Mining green shoots

Mining finance at 32-month high

Despite the slowdown in lending for housing the monthly for total lending finance has trended gently higher from $69 billion in April to $71 billion in October 2018. 

Although investment loans for dwellings have been smashed lower, there has been evident strength in commercial finance to some sectors such as mining and manufacturing.

The rolling annual value of fixed loans to the mining sector has really taken off, tripling from their 2017 nadir. 

Strength in commodity prices might just save the economy's butt.

Something needs to plug the gap because dwelling construction and the associated multiplier is rapidly being sucked down the gurgler. 

The value of sales of residential blocks is falling away, and sharply so in the case New South Wales. 

Spare a thought for homeowners in Darwin, where the once exuberant housing market is in a multi-year decline. 

Home values in the Top End are down 19 per cent since June 2014, but the declines are now accelerating. 

The monthly value of investment in dwellings for rent or resale is now as close to zero as you'll ever see. 

The latest figures for the NT economy are worse than atrocious, with private capital formation imploding by 28 per cent, and final demand contracting by more than 8 per cent in the September 2018 quarter alone. 

Household consumption was also very significantly in negative territory as the sun sets on Darwin's resources-driven boom. 

IO lending lowest in over a decade

IO lending plummets

The flow of new interest-only (IO) loans was only 16 per cent of new residential term loans in the September 2018 quarter. 

While IO mortgages are still an option for some borrowers, the terms are often less attractive, and with the lending slowdown there is also now a smaller denominator, so flows are now very considerably softer than they were. 

With many borrowers also having voluntarily switched to paying down mortgage debt, IO loans were down to 27 per cent of residential loans by value by the end of September quarter, and will be closer to just ¼ today in December.

The chart here only goes back to March 2008, but the stock has never been so low in percentage terms. 

Many of the outstanding IO loans were written under tighter serviceability assessments, while those on IO loans for a longer period probably have a reasonable amount of equity. 

Credit growth to investors is now non-existent.

High LVR lending is the lowest on record, at just 6½ per cent of approvals with an LVR of 90 per cent or greater, down from 22 per cent at the 2009 peak. 

Low-doc lending is also the lowest on record at just $196 million in the September 2018 quarter, down from $6.4 billion at the peak, which is a remarkable measure of just how far things have come. 

Finally loans approved outside serviceability fell sharply, and gross loans impaired and past due remained low for ADIs at 0.84 per cent. 

The wrap

The value of lending to investors was at the lowest level in about half a decade over the past quarter, despite the strong population increase over that time.  

Reserve Bank reports and speeches seem to oscillate between playing down housing market risks and conceding that there is no handle on what the 'right' amount of leverage is, hence the focus has been on the quality of lending. 

As all of the statistics quoted above show lending standards have been incrementally tightened for some years. 

What happens next is unclear.

It's hard to get a handle on timing, but the most recently available figures for rental vacancies showed vacancy rates nationally at their lowest level since 2014, as we head into the festive period. 

Source: SQM Research

There are now fewer homebuyers, and therefore more renters - thus with lending to investors stagnant and lending to non-residents having evaporated this would/should ultimately be reflected in rental market tightening once Sydney and Melbourne have worked through the current swathe of completions. 

As noted previously:

'Although absolute population growth is strongest in Sydney and Melbourne, these cities also have an overhang of off-the-plan settlements to cushion any such shock to the rental market, at least for the time being. 

For that reason the first reports of a 'rental crisis' are more likely to emerge in smaller capital cities such as Hobart, Canberra, and perhaps Adelaide.

And regional locations such as the Hunter Valley, Coffs Harbour, Wagga, Bowral, and Dubbo in New South Wales, then Ballarat, Shepparton, Warrnambool, and Mildura in Victoria, and so on.

Even some of the basket case resources regions could be heading towards renewed rental shortages as once-bitten investors remain spooked away.'

Aussie property prices deflate -1.9pc over the year

Home prices fall in Q3

The ABS released its residential property price indexes this morning.

The indexes showed capital city prices down by -1.9 per cent over the year to September 2018.

Dragging back the data series all the way back to their inception in 2003 you can see that - with Melbourne prices down by -2.6 per cent in Q3 2018 - surprise package Hobart is set to take the mantle of strongest performer over the full history of the data series.

That may seem an unlikely outcome, but there is more interstate and international capital around these days - especially from China - and Hobart has been relatively affordable until recently. 

Asian tourism is firing in Tassie, and the lower dollar has helped to turn around the exporting economy. 

Indexed housing market price changes in Brisbane and Adelaide continue to track each other remarkably closely in recording modest price growth, and there was also solid growth in Canberra over the year to September (+3.7 per cent). 

A significant decline over the year was again recorded in deflationary Darwin at -4.5 per cent.

Looking at the chart from 2003 to 2018 by capital city the most striking observation is just how similar price growth has been, despite the divergence of the resources capitals through the mining boom years (I've posted a few charts here - you can click on them to expand). 

