Channel Nine News Does House Prices and Mortgage Defaults

A segment today from Channel Nine featured the latest data on Sydney residential property, and featured data from the Digital Finance Analytics mortgage default heat mapping, as well as the latest from CoreLogic on Home Prices.


Mortgage Default Heat Map Predictions

In our last post for 2016 we have geo-mapped the probability of mortgage default by post code across the main urban centres through 2017. You can read about our approach to the analysis here.

We start with Sydney, which is looking pretty comfortable.

Melbourne is also looking reasonable, though with a few hot spots.

Brisbane default levels are also benign (though the mining areas are more at risk).

Adelaide shows a few hot spots.

But greater Perth is where we think much of the action will be – plus the mining areas beyond the urban area.

As we discussed, our prediction for 2017 is that the property market generally will still be gaining ground, though some regions will be under significant pressure. Banks will be seeing losses rising a little, but defaults will remain contained.

Thanks to those who followed the DFA blog in 2016. We wish you a peaceful new year. We will be back in 2017 with more intelligent insights.

Capital city clearance rate remain above 70 per cent

CoreLogic confirms the auction clearance stats for the last weekend of the year, with combined capital city clearance rate remaining above 70 per cent, while auction volumes continue their seasonal taper.

Auction activity continued to ease this week after a surge in auctions over the past four weeks. The combined capital city clearance rate fell slightly to 70.5 per cent, down from last week’s 71.6 per cent. The number of properties taken to auction this week also fell across the capital cities, with 2,722 reported auctions, down from 3,432 last week, when the second busiest auction week this year was recorded. However, compared to the corresponding week last year, auction activity is significantly higher, with 1,818 auctions and a lower rate of clearance (59.4 per cent) reported over the same period last year.  Auction numbers will remain relatively sedate over the festive period, with CoreLogic resuming auction reporting in late January.

Today’s Auction Results Are In

The preliminary auction results are in from Domain for the last weekend before the Christmas break. Compared with last year, momentum is still strong, especially in Sydney and Melbourne.

Sydney cleared 71.4%, Melbourne 77.3% and Nationally 73.2%. Elsewhere Brisbane cleared 42% of 142 listings, Adelaide 75% of 75 listed and Canberra 70% of 62 listed.

More Proof That Young Australians Are Choosing Property Investment Over First Home

Regular followers of the DFA Blog will know we have been highlighting the drift of first time buyers towards the property investment sector for the past couple of years. We produce this chart each month, which combines data from our households surveys and the ABS first time buyer series (which stubbornly refuses to identify FTB investors, despite the recent methodology change. The red line shows the number of FTB purchasers who go direct to the investment sector. So called “Rentvesting”.

Now two surveys, as reported in The Real Estate Daily, confirm this trend.

Both NAB’s Residential Property survey and ING Direct’s Financial Wellbeing Index show an increase in the number of young, first-time property buyers purchasing a property investment instead of a home.

The NAB Residential Property survey for the third quarter found first-home investors made up 12.2 per cent of all new property sales in the third quarter of 2016, up from 11.1 per cent in the second quarter, according to the survey.

The survey also found that first home investors represented 10.6 per cent of all established property sales, an increase from 9.7 per cent in the second quarter.

Peter Mastrioanni, of, said the results were a sign that young people still want to invest in property, but in more flexible ways.

“First-time investors are now taking every opportunity to invest in real estate in a way that allows them to invest for reasons such as comfort instead of security, lifestyle instead of retirement, and versatility instead of restriction,” he said.

Mastrioanni said Generation Y in particular were choosing to become “rentvesters” instead of giving up on their dream of property ownership.

Rentvesting involves investing in property in more affordable locations, including interstate if necessary, while continuing to rent in the inner-city suburbs.

“This way, they’re having their property cake and eating it, too,” said Mastrioanni.

The result is backed up by ING Direct’s latest Financial Wellbeing Index, which shows a growing numbers of young buyers in the 18 to 34 age bracket are becoming property investors.

The index showed that 22 per cent of Generation Y own at least one investment property, followed by 20 per cent of Generation X and 19 per cent of Baby Boomers.

Mark Woolnough, ING Direct Head of Third Party Distribution, said concerns about housing affordability are not preventing young people from buying an investment property.

“What’s interesting is that while there are continued questions around affordability and the challenges for younger generations in getting onto the property ladder, it’s actually Gen Y that is leading the property investment pack,” he said.

