card providers to scrap unfair and predatory practices. However, the implementation timetable is extended into 2019. The reforms include:

Requiring affordability assessments be based on a consumer’s ability to repay the credit limit within a reasonable period (from July 2018).  This tightens responsible lending obligations for credit card contracts.

Banning unsolicited offers of credit limit increases (from January 2019). At the moment, whilst the law forbids providers from making these sorts of offers in writing, offers can be made by phone and other mediums. This loophole has been exploited, but will now be closed.

Simplifying how credit card interest is calculated, especially, banning the practice of backdating interest rate charges. Currently, some providers were attracting new customers with promotional low rate, or no rate offers, say for the first month. But, if a customer failed to pay off in full a credit card bill after the first month, the credit card company was often retrospectively applying the new interest rate to previous purchases. This was allowed in the banks’ small print, but the government said the practice did “not align with consumers’ understanding and expectation about how interest is to be charged”. This will be banned, from next year.

Requiring credit card providers to have online options to cancel cards or to reduce credit limits (from January 2019). At the moment, some card providers force customers to come into a bank branch to reduce limits or terminate cards, and when they did come in were often persuaded not to do it. The asymmetry between fast credit card approvals online, and slow cancellation will end.

So another week highlighting the stresses and strains in the banking sector, and the forces behind slowing momentum in the property market. And based on the stance of the regulators, we think the screws will get tighter in the months ahead, putting more downward pressure on mortgage lending home prices and the Banking Sector. Something which the RBA says is a good thing!

72 Hours That Changed Banking – The Property Imperative Weekly 10 Feb 2018

Recent events have the potential to create a revolution in Australian Finance. We explore the 72 hours that changed banking forever.

Welcome to the Property Imperative Weekly to 10th February 2018.Watch the video or read the transcript.

In our latest weekly digest, we start with the batch of new reports, all initiated by the current Australian Government – and which combined have the potential to shake up the Financial Services sector, and reduce the excessive market power which the four major incumbents have enjoyed for years.

On Wednesday, the Productivity Commission, Australian Government’s independent research and advisory body released its draft report into Competition in the Australian Financial System. It’s a Doozy, and if the final report, after consultation takes a similar track it could fundamentally change the landscape in Australia. They leave no stone unturned, and yes, customers are at a significant disadvantage. Big Banks, Regulators and Government all cop it, and rightly so. They say, Australia’s financial system is without a champion among the existing regulators — no agency is tasked with overseeing and promoting competition in the financial system.  It has also found that competition is weakest in markets for small business credit, lenders’ mortgage insurance, consumer credit insurance and pet insurance. The report demonstrates the inter-linkages between difference financial entities, and their links to the four majors. They criticised mortgage brokers and financial advisers for poor advice (influenced by commission and ownership structures) and the regulatory environment, where the shadowy Council of Finance Regulators (RBA, ASIC, APRA and Treasury) do not even release minutes of the meetings which set policy direction. You can watch our separate video blog on this.

On Thursday, the Treasurer released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018.   They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan. This removes the current strategic advantage which the majors have thanks to the credit data asymmetry, and the current negative reporting. We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred. It does however smaller lenders to access information which up to now they could not, so creating a more level playing field.  Consumers may benefit, but they should also beware of the implications of the proposals.

On Friday, Treasurer Morrison released the report by King & Wood Mallesons partner Scott Farrell in to open banking which aims to give consumers greater access to, and control over, their data and which mirrors developments in the UK.  This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service. Great news for smaller players and fintechs, and possibly for customers too. Bad news for the major players. The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now. In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping.  A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From the Commencement Date, the four major Australian banks should be obliged to comply with a direction to share data under Open Banking. The remaining Authorised Deposit-taking Institutions should be obliged to share data from 12 months after the Commencement Date, unless the ACCC determines that a later date is more appropriate.

Then of course the Royal Commission in Financial Services starts this coming week. We discussed this on ABC The Business on Thursday.  Lending Practice is on the agenda, highly relevant given the new UBS research (they of liar loans) suggesting that incomes of many more affluent households are significantly overstated on mortgage application forms.   And The BEAR – the bank executive behaviour regime legalisation – passed the Senate, and as a result of amendments, Small and medium banking institutions have until 1 July 2019 to prepare for the BEAR while it will commence for the major banks on 1 July 2018.

APRA Chairman Wayne Byers spoke at the A50 Australian Economic Forum, Sydney. Significantly, he says the temporary measures taken to address too-free mortgage lending will morph into the more permanent focus on among other things, further strengthening of borrower serviceability assessments by lenders, strengthened capital requirements for mortgage lending, and the comprehensive credit reporting being mandated by the Government.

Adelaide Bank is ahead of the curve, as it introducing an alert system that will monitor property borrowers that are struggling with their repayments. The bank and its subsidiaries and affiliates will compare monthly mortgage repayments with borrowers’ income ratios. In addition, extra scrutiny will be applied where the loan-to-income ratio exceeds five times or monthly mortgage repayments exceed 35% of a borrower’s income.

But combined, data sharing, positive credit and banking competition and regulation are all up in the air, or are already coming into force and in each case it appears the big four incumbents are the losers, as they are forced to share customer data, and competition begins to put their excessive profitability under pressure.  It highlights the dominance which our big banks have had in recent years, and the range of reforms which are in train. The face of Australian Banking is set to change, and we think customers will benefit. But wait for the rear-guard actions and heavy lobbying which will take place ahead.

Of course the RBA left the cash rate on hold this week, and signalled the next move will likely be up, but not for some time.  Retail turnover for December fell 0.5% according to the ABS seasonally adjusted.  This is the headline which will get all the coverage, but the trend estimate rose 0.2 per cent in December 2017 following a rise of 0.2 per cent in November 2017. Compared to December 2016 the trend estimate rose 2.0 per cent. This is in line with average income growth, but not good news for retailers.

The latest Housing Finance Data from the ABS shows a fall in flows in December. In trend terms, the total value of dwelling finance commitments excluding alterations and additions fell 0.1% or $31 million. Owner occupied housing commitments rose 0.1% while investment housing commitments fell 0.5%. Owner occupied flows were worth $14.8 billion, and down 0.3% last month, while owner occupied refinancing was $6.2 billion, up 1.2% or $73 million. Investment flows were worth 11.9 billion, and fell 0.5% or $62 million. The percentage of loans for investment, excluding refinancing was 45%, down from 49% in Dec 2016.  Refinancing was 29.5% of OO transactions, up from 29.2% last month. Momentum fell in NSW and VIC, the two major states. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 17.9% in December 2017 from 18.0% in November 2017 – the number of transactions fell by 1,300 compared with last month. But the ABS warns that the First Time Buyer data may be revised and users should take care when interpreting recent ABS first home buyer statistics.  The ABS plans to release a new publication which will see Housing Finance, Australia (5609.0) and Lending Finance, Australia (5671.0) combined into a single, simpler publication called Lending to Households and Businesses, Australia (5601.0).

We continue to have data issues with mortgage lending, with the RBA in their new Statement on Monetary Policy saying it now appears unnecessary to adjust the published growth rates to undo the effect of regular switching flows between owner occupied and investment loans as they have been doing for the past couple of years.  So now investor loan growth on a 6-month basis has been restated to just 2%. More fluff in the numbers! Additionally, the RBA will publish data on aggregate switching flows to assist with the understanding of this switching behaviour.

More data this week highlighting the pressures on households.  National Australia Bank’s latest Consumer Behaviour Survey, shows the degree of anxiety being caused by not only cost of living pressures but also health, job security, retirement funding as well as Australian politics.  Of all the things bothering Australian households in early 2018, nothing surpasses cost of living pressures. Over 50% of low income earners reported some form of hardship, with almost one in two 18 to 49-year-olds being effected.

