Welcome to the Property Imperative Weekly to 31st March 2018.
Watch the video or read the transcript.
In this week’s review of property and finance news we start with the latest CoreLogic data on home price movements.
Looking at their weekly index, after last week’s brief lift, values fell 0.17% in the past week and as a result Sydney home values have now declined by a cumulative 4.2% over the past 29-weeks, with values also down 4.1% over the past 34 weeks. Sydney’s quarterly growth rate remains firmly negative, down 1.8% according to CoreLogic and annual growth is also down 2.2%.
More granular analysis shows the most significant falls in higher value property, and also in high-rise apartments. Our own analysis, and feedback from our followers is that asking prices are falling quite consistently now, and the same trend is to be see in Brisbane and Melbourne, our largest markets. This despite continued strong migration. We see two trends emerging, more people getting desperate to sell, so putting their property on the market, and having to accept a deeper discount to close a sale.
As we showed this week in our separate videos on the latest results from our surveys, down traders in particular are seeking to release capital now, and there are more than 1 million who want to transact. On the other hand investors are fleeing, though some are now also being forced to sell thanks to the switch from interest only to more expensive principal and interest loans.
This is all consistent with the latest auction results, which Corelogic also reported. They said that volumes last week broke a new record with 3,990 homes taken to auction across the combined capital cities in the lead up to Easter, which exceeded the previous high of 3,908 over the week ending 30th November 2014. The preliminary clearance rate was reported at 65.5%, but the final auction clearance rate fell to 62.7 per cent last week, down from 66.0 per cent across 3,136 auctions the previous week. Over the same week last year, 3,171 auctions were held, returning a significantly stronger clearance rate (74.5 per cent).
CoreLogic said that Melbourne’s clearance rate last week was 65.8 per cent across 2,071 auctions, making it the busiest week on record for the city. In comparison, there were 1,653 auctions held across the city over the previous week, returning a clearance rate of 68.7 per cent. This time last year, 1,607 homes were taken to auction, and a clearance rate of 78.9 per cent was recorded. Sydney was host to 1,383 auctions last week, the most auctions held across the city since the week leading up to Easter 2017 (1,436), while over the previous week, 1,093 auctions were held. The clearance rate for Sydney fell to 61.1 per cent, down from 64.8 per cent over the previous week, while this time last year, Sydney’s clearance rate was a stronger 75.8 per cent.
Across the smaller auction markets, auction volumes increased week-on-week, however looking at clearance rates, Adelaide (64.6 per cent) and Canberra (69.1 per cent) were the only cities to see a slight rise in the clearance rate over the week.
The Gold Coast region was the busiest non-capital city region last week with 87 homes taken to auction, while Geelong recorded the highest clearance rate at 79.7 per cent across 75 auctions.
Given the upcoming Easter long weekend, auction volumes are much lower this week with only 540 capital city auctions scheduled; significantly lower than last week when 3,990 auctions were held across the combined capital cities.
The next question to consider is the growth in credit. As we discussed in a separate blog, credit for housing, especially owner occupied mortgages is still running hot. The smoothed 12 months trends from the RBA, out last Thursday, shows annualised owner occupied growth registering 8.1%, up from last month, investor lending falling again down to 2.8% annualised, and business credit at just 3.6%
Looking at the relative value of lending, in seasonally adjusted terms, owner occupied credit rose 0.71% to $1.15 trillion, up $8.08 billion, while investment lending rose 0.12% to $588.3 billion, up just 0.69 billion. Business lending rose 0.17% to $905 billion, up 1.55 billion and personal credit fell 0.15%, down 0.22 billion to $152.2 billion.
Note that the proportion of investment loans fell again down to 33.9%, and the proportion of business lending to all lending remained at 32.4%, and continues to fall from last year. In other words, it is owner occupied housing which is driving credit growth higher – if this reverses, there is a real risk total credit grow will run into reverse. Again, we see the regulators wishing to continue to drive credit higher, to support growth and GDP, yet also piling on more risks, when households are already terribly exposed. They keep hoping business investment and growth will kick in, but their forward projections look “courageous”. Remember it was housing consumption and Government spending on infrastructure which supported the last GDP numbers, not business investment.
