Preliminary Clearance Rate Increases to 71.7%, While Auction Volumes Remain Steady

From CoreLogic.

This week across the combined capital cities, the preliminary auction clearance rate rose to 71.7 per cent, up from last week when the final clearance rate fell to 67.5 per cent. There were 2,041 capital city auctions this week, virtually unchanged from last week’s 2,040 auctions as well as being higher than the 1,795 auctions held one year ago.

Volumes continue to track higher than what was seen over the corresponding July-August period last year. Across the two largest markets, Melbourne’s preliminary clearance rate rose this week (77.7 per cent), after last week’s final results saw a weakening in the rate of clearance, falling below 70 per cent for the first time since July 16 (69.8 per cent), while Sydney’s clearance rate also improved up to 70.8 per cent this week, however volumes were lower week-on-week in Sydney, while Melbourne held more auctions this week than last.

2017-08-21--CapitalCityAuctionResults

Mortgages and debt: How lending culture is leaving Australians vulnerable

From ABC News.

A decade of housing price rises, low interest rates and relatively easy credit has left Australians carrying the second highest level of household debt in the world.

And despite efforts to tighten lending and to address problems in the lending culture, the ABC’s Four Corners program has learnt bank staff and mortgage brokers are still required to meet tough lending targets and some staff are threatened with dismissal if they do not meet the banks’ requirement to sign up more mortgages.

The problems in the lending culture were acknowledged by the banks themselves earlier this year in a review conducted by the former public service chief, Stephen Sedgwick.

Incentive payments and lending targets are still a primary motivator for bank staff.

Internal performance expectations for Westpac bank lenders, obtained by Four Corners, include targets of six-to-nine home-finance requests a week and between two and three home-loan drawdowns a week.

All the big banks have performance targets.

ANZ chief concedes need for further reform

Most bank CEOs, including Westpac, were unavailable for interview but ANZ chief Shayne Elliott did agree to talk to Four Corners.

Mr Elliott said changes had been made and not all the targets were simply sales targets.

“The targets are small in relation to their overall income,” he said.

Mr Elliott said, following the Sedgewick review, 70 per cent of ANZ’s targets were weighted towards good customer outcomes and customer satisfaction.

“[The targets are] not all about sales, not about the number of mortgages,” he said.

Banking regulators have also moved to tighten lending, forcing banks to make investor loans in particular harder to get — but bank staff told Four Corners they still had to meet tough performance targets.

Four Corners has obtained letters written to lenders by bank branch managers at NAB and Bankwest — owned by the Commonwealth Bank.

The letters warned lenders who had not met their targets that their positions were under review, and both canvassed the possibility of termination.

Mr Elliot conceded there was room for further reform in the industry.

“I think, in terms of our own staff, there will always be room for further improvement,” he said.

But he said there also needed to be a greater focus on the incentives driving the mortgage brokerage industry.

“We’re accountable for the lending, but [for] future reform we need to look at the way that the broking industry is also compensated,” he said.

Some brokers agree.

Philip Dempsey, a former mortgage broker, left the industry after growing increasingly uncomfortable with the commission-only payment system.

“Brokers are under extreme pressure — most of them don’t have a base salary,” he said.

Mr Dempsey said most brokers also had lending targets they had to meet — some as high as $3 million a month.

He said if the targets were not met, the brokers were forced out of the industry.

“There have been people in the industry who have been lending clients too much money, encouraging them to borrow more than what they can comfortably afford,” he said.

A ‘perfect storm’ of issues

Australian banks now hold at least 60 per cent of their loan assets directly to housing.

Concern is growing among some economists and former bankers about the impact of any housing downturn on the banks and on the wider Australian economy.
A shaded line graph showing a rising household debt to income ratio from 1990 to 2015.

 Finance data analyst Martin North gestures with his hands as he speaks to Four Corners.  Photo: Martin North said he had never before seen what he called a "perfect storm" of issues coming together. (ABC News) 

Finance data analyst Martin North conducts a continuous survey of individual household debt and mortgage stress.

He said he had never before seen what he called a “perfect storm” of issues coming together.

“We’ve got very high household debt. We’ve got very high house prices. We’ve got households in some degree of difficulty already,” he said.

“You only need a small consequential change, a small increase in the cost of fuel and stuff, to be able to actually really create that pain point.

“There are a good number of households who are really up against it now.