Despite improved job conditions and households reporting healthier financial buffers, the overall financial comfort of Australians is not advancing, according to ME’s latest Household Financial Comfort Report. In its latest survey, ME’s Household Financial Comfort Index remained stuck at 5.49 out of 10, with improvements in some measures of financial comfort linked to better employment conditions – e.g. a greater ability to maintain a lifestyle if income was lost for three months – offset by a fall in comfort with living expenses.

We released the January 2018 update of our Household Financial Confidence Index, using data from our rolling 52,000 household surveys. The news is not good, with a further fall in the composite index to 95.1, compared with 95.7 last month. This is below the neutral setting, and is the eighth consecutive monthly fall below 100. Costs of living pressures are very real, with 73% of households recording a rise, up 1.5% from last month, and only 3% a fall in their living costs. A litany of costs, from school fees, child care, fuel, electricity and rates all hit home. You can watch our separate video on this.

We also published updated data on net rental yields this week, using data from our household surveys. Gross yield is the actual rental stream to property value, net rental is rental payments less the costs of funding the mortgage, management fees and other expenses. This is calculated before any tax offsets or rebates. The latest results were featured in an AFR article. The results are pretty stark, and shows that many property investors are underwater in cash flow terms – not good when capital values are also sliding in some places. Looking at rental returns by states – Hobart and Darwin are the winners; Melbourne, and the rest of Victoria, then Sydney and the rest of NSW the losers. The returns vary between units and houses, with units doing somewhat better, and we find some significant variations at a post code level.  But we found that more affluent households are doing significantly better in terms of net rental returns, compared with those in more financially pressured household groups. Batting Urban households, those who live in the urban fringe on the edge of our cities are doing the worst.  This is explained by the types of properties people are buying, and their ability to select the right proposition. Running an investment property well takes skill and experience, especially in the current rising interest rate and low capital growth environment. Another reason why prospective property investors need to be careful just now.

Finally, we saw market volatility surge, as markets around the world gyrated following the “good news” on US Jobs last week, which signalled higher interest rates.  In our recent video blog we discussed whether this is a blip, or something more substantive.  We believe it points to structural issues which will take time to play out, so expect more uncertainly, on top of the correction which we have already had. This will put more upward pressure on interest rates, and also on bank funding here.

Overall then, a week which underscores the uncertainly across the finance sector, and households. This will not abate anytime soon, so brace for a bumpy ride. And those managing our large banks will need to adapt to a fundamentally different, more competitive landscape, so they are in for some sleepless nights.

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The Home Price Crunch – The Property Imperative Weekly – 03 Feb 2018

The Home Price Crunch is happening now, but how low will prices go and which areas will get hit the worst? Welcome to the Property Imperative Weekly to 3rd February 2018.

Welcome to our digest of the latest finance and property news. Watch the video or read the transcript.

There was lots of new data this week, after the summer break. NAB released their Q4 2017 Property Survey and it showed that property dynamics are shifting.  They see property prices easing as foreign buyers lose interest, and a big rotation from the east coast.  Tight credit will be a significant constraint. National housing market sentiment as measured by the NAB Residential Property Index, was unchanged in Q4, as big gains in SA and NT and WA (but still negative) offset easing sentiment in the key Eastern states (NSW and VIC). Confidence levels also turned down, led by NSW and VIC, but SA and NT were big improvers. First home buyers (especially those buying for owner occupation) continue raising their profile in new and established housing markets, with their share of demand reaching new survey highs. In contrast, the share of foreign buyers continued to fall in all states, except for new property in QLD and established housing in VIC, with property experts predicting further reductions over the next 12 months. House prices are forecast to rise by just 0.7% (previously 3.4%) and remain subdued in 2019 (0.8%). Apartments will under-perform, reflecting large stock additions and softer outlook for foreign demand.

Both CoreLogic and Domain released updated property price data this week. It is worth comparing the two sets of results as there are some significant variations, and this highlights the fact that these numbers are more rubbery than many would care to admit.  Overall, though the trends are pretty clear. Sydney prices are sliding, along with Brisbane, and the rate of slide is increasing though it does vary between houses and apartments, with the latter slipping further. For example, Brisbane unit prices have continued their downward slide, down to $386,000; a fall of 2.2 per cent for the quarter and 4.4 per cent for the year. Here units are actually at a four-year low. Momentum in Melbourne is slowing though the median value was up 3.2 per cent to $904,000 in the December quarter, according to Domain. Perth and Darwin remains in negative territory. Domain said Darwin was the country’s worst performer with a 7.4 per cent drop in its median house price to $566,000 and a 14 per cent plunge in its unit price to $395,000, thanks to a slowing resources sector. It also hit Perth, with a house median fall of 2.5 per cent to $557,000, and its units 1.7 per cent to $369,000. On the other hand, prices in Hobart and Canberra are up over the past year and Hobart is the winner, but is it 17% or 12%, a large variation between the two data providers?  And is Canberra 8% or 4%? It depends on which data you look at. Also, these are much smaller markets, so overall prices nationally are on their way down.  My take out is that these numbers are dynamic, and should not be taken too seriously, though the trend is probably the best indicator. Perhaps their respective analysts can explain the variations between the two. I for one would love to understand the differences. The ABS will provide another view on price movements, but not for several months.

The latest ABS data on dwellings approvals to December 2017 shows that the number of dwellings approved fell 1.7 per cent in December 2017, in trend terms, and has fallen for three months. Approvals for private sector houses have remained stable, with just under 10,000 houses approved in December 2017, but the fall was in apartments, especially in NSW and QLD.  More evidence of the impact of the rise in current supply of apartments, and why high rise apartment values are on the slide.  Also, the ABC highlighted the fact that Real estate sales companies are using big commissions to tempt mortgage brokers, financial planners and accountants to sell overpriced properties to unsuspecting clients. This is a way to offload the surplus of high-rise apartments, and looks to be on the rise, another indicator of risks in the property sector.

In other economic news, the ABS released the latest Consumer Price Index (CPI) which rose 0.6 per cent in the December quarter 2017. Annual inflation in most East Coast cities rose above 2.0 per cent, due in part to the strength in prices related to Housing.  This follows a rise of 0.6 per cent in the September quarter 2017. However, there were some changes in methodology which may have impacted the results. Softer economic conditions in Darwin and Perth have resulted in annual inflation remaining subdued at 1.0 and 0.8 per cent respectively. Many commentators used this data to push out their forecast of when then RBA may lift the cash rate – but my view is we should watch the international interest rate scene, as this is where the action will be.

Whilst the FED held their target rate this week, there is more evidence of further rate rises ahead. Most analysts suggest 2-3 hikes this year, but the latest employment data may suggest even more. The benchmark T10 bond yield continues to rise and is at its highest since 2014, and now close to that peak then of about 3%. Have no doubt interest rates are on their way up. This will put more pressure on funding costs around the world, and put pressure on mortgage rates here. In fact Alan Greenspan, the former Fed Chair, speaking about the US economy said “there are two bubbles: We have a stock market bubble, and we have a bond market bubble”. “Irrational exuberance” is back! He said we’re working, obviously, toward a major increase in long-term interest rates, and that has a very important impact, on the whole structure of the economy. Greenspan said. As a share of GDP, “debt has been rising very significantly” and “we’re just not paying enough attention to that.”  US rate hikes will lift international capital market prices, putting more pressure on local bank margins.

We published our latest mortgage stress research, to January 2018, Across Australia, more than 924,000 households are estimated to be now in mortgage stress compared with 921,000 last month. This equates to 29.8% of borrowing households. In addition, more than 20,000 of these are in severe stress, down 4,000 from last month. We estimate that more than 51,500 households risk 30-day default in the next 12 months, down 500 from last month. We expect bank portfolio losses to be around 2.7 basis points, though with losses in WA are likely to rise to 4.9 basis points. Some households have benefited from refinancing to cheaper owner occupied loans, giving them a little more wriggle room in terms of cash flow. The typical transaction has saved up to 45 basis points or $187 each month on a $500,000 repayment mortgage. You can watch our separate video blog on the results, where we count down the top 10 most stressed postcodes.

