The combined capital cities saw significantly fewer auctions this week, with a total of 953 auctions held; the lower activity a result of most states being host to a long weekend as well as both the AFL and NRL grand finals taking place. Despite lower auction volumes, clearance rates held firm, returning a preliminary result of 69.4 per cent, rising from the 66.2 per cent last week when final results saw volumes reach their highest level since May this year (2,782).
Melbourne was the main driver of the strong clearance, with a preliminary result just under 90 per cent. Over the same week last year, activity was equally subdued, with 872 auctions held and 75.8 per cent successful. Brisbane was the only capital city to see a rise in volumes week-on-week.
ANZ today announced it had acquired Australian property start-up REALas to help home buyers access better information about the Australian property market.
Launched in 2011, REALas offers a unique algorithm to predict property prices and has forged a strong reputation as the most accurate predictor of sale prices for listed properties.
Commenting on the acquisition, ANZ Managing Director Customer Experience and Digital Channels Peter Dalton said: “This is an important acquisition for our digital transformation as we know customers are increasingly turning to online resources for help as they navigate the Australian property market.
“It’s also a great success story of an Australian start-up, so we’re really pleased to be working with them and looking at how we might incorporate some of their features into ANZ’s products and services in the future.”
REALas CEO Josh Rowe said: “The algorithm at the centre of our site was built using the latest data science methods, local market knowledge from property experts and crowd-sourced data from buyers. Its predictions change in response to the market, which means buyers have access to the latest prediction right up to the time of sale.
“We’re thrilled that ANZ has recognised the value in what we’ve built over the past six years and we’re looking forward to growing our service and helping people get the information they need to make better decisions when buying or selling property.”
REALas.com will continue to operate independently as a wholly-owned subsidiary of ANZ.
The preliminary auction clearance results are in from Domain. Given it is a long weekend, the number of sales are way down on last week.
Brisbane cleared 47% of 78 scheduled, Adelaide had no sales on 8 listed, and Canberra cleared 73% of the 35 scheduled auctions.
Mortgage Lending is slowing and banks are tightening their underwriting standards still further, so what does this tell us about the trajectory of home prices, and the risks currently in the system?
We start our review of the week’s finance and property news with the latest lending data from the regulators.
According to the RBA, overall housing credit rose 0.5% in August, and 6.6% for the year. Personal credit fell again, down 0.2%, and 1.1% on a 12-month basis. Business credit also rose 0.5%, or 4.5% on annual basis. Owner occupied lending was up $17.5 billion (0.68%) and investment lending was up $0.8 billion (0.14%). Credit for housing (owner occupied and investor) still grew as a proportion of all lending. The RBA said the switching between owner-occupier and investment lending is now $58 billion from July 2015, of which $1.7 billion occurred last month. These changes are incorporated in their growth rates.
On the other hand, data on the banks from APRA tells a different story. Overall the value of their mortgage portfolio fell 0.11% to $1.57 trillion. Within that owner occupied lending rose 0.1% to $1.02 trillion while investment lending fell 0.54% to $550 billion. As a result, the proportion of loans for investment purposes fell to 34.9%.
This explains all the discounts and special offers we have been tracking in the past few weeks, as banks become more desperate to grow their books in a falling market. Portfolio movements across the banks were quite marked, with Westpac and NAB growing their investment lending, while CBA and ANZ cutting theirs, but this may include loans switched between category. Remember that if banks are able to switch loans to owner occupied categories, they create more capacity to lend for investment purposes. Putting the two data-sets together, we also conclude that the non-bank sector is also taking up some of the slack.
Our mortgage stress data got a good run this week, with the AFR featuring our analysis of Affluent Stress. More than 30,000 households in the nation’s wealthiest suburbs are facing financial stress, with hundreds risking default over the next 12 months because of soaring debts and static incomes. This includes blue ribbon post codes like Brighton and Glen Iris in Victoria, Mosman and Vaucluse in NSW and Nedlands and Claremont in WA.
The RBA is worrying about household debt, from a financial stability perspective, according to Assistant Governor Michele Bullock. She said households have really high debt – mainly mortgages, as a result of low interest rates and rising house prices, and especially interest only loans. “High levels of debt does leave households vulnerable to shocks.” She said. The debt to income ratio is rising (150%), but for some it is much higher. We will release our September Stress update this coming week.