Rates Plough Higher

Following the FED’s decision today, the benchmark T30 US Bond yield continues to move higher. A strong indicator that capital markets rates will continue to rise.  The FED is signalling more hikes next year, so yields will continue to climb. This has global significance.

The knock on effect for Australia is significant. Banks will have to pay more for their capital markets funding. International money market investors will switch money from Australia in favour of US markets, putting downward pressure on the AU$. This makes an RBA rate cut in 2017 even more remote (though some economists are still talking about 2 cuts!).

Mortgage rates here will continue to rise. Our outlook on the Property Market for 2017 took these rate movements into account.

Further evidence the world changed last month.




China’s Housing Market Isn’t a Bubble, Says One Strategist

From Bloomberg.

A financial crisis in China is no more likely in the coming decade than it was in the past 10 years, and pessimists predicting one have long done so without regard for fundamentals.

So says sinologist Andy Rothman, a San Francisco-based investment strategist at Matthews International Capital Management LLC, which oversees $26.1 billion. Before joining in 2014 he lived in China for two decades, working in the U.S. Foreign Service, including as head of the macroeconomics and domestic policy office of the U.S. embassy in Beijing. He later was a Shanghai-based strategist in CSLA Ltd., an investment banking arm of Credit Agricole SA.

China has no housing bubble and there’s no looming banking crisis, he says. His optimism rests on his view that the housing market is on a solid foundation. Leverage is the most important precondition for a bubble in any asset, and home buyer indebtedness in China is very low because down payment requirements are high, unlike in the U.S., he says.

“This isn’t like speculating in Las Vegas with zero money down,” he says. “China has a lot of problems, but they don’t tend to be the apocalyptic, catastrophic problems that we often read about. They’re more mundane, longer-term problems like how do you develop a rental market.”

While the country’s overall debt situation is serious, it’s still unlikely to lead to a financial crisis or economic hard landing, he says. That’s because potential bad debts are in state entities, which allows the government to manage how or whether they go bad, Rothman says.

He projects new home sales may fall 10 percent next year after rising about 30 percent in 2016 as the government continues to curb prices. While bears may see that as evidence of impending disaster, Rothman says it would still make 2017 China’s second-best year ever for new home sales because the base has grown so big.

So Where Will The Property Market Go In 2017?

Having looked at events in the Property Market in 2016, we now turn to our expectations for 2017. There are many uncertainties which may impact the market, but using our surveys and modelling as a guide, we can make some educated guesses.

First, mortgage rates will be higher by the end of 2017 than they are now. We have already seen the impact of the Trump Effect on capital markets, and these higher costs are already flowing into higher mortgage rates. This process will continue as banks fight for a share of the deposit market, and at the same time continue to build their capital buffers.  We think, on current trajectory rates could rise by more than half a percent, meaning the average repayment mortgage would rise by over $100 a month next year. Larger mortgages would rise by much more.

The RBA is unlikely to cut rates, and it is possible they may lift later in 2017 – but as the cash rate is disconnected from the mortgage rate, this is not necessarily such an important factor as in previous decades.

Many younger households are already using more than half their disposable income to repay their mortgage, and any increase will be very painful in a low income growth environment. We do not expect real incomes to rise at all next year, despite the rising costs of living and higher mortgage repayments.

As a result, we expect mortgage delinquency rates to continue to rise. There will be specific hot spots in the mining belts of Western Australia and Queensland, and we also expect to see problems emerging in the high-rise areas of Melbourne and Brisbane.

Households with a variable rate interest only loan will find their repayments rise more, with a half percent rise in rates translating to a monthly rise in repayments of $146. This illustrates the two problems with interest only loans, first they are more leveraged, so sensitive to rate changes, and second, households still have to find a way to repay the capital. No surprise therefore that the regulators have been forcing the banks to ensure interest only loan holders have a repayment plan, something which many currently do not possess. One third of borrowers could be impacted.

Mortgage finance will still be available, although we expect to see further tightening in underwriting standards, meaning that households will need larger deposits, and will not be able to borrow as much. Remember that our banks rely on mortgage book growth to sustain their business models, so the supply will not be turned off. We also expect to see ongoing lending from the non-traditional banking sector. Recently some of these players have been extending credit – at higher interest rates – to non-conforming loans, and foreign investors. This will continue. Regulation of the non-bank sector needs to be addressed.