But the post code with the highest count of stressed households, once again is NSW post code 2170, the area around Liverpool, Warwick Farm and Chipping Norton, which is around 27 kilometres west of Sydney. There are 7,375 households in mortgage stress here, up by more than 1,000 compared with last month. The average home price is $815,000 compared with $385,000 in 2010. There are around 27,000 families in the area, with an average age of 34. The average income is $5,950. 36% have a mortgage and the average repayment is about $2,000 each month, which is more than 33% of average incomes.

We continue to see mortgage stress still strongly associated with fast growing suburbs, where households have bought property relatively recently, often on the urban fringe. The ranges of incomes and property prices vary, but note that it is not necessarily those on the lowest incomes who are most stretched. Banks have been more willing to lend to these perceived lower risk households but the leverage effect of larger mortgages has a significant impact and the risks are underestimated.

The latest data from The Australian Financial Security Authority, for the December 2017 quarter shows a significant rise in personal insolvency – a bellwether for the financial stress within the Australian community. The total number of personal insolvencies in the December quarter 2017 was 7,578 and increased by 7.4% compared to the December quarter 2016. This year-on-year rise follows a rise of 8.0% in the September quarter 2017.

This is in stark contrast to the latest business conditions survey from NAB. They say that the business confidence index bounced 4pts to +11 index points, the highest level since July 2017, perhaps driven by a stronger global economic backdrop and closes the gap between confidence and business conditions. Business confidence is strongest in trend terms in Queensland and SA and to a lesser extent NSW. Confidence is also reasonable in WA, and is in line with business conditions in the state. Victoria and Tasmania meanwhile are reporting levels of confidence which are lower than their reported level business conditions. But the employment index suggests employment growth may ease back from current extraordinary heights.

The RBA credit aggregates data reported that lending for housing grew 6.3% for the 12 months to December 2017, the same as the previous year, and the monthly growth was 0.4%.  Business lending was just 0.2% in December and 3.2% for the year, down on the 5.6% the previous year.  Personal credit was flat in December, but down 1.1% over the past year, compared with a fall of 0.9% last year. This is in stark contrast to the Pay Day Loan sector, which is growing fast – at more than 10%, as we discussed on our Blog recently (and not included in the RBA data).  Investor loans still make up around 36% of all loans, and a further $1.1 billion of loans were reclassified in the month between investment and owner occupied loans, and in total more than 10% of the investor mortgage book has been reclassified since 2015.

The latest data from APRA, the monthly banking stats for ADI’s shows a growth in total home loan balances to $1.6 trillion, up 0.5%. Within that, lending for owner occupation rose 0.59% from last month to $1.047 trillion while investment loans rose 0.32% to $553 billion. 34.56% of the portfolio are for investment purposes. The portfolio movements within institutions show that Westpac is taking the lion’s share of investment loans (we suggest this involves significant refinancing of existing loans), CBA investment balances fell, while most other players were chasing owner occupied loans. Note the AMP Bank, which looks like a reclassification exercise, and which will distort the numbers – $1.1 billion were reclassified, as we discussed a few moments ago.

Standing back, the momentum in lending is surprisingly strong, and reinforces the need to continue to tighten lending standards. This does not gel with recent home price falls, so something is going to give. Either we will see home prices start to lift, or mortgage momentum will sag. Either way, we are clearly in uncertain territory. Given the CoreLogic mortgage leading indicator stats were down, we suspect lending momentum will slide, following lower home prices. We will publish our Household Finance Confidence Index this coming week where we get an updated read on household intentions. But in the major eastern states at least, don’t bank on future home price growth.

If you found this useful, do like the post, leave a comment or subscribe for future updates. By the way, our special post on Bitcoin will be out in the next few days, we have had to update it based on recent market gyrations.

Housing Affordability and Employment – The Property Imperative Weekly 27 Jan 2018

Housing in Australia is severely unaffordable, and despite the growth in jobs, unemployment in some centres is rising. We look at the evidence. Welcome the Property Imperative Weekly to 27th January 2018.

Thanks to checking out this week’s edition of our property and finance digest.   Watch the video or read the transcript.

Today we start with employment data. CommSec looked at employment across regions over the last year. Despite the boom in jobs, the regional variations are quite stark, with some areas showing higher rates of unemployment, and difficult economic conditions. Unemployment has increased in several Queensland regional centres in recent years. Queensland’s coastal regional centres such as Bundaberg, Gympie, Bundaberg and Hervey Bay, known more broadly as Wide Bay (average 9.0 per cent), together with Townsville (albeit lower at 8.5 per cent) have elevated jobless rates. Unemployment also increased along the suburban fringes and city ‘spines’ such as Ipswich (8.1 per cent) in Brisbane and the western suburbs of Melbourne (9.0 per cent). In Western Australia, Mandurah, south of Perth, experienced a significant decline in the jobless rate to an average of 7.0 per cent in December from 11.2 per cent a year ago. Higher income metropolitan areas, especially in Sydney’s coastal suburbs, dominate the regions with the lowest unemployment rates. However, the corridor between Broken Hill and Dubbo has Australia’s lowest regional unemployment rate at 2.9 per cent, benefitting from agricultural, tourism and mining-related jobs growth. You will find there is a strong correlation with mortgage stress, as we will discuss next week.

The Victorian Government has reaffirmed their intent to shortly accept applications for its shared equity scheme known as HomesVic from up to 400 applicants. We do not think such schemes help affordability, they simply lift prices higher, but looks good politically.  This was first announced in March 2017. The $50-million pilot initiative aims to make it easier for first-home buyers to enter the market by reducing the size of their loan, hence reducing the amount they need to save for a deposit. The initiative targets single first-home buyers earning an annual income of less than $75,000 and couples earning less than $95,000. Eligible applicants must buy in so-called “priority areas” which include 85 Melbourne suburbs, seven fringe towns and 130 regional towns and suburbs. In Melbourne, the list includes suburbs around Box Hill, Broadmeadows, Dandenong, Epping, Fishermen’s Bend, Footscray, Fountain Gate, Frankston, LaTrobe, Monash, Pakenham, Parkville, Ringwood, Sunshine and Werribee. Regional centres on the list include Ballarat, Bendigo, Castlemaine, Geelong, La Trobe, Mildura, Seymour, Shepparton, Wangaratta, Warrnambool and Wodonga. The state government said the locations were chosen in growth areas where there was a high demand for housing and access to employment and public transport. Some of these locations are where mortgage stress, on our modelling is highest – we will release the January results next week. The scheme is not available in most of Melbourne’s bayside suburbs, the leafy inner eastern suburbs or some pockets of the inner north.

Overseas, the US Mortgage Rates continue to rise, heading back to the worst levels in more than 9 months.  Rates have risen an eighth of a percentage point since last week, a quarter of a point from 2 weeks ago, and 3/8ths of a point since mid-December.  That makes this the worst run since the abrupt spike following 2016’s presidential election. While this doesn’t necessarily mean that rates will continue a linear trend higher in the coming months, the trajectory is up, reflecting movements in the capital markets, and putting more pressure on funding costs globally.

The Bank for International Settlements (BIS) has published an important report “Structural changes in banking after the crisis“. The report highlights a “new normal” world of lower bank profitability, and warns that banks may be tempted to take more risks, and leverage harder in an attempt to bolster profitability. This however, should be resisted. They also underscore the issues of banking concentration and the asset growth, two issues which are highly relevant to Australia. The report says that in some countries the 2007 banking crisis brought about the end of a period of fast and excessive growth in domestic banking sectors.  Worth noting the substantial growth in Australia, relative to some other markets and of particular note has been the dramatic expansion of the Chinese banking system, which grew from about 230% to 310% of GDP over 2010–16 to become the largest in the world, accounting for 27% of aggregate bank assets.