“It’s a house of cards, I think. It doesn’t take much to see how it could actually go pretty bad.”

Another economist who has raised the alarm is former banker Satiyajit Das.

He said the 60 per cent exposure to mortgage debt in Australia’s banks was “extremely high”.

That figure “is at least 20 per cent higher than Norway, and also higher than Canada, which is a very comparable economy to Australia”, he said.

Australia’s feverish housing market has contributed but Mr Das said other countries that had experienced rapid house price rises did not have the same potentially dangerous exposure.

“One of the biggest housing bubbles in the world is Hong Kong, but the Hong Kong banks have only got exposure to the housing market of around 15 per cent,” he said.

Exposure to housing debt at Australian levels, Mr Das said, would leave banks more vulnerable in the case of any housing downturn.

“If there is a downturn then obviously the losses will build up quite quickly,” he said.

‘Massive affordability problem’ will exacerbate downturn

Gerard Minack, the former head of developed market strategy at Morgan Stanley, said Australia had been led down this path by current tax arrangements and lenders who had been increasingly willing to leverage up borrowers.

This, he said, had created “a massive affordability problem” that will exacerbate the pain associated with any downturn.

Australia now has a household-debt-to-income ratio of 190 per cent.

“For every $1 of household income, there’s [nearly] $2 of debt,” Mr Minack said.

“I can’t think of a single economy that’s had a downturn with that much debt where it’s not been a deep downturn.”

Mr Elliot said ANZ was comfortable with its current loan exposure.

“It is a healthy mix at about 60 per cent, ” he said.

“The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of really small loans across the country.”

Mr Elliot said the impact of a downturn on the bank would depend on its nature.

“It’s something we look at incredibly seriously because it’s in our best interest to make sure that our risk is well managed,” he said.

This is why apartment living is different for the poor

From The Conversation.

There’s been a lot of talk about apartment living of late. Whether it’s millennials who can’t afford to buy a house, downsizers making a lifestyle change, owner-occupiers struggling to get defective buildings fixed, or foreign investors buying into new development, there’s no shortage of opinions and interest.

Except for one group: lower-income and vulnerable residents.

In Greater Sydney, the latest census data show that almost one in five households (17%) living in apartments and townhouses have weekly household incomes of less than A$649.

Among this group the largest sub-group (36%) live in private rental housing. That’s more than 72,000 households living on $649 or less per week in a housing market where average weekly rents for apartments are $550.

Our research for Shelter NSW identifies multiple challenges such households face.

Why does this matter?

It matters because some things about apartment and townhouse living are fundamentally different to living in a house. These differences have particular impacts on lower-income and vulnerable people living in higher-density housing.

The significant differences include:

  • You live closer to your neighbours, so it’s more likely you’ll see, hear or meet them.
  • You share services and spaces with neighbours, from gardens to laundries to lifts.
  • You have to co-operate with other residents and owners to manage and pay for building operation and upkeep.

If you live in a private apartment building then the fact that a large proportion of apartments are sold to investors and rented out will likely have three key impacts on you:

  1. Developers often cater for investors when designing new apartment buildings, so you will likely find a limited variation in apartment designs and sizes available.
  2. Resident turnover in your building may be high, as private renters move more frequently.
  3. Tensions between owner-occupiers and investor-owners may result in disagreements and disputes over budgeting and maintenance.

While these unique aspects of higher-density living can be tricky for anyone, they present particular challenges for lower-income and vulnerable residents. They tend to have less choice about their living arrangements, so they can’t up and move to better-designed, constructed and managed properties if things aren’t working out.

Building flaws affects some residents in particular

Poor building quality is one of the major issues in high-density development in Australia. The problems relate to design, defects and maintenance.

The design issues include noise disturbances as a result of poor design, inadequate solar access and cross ventilation, the availability and flexibility of shared spaces, and safety and security considerations.

Another issue is design that fails to help meet the needs of particular groups (such as people with a disability, and families with children).

Beyond design, the construction quality of higher-density developments is a major issue in Australia. Key concerns include the quantity and severity of building defects, as well as the difficulties owners face having defects fixed.

Among the problems are quality of workmanship, management of construction, private certification, limited warranties and the often-prohibitive cost of legal action.

