Housing affordability is worsening, warns ratings agency

From Mortgage Professional Australia.

Moody’s report shows regulatory crackdowns and low-interest rates will not protect affordability, putting pressure on Government to take action in the Budget

Housing affordability is deteriorating in Australia despite the impact of regulatory crackdowns and low interest rates, a report by international ratings agency Moody investors Service has found.

Affordability worsened in the year to March 2017, with interest repayments requiring for 27.9% of household income on average, compared with 27.6% in March 2016. Affordability declined steeply in Sydney, Melbourne and Adelaide, according to the report, although it improved in Brisbane and Perth, which is currently the most affordable city in Australia, with the proportion of income going to repayments at 19.9%.

Moody’s expect that housing affordability will continue to deteriorate, blaming “rising housing prices, which outstripped the positive effects of lower interest rates and moderate income growth”. Whilst APRA’s restrictions on interest-only mortgage lending could dampen demand for apartments they could also reduce affordability, Moody’s claims: “the new regulatory measures have prompted some lenders to raise interest rates on interest-only and housing investment loans, which will make such loans less affordable.”

Proportion of joint-income required to meet interest repayments, March 2016:

  • Sydney 37.5%
  • Melbourne 30.3%
  • Brisbane 23.9%
  • Adelaide 23%
  • Perth 19.9%
  • Australia: 27.9%

Coming just weeks ahead of the 2017-18 Federal Budget, Moody’s report indicates the Government cannot rely on regulators and the RBA if it wants to improve affordability. In March Treasurer Scott Morrison said repayment affordability would play a major part in the Budget and was a bigger issue then the difficulty of first home buyers, whilst ruling out any changes to negative gearing.

In a series of sensitivity tests, Moody’s demonstrated the risks faced by Australian homeowners. Looking at the effect of house prices continuing to rise, income decreasing and interest rates increasing, Moody’s found Sydney homeowners were particularly vulnerable. A 10% rise in property values – far from unknown in the harbour city – meant an extra 3.8% of income needed to meet mortgage repayments.

Moody’s report did find that affordability was unchanged for apartments. Apartment owners spent an average of 24.5% of their income on repayments, compared to 29.3% for house owners. This is a national average: affordability of apartments did decline in Sydney and Melbourne.

Inflation number misses the housing crisis

From The New Daily.

Almost nothing is to be seen of Australia’s housing crisis in the latest inflation figures.

Wednesday’s Consumer Price Index (CPI) from the Australian Bureau of Statistics showed just a 0.5 per cent increase in inflation this quarter, up 2.1 per cent over the past 12 months.

Over the same period, house prices grew 1.4 per cent, and by 75 per cent over the past five years.

The biggest increases in the CPI were in fuel, healthcare, power and, yes, housing.

However, as pointed out recently by Commonwealth Bank senior economist Gareth Aird, this ‘housing’ figure, which accounts for 22 per cent of the CPI calculation, does not truly reflect the struggle of many Australians to get onto the property ladder.

“The CPI is a poor barometer of changes in the cost of living for people who don’t own a dwelling and aspire to purchase one,” Mr Aird wrote.

That’s because the CPI measure of ‘housing’ only counts rents, utilities and the cost of building a new dwelling. It doesn’t include the cost of the land the dwelling sits on. And it doesn’t include the interest costs of repaying a mortgage.

If the full cost of housing was factored in, Mr Aird estimated it would add roughly 55 percentage points to headline inflation.

As mentioned above, the CPI ‘housing’ measure also doesn’t include interest charges. It used to, but they were removed in 1998 after lobbying from the Reserve Bank, which argued that rising mortgage interest rates would push up inflation, thereby requiring official cash rate rises, which would then push mortgage rates even higher, in a vicious loop.

The RBA said then that “excluding interest charges would in no way distort the outcome over the long run”.

Australia Institute senior research fellow David Richardson said if the CPI were to include land prices, the inflation rate would be pulled too hard by almost out of control house prices.

“Imagine if things went up 15 per cent a year in price,” Mr Richardson told The New Daily.

“Lots of contracts in Australia are indexed against the CPI. If they’re sort of fiddled then you’re talking billions and billions in consequences.”

Marcel van Kints, program manager with the Prices Branch of the ABS Macroeconomic Statistics Division, told The New Daily: “The ABS CPI aligns with international standards, an international respected measure of inflation.”

The ABS also published a FAQ with Wednesday’s release in which they pointed to their reasoning behind the exclusion of land from the CPI.

They said that housing is included in the Selected Living Cost Indexes, which are “particularly suited to assessing whether or not the disposable incomes of households have kept pace with price changes”.

Inflation outpaces wages

All of this is seeing many Australians left behind as both housing and the prices of popular consumer goods rise while wages stagnate.

