Negative gearing distorting Sydney housing market: Report

From Australian Broker.

Sydney’s housing affordability crisis is being artificially exacerbated by “lunacy” tax incentives, a new report has claimed.

According to the analysis by the UNSW’s City Futures Research Centre, up to 90,000 properties are sitting empty in some of Sydney’s most sought-after suburbs as investors chase capital gains over rental returns.

The analysis’ researchers, Professor Bill Randolph and Dr Laurence Troy, said this is thanks to the “perverse outcomes” of tax incentives such as negative gearing, Fairfax has reported.

“Leaving housing empty is both profitable and subsidised by government,” Randolph and Troy told Fairfax.

“This is taxation lunacy and a national scandal.”

According to Fairfax, the 2011 census revealed that in Sydney’s “emptiest” neighbourhood of the CBD, Haymarket and The Rocks, one in seven dwellings was vacant.

Close behind were Manly-Fairlight, Potts Point-Woolloomooloo, Darlinghurst and Neutral Bay-Kirribilli, which all had vacancy levels above 13%. These neighbourhoods, together with central Sydney, account for nearly 7,200 empty homes.

The UNSW analysis of the 90,000 unoccupied dwellings across metropolitan Sydney compared the number of empty homes in a suburb against the rate of return investors made by renting out a property.

It found that properties in neighbourhoods with lower rental yields and higher expected capital gains were more likely to be unoccupied.

Gordon-Killara on the north shore had the highest share of vacant apartments, with more than one in six unoccupied on Census night, according to Fairfax. By contrast, only one in 42 dwellings (2.4%) in Green Valley-Cecil Hills, in Sydney’s west, was unoccupied.

These results suggest property investors in some of Sydney’s most desirable areas have become indifferent to whether their investment property is rented or not. Instead, investors are chasing capital gains with rental losses offset by negative gearing and capital gains concessions.

According to Troy and Randolph, this calls into question Sydney’s housing supply and affordability problem.

“If you choose to accept that there is a housing shortage in Sydney, then the sheer scale and location of these figures strongly suggest that this is an artificially produced scarcity,” they said, according to Fairfax.

Home Lending Rotation Continued In September

The latest home finance data from the ABS confirm the trend that investor loans are on the slide, and being replaced by growth in owner occupied loans and refinancing. In September, trend,  owner occupied housing commitments rose 2.0% to $20.5 bn while investment housing commitments fell 1.9% to $12.9 bn. The number of commitments for owner occupied housing finance rose 0.7% in September whilst the number of commitments for the purchase of new dwellings rose 1.3% the number of commitments for the purchase of established dwellings rose 0.8%. The number of commitments for the construction of dwellings fell 0.1%.

The proportion of investor loans fell back to 48%, whereas a few months back it was well above 50%. Refinance of owner occupied loans continues to rise, to nearly 20% of all loans written, a level not seen since 2012. So the relative shift away from investment loans is confirmed, in response to regulatory intervention.

Home-Loan-Flows-ABS-Sept-2015In stock terms, the mix of investment loans – as reported in original terms, has fallen back to 38%, but is still way higher than when regulators officially started to worry about the systemic risks of investment loans above mid thirties.  we can expect to see further data revisions in coming months, as banks continue to reclassify loans.

Home-Lending-Stock-ABS-Sept-2015Turning to first time buyers, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 15.4% in September 2015 from 15.8% in August.  However, this does not tell the full story.

FTB-Home-Loans-ABS-Sept-2015Looking at DFA adjusted data, to take account of first time buyers going direct to the investment sector, we see a further fall in new FTB investor loans, down more than 2% in the month. The number of FTB loans for owner occupation rose however, by 6%, so the overall volume of loans is up. The average FTB loan was 2% larger this month.

FTB-DFA-Sept-2015  The strategies of the banks are clear, focus on owner occupied loans, and offer deep discounts to wrest refinanced loans from competitors, whilst using back-book repricing to fund it. At what point will the regulators step-up their surveillance of owner occupied lending? We think they should do so now.



Financial Stability Review Says Housing Risks Higher Than Thought

The RBA released their latest Financial Stability Review today. It is worth reading through the 66 pages, because there are a number of important themes, relating to housing. Underlying this though is a beat which could be interpreted as the RBA admitting they have misread the housing sector.

In summary, they recognise that underwriting standards were not as good as initially thought, the investment loan and interest only loan sectors carry potentially higher risks, and the changes to capital and regulatory standards will have a mitigating impact, over the medium term. That said, households remain well placed (despite the highest ever debt at lowest ever interest rates).