Back home, an ASIC review of financial advice provided by the five biggest vertically integrated financial institutions (the big four banks and AMP) has identified areas where improvements are needed to the management of conflicts of interest. 68% of clients’ funds were invested in in-house products. ASIC also examined a sample of files to test whether advice to switch to in-house products satisfied the ‘best interests’ requirements. ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients. Further, 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position. This highlights the problems in vertically integrated firms, something which the Productivity Commission is also looking at. The real problem is commission related remuneration, and cultural norms which put interest of customers well down the list of priorities.

The Financial Services Royal Commission has called for submissions, demonstrating poor behaviour and misconduct. It will hold an initial public hearing in Melbourne on Monday 12 February 2018. The not-for-profit consumer organisation, the Consumer Action Law Centre (CALC) said the number of Aussie households facing mortgage stress has “soared” nearly 20 per cent in the last six months, and argued that lenders are to blame. Referencing Digital Finance Analytics’ prediction that homes facing mortgage stress will top 1 million by 2019, CALC said older Australians are at particular risk. The organisation explained: “Irresponsible mortgage lending can have severe consequences, including the loss of the security of a home. “Consumer Action’s experience is that older people are at significant risk, particularly where they agree to mortgage or refinance their home for the benefit of third parties. This can be family members or someone who holds their trust.” Continuing, CALC said a “common situation” features adult children persuading an older relative to enter into a loan contract as the borrower, assuring them that they will execute all the repayments. “[However] the lack of appropriate inquiries into the suitability of a loan only comes to light when the adult child defaults on loan repayments and the bank commences proceedings for possession of the loan in order to discharge the debt,” CALC said. We think poor lending practice should be on the Commissions Agenda, and we will be making our own submission shortly.

The latest 14th edition of the Annual Demographia International Housing Affordability Survey: 2018, continues to demonstrate the fact that we have major issues here in Australia. There are no affordable or moderately affordable markets in Australia. NONE! Sydney is second worst globally in terms of affordability after Hong Kong, with Melbourne, Sunshine Coast, Gold Coast, Geelong, Adelaide, Brisbane, Hobart, Perth, Cains and Canberra all near the top of the list. You can watch our separate video where we discuss the findings and listen to our discussion with Ben Fordham on 2GB.  When this report comes out each year, we get the normal responses from industry, such as Australia is different or the calculations are flawed. I would simply say, the trends over time show the relative collapse in affordability, and actually the metrics are well researched.

Fitch Ratings published its Global Home Prices report. They say price growth is expected to slow in most markets and risks are growing as the prospect of gradually rising mortgage rates comes into view this year. Their data on Australia makes interesting reading. Fitch expects Sydney and Melbourne HPI to stabilise in 2018, due to low interest rates, falling rental yields, increasing supply, limited investment alternatives and growing dwelling completions, partially offset by high population growth. Fitch expects the increase in FTB to be temporary; low income growth, tighter underwriting and rising living costs will maintain pressure on affordability for FTB. As mortgage rates are currently low, any material rate rise will weigh further on mortgage affordability and serviceability. The rising cost of living and sluggish wage growth are likely to increase pressure on recent borrowers who have little disposable income. Fitch expects mortgage lending growth to slow to around 4% in 2018, based on continued record low interest rates and stable unemployment. This will once again be offset by continued underemployment, reduced investor demand and tougher lending practices.

Finally, the latest weekly data from CoreLogic underscores the weakness in the property market. First prices are drifting lower, with Sydney down 0.4% in the past week and Melbourne down 0.1%.  The indicator of mortgage activity is also down, suggesting demand is easing as lending rules tighten. But then we always have a decline over the summer break. The question is, are we seeing a temporary blip, over the holiday season, or something more structural? We think the latter is more likely, but time will tell.

So that’s the Property Imperative Weekly to 27th January 2018. If you found this useful, do like the post, add a comment and subscribe to receive future editions. Many thanks for taking the time to watch.

 

 

 

 

 

The 200% Club – The Property Imperative Weekly – 20th Jan 2018

Lenders are facing a dilemma, do they chase mortgage lending growth, and embed more risks into their portfolios, or accept the consequences of lower growth and returns as household debt explodes and we join the 200% Club!

Welcome to the Property Imperative weekly to 20 January 2018. We offer two versions of the update, the first a free form summary edition in response to requests from members of our community:

Alternatively, you can watch our more detailed version, with lots of numbers and charts, which some may find overwhelming, but was the original intent of the DFA Blog – getting behind the numbers.

Tell us which you prefer. You can watch the video, or read the transcript.

In our latest digest of finance and property news, we start with news from the ABS who revised housing debt upward, to include mortgage borrowing within Superannuation, so total Household Liabilities have been increased by approximately 3% to $2,466bn. The change, which required the accurate measurement of property investment by self-managed superannuation funds, brought the figure up from 194 per cent so we are now at 200% of income. A record which no-one should be proud of. It also again highlights the risks in the system.   Australian households are in the 200% club.

The final set of data from the ABS – Lending Finance to November 2017 which also highlights again the changes underway in the property sector. Within the housing series, owner occupied lending for construction fell 0.88% compared with the previous month, down $17m; lending for the purchase of new dwellings rose 0.25%, up $3m; and loans for purchase of existing dwellings rose 0.11%, up $12m.

Refinance of existing owner occupied dwellings rose 0.28%, up $16m.

Looking at investors, borrowing for new investment construction rose 5%, up $65m; while purchase of existing property by investors fell $74m for individuals, down 0.75%; and for other investors, down $21m or 2.28%.

Overall there was a fall of $16m across all categories.

We see a fall in investment lending overall, but it is still 36% of new lending flows, so hardly a startling decline. Those calling for weakening of credit lending rules to support home price growth would do well to reflect that 36% is a big number – double that identified as risky by the Bank of England, who became twitchy at 16%!

Looking then across all lending categories, personal fixed credit (personal loans rose $70m, up 1.74%; while revolving credit (credit cards) fell $4m down 0.18%.  Fixed commercial lending, other than for property investment rose $231m or 1.12%; while lending for investment purposes fell 0.25% or $30m. The share of fixed business lending for housing investment fell to 36.7% of business lending flows, compared with 41% in 2015. Revolving business credit rose $6m up 0.06%.

A highlight was the rise in first time buyer owner occupied loans, up by around 1,030 on the prior month, as buyers reacted to the incentives available, and attractor rates. This equates to 18% of all transactions. Non-first time buyers fell 0.5%. The average first time buyer loan rose again to $327,000, up 1% from last month. We do not think the data gives any support for the notion that regulators should loosen the lending rules, as some are suggesting.  That said the “incentives” for first time buyers are having an effect – in essence, persuading people to buy in at the top, even as prices slide. I think people should be really careful, as the increased incentives are there to try and keep the balloon in the air for longer.

So, what can we conclude? Investment lending momentum is on the turn, though there is still lots of action in the funding of new property construction for investment – mostly in the high rise blocks around our major centres. But in fact momentum appears to be slowing in Brisbane, Sydney and Melbourne. This does not bode well for the construction sector in 2018, as we posit a fall in residential development, only partly offset by a rise in commercial and engineering construction (much of which is state and federal funded). What I’m noticing is that those in the construction sector – from small builders to sub-contractors – have significantly lower confidence levels than they did six months ago, based on our surveys.

Whilst lending to first time buyers is up, there are risks attached to this, as we will discuss later.

The good news is lending to business, other than for housing investment is rising a little, but businesses are still looking to hold costs down, and borrow carefully. This means economic growth will be slow, and potential wages growth will remain contained.

Fitch Ratings says Australian banks’ profit growth is likely to slow in 2018 as global monetary tightening pushes up funding costs, loan-impairment charges rise, and tighter regulation has an impact on business volumes and compliance costs from the 15 or so inquiries or reviews across the sector (according to UBS). They say Australian banks are more reliant on offshore wholesale funding than global peers, as the superannuation scheme here has created a lack of domestic customer deposits. Global monetary tightening could therefore push up banks’ funding costs. Indeed, The 10-Year US Bond yield is moving higher, and whilst the US Mortgage rates were only moderately higher today, the move was enough to officially bring them to the highest levels since the (Northern) Spring of 2017.