Debt continues to remain an issue. For example, new data from the Australian Financial Security Authority shows that in 2016–17, the most common non-business related causes of debtors entering personal insolvencies was the excessive use of credit (8,870 debtors), followed by unemployment or loss of income (8,035 debtors) and then domestic discord or relationship breakdown (3,222 debtors). However, employment related issues figured first in WA and SA.
It is also worth saying the Bank of England has now signalled that the UK cash rate will rise, and this follows recent statements from the FED in the same vein. It is increasingly clear these moves to lift rates will raise international funding costs to banks and put more pressure on the RBA to follow suit.
Meantime, lenders continue to tighten their underwriting standards.
ANZ announced that it will be implementing new restrictions on some loans for residential apartments, units and flats in Brisbane and Perth. Now there will be a maximum 80 per cent loan-to-value ratio for owner-occupier and investment loans for all apartments in certain inner-city post codes. We think these changes reflect concerns about elevated risks, due to oversupply and price falls. ANZ’s policy changes apply to all apartments in affected postcodes, including off-the-plan and non-standard small residential properties valued at less than $3 million. Granny flats though are excluded.
More generally, ANZ also issued a Customer Interview Guide with specific which topics brokers should discuss with home and investment loan borrowers. “We expect brokers to use a customer interview guide (CIG) to record customer conversations as a minimum moving forward,” noted ANZ “while it is not required to submit the CIG with the application, it should be made available when requested as a part of the qualitative file reviews.”
CBA launched an interest-only simulator to help brokers show customers the differences between IO and P&I repayments and a new compulsory Customer Acknowledgement form to be submitted with all home loan applications that have interest-only payments to ensure that IO payments meet customer needs. CBA said that brokers must complete the simulator for all customers who are considering IO payments irrespective of whether the customer chooses to proceed with them. These requirements will be mandatory for all brokers and will become effective on Monday, 9 October.
Suncorp announced it is introducing new pricing methodology for interest only home lending. Variable interest rates on existing owner-occupier interest only rates will increase by 0.10% p.a and variable interest rates on all investor interest only rates will increase 0.38% p.a., effective 1 November, 2017.
But what about property demand and supply?
The ABS said Australia’s population grew by 1.6% during the year ended 31 March 2017. Natural increase and Net Overseas contributed 36.6% and 59.6% respectively. In fact, all states and territories recorded positive population growth in the year ended 31 March 2017, but Victoria recorded the highest growth rate at 2.4%. and The Northern Territory recorded the lowest growth rate at 0.1%. Significantly, Victoria, the state with the highest growth rate is currently seeing the strongest auction clearance rates, strong demand, and home price growth. This is not a surprise, given the high migration and this may put a floor on potential property price falls.
On the other hand, we also see an imbalance between those seeking to Trade up and those looking to Trade down, according to our research. Those trading up are driven by expectations of greater capital growth (42%), for more space (27%), life-style change (14%) and job change (11%). Those seeking to trade down are driven by the desire to release capital for retirement (37%), to move to a place which is more convenient (either location, or for easier maintenance) (31%), or a desire to switch to, or invest in an investment property (18%). In the past we saw a relative balance between those seeking to trade up and those seeking to trade down, but this is now changing.
Intention to transact, highlights that relatively more down traders are expecting to transact in the next year, compared with up traders. Given that there around 1.2 million Down Traders and around 800,000 Up Traders, we think there will be more seeking to sell, than buyers able to buy. As a result, this will provide a further drag on future price growth, especially in the middle and upper segments of the markets, where first time buyers are less likely to transact. This simple demand/supply curve provides another reason why prices may soon pass their peaks. Up Traders have more reason to delay, while Down Traders are seeking to extract capital, and as a result they have more of a burning platform.
Finally, auction clearance rates were still quite firm, despite the fact that property price growth continues to ease and time on market indicators suggest a shift in the supply and demand drivers, especially in Sydney.
So, overall, banks are on one hand still wanting to grow their home loan portfolios (as it remains the main profit driver), but lending momentum is slowing, and underwriting standards are being tightened further, at a time when home price growth is slowing.
This leaves many households with loans now outside current lending criteria, households who are already feeling the pain of low income growth as costs rise. More households are falling into mortgage stress, and this will put further downward pressure on prices and demand.
So we think the risks in the mortgage market are extending further, and the problem is that recent moves to ease momentum have come too late to assist those with large loans relative to income. As a result, when rates rise, as they will, the pain will only increase further.