6tl-hhfinThey are however concerned about the impact of the current residential construction boom.

They also highlight risks from lending by banks to the commercial property sector, and the ongoing use of SMSF’s to invest in property.

There is also a section of the capital ratios for the banks, both under then IRB and standard approaches to capital ratios. Of particular note is for banks using the standard approach, they show how the presence of Lender Mortgage Insurance (LMI) and different LVR’s impact the capital weights. Despite the upcoming move from 17 to 25 basis points for banks under the advanced IRB approach, banks with the standard approach remain at a competitive disadvantage.

ABC Highlights Housing Risk On 7:30

ABC’s 7:30 did a segment on housing risks, and the implications should the bubble burst.  They discussed the risks if interest rates were to rise, against the context of high household debt. SATYAJIT DAS, FINANCIAL ANALYST said “Australians have been playing this Ponzi game of housing where I buy a house and the value goes up and what happens is then I make money by selling it to somebody else and the whole game depends on the buyer always being able to borrow ever larger sums of money and that all depends on incomes and employment, and that side of the economy, the real economy, is looking extremely weak”.

They also flagged the potential for the RBA to cut the cash rate, in response to banks lifting their mortgage rates.




New Home Sales Falter in May – HIA

The HIA New Home Sales Report, a survey of Australia’s largest volume builders, recorded the first decline for 2015 in May. The four month winning streak came to a modest end in May 2015 with total seasonally adjusted new home sales falling by 2.3 per cent. The decline was driven by a 5.1 per cent dip in detached house sales, reflecting weaker monthly demand in four out of the five states surveyed. DFA observes that the rotation from houses to units continues to build momentum, in answer to the demand for investment property, where returns to builders are also higher.

The mature stage of the new home building cycle primarily reflects further momentum in the ‘multi-unit’ sector, together with persistence of healthy conditions in New South Wales and Victoria. New sales of multi-units increased by 7.6 per cent during the month to yet a new record level, with sales volumes up by 26.7 per cent over the three months to May. Meanwhile strength in detached houses sales is evident in NSW and Victoria, with growth in the May 2015 ‘quarter’ of 5.2 per cent and 6.2 per cent, respectively.

HIA-May-2015In the month of May 2015 detached house sales increased by 3.3 per cent in Queensland, but fell by 2.3 per cent in NSW, 9.9 per cent in Victoria, 5.2 per cent in South Australia, and 8.1 per cent in Western Australia. In the May 2015 quarter, detached house sales increased in NSW (+5.2 per cent) and Victoria (+6.2 per cent). Sales fell over the three month period in SA (-8.1 per cent), Queensland (-7.5 per cent), and WA (-1.3 per cent).

Perspectives on the Housing Debate

Last week amongst all the noise on housing there were some important segments from the ABC which made some significant contributions to the debate. These are worth viewing.

First Lateline interviewed the Grattan Institute CEO on the social and political impacts of housing policy, and also covered negative gearing.

Second The Business covered foreign investors, restrictions on investment lending and the implications for non-bank lenders who are not caught by the APRA “guidance”.

Third, a segment from Insiders on Sunday, dealing with both the economic arguments and the political backcloth.

Next a segment from Australia Wide which explores the tensions dealing with housing in a major growing city, Brisbane. No-one wants building near their backyard, so how to deal with population growth.


Banking: Australian Banks’ Moves to Curb Residential Investment Lending Are Credit-Positive – Moody’s

In a  brief note, Moody’s acknowledged that the bank’s recent moves to adjust their residential loan criteria could be positive for their credit ratings, but also underscored a number of potential risks in the Australian housing sector including elevated and rising house prices, declining mortgage affordability, and record levels of household indebtedness. As a result, they believe more will need to be done to tackle the risks in the portfolio.

Moody’s says the recent initiatives are credit positive since they reduce the banks’ exposure to a higher-risk loan segment. At the same time, it is likely that further additional steps will be required because the growing imbalances in the Australian housing market pose a longer-term challenge to the Australian banks’ credit profiles, over and above the immediate concerns relating to investment lending.

Therefore they expect the banks first to curtail their exposure to high LTV loans and investment lending further over the coming months; and second, they will gradually improve the quantity and quality of their capital through a combination of upward revisions to mortgage risk weights and capital increases. This is likely to happen over the next 18 months or so.

