The latest preliminary results from APM Pricefinder show that there was a high auction clearance rate, though slightly lower than the extraordinary results from last week, but on much lower volumes thanks to the long weekend. Sydney achieved 76.6% on just 263 listings, Melbourne 76.8% on 52 listings, and Nationally, 75% on 399 listings, compared with 1,916 last weekend. Canberra achieved 58% on 16 listings, Brisbane 56% on 57, and Adelaide did not sell any of the 11 listed (the bad weather may have something to do with this?)
The latest pain and gain report from CoreLogic, highlights the diversity in property outcomes across the country.
The Pain and Gain Report is a quarterly analysis of residential properties which were resold over the quarter. It compares the most recent sale price to the previous sale price in order to determine whether the property sold at a gross profit or gross loss. It provides a proxy for the performance of each housing market and highlights the magnitude of profit or loss the typical seller of a home makes across those regions analysed.
Over the June 2016 quarter, 9.5% of all dwellings resold recorded a gross loss when compared to their previous purchase price. This figure was higher than the 9.3% at the end of the first quarter this year and the highest proportion recorded since March 2014. Across those dwellings which resold at a loss over the quarter, the total value of loss was $459 million with an average loss of $73,009.
Given less than 10% of homes resold at a loss over the quarter, more than 9 out of every 10 homes resold for more than their previous purchase price. Across these sales, the total profit was recorded at $15.7 billion and an average profit of $262,550 per resale. Also important to note is that over the quarter, 29.4% of resold homes transacted for more than double their previous purchase price.
The data also highlights the fact that ownership of property, whether for investment or owner occupier purposes, should be seen as a long-term investment. Across the country, those homes that resold at a loss had an average length of ownership of 6.3 years. Across all sales recording a gross profit the average length of ownership was recorded at 10.3 years, while homes which sold for more than double their previous purchase price were owned for an average of 17.7 years.
The capital city housing markets continue to record a lower proportion of loss-making resales than regional areas of the country. The trends in regional areas are shifting with the proportion of loss-making resales trending lower in most areas linked to tourism and lifestyle. On the other hand, housing markets linked to the resources sector are generally seeing an elevated level of loss-making resales after housing market conditions in many of these locations have posted a sharp correction.
Sydney is on the latest UBS housing bubble list. They say real housing prices peaked in the second half of 2015 after an increase of 45% since mid-2012. Since then, prices have corrected by a low single-digit. Sydney sits alongside London, Stockholm, Munich and Hong Kong. The UBS Global Real Estate Bubble Index is designed to track the risk of housing bubbles in global financial centers.
The Australian residential market is influenced by a rapidly growing foreign demand (in particular, Chinese), which has tripled in value over the last three years. Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly.
Vancouver tops the index in 2016. Bubble risk also seems eminent in London, Stockholm, Sydney, Munich and Hong Kong. Deviations from the long-term norm point to overvalued housing markets in San Francisco and Amsterdam. Valuations are also stretched, but to a lesser degree, in Zurich, Paris, Geneva, Tokyo and Frankfurt. In contrast, Singapore, Boston, New York and Milan are fairly valued, while Chicago’s housing market remains undervalued relative to its own history.
Out of touch with fundamentals House prices of the cities within the bubble risk zone have increased by almost 50% on average since 2011. In the other financial centers, prices have only risen by less than 15%. This gap is out of proportion to differences in local economic growth and inflation rates.
Elevated risk of a price correction
The discrepancies have emerged out of a mix of optimistic expectations, capital inflows from abroad and loose monetary policy. The weak economic foundations of the latest price boom make the housing markets in those cities vulnerable.
A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices. Investors in overvalued markets should not expect real price appreciation in the medium to long run.
Sydney‘s housing market has been overheating since the city became a target for Chinese investors several years ago. While Sydney showed the lowest index score of all our covered APAC cities in 2012, the market now ranks in the bubble risk category and tops all other cities in the region.
Mortgage Brokers earnt more than $1.1 billion in new commissions in the last year, as their share of new loans continues to rise according to the latest results from the Digital Finance Analytics Mortgage Industry Model.
The model tracks new loan approvals and channel mix and estimates the commissions earned by brokers from lenders.
The share of loans originated via brokers has reach 50% across the market (some say it is even higher, as much as 60%!)
APRA publishes ADI specific data showing that foreign subsidiary banks originate close to 70% of their loans via brokers, other domestic banks, around half, just above the average of the big four, with credit unions and building societies lower.
Brokers can earn an upfront commission on each new loan, as well as a trail. According to a recent MFAA document:
Lenders usually pay upfront and/or trail commissions in respect of the loans, mortgage brokers originate. The upfront remuneration offered by lenders is mostly uniform at 0.65%, and trail remuneration also uniform at 0.15% for the life of the loan. Lenders vary in their application of claw-back, ranging from 12-24 month terms as well as their introduction of trail payments (delayed until the 13mth).