The main risks to banks’ performance stem from high property prices and household debt. Australian banks are more highly exposed to residential mortgages than international peers, while households could be sensitive to an eventual increase in interest rates or a rise in unemployment, given that their debt is nearly 200% of disposable income. Indeed, Tribeca Investment Partners said this week that local equities may be hurt by troughs in the domestic property market. “A heavily indebted household sector that is experiencing flat to negative real income growth, as well as dealing with higher energy and healthcare costs, and which has drawn down its savings rate, is unlikely to fill the gap in growth”

In local economic news, the latest ABS data on employment to December 2017, shows the trend unemployment rate decreased slightly to 5.4 per cent in December 2017, after the November 2017 figure was revised up to 5.5 per cent.  The trend unemployment rate was 0.3 percentage points lower than a year ago, and is at its lowest point since January 2013.

The seasonally adjusted number of persons employed increased by 35,000 in December 2017. The seasonally adjusted unemployment rate increased by 0.1 percentage points to 5.5 per cent and the labour force participation rate increased to 65.7 per cent.  The number of hours worked fell. By state, trend employment rose in NT, WA and SA.  Over the past year, all states and territories recorded a decrease in their trend unemployment rates, except the Northern Territory (which increased 1.6 percentage points). The states and territories with the strongest annual growth in trend employment were Queensland and the ACT (both 4.6 per cent), followed by New South Wales (3.5 per cent).

The ABA released new research – The Edelman Intelligence research conducted late last year which tracks community trust and confidence in banks. Whilst progress may be being made, the research shows Australian banks are behind the global benchmark in terms of trust. Based on the Annual Edelman Trust Barometer study released in January 2017, Australia remains 4 points behind the global average.

The Australian Financial Review featured some of our recent research on the problem of refinancing interest only loans (IO).  Many IO loan holders simply assume they can roll their loan on the same terms when it comes up for periodic review.  Many will get a nasty surprise thanks to now tighter lending standards, and higher interest rates.  Others may not even realise they have an IO loan!

Thousands of home owners face a looming financial crunch as $60 billion of interest-only loans written at the height of the property boom reset at higher rates and terms, over the next four years.

Monthly repayments on a typical $1 million mortgage could increase by more than 50 per cent as borrowers start repaying the principal on their loans, stretching budgets and increasing the risk of financial distress.

DFA analysis shows that over the next few years a considerable number of interest only loans (IO) which come up for review, will fail current underwriting standards.  So households will be forced to switch to more expensive P&I loans, assuming they find a lender, or even sell. The same drama played out in the UK a couple of years ago when they brought in tighter restrictions on IO loans.  The value of loans is significant. And may be understated.

We also featured research on the Bank of Mum and Dad, now a “Top 10” Lender in Australia. Our analysis shows that the number and value of loans made to First Time Buyers by the “Bank of Mum and Dad” has increased, to a total estimated at more than $20 billion, which places it among the top 10 mortgage lenders in Australia. Savings for a deposit is very difficult, at a time when many lenders are requiring a larger deposit as loan to value rules are tightened. The rise of the important of the Bank of Mum and Dad is a response to rising home prices, against flat incomes, and the equity growth which those already in the market have enjoyed.  This enables an inter-generational cash switch, which those fortunate First Time Buyers with wealthy parents can enjoy. In turn, this enables them also to gain from the more generous First Home Owner Grants which are also available. Those who do not have wealthy parents are at a significant disadvantage. Whilst help comes in a number of ways, from a loan to a gift, or ongoing help with mortgage repayments or other expenses, where a cash injection is involved, the average is around $88,000. It does vary across the states. But overall, around 55% of First Time Buyers are getting assistance from parents, with around 23,000 in the last quarter.

There was also research this week LF Economics which showed that some major lenders are willing to accept a 20% “Deposit” for a mortgage from the equity in an existing property, and in so doing, avoided the need for expensive Lenders Mortgage Insurance.

Both arrangements are essentially cross leveraging property from existing equity, and is risky behaviour in a potentially falling market. More evidence of the lengths banks are willing to go to, to keep their mortgage books growing. We think these portfolio risks are not adequately understood.

So, we conclude that banks are caught between trying to grow their books, in a fading market, by offering cheap rates to target new borrowers, and accept equity from existing properties, thus piling on the risk; while dealing with rising overseas funding, and in a flat income environment, facing heightened risks from borrowers as they join the 200% club.

That’s the Property Imperative Weekly to 20 January 2018. If you found this useful, do leave a comment, subscribe to receive future updates and check back for our latest posts. Many thanks for watching.

The Game Is Up – The Property Imperative Weekly 13 Jan 2018

The game is up. Major changes are rippling through the property market, with continued pressure on many households, so we examine the latest data.

Welcome to the Property Imperative weekly to 13 January 2018. Watch the video or read the transcript.

In this week’s review of the latest finance and property news, we start with the AFG Mortgage Index with data to December 2017. While the view is myopic (as its only their data) it is useful and really highlights some of the transitions underway in the industry.  First, there has been an astonishing drop in the number of interest only loans being written, from 60% of volume in 2015, to 20% now – WOW! We also see a small rise in first time buyer volumes, as expected. So the regulatory intervention is having some impact. However, average loans size is rising (and faster than income and inflation), and Victoria stands out as the state to watch with an increase in average loan size over the past 12 months nearly double the size of the increase in New South Wales. So more still needs to be done on the regulatory front. Overall, the national average loan size is up 2.8% over the past 12 months. The average loan size in New South Wales is now $613,084. Queensland has increased by 3.4% to now be sitting at $416,921. South Australia is up 3.4% to $390,706. The Northern Territory is up 22% to $469,502, albeit from a low volume. Reflecting the challenges being encountered by the WA economy, the state’s average loan size is down 1.1% to $439,944. Finally, the share of the major’s banks is falling, as we have seen from other data, as smaller players and non-banks pick up the slack. The majors now have just 64.2% of the market compared to the non-majors sitting at 35.8%.

There is more evidence of poor mortgage lending practice, according to online property lender Tic:Toc Home Loans as reported in The Australian Financial Review. This is another version of the ‘liar loans’ story, and shows that borrowers are more stretched than some lenders suspect. Tic:Toc says, one in five property borrowers are exaggerating their income and nearly half understating their spending, triggering new concerns about underwriting standards and vulnerability to sharp economic corrections. We see similar issues in our own surveys, as households stretch to get the largest mortgage they can, whatever the cost, and whatever the risk.

APRA  released the final version of the revised reporting requirements for residential mortgage lending. It comes into effect from March and lenders will have to report more fully, including data on gross income, (excluding super contributions), new reporting on self-managed superannuation funds (SMSFs) and non-residents, as well as all family trusts holding residential mortgages. Reporting of refinanced loans should include date of refinance (not original funding date) and APRA says the original purpose of the loan is not relevant to reporting when refinanced. Once again we see APRA in catch-up mode trying to get the data to manage the mortgage lending sector more effectively. We think they have been late to the party, and have much to do.

The chairman of the Australian Competition and Consumer Commission has revealed that there will be some “surprises” in the upcoming draft report into how the banks price residential mortgage products. The inquiry into how the major banks price their mortgage is the first undertaking of the ACCC’s new Financial Sector Competition Unit, which is tasked with undertaking regular inquiries into specific competition issues across the financial sector. Starting with the $1.2 million inquiry into residential mortgage product pricing, the ACCC is aiming to understand how the banks affected by the major bank levy explain any changes or proposed changes to fees, charges or interest rates in relation to residential mortgage products. The inquiry relates to prices charged until 30 June 2018. A draft report will be published in February or March. This will be an important piece of work especially, as the corporate watchdog has also previously warned that the big banks could be in breach of the ASIC Act over the reasons given for hiking interest rates.