Housing Market Imbalances Pose Long-term Challenges for Australian Banks – Moody’s

Moody’s Investors Service says that underwriting discipline and capital are key variables in maintaining the health of bank credit profiles in Australia, in the face of rising housing market imbalances.

“Rapid house appreciation, particularly in Sydney, as well as lending imbalances are increasing the risks of a housing market correction,” says Ilya Serov, a Moody’s Vice President and Senior Credit Officer. “This poses long-term challenges to Australian bank credit profiles”.

“We expect that over time the banks will revise up their mortgage risk weights and capital levels to better recognize the rising tail risks embedded in their housing portfolios,” adds Serov .

Moody’s analysis is contained in its just-released report titled “Rising Housing Market Imbalances Pose Long-Term Challenges for Australian Banks,” and is authored by Serov.

Moody’s report points out that dividend policy initiatives announced recently by major Australian banks — including National Australia Bank’s announcement of a capital raising of AUD5.5 billion — represent the start of a capital accumulation phase that is likely to extend well into 2016.

In Moody’s assessment, the risks in Australia’s housing market risks are skewed towards the downside. While over the short run, stability in the housing market will be supported by low interest rates and the healthy state of bank balance sheets, elevated and rising house prices are intensifying imbalances in the housing market.

Moody’s evaluation of the Australian housing market suggests that housing affordability is falling, despite the low interest rate environment. Similarly, lending imbalances, including a decline in the proportion of first-time home buyers and a sharp rise in residential investment activity, pose a further source of risk.

In Moody’s view, Australian banks are well-positioned to adjust their origination practices and capital levels to better recognize the rising tail risks embedded in their housing portfolios.

Moody’s report says likely regulatory changes will see average mortgage risk weights for the major banks in Australia increase to the 20%-25% range, up from the current 15%-20%. It estimates that Australia’s four major banks — National Australia Bank Limited (NAB, rated Aa2 stable, a1), Westpac Banking Corporation (Aa2 stable, a1), Australia and New Zealand Banking Group Limited (Aa2 stable, a1) and the Commonwealth Bank of Australia (Aa2 stable, a1) — are well-positioned to absorb such a change.

However, Moody’s also anticipates a broader increase in regulatory capital requirements, in line with the November 2014 recommendation by Australia’s independent Financial System Inquiry that Australian bank capital ratios should be “unquestionably strong” and rank in the top quartile of internationally active banks. This scenario would necessitate deeper adjustments to the banks’ dividend policies, and potentially the raising of new capital.

Moody’s report points out that the latest regulatory data suggests that Australian banks have become more conservative in their underwriting, as they have curtailed their exposure to high loan-to-value ratio loans. Such moves would help offset the risks posed by the country’s deepening housing market imbalances.

The rating agency sees ongoing adjustment to banks’ underwriting practices to bring them into line with the guidelines released by the Australian Prudential Regulation Authority in December 2014, which include limiting growth in investor housing loans to 10% per annum and specific guidance around stressed debt-service requirements, as supportive of the banks’ high rating levels.

Moody’s report notes that since May 2014, median home prices have risen by 10% nationwide, and by 16% in the core Sydney market . The report further notes that Australian home prices have risen by 23% since the start of the latest interest rate cutting cycle in November 2011.

Overall, Moody’s says that the banks’ asset quality metrics and portfolio quality will remain strong in calendar 2015, supported by Australia’s low interest-rate environment.

Investor Loans Still Hot – ABS

The ABS released their housing finance data to March 2015. Pretty common story, with the trend estimate for the total value of dwelling finance commitments excluding alterations and additions rising 0.8%. Owner occupied housing commitments rose 0.8% and investment housing commitments rose 0.8%.  In trend terms, the number of commitments for owner occupied housing finance rose 0.4% in March 2015.

In trend terms, the number of commitments for the purchase of established dwellings rose 0.7%, while the number of commitments for the construction of dwellings fell 1.4% and the number of commitments for the purchase of new dwellings fell 0.1%. The growth in investor property loans continued, with more than half in March (excluding refinance). Refinancing also grew in value and in percentage terms, from 18% of all loans a year ago, to over 20%, stimulated by ultra low rates.

Housing-FinanceMarch2015Looking at the First Time Buyer data, in original terms, WA had the highest share of FTB, and NSW the lowest.

FTBCountByStateMarch2015The percentage of FTB compared with all dwellings is relatively static.

FTBMarch2015However, if we overlay the DFA survey data on first time buyers who are going straight to investment property, this continues to rise, and pushes the true number of FTB higher. We continue to see a rotation away from owner occupation to investor first time buyers.