We expect property investors to continue to pile into the market, especially in the eastern states, so the volume of investment loans will continue to rise. A high proportion of these will be interest only loans. Given the current tax settings, where negative gearing and capital gains assist investors, many see this as the best investment option, including those in a self-managed super fund.

We expect momentum in owner occupied lending will slow, as the rate of refinancing eases. In the first part of the year, we expect a rise in the volume of fixed rate loans, as households decided to fix at a rate lower than the market’s expectation. But beware, most fixed loans already imply a hike in rates, so many of the best deals have already gone. More households will turn to mortgage brokers for assistance, and we expect they will grow their market share to well above fifty percent.

Foreign investors will still be attracted to the market here, and migration will continue, so we expect to see ongoing support to prices in the main markets of Sydney and Melbourne and they will remain above long term fundamentals.

First time buyers will continue to be squeezed from the market, thanks to higher underwriting standards and flat incomes. A proportion of these households will choose to go direct to the investment sector as a result.

But net-net, demand will remain strong, auction clearance rates will be elevated, and property in many places will be in short supply.

As a result, we think home prices will in most centres continue to rise. We are certainly not anticipating a dramatic fall. This is because supply of new property is likely to slow in line with the fall in building approvals.

There will be specific areas across Australia however where prices are likely to fall. We expect further weakness in Western Australia and Queensland, and also in the apartment markets in Brisbane and Melbourne, as well as across a number of regional centres. But the core Sydney market, and houses in the broader Melbourne and Brisbane markets will remain strong.

We are expecting underemployment to become an important thematic next year. Many households, even those with multiple jobs, are not getting the levels of income they need to maintain their lifestyle. Whilst the core unemployment rate is unlikely to rise significantly, cash flow with be a major issue for many households. As a result, we do not expect to see any significant growth in personal credit – other than in the short-term credit sector, where online origination will stimulate demand. Household mortgage stress will continue to rise.

A number of factors are likely to weigh on household financial confidence next year. Rises in mortgage repayments, flat incomes and rising costs will all take their toll. However, ongoing property price growth, higher returns on bank deposits and higher stock market prices will counteract the drag. We expect property investors and home owners in the eastern states to remain quite bullish, despite depressed rental income growth. However, in WA, QLD and some regional centres, and among those living in rented accommodation, confidence will be significantly lower.

Banks will largely be able to buttress their profits, thanks to improved margins and low levels of mortgage default. As a result, we think the majors will mostly be able to maintain their payouts to their shareholders at current levels. Regional banks will remain under severe pressure, and we are not convinced that their drive to move to advanced capital models will be a panacea. We will also know the required final capital settings from Basel. We expect banks will need to hold more capital, and the benefits of advanced capital models be further reduced.

So in summary, expect higher mortgage rates and delinquencies to slow the property market a little, but momentum in the major centres is unlikely to stall completely because the banks need mortgage book growth to sustain their businesses. As a result, we expect household debit to be extended further.

Finally, a word on the broader economy. Housing momentum is not sufficient to replace the drop-off in mining investment, and given the reluctance of businesses to invest in growth, we think overall growth will still be sluggish. We might get a free kick from higher commodity prices – if they continue – but we do not have a realistic path to sustained growth. This structural issue needs to be addressed, and soon, if in the longer term the property market is to not go into a spiral of decline.  However, we do not think 2017 will be the start of that down cycle.

Auction markets continue their strong run

The latest data from CoreLogic confirms that the auction markets continued their strong run last weekend, with the number of auctions recorded at the second highest level this year and clearance rates remaining above 70 per cent for the 20th successive week.

Auction activity does not appear to be slowing through the festive period, with auction numbers reaching the highest level since March earlier this year.  There were 3,411 auctions held over the past week, returning a preliminary clearance rate of 74.6 per cent, which is up from last week’s 72.3 per cent and substantially higher than the equivalent period last year (58.2 per cent). The combined capitals clearance rate has been tracking above 70 per cent consistently over the past 20 weeks, with the clearance rate higher than 75 per cent over eleven of the past twenty week’s.  The last time the combined capital city clearance rate was tracking over 70 per cent over the given period was in 2009.  Across Australia’s two largest markets in Sydney and Melbourne, clearance rates rose this week, with preliminary results showing 77.4 per cent and 80.2 per cent respectively.

The 2016 Property Market In Review

Today we start a short series which will review the property market in 2016, and then look forward to 2017. We will start by looking at demand for property, then look at property and funding supply, before examining the risk elements in the market for both property owners, lenders and the broader economy.

