Today we launch the first of our regular Property Imperative Weekly Update Blogs and Vlogs; the next stage in the development of the Digital Finance Analytics site and in response to requests for a summary service.
We have been publishing regular reports on the residential property and mortgage industry in Australia for many years, in our Property Imperative series. Volume 8 is still available.
With so much happening in the property and mortgage sector, we will discuss the events of the past week in an easy to watch summary. We also will deploy the video blog on our YouTube channel and provide a transcript here, with links to the key articles.
This is the first. Watch it here.
We start with the latest data from the Reserve Bank and APRA for March showed that investment mortgage lending grew more strongly than owner occupied loans, and also that the non-banks are getting more active in this less regulated segment of the market. Pepper for example reported strong loan growth.
Smaller regional banks are getting squeezed, and mortgage lending overall is accelerating despite regulatory pressure. As the total mortgage book grew at more than 6% in the past year, when household incomes are static, the record household debt is still growing. More definitive action from the regulators is required.
APRA Chairman Wayne Byers discussed the residential and commercial property sectors this week at CEDA, and indicated the 10% speed limit on investment loan growth was maintained to protect the pipeline of dwellings under construction. This seems a bit circular to me!
In the past week, the upward momentum in mortgage rates continued with both Westpac and ANZ lifting fixed rate and interest only loan rates, by up to 30 basis points, though some owner occupied loans fell a little. These moves follow recent hikes from CBA and NAB, and continues the cycle higher in response to regulatory pressure, funding costs, competitive dynamics and the desire to repair net interest margins. The regulators have given the banks a perfect alibi!
For investors, these out of cycle rises are now getting close to 1%, though owner occupied borrowers, on principal and interest loans have not been hit as hard. However, even small rises are hitting households in a low income growth environment.
Mortgage stress was in the news this week, with a good piece on the ABC’s 7:30 programme, looking at stress in Western Australia, and citing the example of a property investor who is now in trouble. Our research into stress was also covered in the media, with a focus on Melbourne. Our latest analysis, for April shows a further rise in households in mortgage stress. More of that later.
Meantime, Finder.com published analysis which suggested more than half of mortgage holders were close to a tipping point if mortgage repayments rose by just $100. This would equate to a rate of just 5.28%, not far from current rates at all.
Mortgage Brokers were in the news again thanks to evidence given to the Senate Standing Committee on Economics looking at a consumer protection in the banking and finance industry. Evidence suggested commission aligned to achieving specific volume targets and the use of lender lists may mean the interest of consumers are compromised. We discussed this on the DFA blog last year. In addition, ASIC highlighted deficiencies in the information flows between brokers and banks, and suggested that more robust systems and processes are needed, especially around commission data and broker performance.
Also, the risk of loans originated via brokers was discussed again, with the argument being mounted that financial incentives make broker loans intrinsically riskier.
Meantime whilst the government switched the narrative to good and bad debt, housing affordability remained in the news, with the HIA arguing again that supply side issues are the key, despite the fact that the average number of people living in each dwelling across Australia has hardly changed in years.
We think supply is not the big issue. Yes, there should be more focus on building more affordable social housing, but the main focus needs to be the reduction in investor tax incentives. The financialisation of property is the real underlying issue, but this is hard to address, and explains why the government is now wanting us to look elsewhere.
In broader economic news, inflation rose a tad, thanks to a strong rise in Victoria, and as a result there is less reason to expect an RBA cash rate cut. That said, the official CPI understates the real experience of many households, not least because housing costs are so significant now. We maintain our view that the next RBA rise will be up, not down, unless we get a significant external shock. Of course a cash rate rise will likely flow on to mortgage holders, putting them under more under pressure.
Finally, in preliminary news from CoreLogic they suggest that Sydney home prices may have stalled in April. Whilst some reports say this is the top, there are a range of technical issues which suggests it is too early to make this call. We need to see more data, and the Auction clearances may be an indicator of what is to come.
Nevertheless, we hold the view that we have probably reached the peak, and as mortgage lending tightens, and investors become more sanguine, prices in the major centres are likely to slide, mirroring the falls in WA, now, in some places down more than 20%. It then becomes a question of whether is turns into a rout, or whether prices drift sideways for some long time.
And that’s the Property Imperative week to the 29th April!