Over the past 12 months, the CPI rose 2.1 per cent while wages grew by only 1.9 per cent, according to the latest ABS data.

The Australia Institute’s David Richardson said this is leaving many Australians worse off.

“I suspect that as professionals and skilled white collar workers, we’re all in the same boat,” he said.

“What we’re seeing now is a symptom of structural change that’s been creeping up on us for a long time.”

Housing still out of reach for many even as rents fall in post-boom Western Australia

From The Conversation.

As rents soar in Melbourne and Sydney, the rental market in Western Australia has become more affordable for low-wage workers since the end of the mining boom. But many households still struggle to find affordable accommodation.

Today Anglicare released its annual national Rental Affordability Snapshot, which includes a focus on each state.

In WA, 14,123 private rentals were advertised at the beginning of April, up 8% from a year ago. With increased stock, rents are becoming more affordable across the state. The median rent in the Perth metro area fell 11% to A$350; by 6% in the Southwest and Great Southern regions; and by 7% in the Northwest, including the Pilbara and Kimberley.

Following years of inflated rents during the mining boom, working families in WA are seeing some real improvement in rental affordability – defined as less than 30% of household income. More than 46% of properties listed in Perth were found to be affordable for a couple both earning minimum wages and receiving Family Tax Benefit in 2017, compared to 39% in 2016. Similar families could afford 23% of properties in Melbourne and only 4% in Sydney.

Single parents on a minimum wage had far fewer options. They could afford only 6% of listed properties in Perth. In all of Sydney and Melbourne, only one property was affordable for single parents on a minimum wage.

The situation remains dire for households on fixed incomes in WA – as it does for similar households across Australia. A person on a disability pension could afford only 25 properties (0.2% of available properties). A single parent could afford 48 (0.3%). And pensioners could afford 105 (2.7%) in all of WA.

People on Newstart or Youth Allowance had no affordable options in the entire state. This includes boarding houses and share houses, where rooms are rented out individually.

What are the consequences?

With more than 18,500 households on the waiting list for social housing and an average wait time of three years, most low-income households must find somewhere to live in the private rental market. When housing is unaffordable, low-income households end up paying a large percentage of their income on rent. Doing this means they forgo basic necessities, borrow money to stay afloat and, in some cases, experience homelessness.

The number of people at risk of homelessness is increasing every year. More than 24,000 Western Australians sought help from a homelessness service in 2016, an increase of 5% from the previous year.

The slowing state economy has brought insecurity and uncertainty to many working families. With growing rates of unemployment and under-employment, and increased casualisation of the workforce, many WA households are in precarious financial circumstances.

Anglicare WA financial counsellors report an increase in requests from tenants who have had to break their lease due to a job loss or needing to move interstate for employment. They find themselves liable for the period the rental remains vacant in the soft housing market, as well as the difference between the rent they paid and the likely reduced rent for new tenants.

Landlords remain protected from the loss, while the tenants often end up paying for a home they no longer live in.

What can be done?

To start with, increasing the stock of social housing would go some way to overcoming the lack of affordable options for people on low incomes.

The creation of affordable housing bonds, similar to those discussed by Treasurer Scott Morrison in his address to the Affordable Housing and Urban Research Institute earlier this month, would create a pool of funds for social housing providers to use to build more stock. However, such a mechanism is still many years off.

In the meantime, increasing the rate of Newstart from the current $268 per week to ensure a basic standard of living for job-seekers would bring households living in poverty back from the brink of homelessness.

Two other policy options would also help improve housing affordability for people on low incomes. The government should remove distortions in the tax system that inflate the cost of housing and discourage institutional investment in the private rental sector. Commonwealth Rent Assistance could also be increased and better targeted.

The main conclusion from this study is that broader discussions about housing affordability overlook the fact that the private rental market is not capable of meeting the needs of many people on low and fixed incomes without trapping them in poverty by consuming most of their available funds.

Author: Shae Garwood, Honorary Research Fellow, School of Social and Cultural Studies, University of Western Australia

It’s Not Just Low Income Households In Mortgage Stress

So the banking analysts are lining up to talk about the risks in the housing market, and the potential impact on bank earnings. But the latest line being peddled is that the major risks are located among low income – small mortgage – urban fringe – households.

But this is just not true. Our household surveys, probably the most accurate and current view of households financial footprints, tell a different story. We have already explored this from a segmented perspective, and highlighted that affluent households are also exposed – they have the big incomes and life-styles, but also the mortgages to match.

Here is a different view, mapping income bands to loan to income (LTI) bands. LTI is relevant because traditionally a ratio of much above 3 times begins to look more risky, especially in a low income growth environment.

First we look at the relative distribution by count of loans. This visualisation shows that around 55% of loans are sitting in the 3 times or below LTI range, and 68% of the loans are sitting in the household income bands  below 100k. But this is deceptive.