The MFAA would like to note that broker remuneration provided by lenders has reduced over the past ten (10) years from a mostly uniform offering of 0.70% and 0.25% for upfront and trail commissions
There are however some variations between lenders in the absolute percentage applied, reflecting commission tiers, targets and other factors. It is hard to get solid industry data because commission arrangements are bi-lateral commercial agreements, and often not fully disclosed.
However, using data from a range of sources, taking into account commission rates and new loan volumes, we have an estimate of the monthly flow in new commissions earned. Commissions have been rising in line with loan growth (as it directly related to the size of the loan) as well as rising third party origination. Some lenders have tweaked commission structures recently to incentivise specific types of loans.
So, we estimate over the past year, $1.1 billion of new commissions were paid to brokers. A relevant statistic given the current broker remuneration review by ASIC.
Confirming the APM result we reported on Saturday, the preliminary clearance rate remains above 70 per cent for the ninth consecutive week, edging close to 80 per cent.
It has been another strong week for auction activity, there were 2,445 auctions held across the combined capital cities with a preliminary auction clearance rate of 78.3 per cent this week. Last week, the final auction clearance rate was recorded at 76.2 per cent with 2,149 residential properties taken to auction. At the same time last year, auction volumes were higher (2,835) with a clearance rate of 69.7 per cent. Over the first four weeks of Spring, auction clearance rates have consistently been recorded at a higher rate than over the corresponding weeks last year, while auction volumes remain around 20 per cent lower.
Latest preliminary data from APM Pricefinder shows continued momentum in auction sales today. Nationally, 1,912 were listed and 78.9% cleared, compared with 75.8% of 1,599 listed last week, and 68.4% on a slightly higher listing last year. Sydney led the way at 81.6%, compared with 79.6% last week on higher volumes.
Melbourne was also higher at 79.6% on 950 listing, compared with 78% on 793 properties last week. Adelaide 77% of the 86 listed, and Brisbane cleared 53% of the 103 listed. Canberra hit 66% of the 56 properties listed.
Australia is building an extraordinary number of high rise apartments right now. Everywhere you look, there seems to be a new development under construction, especially in Australia’s southeastern capitals.
And, going off recent building approvals data, it seems that there are a whole lot more coming.
Like a number of other commentators, Bill Evans, chief economist at Westpac, is uneasy about Australia’s high rise construction boom, stating in a research note released today that “huge uncertainty prevails in this market”.
The source of this uncertainty, says Evans, is the heavy involvement of Chinese buyers in the market, something that has helped propel the building boom in recent years along with the increased prevalence of housing investors.
“The number of high rise apartments currently under construction in March this year (ABS latest) has surged to 110,000 – including 44,000 in New South Wales; 34,000 in Victoria; and 23,000 in Queensland,” says Evans.
“However, a significant proportion of the buyers are offshore based, so called FIRB buyers,” he adds.
According to a recent survey conducted by ANZ in consultation with the Australian Property Council, foreign investors accounted for 23.9% of all property sales in Australia during the June quarter of 2016. The proportion of sales in Victoria and New South Wales were the highest in the country, accounting for 30.8% and 25.4% of all sales over the same period.
With so many apartments being sold to foreigners, many of them to Chinese, it is clear that much of the residential building boom, and beyond that the outlook for prices, is determinant on the continued involvement of foreign investors.
According to Evans, this creates heightened risks for the sector should the buying start to dry up.
He suggests that recent moves from Chinese policymakers to stymie capital outflows from the country not only heighten risks for apartment prices and settlement on newly constructed apartments, but are also a crucial cog in Australia’s economic transition, the booming residential construction sector.
“At some point, the Chinese authorities, who appear to have stabilised last year’s spectacular near USD 1 trillion loss in foreign reserves, may decide to slow this leakage,” says Evans.
“Certainly we have seen marked evidence of a tightening of capital controls, particularly for the non-corporate sector. That tightening of capital controls might also impact the construction boom.”
Adding to the uncertainty, Evans says that Australian banks have stopped funding FIRB buyers, suggesting that this presents “risks to local developers who may have sold more than 50% of their stock to these buyers”.
“It is generally accepted that apartment buyers in the Melbourne CBD have incurred some capital losses, while Sydney purchasers are seeing their profits squeezed,” he says. “These liquidity and capital loss prospects may discourage foreign buyers, with the result of sharply slowing the apartment construction cycle.”
Evans, like others, is unsure how it will all play out, noting that possible outcomes range “from ongoing spectacular momentum to a sudden liquidity driven slowdown”.
In the case of the latter, he says “one part of the recent boost to Australia’s growth story might fade quickly”.
The sentiment expressed by Evans is similar to that communicated by a growing number of analysts.
In a research note released in early September, Ivan Colhoun, chief markets economist at the National Australia Bank, suggested that the presence of a large numbers of foreign investors in these markets complicates not only the outlook for prices but also settlement risks.
“Recent trends and reports suggest there has been a modest increase in delays in settlement rather than outright non-settlement. And it is typically foreign buyers that are now finding it somewhat harder to access finance and/or expatriate finance (the latter largely from China),” he wrote.