And that’s the Property Imperative weekly to 30th September 2017.
Just rounding out our analysis of households and their property buying inventions, having looked at investors and first time buyers we now turn to those seeking to trade up (sell their current property and buy bigger) and those trading down (sell their current property and buy smaller).
Those trading up are driven by expectations of greater capital growth (42%), for more space, 27%, life-style change (14%) and job change (11%).
Those seeking to trade down are driven by the desire to release capital for retirement (37%), to move to a place which is more convenient (either location, or for easier maintenance) (31%), or a desire to switch to, or invest in an investment property (18%).
Intention to transact, highlights that relatively more down traders are expecting to transact in the next year, compared with up traders.
Given that there around 1.2 million Down Traders and around 800,000 Up Traders, we think there will be more seeking to sell, than buyers able to buy. As a result, this will provide a further drag on future price growth, especially in the middle and upper segments of the markets, where first time buyers are less likely to transact. This simple demand/supply curve provides another reason why prices may soon pass their peaks. Up Traders have more reason to delay, while Down Traders are seeking to extract capital, and as a result they have more of a burning platform.
This analysis will be taken further in the next edition of the Property Imperative, due out in a month or so. Meantime, you can still get the April 2017 edition.
Auction volumes increase across all but one of the capital cities this week, returning a preliminary clearance rate of 70.7 per cent across 2,759 auctions.
Auction volumes have increased across all but one of the capital cities this week with a total of 2,759 homes taken to auction, making it the busiest week for auctions since the end of May. So far, 2,226 results have been reported to CoreLogic, returning a preliminary clearance rate of 70.7 per cent, up from last week’s final clearance rate of 66.7 per cent across 2,510 auctions.
The final clearance rate across the combined capital cities has been holding around 66 per cent for the last 3 weeks so it will be interesting to see if this is the case again on Thursday once the remaining results have been collected. One year ago, the final auction clearance rate was recorded at 75.4 per cent and there were 2,480 auctions held across the capital cities.
The preliminary auction results from Domain are in, and Melbourne is still leading Sydney significantly. Sales Volume appear lower compared with last week, and this time last year. We will see where the final counts settle later. This confirms our view that momentum continues to ease.
Brisbane cleared 50% of 94 scheduled auctions, Adelaide 78% of 91 auctions, (above even Melbourne), and Canberra 65% of 65 scheduled.
We look at another massive week in property and finance, examine the arguments around mortgage rate rises, and consider which households are more likely to buy in the current market.
We start with mortgage arrears. Moody’s said the number of Australian residential mortgages that are more than 30 days in arrears has shot up to a five year high with a 30+ delinquency rate of 1.62% in May this year and with record high rates in Western Australia, the Northern Territory and South Australia. Arrears were also up in Queensland and the Australian Capital Territory while levels decreased in New South Wales, Victoria and Tasmania.
Ratings agency Standard & Poor’s (S&P) Global Ratings also recorded an increase in the number of delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS). This rate rose from 1.15% in June to 1.17% in July. Delinquent loans underlying the prime RMBS at the major banks made up almost half of all outstanding loans and increased from 1.08% to 1.11% from June to July. For the regional banks, this level rose from 2.30% to 2.35%.
Fitch says 30+ days arrears were 3 basis points higher compared with last year despite Australia’s improved economic environment and lower standard variable interest rates. However, default rates on Retail Mortgage Back Securities was 1.17%, 4 basis points better than the previous quarter. They made the point that losses experienced after the sale of collateral property remained extremely low, with lenders’ mortgage insurance payments and/or excess spread sufficient to cover principal shortfalls in all transactions during the quarter. So, banks are protected in this environment, even if households are not.
Much of the debate this week centred on how well the economy is doing, and what this means for interest rates. Globally, the Fed is maintaining its tightening stance, with the removal of some stimulus and further lifts in their benchmark rate soon. The financial markets reacted by lifting bond yields, and if this continues the cost of overseas funding will rise, making out of cycle mortgage rate hikes more likely here.