As with poor design, lower-income households are particularly susceptible to construction issues. This is because there are more incentives to cut corners when constructing more affordable housing. Examples include rushing jobs, hiring cheaper but less experienced tradespeople, or using substandard materials.

Once residents move in, negotiating to fix defects is particularly difficult for private renters, as they typically must go through the real estate agent or landlord. This means renters may be stuck with unsatisfactory living conditions.

Lower-income renters are also likely to be over-represented in poorly maintained buildings, as these are usually cheaper to rent. Compared to a detached house, maintenance in higher-density properties is complicated by the complexity of the buildings themselves and the governance structures.

As a result, required maintenance work is often not carried out, or is reactive rather than proactive. This is especially true in buildings occupied by lower-income renters with no direct recourse to the strata committee. They often cannot afford to move and may fear retaliatory rent increases if they report maintenance issues.

Social relations can be challenging

Neighbour disputes happen everywhere, but evidence suggests disputes are more common in areas with more lower-income and vulnerable residents and with more apartments.

Common causes of neighbour conflict in higher-density housing reflect different expectations about noise levels, parking practices, or spending on maintenance and improvements.

Neighbour disputes can have significant impacts on health. This potentially counteracts the health benefits associated with the walkable nature of many higher-density neighbourhoods.
When disputes arise, the number of stakeholders involved complicates efforts to find a resolution. They might include renters, resident owners, investor owners, building managers, strata managers and strata committee members.

Research with strata residents in New South Wales shows residents find formal dispute resolution mechanisms complex and slow. Most disputes are resolved informally.

Lower-income residents, and renters in particular, are likely to have less influence over the outcomes of such processes.

Fostering positive neighbour relations can be more difficult where resident turnover is high, such as in buildings dominated by private renters. It is also more difficult in poorly designed buildings without quality shared spaces.

New norm promotes inequity

Apartment living is the new norm in Australia. As the nursery rhyme says, when it’s good it’s very, very good, but when it’s bad it’s horrid. If these homes are poorly designed, poorly built, poorly maintained or poorly managed, they are poor places to live.

The market-led housing model that underpins Australia’s compact city policies has meant that people with less money get a poorer product. Few planners or politicians have adequately acknowledged these inequities.

Authors: Hazel Easthope, Senior Research Fellow, City Futures Research Centre, UNSW; Laura Crommelin, Research Associate, City Futures Research Centre, UNSW; Laurence Troy, Research Fellow, City Futures Research Centre, UNSW

Auction Results 19 Aug 2017

Domain has released the preliminary auction clearance results for today. Melbourne looks like it is leading the way at 78.3% clearance, ahead of Sydney. Still seems to be momentum in the main centres.

Brisbane achieved 50% clearance on 100 scheduled auctions, Adelaide 67% on 67 scheduled, and Canberra 74% of 37 scheduled auctions.

 

The Debt Monster – The Property Imperative Weekly – 19 Aug 2017

Household Incomes are growing at the slowest rate for two decades, putting more strain on family budgets who are wrestling with rising costs and bigger mortgages and battling the debt monster.

What the implications for home prices, and the broader economy? Welcome the Property Imperative weekly to 19th August 2017, as we look at the latest finance and property news.

Last week we saw auction clearance rates accelerate. According to CoreLogic they rose to 2,011, compared with 1,857 over the previous week.  This was the largest number of auctions held since the last week of June 2017 and one third higher compared with the same week a year ago. Melbourne has held the record for the largest number of sales, but Sydney achieved a higher clearance rate at 72%. So not much sign of the property market flagging.

More data came from the RBA when Assistant Governor Christopher Kent discussed insights from a dataset which covers about 280 ‘pools’ of securitised assets and has information on 1.6 million individual mortgages with a total value of around $400 billion. Currently, this accounts for about one-quarter of the total value of home loans outstanding in Australia.

A couple of caveats. While the dataset covers a significant share of the market for housing loans, it may not be entirely representative across all its dimensions. In particular, the choice of assets in the collateral pool may be influenced by the way that credit ratings agencies assign ratings and by investor preferences. Also, in practice it may take quite a while until new loans enter a securitised pool.

But the first thing to note is that rates on owner-occupier loans and investor loans used to be similar, but investor loans became relatively more expensive from the latter part of 2015. In fact, up until most recently, actual rates paid on interest-only loans have been lower than those on principal-and-interest loans. But now, interest only loans are significantly more expensive for both owner-occupied and investor borrowers. This is reflecting recent bank repricing as they seek to repair margins and throttle back interest only lending in response to regulatory pressure. Monthly repayments are on the rise, and on large loans this is a significant impost.