Turning to broader economic news, The November data from the ABS shows that Australian retail turnover rose 1.2 per cent in November 2017, seasonally adjusted, with Black Friday and iPhone X sales driving the outcome This follows a 0.5 per cent rise in October 2017. Some will spruke this as a positive sign. However, the more reliable trends are less positive, with the estimate for retail turnover up 0.1 per cent in November 2017 the same as October 2017. This is just 1.7 per cent over that past year, so still weak, reflecting stagnant wage growth, rising costs and high levels of debt. The state trend data showed NSW, ACT and QLD had no change, NT fell 0.2% along with WA, while VIC rose 0.3% and SA 0.4%, and TAS rose 0.2%. Online retail turnover was a new record at 5.5 per cent of total retail turnover. But the key takeaway is that households are continuing to keep their wallets firmly in their pockets.

The latest ANZ Job Ads series for December in seasonally adjusted terms, fell 2.3% largely unwinding the increase over the previous two months. On an annual basis job ads are up 11.4%, a slight moderation from 12.0% y/y growth the previous month. The labour market in 2017 was characterised by widespread job growth (particularly in full time jobs), an increase in participation and a fall in the unemployment rate to a four-year low of 5.4%. Growth in ANZ Job Ads provided a leading signal of this strong performance. But of course this has not been converted to rising wages growth so far.

The Building Approvals data from the ABS was much stronger than expected, with the number of dwellings approved up 0.9 per cent in November 2017, in trend terms, and has risen for 10 months. The strong results were driven by renewed strength in approvals for apartments. Approvals for private sector houses fell 0.1 per cent in November. Private sector house approvals fell in Western Australia (3.3 per cent), New South Wales (0.8 per cent) and Queensland (0.4 per cent), but rose in South Australia (1.3 per cent) and Victoria (1.1 per cent).

Consumer Confidence was stronger in the first week of January according to the ANZ/Roy Morgan index, which jumped 4.7% to 122 last week, leaving it at the highest level since late 2013. It often jumps after Christmas, and perhaps the holidays and ashes victory are colouring perspectives. Certainly, it makes an interesting contrast to our own Household Financial Security Index, which we released this week, based on December 2017 survey data. The latest edition of the Digital Finance Analytics Household Financial Security Confidence Index, fell from 96.1 last month to 95.7 this time, and remains below the neutral measure of 100. You can watch our video where we discuss the research.

Analysis of households by their property owning status reveals that property investors are in particular turning sour, as flat net rental incomes, and rising interest rates hit many, at a time when property capital growth is stalling. Owner occupied households are faring a little better, thanks to a range of ultra-cheap mortgage rates on offer at the moment, but they are also concerned about price momentum. Those without property interests remain the least confident, as the costs of renting outstrip income growth, and more are slipping into rental stress.

More questions came out this week, when The ABC is reporting that a Treasury  FOI request has shown that Federal Labor’s negative gearing overhaul would likely have a “small” impact on home values, official documents reveal, contradicting Government claims the policy would “smash” Australia’s housing market. The previously confidential advice to Treasurer Scott Morrison from his own department said the Opposition’s plan might cause “some downward pressure” and could have “a relatively modest downward impact” on prices. This is further evidence that tackling negative gearing should be a strategic priority to help bring our housing market back to reality.

There is also a blind spot at the heart of macroeconomics according to Claudio Borio Head of the BIS Monetary and Economic Department – the BIS is the Central Bankers Banker. He argues that a core assumption implicit in policy setting is that macroeconomics can treat the economy as if it produced a single good through a single firm. The net effect of this assumption is to drag down interest rates and productivity. The truth is much more complex, and within the economy there are “zombie firms” where resources are effectively misallocated, leading to reduced productivity and lower than expected economic outcomes, which will cast a long shadow through the economic cycle. The bottom line is first, credit booms tend to undermine productivity growth as they occur and second, the subsequent impact of the labour reallocations that occur during a financial boom is much larger if a banking crisis follows. This may also help to explain the current gap between employment and wages growth.

Finally, if you want more evidence of the risks in the system look at the RBA chart pack which was released this week. You can watch our video on this, but first, relative to the ultra-low cash rate, actual mortgage rates are rising – no surprise given the rise in mortgage stress we are registering. Next, home loan approvals are on the slide – expect more of this as tighter underwriting standards bite, and many interest only borrowers are forced to switch to higher cost interest and principal loans. Home price indices are trending lower (but still net positive growth overall at the moment). Expect more falls in the months ahead. Household debt continues higher. Now double disposable income, and we have some of the most highly in debt households in the world. Lending growth is still three times income, so this is likely to continue higher. All this is bearing down on household consumption as real income growth stalls. The savings ratio is falling, as households tap these to prop up their finances, OK in the short term, but unsustainable longer term.

In summary, UNSW’s Professor Richard Holden wrote that troubling borrowing and lending markers in the Australian housing market suggest that the lessons from the US mortgage meltdown have not been learned. He rightly draws comparisons with the USA, as we discussed in last week’s Property Imperative, with loose lending standards, a high penetration of interest only loans, many of which will need to be refinanced to higher rate principal and interest loans down the track, and liar loans. Plus, there are questions about where borrowers are getting their deposits from (even drawing from credit cards or borrowing from the Bank of Mum and Dad), and while more loans are originated via brokers, he suggests the banks are myopic to the risks in their portfolio.  He says we are still left with highly indebted households who have nearly $2 of debt for every $1 of GDP, a raft of interest-only loans that will soon involve principal repayments, and stagnant wage growth, and concludes “Having lived in the US during the mortgage meltdown I’m sorry to say that I’ve seen this movie before. The question is: why haven’t our bankers?” I would add, our Regulators should answer the same question. We are on the brink; the game is up!

And that’s the Property Imperative weekly to 13 January 2018. If you found this useful, do like the post, add a comment, or subscribe to receive future updates. In the past week our YouTube Channel followers have grown by a third, so thanks to all those who joined and the comments you left.  We are busy collecting questions for our next Q&A session, so keep a look out for that.

Meantime, we will be back with more insights in the next few days, and many thanks for taking the time to watch.

Q&A – The Property Imperative Weekly 06 Jan 2018

In this edition of of our Vlog, we answer some of the most popular questions received via our social media channels.

These include the following:

  • How do we define mortgage stress?
  • Do you see parallels here with the US mortgage market in 2005?
  • Will underwriting standards get tougher still?
  • What is the likely trajectory of interest rates and home prices?

Our Top Reports Released In 2017

As we tie the ribbons on 2017, here are our most popular reports from 2017, all of which are still available free on request.

The Property Imperative Volume 9 Report Released Today

Time For “Digital First” – The Quiet Revolution Report Vol 3 Released

DFA’s SME Report 2017 Released

 

The Shape of 2018 – The Property Imperative Weekly 30th Dec 2017

In the final edition of the Property Imperative Weekly for 2017, we look ahead to 2018 and discuss the future trajectory of the property market, the shape of the mortgage industry, the evolution of banking and the likely state of household finances.

Watch the video, or read the transcript.

We start with the state of household finances. The latest data from the RBA shows that the ratio of debt to income deteriorated again (no surprise given the 6%+ growth in mortgage debt, and the ~2% income growth). The ratio of total debt to income is now an astronomical 199.7, and housing debt 137.5. Both are at all-time records, and underscores the deep problem we have with high debt.

We think that households will remain under significant debt pressure next year, and the latest data shows that mortgage lending is still growing at 3 times income growth. We doubt that incomes will rise any time soon, and so 2018 will be a year of rising debt, and as a result, more households will get into difficulty and mortgage stress will continue to climb.  We think Treasury forecasts of rising household incomes are overblown. On the other hand, the costs of living will rise fast.

As a result, two things will happen. The first is that mortgage default rates are likely to rise (at current rock bottom interest rates, defaults should be lower), and if rates rise then default rates will climb further. The second outcome is that households will spend less and hunker down. As the Fed showed this week, the US economy is highly dependent on continued household spending to sustain economic growth – and the same is true here. We think many households will hold back on consumption, spending less on discretionary items and luxuries, and so this will be a brake on economic activity. This will have a strong negative influence on future economic growth, which we already saw throughout the Christmas shopping season.