The RBA was pretty positive about the outlook for the global economy, as well as conditions locally. Governor Philip Lowe said to quote “The Next Chapter Is Coming”. In short, the global economy is on the up, central banks are beginning to remove stimulus, and locally, wage growth is low, despite reasonable employment rates. Household debt is extended, but in the current low rates mostly manageable, but the medium term risks are higher. Business conditions are improving. He then discussed the growth path from here, including the impact of higher debt on household balance sheets. He said we will need to deal with the higher level of household debt and higher housing prices, especially in a world of more normal interest rates. In this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets.
I debated the trajectory of future interest rates, and the impact on households with Paul Bloxham the Chief Economist HSBC on ABC’s The Business. In essence, will the RBA be able to wait until income growth recovers, thus protecting household balance sheets, or will they move sooner as global rates rise, and put households, some of whom are already under pressure, into more financial stress?
The Government announced late on Friday night (!) before the school holidays, a consultation on the formation of a new entity to help address housing affordability – The National Housing Finance and Investment Corporation or NHFIC. It also includes, a $1 billion National Housing Infrastructure Facility (NHIF) which will use tailored financing to partner with local governments in funding infrastructure to unlock new housing supply; and an affordable housing bond aggregator to drive efficiencies and cost savings in the provision of affordable housing by community housing providers.
Actually, this simply extends the “Financialisation of Property” by extending the current market led mechanisms, on the assumption that more is better. Financialisation is, as the recent UN report said:
… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.
So, we are not so sure about these proposals. Also, we are not convinced housing supply problems have really created the sky-high prices and affordability issues at all. And, by the way, the UK, on which much of this thinking is based, still has precisely the same issues as we do, too much debt, too high prices, flat incomes, etc. Anyhow, the Treasury consultation is open for a month.
More lenders dropped their mortgage rates to attract new business, including enticing property investors. For example, Virgin Money decreased the principal and interest investment rates by between 5 and 10 basis points, for loans with an LVR of 80% or below. Westpac cut its two-year fixed rate for owner-occupiers paying principal and interest by 11 basis points to 4.08 per cent (standalone rate) or 5.16 per cent comparison.
Net, net, demand is weakening and the Great Property Rotation is in hand. Lenders are tightening their underwriting standards further. This week NAB said it would apply a loan to income test to interest-only and principal and interest loans. The new ratio, which aims to determine the “customer’s indebtedness to the loan amount” takes the total limit of the loan and divides it by the customer’s total gross annual income (as disclosed in the application). Ratios greater than eight will be declined, according to the new policy. This is still generous, when you consider the LTI guidance from the Bank of England is 4.5 times. But good to see Loan to Income ratios being brought to bear – as they are by far the best risk metrics, better than loan to value, or debt servicing ratios.
Our latest surveys showed that more first time buyers are looking to purchase now. We see that 27% want to buy to capture future capital growth, the same proportion seeking a place to live! 13% are seeking tax advantage and 8% greater security of tenure. But the most significant change is in access to the First Home Owner Grants (8%), thanks to recent initiatives in NSW and VIC, as well as running programmes across the country. The largest barriers are high home prices (44%), availability of finance (19% – and a growing barrier thanks to tighter underwriting standards), interest rate rises (9%) and costs of living (6%). Finding a place to buy is still an issue, but slightly less so now (18%).
On the other hand, Property Investors, who have been responsible for much of the buoyant tone in the eastern states are less bullish. For example, in 2015, 77% of portfolio investors were intending to transact, today this is down to 57%, and the trend is down. Solo investors are down from a high of 49% to 31%, and again is trending lower. Turning to the barriers which investors face, the difficulty in getting finance is on the rise (29%), along with concerns about rate rises (12%). Other factors, such as RBA warnings (3%), budget changes (1%) only registered a little but concerns about increased regulation rose (7%). Around one third though already hold investment property (33%) and so will not be buying more in the next year. So, net demand is weakening.
CBA was the latest major bank to jettison lines of business, as banks all seek to return to their core banking business, by announcing the sale of 100% of its life insurance businesses in Australia (“CommInsure Life”) and New Zealand (“Sovereign”) to AIA Group for $3.8 billion. We have been watching the expansion and contraction cycle for many years, as banks sought first to increase their share of wallet by acquiring wealth and insurance businesses, then found that bankassurance, as the model was called, was difficult to manage and less profitable than expected, as well as being capital intensive. Hence the recent sales – and expect more ahead. We think considerable shareholder value has been destroyed in the process, especially if you also overlay international expansion and then contraction. Now all the Banks are focussing on their “core business” aka mortgages – but at a time when growth here is on the turn. The moves will release capital, and thanks to weaker competition across the local markets, they can boost returns, but at the expense of their customers.