Looking at loan to value ratios, we see that there is a large share of both owner-occupier and investor loans with current LVRs between 75 and 80 per cent. That is consistent with banks limiting the share of loans with LVRs (at origination) above 80 per cent. Also, borrowers have an incentive to avoid the cost of mortgage insurance, which is typically required for loans with LVRs (at origination) above 80 per cent. This is consistent with the DFA market model, and suggests that a common held view that the average LVR is circa 50% is not correct any more. Bigger loans, lower equity, larger repayments.

Finally, they looked at offset accounts, which showed strong growth up to 2015 probably related to the rise in the share of interest-only loans, with the two being offered as a package. Interestingly, we saw a significant slowing in growth in offset balances around the same time as growth in interest-only housing loans started to decline. Offset balances provide some security for borrowers in times of finance stress.  But the RBA highlights that for investor loans, even after accounting for offset balances, there is still a noticeable share of loans with current LVRs of between 75 and 80 per cent. And for both investor and owner-occupier loans, adjusting for offset balances leads to only a small change in the share of loans with current LVRs greater than 80 per cent. This suggests that borrowers with high current LVRs have limited repayment buffers.

Oh, and note there was no analysis at all on the most critical metric – loan to income ratios, which as we have been highlighting is a more reliable risk assessment tool, but one which in Australia we appear loathe to discuss.

This becomes important when we consider that home prices continue to rise in most states. Separate analysis from CoreLogic showed that the cost of housing has continued to rise across most parts of the country over the past 12 months, pushing the proportion of homes selling for at least one million dollars to new record highs.  Bracket creep should come as no surprise in markets like Sydney and Melbourne where dwelling values have increased by 77% and 61% respectively over the past five years.  While the rise in housing values has been most pronounced in Sydney and Melbourne, most other capital cities and regional areas have also seen a proportional lift in home sales over the million-dollar mark.

The banks continue to lend strongly in the mortgage sector, with system growth still sitting around 6% over the past year. ANZ, who reported their third quarter results this week revealed that they had grown their owner occupied lending at 1.3 times system growth, whilst investor loans grew at 0.8%. Lenders are still banking on mortgage credit growth.

The RBA minutes were more muted this month, perhaps because of the reaction to the 2% rate lift to neutral last month, which was hurriedly walked back subsequently! They mentioned concerns about high household debt again, and that inflation is running below 2%. They also mentioned that the Australian Bureau of Statistics intends to update the weights in the CPI in the December quarter 2017 CPI release, to reflect changes in consumers’ spending behaviour over recent years. This is expected to lead to lower reported CPI inflation because the weights of items whose prices had fallen were likely to be higher, whereas the weights of items whose prices had risen were likely to be lower.

Underlying inflation was expected to be close to 2 per cent in the second half of 2017 and to edge higher over the subsequent two years. Retail electricity prices were expected to increase sharply in the September quarter. They said “ongoing low wage growth and the high level of debt on household balance sheets raised the possibility that consumption growth could be lower than forecast”.

The income data from the ABS confirmed low wage growth, with seasonally adjusted, private sector wages up just 1.8 per cent and public sector wages up 2.4 per cent through the year to June quarter 2017. So wages for those not fortunate enough to work in the public sector continues to be devalued in real terms.  Also, whilst more jobs were created in July, the employment rate is still quite high, and underemployment remains a significant factor – one reason why wages growth is unlikely to shift higher.

So, what are the consequences of home lending rising 6%, inflation 2% and incomes below this? The short answer is more debt, and mostly mortgage debt.

To get a feel for the impact of this, look at our recent focus group results.  Around two thirds of the households in the session held a basic assumption that high debt levels were normal. They had often accumulated debts through their education, when they bought a house, and running credit cards. Even more interestingly, their concern from a cash flow perspective was about servicing the debts, not repaying them. One quote which struck home was “once I am dead, my debts are cancelled, I just keep borrowing until then”.

Debt, it seems has become part of the furniture, and will remain a spectre at the feast throughout their lifetime.  The banks will be happy!

So it is worth looking at some long term trends, as we did on Friday using RBA data.