Mortgage interest rates are likely to rise as international markets follow the US higher, lifting bank funding costs. This is separate from any change to the cash rate. This year the RBA was able to sit on its hands as the banks did their rate rises for them. We hold the view that the cash rate will remain stuck it its current rut for the next few months, because the regulators are acutely aware of the impact on households if they were to lift. They have little left in the tank if economic indicators weaken, and the bias will be upward, later in the year.

Competition for new loans will be strong, as banks need mortgages to support their shareholder returns. The latest credit data from the RBA showed that total mortgages are now at a record $1.71 trillion, and investor lending has fallen to an annual rate of 6.5%, compared with owner occupied lending at 6.3%, so total housing lending grew at 6.4%. Business lending is lower, at 4.7% and personal lending down 1.2%.

But APRA’s data shows that banks are writing less new business, so total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reached $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow. In fact, comparing the RBA and APRA figures we see the non-bank sector is taking up the slack, and of course they do not have the current regulatory constraints.  The portfolio movements of major lenders show significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little.  Westpac and NAB grew their investment loans more than the others.

We think there will be desperate attempts to attract new borrowers, with deeply discounted rates, yet at the same time mortgage underwriting standards will continue to tighten. We already see the impact of this in our most recent surveys. The analysis of our December 2017 results shows some significant shifts in sentiment –  in summary:

  • First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
  • Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
  • Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate away from property investors.
  • Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, and this could have a profound impact on the market. We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. First time buyers remain the most committed to saving for a deposit, helped by new first owner grants, while those who desire to buy, but cannot are saving less. Those seeking to Trade Up are most positive of future capital growth. Foreign buyers will be less active in 2018.

So our view is that demand for property will ease, and the volume of sales will slide through 2018. As a result, the recent price falls will likely continue, and indeed may accelerate. We will be watching for the second order impacts as investors decide to cut their losses and sell, creating more downward pressure. Remember the Bank of England suggested that in a down turn, Investment Property owners are four times more likely to exit compared with owner occupied borrowers.

So risks in the sector will grow, and bank losses may increase.

More broadly, banks will remain in the cross-hairs though 2018 as the Royal Commission picks over results from their notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards. We expect more issues will surface. The new banking code which was floated before Christmas is not bad, but is really still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits?  What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans?  And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

We will get to hear about the approach to Open Banking, the Productivity Commission on vertical integration and the ACCC on mortgage pricing, as well as the outcomes from a range of court cases involving poor banking behaviour. APRA will also discuss mortgage risk weights. So 2018 looks like adding more pressure on the banks.

So in summary, we think we will see more of the same, with pressure on households, pressure on banks, and a sliding housing market. Despite this, credit is growing at dangerous levels and regulators will need to tighten further.  We are not sure they will, but then the current issues we face have been created by years of poor policy.

Households can help to manage their financials by building a budget to identify their commitments and cash flows. Prospective mortgage borrowers should run their own numbers at 3% above current rates, and not rely on the banks assessment of their ability to repay – remember banks are primarily concerned with their risk of loss, not household budgets or financial sustainability per se. Regulators have a lot more to do here in our view.

Many will choose to spruke property in 2018 (we are already seeing claims that the Perth market “is turning”), and the construction sector, real estate firms, and banks all have a vested interest in keeping the ball in the air for as long as possible. Governments also do not want to see prices fall on their watch, and many of the states are totally reliant on income from stamp duty.  But we have to look beyond this. If we are very luck, then prices will just drift lower; but it could turn into a rout quite easily, and don’t think the authorities have the ability to calibrate or correct a fall if it goes, they do not.

The bottom line is this. Think of property as a place to live, not an investment play. Do that, and suddenly things can get a whole lot more sensible.

That’s the Property Imperative Weekly to 30th December 2017. We will return in the new year with a fresh weekly set of objective news, analysis and opinion. If you found this useful, do leave a comment, or like the post, and subscribe to receive future updates.  Best wishes for 2018, and many thanks for watching.

First Time Buyers Keep The Property Market Afloat – The Property Imperative Weekly – 9th Dec 2017

First Time Buyers are keeping the property ship afloat for now, but what are the consequences?

Welcome to the Property Imperative weekly to 9th December 2017. Watch the video, or read the transcript.

In our weekly digest of property and finance news, we start this week with the latest housing lending finance from the ABS. The monthly flows show that owner occupied lending fell $23m compared with the previous month, down 0.15%, while investment lending flows fell 0.5%, down $60m in trend terms. Refinanced loans slipped 0.13% down $7.5 million. The proportion of loans excluding refinanced loans for investment purposes slipped from a recent high of 53.4% in January 2015, down to 44.6% (so investment property lending is far from dead!)

While overall lending was pretty flat, first time buyers lifted in response to the increased incentives in some states, by 4.5% in original terms to 10,061 new loans nationally. At a state level, FTB’s accounted for a 19% per cent share in Victoria and 13.7% in New South Wales, where in both states, a more favourable stamp duty regime and enhanced grants were introduced this year. But, other states showed a higher FTB share, with NT at 24.8%, WA at 24.6%, ACT at 20.1% and QLD 19.7%. SA stood at 13% and TAS at 13.3%. There was an upward shift in the relative numbers of first time buyers compared with other buyers (17.6% compared with 17.4% last month), still small beer compared with the record 31.4% in 2009. These are original numbers, so they move around each month. The number of first time buyer property investors slipped a little, using data from our household surveys, down 0.8% this past month. Together with the OO lift, total first time buyer participation has helped support the market.

The APRA Quarterly data to September 2017 shows that bank profitability rose 29.5% on 2016 and the return on equity was 12.3% compared with 9.9% last year. Loans grew 4.1%, thanks to mortgage growth, provisions were down although past due items were $14.3 billion as at 30 September 2017. This is an increase of $1.5 billion (11.8 per cent) on 30 September 2016. The major banks remain highly leveraged.

The property statistics showed that third party origination rose with origination to foreign banks sitting at 70% of new loans, mutuals around 20% and other banks around the 50% mark. Investment loan volumes have fallen, though major banks still have the largest relative share, above 30%.  Mutuals are sitting around 10%.  Interest only loans have fallen from around 40% in total value to 35%, but this represents a fall from around 30% of the loan count, to 27%. This reflects the higher average loan values for IO borrowers. The average loan balance for interest only loans currently stands at $347,000 against the average balance of $264,000.  No surprise of course, as these loans do not contain any capital repayments (hence the inherent risks involved, especially in a falling market).

But there has been a spike in loans being approved outside serviceability, with major banks reporting 5% or so in September. This may well reflect a tightening of standard serviceability criteria and the wish to continue to grow their loan books. We discussed this on Perth 6PR Radio.  So overall, we see the impact of regulatory intervention. The net impact is to slow lending momentum. As lenders tighten their lending standards, new borrowers will find their ability to access larger loans will diminish. But the loose standards we have had for several years will take up to a decade to work through, and with low income growth, high living costs and the risk of an interest rate rise, the risks in the system remain.

On the economic front, GDP from the ABS National Accounts was 0.6%. This was below the 0.7% expected. This gives an annual read of 2.3%, in trend terms, well short of the hoped for 3%+. Seasonally adjusted, growth was 2.8%. Business investment apart, this is a weak and concerning result.  The terms of trade fell. GDP per capita and net disposable income per capita both fell, which highlights the basic problem the economy faces.  The dollar fell on the news. Households savings also fell. No surprise then that according to the ABS, retail turnover remained stagnant in October. The trend estimate for Australian retail turnover fell 0.1 per cent in October 2017 following a relatively unchanged estimate (0.0 per cent) in September 2017. Compared to October 2016 the trend estimate rose 1.8 per cent. Trend estimates smooth the statistical noise.

So no surprise the RBA held the cash rate once again for the 16th month in a row.