An alternative and more concerning view is based on the value of loans outstanding. This next visualisation shows that by value the loans spread up the income bands, but also spread across the loan to income bands. In fact only 28% of loans by value sit at LTI’s below 3 times and 34% sit with household incomes of $100k or below.

So, once you take the relative size of loans into account, mortgage stress breaks the boundaries of “low income, small mortgage” households. The problem is much more deep seated, and more affluent households are some of the most leveraged, to the point where small rate rises will hurt, especially where they have both owner occupied and investment mortgages.  They are also less likely to know how to respond, whereas the battlers are use to sailing close to the wind in terms of managing a household budget.

$100 tipping point for 57% of mortgage holders

From Australian Broker.

A staggering 57% of mortgage holders could not handle a $100 increase in their loan repayments, according to new research by Finder.com.au.

This additional $100 is equivalent to an interest rate rise of just 0.45% based on the national average mortgage of $360,600. This means the average standard variable rate of 4.83% would only have to rise to 5.28% to put more than half of mortgage holders in stress.

With increasing interest rates, some borrowers have little breathing room, said Bessie Hassan, money expert at Finder.com.au.

“The typical mortgage holder will begin to struggle once interest rates reach around 5.28% – that’s a pretty small window before borrowing costs start to hurt,” she said.

“The reality is borrowers have over-extended themselves if it only takes a $100 leap in repayments for more than half of homeowners to reach their tipping point.”

Hassan expressed concern about mortgage holders and their exposure to mortgage stress, especially with rising rates forcing borrowers to use a greater percentage of income on their loans.

Looking at higher rate rises, the research found 18% of borrowers could handle a monthly repayment increase of $250 while just 14% could manage $1,000 or more.

There is a $209 monthly difference between the cheapest fixed interest rate (3.59%) and the most expensive (4.59%), Hassan said, meaning borrowers could be “throwing away thousands of dollars” per year.

With the research also showing that 39% of all mortgages are interest-only, this highlights why the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) have shown some concern, she added.

Comparing genders, 63% of women and 50% of men would struggle to repay their mortgages with an increase of less than $100 per month.

Across the states, South Australian borrowers were the worst placed with 70% saying they could not handle an increase of less than $100 per month. This figure was lower in New South Wales, Tasmania and Western Australia at 59% and further dropped to 51% in Victoria.

Four charts which should worry you about rising house prices and inequality

From The Conversation.

When we want to measure the economic activity of a country, we tend to reach for the gross domestic product, or GDP. This may be an imperfect measure, but it does allow us to track where the money comes from for every item bought and sold. It tells us whether we worked to earn it through wages, or whether it came from capital income – including stock dividends, rents and capital gains on assets such as housing.

When it comes to the US, economists became used to the idea that the share of GDP attributable to labour income fluctuated around 60% while the remaining 40% was capital income. Then came Thomas Piketty. His 2014 book, Capital in the 21st century explained that the labour share has actually been more unstable over the past century than commonly assumed.

Piketty’s data also showed that the capital share has increased quite significantly at the expense of the labour share over the past three decades. Both in the US and in the UK, for example, the labour share declined from about 70% in the 1970s to about 60% in recent years. This was seized upon as it helps to explain the recent increase in wealth inequality. A large majority of the population gets most of their income almost exclusively in the form of wages. Only a few lucky ones own enough financial assets such as real estate and stocks to earn the equivalent of an annual wage.

More than 80% of the stock market’s value in the US is held by the top 10%. With an average interest rate of 5%, US$1m in stocks are needed to get a return of US$50,000, which is close to the median household income. The person who can make a living from his capital income is certainly no average Joe.

Capital gains

A look at four charts helps to show why this matters, and the impact it can have on those without the means to live on income from capital assets.

Author/Erik Bengtsson and Daniel Waldenström, Author provided

The chart above shows the average capital share for 17 advanced economies from 1875 to 2012. This new dataset, based on work by Erik Bengtsson and Daniel Waldenström, includes more countries than Piketty’s original analysis. The figure confirms the same inverted U-shaped pattern, with high values for the capital share at the beginning and at end of the 20th century, that Piketty found for some major economies such as the US and the UK.

He argued that three major global shocks, the two world wars and the Great Depression, led to a large reduction in wealth around the world. This destruction of capital can also explain the very low capital share in the post World War II period. The recent increase might thus simply represent a reversion towards a value that is more in line with the historic long-run average.

So why is this important for workers? Well, the next chart shows the net capital share in the US from 1929 until 2012.