The traditional argument trotted out is that household wealth is greater than ever, this despite low income growth and rising debt. But of course wealth is significantly linked to home prices, which in turn is linked to debt, so this is a circular argument. You get a different perspective by looking at some additional trends.  And if property prices fell it would all turn sour.

But let’s start with the asset side of the ledger. Since 1999, superannuation has grown by 181.2%, and at the fastest rate. But it is arguably the least accessible asset class.

Residential property values rose 160.2% over the same period, and grew significantly faster than equities which achieved 135.8% growth, so no wonder people want to invest in property – the capital returns have been significantly more robust. Deposit savings grew 159.1% (but the savings ratio has been declining recently). Overall household net worth rose 151.2%. So the story about households being more affluent can be supported on this view of the data. But it is myopic.

Overall household debt rose 161.9%, a growth rate which is higher than residential property values, at 160.2% and above overall household net worth at 151.2%.

But the growth in income, which is a puny 60.5%, under half the asset growth. OK, interest rates are lower now, but this increase in leverage is phenomenal – and explains the “debt is normal” findings from our focus groups. I accept debt is not equally spread across the population, but there are significant pockets of high borrowing, as can be seen from our mortgage stress analysis – and it’s not just among battling urban fringe mortgage holders.

Finally, it is worth noting the growth in the number of residential properties rose by just 29.8% over the same period. So the average value of individual properties has increased significantly. On paper.

To me this highlights we have learned nothing from the GFC. Our appetite for debt, supported by the low interest rate monetary policy, significant tax breaks, and salted by population growth has created a debt monster, which has the capacity to consume many if interest rates were to rise towards more normal levels. Unlike Governments, household debt has to be repaid, eventually.

This data series shows clearly the relationship between more debt and home prices, they feed of each other, and this explains why the banks have enjoyed such strong balance sheet growth. But the impact on households is profound, and long term. Our current attitude to debt will be destructive eventually.

If you are interested in this debate, try to watch ABC Four Corners on Monday night, as they will be looking at the housing bubble and mortgage stress, and using some of our data in the programme.

And that’s the Property Imperative to 19th August 2017. If you found this useful, do subscribe to get updates, and check back for next week’s installment. Thanks for watching.

Million Dollar Sales at Record Levels

From CoreLogic.

The cost of housing has continued to rise across most parts of the country over the past 12 months, pushing the proportion of homes selling for at least one million dollars to new record highs.  Bracket creep should come as no surprise in markets like Sydney and Melbourne where dwelling values have increased by 77% and 61% respectively over the past five years.  While the rise in housing values has been most pronounced in Sydney and Melbourne, most other capital cities and regional areas have also seen a proportional lift in home sales over the million dollar mark.

Over the 12 months to June 2017, 15.4% of all house sales and 8.8% of all unit sales nationally were at a price of at least $1 million.  By comparison, 12 months earlier 14.4% of all house sales and 7.5% of all unit sales were at least $1 million in value.

Annual % of sales of at least $1 million,
National

2017-08-14--annual%ofsalesofatleast$1million,national

 

The instances of dwellings selling for at least $1 million is much more prevalent across the combined capital cities.  Over the 12 months to June 2017, 23.2% of all houses and 10.8% of all units sold in capital cities were sold for at least $1 million.  The proportion of sales of at least $1 million has increased over the year from 21.5% of houses and 9.1% of units.

Auction Volumes Rise to Highest Level in 6 Weeks

From CoreLogic.

Across the combined capital cities this week, the number of homes taken to auction rose to 2,011, compared with 1,857 over the previous week.  This was the largest number of auctions held since the last week of June 2017 and approximately one third higher compared with the same week a year ago.

The preliminary auction clearance rate of 70.5 per cent has increased relative to last week’s final clearance rate, up from 68.2 per cent.  However as more results are collected it is expected that the final auction clearance rate will revised lower to remain within the high 60 per cent range where it has tracked since the first week of June.

Over the corresponding week last year, the clearance rate was 75.0 per cent and 1,471 auctions were held. In Sydney, the preliminary clearance rate rose to 72.0 per cent, which was higher than Melbourne’s preliminary clearance rate of 71.0 per cent.  Afar Melbourne has remained the stronger performer for many weeks it is possible that Melbourne’s final clearance rate could drop below the 70 per cent mark for the first time since July last year.