The latest BIS data on Debt Servicing ratios shows Australia is second highest after the Netherlands. We are above Norway and Denmark, and the trajectory continues higher. Further evidence that current regulatory settings in Australia are not correct. As the BIS said, such high debt is a significant structural risk to future prosperity. They published a special feature on household debt, in the December 2017 Quarterly Review. They call out the risks from high mortgage lending, high debt servicing ratios, and the risks to financial stability and economic growth.  All themes we have already explored on the DFA Blog, but it is a well-argued summary. Also note Australia figures as a higher risk case study.  They say Central banks are increasingly concerned that high household debt may pose a threat to macroeconomic and financial stability and highlighted some of the mechanisms through which household debt may threaten both. Australia is put in the “high and rising” category.  The debt ratio now exceeds 120% in both Australia and Switzerland.  Mortgages make up the lion’s share of debt.  In Australia mortgage debt has risen from 86% of household debt in 2007 to 92% in 2017.

Basel III was finally agreed this week by the Central Bankers Banker – the Bank for International Settlements – many months later than expected and somewhat watered down. Banks will have to 2022 to adopt the new more complex framework, though APRA said that in Australia, they will be releasing a paper in the new year, and banks here should be planning to become “unquestionably strong” by 1 January 2020.  We note that banks using standard capital weights will need to add different risk weights for loans depending on their loan to value ratio, advanced banks will have some floors raised, and investor category mortgages (now redefined as loans secured again income generating property) will need higher weights. Net, net, there will be two effects. Overall capital will probably lift a little, and the gap between banks on the standard and internal methods narrowed. Those caught transitioning from standard to advanced will need to think carefully about the impact. This if anything will put some upwards pressure on mortgage rates.

The Treasury issues a report “Analysis of Wages Growth” which paints a gloomy story. Wage growth, they say, is low, across all regions and sectors of the economy, subdued wage growth has been experienced by the majority of employees, regardless of income or occupation, and this mirrors similar developments in other developed western economies. Whilst the underlying causes are far from clear, it looks like a set of structural issues are driving this outcome, which means we probably cannot expect a return to “more normal” conditions anytime some. This despite Treasury forecasts of higher wage growth later (in line with many other countries). We think this has profound implications for economic growth, tax take, household finances and even mortgage underwriting standards, which all need to be adjusted to this low income growth world.

Mortgage Underwriting standards are very much in focus, and rightly, given flat income growth.  There was a good piece on this from Sam Richardson at Mortgage Professional Australia which featured DFA. He said that over four days in late September two major banks added extra checks to an already-extensive application process. ANZ introduced a Customer Interview Guide requiring brokers to ask questions about everything from a customer’s Netflix subscription to whether they were planning to start a family. Three days later CBA introduced a simulator that would show interest-only borrowers how their repayments would change and affect their lifestyle. Customers would be required to fill in an ‘acknowledgement form’ to proceed with an interest-only application.

Getting good information from customers is hard work, not least because as we point out, only half of households have formal budgeting. So, when complete the mortgage application, households may be stating their financial position to the best of their ability, or they may be elaborating to help get the loan. It is hard to know. Certainly banks are looking for more evidence now, which is a good thing, but this may make the loan underwriting processes longer and harder. Improvements in technology could improve underwriting standards for banks while pre-populating interactive application forms for consumers and offering time-saving solutions to brokers and Open Banking may help, but while Applications can be made easier, this does not necessarily mean shorter.

More data this week on households, with a survey showing Australians have become more cautious of interest only loans with online panel research revealing that 46 per cent of Australians are Adamant Decliners of interest-only home loans according to research from the  Gateway Credit Union. In addition, a further quarter of respondents are Resistant Approvers, acknowledging the benefits of interest-only loans yet choosing not to utilise them. Of the generations, Baby Boomers are most likely to be Adamant Decliners and therefore, less likely to use interest-only products. While Gen Y are most likely to be Enthusiastic Users.

Banks continue to offer attractive rates for new home loans, seeking to pull borrows from competitors. Westpac for example, announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans. Rates for both new fixed rate loans and variable rate loans were reduced.  For example, the bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

The RBA released their latest Bulletin  and it contained an interesting section on Housing Accessibility For First Time Buyers.  They suggest that in many centers, new buyers are able to access the market, thanks to the current low interest rates. But the barriers are significantly higher in Melbourne, Sydney and Perth. They also highlight that FHBs (generally being the most financially constrained buyers) are not always able to increase their loan size in response to lower interest rates because of lenders’ policies. Indeed, the average FHB loan size has been little changed over recent years while the gap between repeat buyers and FHBs’ average loan sizes has widened. They also showed that in aggregate, rents have grown broadly in line with household incomes, although rent-to-income ratios suggest housing costs for lower-income households have increased over the past decade.

Housing affordability has improved somewhat  across all states and territories, allowing for a large increase in the number of loans to first-home buyers, according to the September quarter edition of the Adelaide Bank/REIA Housing Affordability Report. The report showed the proportion of median family income required to meet average loan repayments decreased by 1.2 percentage points over the quarter to 30.3 per cent. The result was decrease of 0.6 percentage points compared with the same quarter in 2016. However, Housing affordability is still a major issue in Sydney and Melbourne they said.  In addition, over the quarter, the proportion of median family income required to meet rent payments increased by 0.3 percentage points to 24.6 per cent.

Our own Financial Confidence Index for November fell to 96.1, which is below the 100 neutral metric, down from 96.9 in October 2017. This is the sixth month in succession the index has been below the neutral point. Owner Occupied households are the most positive, scoring 102, whilst those with investment property are at 94.3, as they react to higher mortgage repayments (rate rises and switching from interest only mortgages), while rental yields fall, and capital growth is stalling – especially in Sydney.  Households who are not holding property – our Property Inactive segment – will be renting or living with friends or family, and they scored 81.2. So those with property are still more positive overall. Looking at the FCI score card, job security is on the improve, reflecting rising employment participation, and the lower unemployment rate.  Around 20% of households feel less secure, especially those with multiple part time jobs. Savings are being depleted to fill the gap between income and expenditure – as we see in the falling savings ratio. As a result, nearly 40% of households are less comfortable with the amount they are saving. This is reinforced by the lower returns on deposit accounts as banks seek to protect margins. More households are uncomfortable with the amount of debt they hold with 40% of households concerned. The pressure of higher interest rates on loans, tighter lending conditions, and low income growth all adds to the discomfort. More households reported their real incomes had fallen in the past year, with 50% seeing a fall, while 40% see no change.  Only those on very high incomes reported real income growth.

Finally, we also released the November mortgage stress and default analysis update. You can watch our video counting down the most stressed postcodes in the country. But in summary, across Australia, more than 913,000 households are estimated to be now in mortgage stress (last month 910,000) and more than 21,000 of these in severe stress, the same as last month. Stress is sitting on a high plateau. This equates to 29.4% of households. We see continued default pressure building in Western Australia, as well as among more affluent household, beyond the traditional mortgage belts across the country. Stress eased a little in Queensland, thanks to better employment prospects. We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points.

So, the housing market is being supported by first time buyers seeking to gain a foothold in the market, but despite record low interest rates, and special offer attractor rates, many will be committing a large share of their income to repay the mortgage, at a time when income growth looks like it will remain static, costs of living are rising, and mortgage rates will rise at some point. All the recent data suggests that underwriting standards are still pretty loose, and household debt overall is still climbing. This still looks like a high risk recipe, and we think households should do their own financial assessments if they are considering buying at the moment – for home prices are likely to slide, and the affordability equation may well be worse than expected. Just because a lender is willing to offer a large mortgage, do not take this a confirmation of your ability to repay. The reality is much more complex than that. Getting mortgage underwriting standards calibrated right has perhaps never been more important than in the current environment!

And that’s the Property Imperative to 9th December 2017. If you found this useful, do leave a comment, sign up to receive future research and check back next week for the latest update. Many thanks for taking the time to watch.