Cameron Kusher, research analyst at CoreLogic, suggested in May that tighter restrictions on overseas buyers from Australian banks was a factor that could amplify settlement risks for newly built apartments in the years ahead.
“Mortgage lenders have recently tightened their lending criteria, subsequently some people who have committed to off-the-plan units may not be able to borrow as much as they could at the time of signing the contract,” said Kusher.
As a result, Kusher noted that there was a clear risk that some properties may be be worth less than the price they were purchased for, heightening settlement risks.
“Many of the units are coming up for settlement in similar locations and will compete with existing unit stock,” he said.
“With so much stock coming online at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.”
As we look across our latest household research, today we home in on property investors. We showed yesterday there is strong demand from both portfolio investors (those with multiple investment properties) and from solo investors (those with one or two properties). These segments are being motivated by the tax efficiency of the investment (36%), ongoing expectation of property capital growth (25%, compared with 28% a year ago), attractive overall returns compared with deposit accounts (18%) and low financing interest rates (14%). Overall, these drivers have been consistent through the last property boom cycle.
Drilling into solo investors, we see the same focus on tax efficiency (30%) and the lure of higher returns compared with bank deposits (35%). Indeed, as cash rates have fallen, we have see more switching from cash to property, one of the trends supporting the market.
There are a number of barriers to investors, apart from the obvious one of having already bought a property (43%), around 16% of investors are having difficulty getting the funding they need (16% compared with 4% a year ago) as lenders tighten their underwriting standards and income ratios. Fear of changes to regulation have receded from 21% a year back to 11% now. So essentially the main brake on property transactions is tighter standards. Property supply does not appear to be a problem.
We see a continued rise in SMSF investors adding property to their portfolio, with around 4% of funds holding residential property. Once again tax efficiency (31%) and appreciating capital values (25%) are the main drivers, supported by low financing rates (15%).
Finally, it is worth noting that SMSF trustees are getting their investment property advice mainly from internet sites or forums (21%) or mortgage brokers (24%, compared with 21% a year ago). They also rely on their own knowledge (16%), Accountants (15%) or real estate agents (11%). Mortgage brokers appear to be more in favour now as a source of guidance.
So, in summary the investment sector is still strong, driven by the market fundamentals of expected capital growth and tax benefits, supported by ultra-low interest rates. Tightening underwriting standards make it harder for some to get the finance they require. However, we conclude the property investment boom is still largely intact.
It is worth also reiterating our earlier observation that many prospective investors are being drawn to the eastern states, irrespective of where they live. These “honey pots” are drawing in the bulk of transactions.
As we finalise the next edition of the Property Imperative, we turn to the latest survey results, looking at household attitudes to property. The growth in volume of loans may be down a little, but their appetite for property is still strong. Recent auction results also underscore this. Today we compare the cross-segment survey responses, before in later posts diving into the more detailed results.
A quick reminder, we use the results from our 26,000 household surveys, and segment the results as described in the “segment cookbook“.
First we look at home price expectations. Overall households are quite bullish on future capital growth, with portfolio investors most confident (68% expect a rise), 67% of solo investors and 58% of up traders expecting further gains. More than half of holders, and first time buyers also think prices will rise. Down traders are the least positive, here 20% think prices will continue to rise. There were some state variations, but we won’t discuss that here, other than to say NSW and VIC seem most bullish.
Demand for finance is also quite strong, with 92% of portfolio investors looking to borrow more (up from 87% a year ago) and 58% of solo investors up from 51% a year ago also seeking to borrow. Looking at first time buyers, 64% are seeking to borrow, compared with 60% a year ago. Those who are refinancing and borrowing more is also up, 38% compared with 30% a year ago.
Investors, down traders and refinancers are most likely to transact in the next 12 months. 67% of portfolio investors are looking to buy another property, 49% of solo investors, and 40% of refinancers are in the market. The proportion of first time buyers continues to sit around 9%. As we will see in later posts, there are more barriers to getting a loan now, thanks to tighter underwriting standards.
First time buyers are saving hard (despite low deposit account rates and flat incomes), 76% compared with 72% a year ago. The proportion of want to buys (not actively seeking to buy) who are saving is down from 21% a year ago to 19% now. The combination of high prices, tighter lending standards and limited incomes all work against them.
Finally, in the overview, those seeking to refinance are most likely to use a mortgage broker (79%, compared with 75% a year ago), then first time buyers (61%) and portfolio investors (51%). Holders apart, down traders are the least likely to seek assistance from a mortgage broker.
So, we are still seeing strong demand for property. The question is whether there is supply of property, and mortgages to meet the demand. Our results also confirm that property investors are back in the game.
Sydney property prices rose in June quarter 2016 after six months of falls, according to figures released today by the Australian Bureau of Statistics (ABS).
Prices for established houses in Sydney rose 3.2 per cent and attached dwellings rose 2.0 per cent.
Residential property prices fell in Perth and Darwin, while prices rose in all other capital cities.
Established house prices for the eight capital cities rose 2.3 per cent and attached dwellings rose 1.4 per cent in the June quarter 2016.