2017-08-14--AuctionResultsCapitalCities

Home Prices In Hong Kong Climb To Record Highs Even As Chinese Buyers Pull Back

From Zero Hedge.

Chinese banking regulators’ efforts to force the country’s largest conglomerates to deleverage after an unprecedented binge on foreign assets has already spurred a pullback in foreign real-estate investment, part of a broader decline in foreign investment more generally.

But with wealthy Chinese buyers suddenly out of the real-estate market, housing analysts are anticipating a wave of sharp declines in housing prices in some of the world’s most expensive markets like New York City, London and Hong Kong.

But during the first half of the year, real-estate prices in these markets have continued to climb. Even in Hong Kong, one of the most expensive markets, and also one of the first places one might expect the impact of a mainland pullback to be felt, prices have instead climbed to all-time highs, according to Bloomberg.

The Centaline Property’s Centa-City Leading Index of existing home prices surged to a record high 160.3 as of July 30. The index has climbed 11 percent this year, and more than 50% in the past five years.

Over the past five years, the rapid runup in home prices has caused densely populated Hong Kong to become the world’s most expensive housing market.

“Hong Kong’s housing affordability ratio, which measures the proportion of income spent on mortgages, worsened to about 67 percent for the quarter, the government said Friday, up from 56 percent in the year-earlier period.”

Reining in housing prices in the former British colony is a top priority of the HKMA – the city’s de facto central bank – and its incoming Chief Executive Carrie Lam. Home prices have been a major driver of inequality; for example, now takes a household earning the median income 18 years to afford a home, according to data from Demographia. Every housing auction is hopelessly oversubscribed.

Back in May, HKMA’s current Chief Executive Norman Chan warned about the bubble-like behavior in the city’s housing market, saying levels of demand were reminiscent of 20 years ago, just before Hong Kong suffered a property bust. Chan cautioned people with limited financial resources to stop speculating in property based on the expectation that prices would rise indefinitely.

With wealthy foreign buyers stepping away, there’s probably enough repressed demand in the local market to keep prices buoyant for now. The number of residential transactions surged 43 percent to 18,892 in the second quarter, helping to push prices higher.

Unfortunately for investors, without a supply of wealthy mainland buyers willing to pay the “Chinese premium,” prices will soon slide back to Earth.

Auction Results 12 Aug 2017

The preliminary results from Domain are out, and, yes, we still have momentum so far as auction clearances are concerned. Sydney has a higher clearance rate at 73.7% compared with Melbourne, at 71.7, but more property continues to be sold in Melbourne. Most of the action remains in these two main centres.

Brisbane cleared just 41% of 78 scheduled auctions, Adelaide did a little better at 62% of 64 scheduled, and Canberra achieved a massive 91% clearance on 51 scheduled auctions. In fact, on several metrics the Canberra market could be said to be the most buoyant – helped by the Public Sector pay rises!

Things may change a bit a the results are finalised over the next few days. But seems to support our view that the market remains quite hot.

When Will Rates Rise? – The Property Imperative Weekly 12 Aug 2017

Demand for housing credit remains firm, which explains the ongoing high auction clearance rates. So has the property market further to run and what is the RBA likely to do?

Welcome to the Property Imperative weekly to 12th August 2017, our weekly digest of the latest finance and property news.

Company results released this week included the full-year outcomes from the CBA,  half year from AMP, and 3rd Quarter results from NAB. There was a common theme through them all. Mortgage loan growth has continued, and thanks to loan and deposit repricing, net interest margins have improved in recent months. This was also helped by more benign conditions in the international capital markets. In addition, overall provisions for bad loans were reduced, despite higher delinquency rates in the troubled Western Australia market.  We think the banks, overall, will continue to churn out larger profits as they use repricing to cover the extra regulatory costs and bank taxes.  In fact savers are taking a lot of the pain, especially on term deposits, as rates fall even lower, this gets less focus compared with all the commentary is on mortgage interest rates.

Mortgage Brokers were in the news again, this week, with NAB suggesting that changes do need to be made to “improve the trust and confidence that consumers can have in brokers”.  UBS put out a research note suggesting that broker commissions will be trimmed soon, whilst CBA reported a fall in the volume of new mortgages sourced via brokers, compared with their branch channels. We are beginning to see significantly differentiated distribution strategies, with some suggesting a migration to digital will reduce the importance of the branch, whilst other lenders, like CBA are investing in new, smaller, outlets with the expectation of driving more business generation through them.   On the other hand, CBA, as a result of John Symond exercising his put option, is also buying the remaining 20% interest rest of Aussie Home Loans. Interesting timing!