Now, let’s compare the total housing lending from the RBA of $1.74 trillion, which includes the non-banks (though delayed, and partial data), with the APRA $1.61 trillion. The gap, $130 billion shows the non-bank sector is growing, as historically, the gap has been closer to $110 billion. This confirms the non-bank sector is active, filling the gap left by banks tightening. Non-banks have weaker controls on their lending, despite the new APRA supervision responsibilities. This is an emerging area of additional risk, as some non-banks are ready and willing to write interest only and non-conforming loans, supported by both new patterns of securitisation (up 13% in recent times) and substantial investment funds from a range of local and international investors and hedge funds.
Once again, we see the regulators late to the party. This continues the US 2005-6 playbook where non-conforming loans also rose prior to the crash. We are no different.
The ABS released more census data this week, and focussed on the relative advantage and disadvantage across the country. Ku-ring-gai on Sydney’s upper north shore is Australia’s most advantaged Local Government Area (LGA). Another Sydney LGA, Mosman, which includes the affluent suburbs of Balmoral, Beauty Point and Clifton Gardens, has also been ranked among the most advantaged. In fact, SEIFA data shows the 10 most advantaged LGAs in Australia are all located around the Northern and Eastern areas of Sydney Harbour and in coastal Perth.
The most disadvantaged LGA is Cherbourg, approximately 250 kilometres north-west of Brisbane (QLD), followed by West Daly (NT). The 10 most disadvantaged LGAs in Australia can be found in Queensland and the Northern Territory.
The latest data has found that more than 30 per cent of people born in China, South Africa and Malaysia live in advantaged areas and less than 10 per cent reside in disadvantaged areas. Meanwhile, 40 per cent of Vietnamese-born live in disadvantaged areas and only a small proportion (11 per cent) live in advantaged areas.
People of Aboriginal and/or Torres Strait Islander origin are more likely to live in the most disadvantaged areas with 48 per cent living in the bottom fifth most disadvantaged LGAs, compared to 18 per cent of non-Indigenous people. Overall, only 5.4 per cent of Aboriginal and/or Torres Strait Islander people live in areas of high relative advantage compared with 22 per cent of non-Indigenous people.
What the ABS did not show is that there is a strong correlation of those defined as advantaged to valuable real estate – home price rises have both catalysed the economic disparities across the country, and of course show the venerability that more wealthy areas have should home prices fall further. The paper value of property is largely illusory, and of course only crystallises when sold.
The HIA reported that new home sales declined for the second consecutive month during February 2018 overall, but the markets were patchy, based on results contained in the latest edition of their New Home Sales report – a monthly survey of the largest volume home builders in the five largest states.
Despite the fact that the overall volume of sales declined during February, reductions only occurred in two of the five states covered by the HIA New Home Sales Report – the magnitude of these reductions outweighed the increases which took place elsewhere. The largest fall was in Queensland (-16.3 per cent) with a 9.9 per cent contraction recorded in WA. The largest increase in sales was in NSW (+11.7 per cent), followed by SA (+10.3 per cent) and Victoria (+4.8 per cent).
Finally, we walked through our survey results in a series of separate videos, but in summary, the latest release of the Digital Finance Analytics Household Survey to end March 2018, helps to explain why we think home prices are set to fall further by drawing on our 52,000 sample, from across Australia.
This chart, which looks across our property segments, shows that both portfolio property investors (who hold multiple properties) and solo investors (who hold one, or perhaps two) intentions to transact are tanking, down 8% since December 2017. This is because credit is less available, capital growth has stalled, and in fact only the tax breaks remain as an incentive! This decline started in 2015, but is accelerating. Remember that around one thirrd of mortgages are for investment purposes, so as this demand dissipates, the floor on prices starts to shatter.
Whilst there are offsetting rises from down traders (who are seeking to release capital before prices fall further) and first time buyers (who are being “bribed” by first owner grants) there is a significant net fall in demand. This pattern is seen across the country, but is most prevalent in our two biggest markets of Sydney and Melbourne.
Refinancing is up a little, thanks to the attractive discounts being offered by many lenders, and the prime driver is to reduce monthly repayments, as currently household finances are under pressure. We release the latest mortgage stress analysis in a few days.
And if you want to think about the consequences of all this, then watch our commentary on the Four Scenarios which portrays how the property and finance sector may play out, and compare the comments from APRA with those in Ireland in 2007 in our latest video blog – they are eerily similar, and we all know what happened there!
The outlook for finance and property in Australia in decidedly uncertain.