The Productivity Commission Inquiry into Banking Competition is well in hand, with submissions released this week from the Customer Owned Banking Association. They said that we don’t have sustainable banking competition at the moment. A lack of competition can contribute to inappropriate conduct by firms, and insufficient choice, limited access and poor quality products for consumers. The current regulatory framework over time has entrenched the dominant position of the largest banks. Promoting a more competitive banking market does not require any dilution of financial safety or financial system stability. They also showed that borrowers could get better rates from Customer Owned Lenders, compared with the big players. So shop around.
So back to property. The ABS Property Price Index to June 2017 show considerable variations across the states, with Melbourne leading the charge, and Perth and Darwin languishing. Annually, residential property prices rose in Sydney (+13.8%), Melbourne (+13.8%), Hobart (+12.4%), Canberra (+7.9%), Adelaide (+5.0%) and Brisbane (+3.0%) and fell in Darwin (-4.9%) and Perth (-3.1%). The total value of residential dwellings in Australia was $6.7 trillion at the end of the June quarter 2017, rising $146 billion over the quarter.
Auction clearance rates are still quite strong, if off their highs, but we expect loan and transaction volumes to continue to drift lower as we head for summer.
Putting all the available data together we think home prices in the eastern states will still be higher at the end of the year, but as rates rise from this point, price momentum will ease further, that is unless income growth really does start lifting. The current 6% plus growth in mortgage lending, when incomes and inflation are around 2% is a recipe for disaster down the track. Despite all the jawboning about future growth prospects we think the debt burden is going to be a significant drag, and the risks remain elevated.
And that’s the Property Imperative Weekly to 23th September.
As we continue our series based on our most recent household surveys, we look at first time buyers, who seem to be picking up at least some of the slack from property investors (which we covered yesterday).
We see that 27% want to buy to capture future capital growth, the same proportion seeking a place to live! 13% are seeking tax advantage and 8% greater security of tenure. But the most significant change is in access to the First Home Owner Grants (8%), thanks to recent initiatives in NSW and VIC, as well as running programmes across the country.
The largest barriers are high home prices (44%), availability of finance (19% – and a growing barrier thanks to tighter underwriting standards), interest rate rises (9%) and costs of living (6%). Finding a place to buy is still an issue, but slightly less so now (18%).
Today we commence a short series on the results from our latest household surveys, as we examine the drivers of property demand by household segment.
These results, from our 52,000 sample to September 2017 reveals that a significant rotation is underway, with first time buyers seeking to buy, supported by recent enhanced first home owner grants, while property investors are now significantly less likely to transact. We will examine the underlying drivers, initially across the segments, and then later in more detail within a segment.
The segmentation we use is based on the master property definitions as described in our segmentation cookbook. It is essential to look across the segments, as cohorts have significantly different imperatives, which at an aggregate level are lost.
We start with an indication of which segments are most likely to transact over the next year (either buying or selling property). We can trace the trends since 2013, as displayed below, and until recently both portfolio investors (holding multiple properties for investment purposes) or solo investors (holding one or two properties) led the field. But we are now seeing a marked slow down in investors intending to transact. For example, in 2015, 77% of portfolio investors were intending to transact, today this is down to 57%, and the trend in down. Solo investors are down from a high of 49% to 31%, and again is trending lower. Later we will examine the drivers behind these trends.
In contrast, the proportion of Down Traders is 49%, has been rising a little. Demand remains quite strong, and has overtaken demand from solo investors. We also see a rise in demand from those seeking to refinance, with around 31% expecting to transact, in 2013, this was 13%. Finally, we see an uptick in First Time Buyers looking to buy, support, as we will see later by the FHOG available. First Time Buyers are also saving harder, with 82% saving, up from a low of 71% in 2014.
Given the rotation we have described, there is a slowing of demand for more finance (relatively speaking) from both Portfolio and Solo Investors, while demand from First Time Buyers, Up Traders and those seeking to Refinance is greater.
Finally, we see that usage of mortgage brokers continues to vary by segment, with those seeking to refinance most likely to use a broker, (77%), then First Time Buyers (64%) and Portfolio Investors (50%)
The results from this analysis will also flow into the next edition of our flagship report The Property Imperative, due out next month.