Author/Erik Bengtsson and Daniel Waldenström, Author provided

Some economists argue that the net share is more relevant than the gross share if one is concerned about inequality. The net share excludes depreciation, the gradual decline in the value of physical capital such as machinery, which is normally included in the GDP figures – even though it is not an income stream to anybody. The data clearly shows the recent increase in the net capital share from a low of 22% in the early 1980s to a high of 30% in 2010. This means that an additional 8% of net national income now takes the form of capital income instead of wages.

So, why is it important if capital takes a larger slice of the pie? If the economy is still growing, surely everybody must win? Well, not quite. The answer is, of course, that capital ownership is highly concentrated. The increase in the capital share effectively means that capital incomes have grown at a faster pace than wages. This leads to a more unequal society since most of the stock market and even a significant portion of real estate is owned by a wealthy few. The more money invested in assets such as property and stocks, the less available to pay workers and boost productivity.

This can work out as a significant hit to the average worker. Net national income in the US was about US$48,700 per person in 2015. Had the net capital share remained at the low value of 22%, an additional US$3,900 per person would flow in the form of wages instead of capital income. This translates to an additional US$10,000 per employed person, certainly a sizeable amount of money.

The importance of real estate

Some researchers, including Piketty, point out that the recent increase in the capital share is related to the rising values of real estate. The next chart shows the average value of real house prices, adjusted for inflation, for the same 17 economies from 1870 until today.

Author/Jorda, Schularick and Taylor, Author provided

House prices stayed fairly constant for almost a century after 1870. However, over the past 50 years real house prices have more than tripled. In some countries such as Australia, they have even increased by a factor of ten over the same time period. Furthermore, these are just national averages. Big cities, including New York, London, and Stockholm, have experienced even larger increases in the value of real estate.

The following chart describes the impact of that and compares the median net worth of families in the US who are home owners with those who are renters. The gap widened significantly during the years of the housing boom. The net worth of home owners exceeded those of renters by a factor of about 46 in 2007. House prices have recovered from the bust in 2008 and are now as high as before the crisis.

Author/Federal Reserve, Author provided

This is a challenge chock full of concerns for policy makers – especially those politicians hoping to win the votes of home owners. But rising house prices, especially in big cities, and the rise of the capital share are both trends which decisively favour asset owners over workers and which slowly chisel out a crevice between the two. Inequality could well increase much further without adequate responses from national governments. These charts should be a simple way of explaining just why things such as subsidies for housing construction in high-demand areas, easing of zoning laws, and higher taxes on capital income should be put on the table by anyone serious about reducing inequality.

Author: Julius Probst, Phd candidate in Economic History with a focus on long-run economic growth, Lund University

The Answer to our Housing Affordability Challenge is Housing Supply – HIA

The HIA makes some good points about the need for a credible land planning body to provide national monitoring and forecasting of future land release and housing requirements to address housing affordability; but ignores the important point that supply is actually NOT the key issue, because average number of people per property has remained the same as the mortgage loan growth and house prices have risen. Other factors are at work.

Australia needs supply not demand focused solutions to address our national affordability challenges, said the Housing Industry Association.

“Attempts to remove demand for new housing will reduce supply, affordability and jobs,” said HIA’s Deputy Managing Director, Graham Wolfe.

“While several measures announced today by Labor to address Australia’s housing affordability challenges provide a sensible approach to increasing supply of new homes, others targeting demand will have an adverse impact on affordability now and into the future,” said Mr Wolfe.

“We can’t address housing affordability nationally with both eyes solely on Sydney and Melbourne,” said Mr Wolfe. “Sydney house price increases have been driven by many factors, including significant population growth, a ten-year supply recession, low interest rates and the impact of extremely high stamp duty costs on sales in the established housing market.”
“The dynamics in Perth, Adelaide, Northern Queensland and Darwin are very different. Foreign investors and self-managed superannuation fund investors cannot be blamed for the recent fall in house prices in Perth and Darwin, or the slower level of new housing activity in Adelaide. Inflicting demand side measures on these capital cities ignores the significant negative impact on housing supply, jobs and economic growth in these economies.

“Right now, if foreign capital investment in Australia helped bring significant residential development projects to commencement in Perth, creating jobs and production, the Western Australian economy would be much better for it.
“Australia needs a credible land planning body to provide national monitoring and forecasting of future land release and housing requirements. The body would help to inform government policy on financing, infrastructure and demographics.

“Other policies to address housing affordability must include a reduction in the imbedded taxation on new housing, government funding to support infrastructure and reforms to address unnecessary planning delays in bringing new residential developments to market.

“Our national housing affordability challenge is complex, and necessitates a national ‘cost of housing’ inquiry to identify impediments to the supply of new housing. Such an inquiry would bring together the overlapping impact of regulations, taxes and barriers imposed by all three levels of government, and importantly, inform governments in developing cohesive, integrated and responsible housing reforms, measures and programs,” concluded Mr Wolfe.