Looking at the long run figures the case for a raging property bubble isn't an especially strong one, with the weighted average capital city price index slightly more than doubling over the 15 years to September 2018.

A glance at a compound interest rate table tells you equates to a compound annual growth rate of ~5 per cent, while prices would already be some way lower today as I write this in December. 

This was a 15-year period through which the Aussie population increased by 5¼ million - overwhelmingly into a handful of capital cites - and the standard variable mortgage rate declined by ~125 basis points. 

In Sydney the more volatile detached house price index was down by -5 per cent year-on-year as at September 2018, and attached dwellings were down by -3 per cent. 

The mean dwelling price nationally has declined from a peak of $697,100 to $675,000, mainly due to the declines now being recorded in Sydney and Melbourne. 

The figures for the total dwelling stock are preliminary only, but show that New South Wales and Queensland have addressed their respective housing shortages through this cycle, as previously sluggish levels of apartment construction picked up very strongly. 

Melbourne has tended to be less supply-constrained and has long built dwellings at a solid pace, and the figures for Victoria reflect this consistency. 

There are now  about 10.2 million dwellings in Australia. 

Finally the total value of dwelling stock peaked for this cycle at $6.99 trillion, and has since declined to $6.85 trillion (note that these figures are not adjusted for population growth). 

The wrap

As expected the figures confirmed an ongoing deflation in property prices in 2018, with capital city prices down by -1.5 per cent for the quarter, and -1.9 per cent year-on-year.

The ABS figures suggest that the Sydney decline has been ongoing for about 18 months now, although my on-the-ground experience was that prices may have peaked a little earlier.

No matter.

Melbourne took a little while to join Sydney, but recorded the sharpest decline in Q3 2018 with prices down by -2.6 per cent in the third quarter alone. 

The ABS noted that price declines are no longer confined to premium markets, with declines also now reported across lower and middle price market segments.

Auction markets now head until hibernation until after Australia Day, which is also when the final report for the Royal Commission into banking and financial services misconduct falls due. 

RBA on lending rates

At any rate...

Another very handy speech from the Reserve Bank this week, this time from Assistant Governor Kent. 

As trader Kit Lowe noted on Twitter below, there has been some tremendous hyperbole about the rising cost of borrowing in Australia. 

It's obviously the case that interest rates in the US have increased, although with the yield curve recently inverting the Federal Reserve may be getting closer to a neutral setting now.

As for Australia's funding costs and housing lending rates? 

The Reserve Bank summarised this neatly in one chart. 

Kent noted that:

'Changes in monetary policy settings elsewhere need not, and do not, mechanically feed through to the funding costs of Australian banks, and hence their borrowers are insulated from such changes'.

There are some useful explanations of hedging practices, and how Aussie banks are not forced to acquire US dollars. 

There will most likely be no hikes in the cash rate any time soon either.

The RBA's SOMP forecasts have suggested underlying inflation might get back to 2¼ per cent by the end of 2019. 

There are, however, some downside risks (the oil price which has very quickly nosedived from above US$75 per barrel towards $50, for example). 

Cash rate futures imply that rates may well be on hold throughout all of 2019, and most of 2020 as well. 

The 'bounce' in investor loans

On the rebound

OK, so there was a tiny increase in investor loans in October.

But seriously...it was the weakest 3-month period for half a decade for investment lending.

This now puts investment housing loans as a share of ADI loans at just 33.36 per cent of the total.

This measure now sits well below the average for the past dozen years (33.9 per cent).

And that's despite a surge of immigration over that period into the major capital cities, greatly increasing the demand for rentals. 

And with Chinese investors shot out of the market by surcharge taxes the result will almost certainly be be an epic drop in apartment construction, given that significant apartment projects don't get built without investors.

AiG's latest reading for apartment construction collapsed to 31, whereby a reading of under 50 denotes contraction.

Mmm...oh dear!

Gentrifiying suburbs - actual examples (video interview)

Gentrifying suburb examples

One trend that homebuyers and property investors look towards is landlocked blue chip areas where new dwelling supply is chronically limited.

An alternative approach is to look for properties with a high land value content in areas that are less than perfect today, but have the potential to gentrify significantly over the decade or two ahead.

Gabba upgrade

Here's one such example in Brisbane: Woolloongabba. 

The 'Gabba' will undergo some dramatic changes over the decade ahead, including a new Gabba precinct, new apartment developments, the $600 million South City Square regeneration, a cricket ground upgrade, the exciting Cross River Rail project linking into the City, and much more.

Here's the Gabba transport precinct today (OK, I took this photo a couple of weeks ago). 

It's not much to look at in 2018, admittedly, partly due to the ongoing demolition in preparation for the Cross River Rail. 

And now, here are the future Cross River Rail visuals...

Source: Cross River Rail Queensland

...and those for South City Square.

Source: South City Square

And so on.