Remember that there is more than six trillion dollars invested in residential property in Australia, three times as much as in the whole superannuation system, and close to a third of households rely on income from property, either directly or indirectly, (from rents, or jobs in the sector across construction, maintenance and management), to say nothing of the capital two thirds of Australians are sitting on thanks to strong recent price rises. So what happens to property really matters.

Property Demand

We start with demand for property. The latest data from our household surveys shows that demand for property is very strong. Two thirds of households have interests in property, and about half of these have a mortgage. Owner occupied home owners are a little more sanguine now, but property investors, after a wobble earlier in the year, are still strongly in the market. In addition, there is still demand from overseas investors, and migrants. Overall demand is now stronger than at the start of the year. This is reflected in continued high auction clearance rates, especially down the east coast.

First time buyers are finding it difficult to compete with cashed up investors, and with incomes static and tighter underwriting standards, it is harder than ever for them to enter the market.  Down traders – people looking to sell and release capital – are active, and are in the market for smaller homes, and investment property. Households seeking to trade up are also active, driven by the expectation of ongoing capital gains. Investors are attracted by the generous tax breaks, including negative gearing and capital gains.  This despite rental incomes falling again, and the fact that about half of investors are underwater on a cash-flow basis, though bolstered by continued capital gains.

So overall demand is strong, and it has not yet been impacted by the rising mortgage interest rate bias that we have seen in the past couple of months.

Property Supply

Turning to property supply, there have been a significant surge in new building, mainly in and close to the central business districts in Melbourne, Brisbane and to some extend in Sydney, though here new building is more widely spread. Well over two hundred thousand new properties are coming on stream and more than half of these will be high-rise apartments. That said forward approvals are slipping now, so we may have passed “peak build” in the current cycle.

We are also seeing significant subdivision of existing residential land, and a rise in new house construction as well. The average plot size continues to fall, but we still place larger buildings on these smaller plots.

In Sydney and Melbourne, the amount of housing on the market is not meeting demand, though this is not true in some other markets – for example in areas of Western Australia and Queensland, especially in the mining belts. The Reserve Bank is concerned about the impact of potential oversupply in apartments in the main centres.

Finance Supply

Turning to finance supply, Households can still get mortgage finance, but in recent times there has been a significant tightening of underwriting standards. Interest rate buffers are now higher than they were, income flows are being examined more critically, and lenders who are making interest only loans, which account for about one third of transactions, are looking for greater precision as to how the capital will be repaid later. Foreign investors are finding it harder to get a loan from the major lenders, although a number of smaller banks, and other non-traditional lenders are more than willing to do a deal. In addition, foreign income is now under greater scrutiny, following a number of recent frauds.

Overall credit growth is a little slower than a year ago, but at above 6% is still well above inflation and income growth. Within the mix, recently, investment mortgages have been growing faster than owner occupied loans. Household debt has reached an all-time high, thanks mortgage growth, with the ratio at 186 percent of debts to disposable incomes, one of the highest ratios in the world. Low interest rates mean that currently the servicing burden is not currently too bad, but this would change quickly if rates were to rise, thanks to excessive leverage.  Household savings ratios are falling.

Whilst unemployment rates remain controlled, at 5.6%, the main issue for many households is that real incomes are just not rising, and as a result, some are finding it harder to make their mortgage repayments on time. At the moment mortgage delinquency is rising, just a little, but faster in areas of WA and QLD.

Recently the Trump Effect has led to a rise in US bond yields, and this has had a knock-on effect in the capital markets, lifting the rates banks must pay for capital. As a result, we have seen the yield curve move up, and banks have been lifting their mortgage rates – somewhat selectively so far – with investors taking the brunt, but the trend is widening. The recent RBA cash rate cuts are being offset by these rises, and we think it unlikely the RBA will lower rates again, so mortgage rates will continue to rise. We will discuss the possible impact in 2017 later.


So we can say that 2016 has been a positive year for those in the market, with sizable capital gains for many, significant transaction momentum and construction, and in line with the RBA’s intention part of the re-balancing of the economy away from mining construction. The cost has been, first higher home prices, as well as larger pools of debt and more households excluded from the market.  Banks have 62% of their assets in residential property, a high, and are more exposed to the sector than ever, despite holding more capital than they did. We believe regulators should be doing more, but only reluctantly, and lately, are they coming to the party.

Next time we will look at prospects for 2017.