RBA Governor Philip Lowe’s Opening Statement to the House of Representatives Standing Committee on Economics today contained a few gems.

Globally monetary policy stimulus may be reducing, whilst low wage growth is linked to a complex range of global factors, from technology, competition and lack of security. Locally, business investment is still sluggish, and the RBA says, household are adjusting to lower wage growth plus rising power prices and the burden of household debt.  They still back 3% growth in the years ahead. The next move in the cash rate will be up, but not for some time yet.

Ten years ago this week, French bank BNP Paribas wrote a warning of the risks in the US securitised mortgage system. Later, UK lender Northern Rock saw customers queuing to get their money from the bank, a reminder of what happens when confidence fails.  Later still, Lehmann Brothers crashed. In the ensuing mayhem, as banks fell from grace and were either left to die, or were bailed out – mostly with public funds – and as mortgage arrears rocketed away in many northern hemisphere centres.

Whilst much has changed, and banks now hold more capital, we still think there are risks in the financial system. In fact, if the RBA does raise rates here, there is a risk we could have our own version of the GFC. It was the sharp move up in mortgage rates which finally triggered the crash a decade ago. We have very high household debt, high home prices, flat income, rising living costs and ultra-low, but rising mortgage rates. We also have a construction boom, with a large supply of new (speculative) property, and banks that have around 60% of their assets in residential property. Arguably lending standards are still too lose despite recent tightening (which note, had to be imposed on the lenders by the regulators!). So the RBA will need to lift rates carefully to avoid a crash.

Lending data from the ABS showed owner occupied housing lending rose 0.5% in trend terms in the past month – or around 6% annually, well ahead of inflation.  Lending for new construction rose. But lending for investment housing fell 0.85% month on month, despite ongoing strong demand from investors in Sydney and Melbourne. First time buyers were more active in June, they made up 15.0% of transactions, compared with 14.0% in May. Property demand is actually stronger than a couple of months ago as confirmed by the still strong auction clearance rates. Other personal finance fell 1.8%.

The trend series for the value of commercial finance commitments rose 1.8%. Non housing fixed lending rose 3% and revolving credit rose 1.8%. So, perhaps, finally, we see lending by business beginning to gain momentum! This is needed for sustainable growth. The ANZ Job ads were also stronger in July, and the NAB business confidence indicators were also higher. All pointing to strong business investment, perhaps.

On the other hand, the July DFA household finance confidence index was lower with the average score at 99.3, down from 99.8 last month and below the neutral setting. However, the average score masks significant differences across the dimensions of the survey results. For example, younger households are considerably more negative, compared with older groups. This is strongly linked with property owning status, with those renting well below the neutral setting (and more younger households rent these days), whilst owner occupied home owners are significantly more positive. We also see a fall in the confidence of property investors, relative to owner occupied owners. Across the states, we see a small decline in confidence in NSW from a strong starting point, whilst VIC households were more confident in July.

The driver scorecard shows little change in job security expectations, but lower interest rates on deposits continue to hit savings. Households are more concerned about the level of debt held, as interest rate rises bite home. The impact of flat or falling incomes registers strongly, with more households saying, in real terms they are worse off. Costs of living are rising fast, with the changes in energy prices, child care costs and council rates all hitting hard. That said, the continued rises in home prices, especially in the eastern states meant that net worth for households in these states rose again, which was not the case in WA, NT or SA.

Sentiment in the property sector is clearly a major influence on how households are feeling about their finances, but the real dampening force is falling real incomes and rising costs. As a result, we still expect to see the index fall further as we move into spring, as more price hikes come through. In addition, the raft of investor mortgage rate repricing will hit, whilst rental returns remain muted.

So, overall, we see a mixed and complex picture, with demand for property remaining firm, lending still rising, incomes still under pressure and lenders able to buttress their profits thanks to lifting margins. This puts pressure on the RBA, who continues to warn of the risks to households but then cannot lift rates very far. This tension will all play out, not just in the next few months, but over the next two or three years.

And that’s the Property Imperative to 12th August 2017. If you found this useful, do subscribe to get future updates, and check back for the latest installment.