Woolloongabba is located only 2 kilometres or so from the heart of the City, so simple geometry dictates that quiet, quality streets in the suburb and land will retain an inherent scarcity value, and the suburb is becoming more liveable with each passing year. 

It's important to buy the right type of property for the location, being one with a strong land value component, and ideally a property with the opportunity to add value too. 

Here's an example property that we bought this week: a post-war Queenslander with a superb opportunity to raise the home up and create a 5-bedroom, 3 bathroom executive home, with parking a a pool, and greatly improved district views towards the city. 

Some of the homes on the street have been renovated; but, to date, many have not.

So, that's one great example, with enormous upside potential over the years and decades ahead. 

Entry level opportunities on decent-sized blocks come with a fair price tag, but it's an area where a turnkey executive home on a 500-600 square metre block that appeals to a professional family could achieve very high prices over the years ahead.

In a constrained lending environment the buy, hold, and then renovate strategy can offer tremendously powerful leverage and bang for your buck in Brisbane.

Minimum 16 perch (405 square metre) blocks are ideal for Brisbane - unless you're in New Farm or Teneriffe, in which case just the best block you can afford! - and 24 perch (or 607 square metres) is even better. 

Oxley hub

What about if you have a lower budget?

Another example suburb where we've bought many properties in recent years is Oxley, which is located about 10 kilometres from the Central Business District (CBD) of Brisbane. 

I know from previous industry experience that Woolworths will never invest in new stores unless a location fulfils hundreds of key criteria.

So when the new Woolies store and shopping centre was announced for Oxley I intuitively knew it would be an area that's going places.

To be frank, the locale wasn't all that appealing 10 or 15 years ago, but already today there are coffee houses, places to shop, and great connectivity to the city. 

I often stop in for a caffeine shot or a brekkie these days, which says almost everything about how much the area has improved. 

As is so often the case with real estate, much of this comes down to simple common sense.

When the adjacent suburb of Corinda - which has the same postcode - is consistently recording home sales of above $2 million (and considerably higher in many cases), then eventually homebuyers will ripple outwards to the next available more affordable suburb as the city population grows. 

Every time you visit Oxley you'll note further improvements in the area itself, and in terms of the modernisation of the dwelling stock.

As ever, property type and especially location are key - after all, you can't change the location of a property once it's bought. 

You don't want to be a 35-minute walk from the train station, or way out on the other side of the motorway, assuming the budget permits. 

And you also don't want to buy generic and small apartments. 

A strong land value content and future potential are ideal criteria, if the budget allows.

Here's an interview I recorded recently with James Freudigmann of PMC Property and Richard Jefferies of Newbridge Financial on the housing market in south-east Queensland. 

Unlike me, James is a Queenslander born and bred, and you'll note that he too is keen on Oxley as a hub with fantastic potential over the medium to long term (and James would remember the area when it was very different!). 

In fact, the whole interview is worth a listen as James adds some great advice here. 

Housing finance posts biggest bounce in 2 years, but...

Housing finance bounce, but...

A bounce for housing finance seemed to be on the cards, as all those painfully slow mortgage applications finally grind through the arduous process. 

And so it proved, with owner-occupier approvals excluding refinancing up by nearly 5 per cent in October 2018.

I didn't think last month's plunge was too much to get excited about, and the same view applies to this month's bounce.

Yes, a seasonally adjusted $30 billion of housing finance in aggregate is apparently much more solid than $29.3 billion a month earlier. 

But smoothing the results on a trend basis simply puts the ABS figures back in line with the credit impulse, and implies modest further declines in housing prices in Sydney and Melbourne into 2019. 

Investment housing loans posted a small bounce, but it was still the weakest quarter for investment lending since 2013. 

At the state level home loan transactions in Western Australia now look set to rise, as New South Wales and Victoria ease. 

The average loan size has been trimmed back a little over the past five months, for both first homebuyers and non-first homebuyers. 

The share of first homebuyers rose to a 6-year high at a tick above 18 per cent, first-timers being pulled in by grants and incentives, although tighter credit risks pushing more of them into negative equity, which is not the greatest start in life.

There are still plenty of new homes settling and being financed for now, but apartment pre-sales have dried up, suggesting that this figure is set to continue plunging for a long while to come. 

Non-banks have picked up some of the slack, but here too lending volumes have been curtailed of late. 

Overall, a much more upbeat release than the preceding month, but one that needs to be seen in the context of recent trends. 

Jobs market defying gravity

Different here

'Uncharted territory' says the RBA, a phenomenon not seen anywhere in the world: a decent fall in house prices, solid growth in the economy, and falling unemployment. 

Well, let's see, but employment growth still appears to be defying gravity for now.

Roy Morgan reported employment up by +408,000 over the year to November 2018. 

Lots of part-time jobs in that total, though, and the latest new auto sales figures were a total bloodbath, with the New South Wales figures getting roundly hammered. 

The final ABS update on the labour force for 2018 is due out next week, and will command a huge level of attention.