Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 21 March 2018

Arrears up in January

Mortgage arrears rise

30+ day prime mortgage arrears jumped from 1.07 per cent to 1.30 per cent in January 2017.

Quite a significant jump this year, then, though mortgage arrears do always rise quite sharply in the month of January because of the summer break. 

Looking at the trend for January arrears over the past 23 years shows that delinquencies are only fractionally higher than a year earlier. 

Arrears were lower than a year earlier in New South Wales at just 0.98 per cent - they were even lower in the ACT at only 0.80 per cent - and also declined over the year in South Australia and Tasmania to 1.47 per cent and 1.36 per cent respectively.

The seasonal January jump was most notable in Western Australia (2.44 per cent) and the Northern Territory (2.25 per cent). 

Resources-rich Western Australia had a remarkable run through the mining boom, but arrears hit their highest ever level on this series.

S&P reported that 'improving employment conditions will keep arrears low', but noted that rate rises could cause stress for some borrowers, while at the margin the switch from interest-only repayments to paying down principal could hurt some less prudent borrowers. 

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Tuesday, 20 March 2018

Dwelling prices up 5pc in 2017

Prices gain ground

Dwelling prices increased by +1 per cent in the final quarter of 2017, to be +5 per cent higher over the calendar year. 

This is a slower pace of growth than the +7.7 per cent increase reported for calendar year 2016. 

The quarterly gains were again driven by Melbourne (+2.6 per cent) and Hobart (+3.9 per cent), while notably Perth (+1.1 per cent), Brisbane (+0.9 per cent), and Canberra (+1.7 per cent) notched quarterly gains. 

Darwin prices fell -6.3 per cent in 2017, with the declines continuing throughout the year. 

Hobart's annual gain increased to +13.1 per cent. 

The Tasmanian capital is small city with a population of under 225,000 and building approvals kicked off 2018 by rising to the highest level since 2011, but new supply takes time to be delivered and the housing market remains very tight.  

Sydney house prices declined very marginally for houses in the fourth quarter, while the attached dwelling price index was flat, leaving the city's index down -0.1 per cent for the quarter (though up +3.8 per cent for the year). 

Australia's mean dwelling price increased by +$25,900 in 2017 to a new high of $686,700.

The increase was driven by higher mean dwelling prices in New South Wales (+$30,300), Victoria ($51,800), and Tasmania ($38,500). 

Stock up to $6.87 trillion

The number of dwellings in Australia officially passed 10 million for the first time at the back end of 2017. 

The statistics show that Western Australia continued to expand its dwelling stock at a rate anticipating demand ahead of what transpired, accounting for the stock overhang (although this is now correcting itself and prices are rising again). 

The total value of dwelling stock increased from $6.49 trillion in 2016 to $6.87 trillion in 2017.

And this puts the dwelling price to GDP ratio at ~4x.

The latest numbers reported for quarter dwelling transfers are, as ever, preliminary (and therefore meaningless).

More in-depth analysis of the outlook for 2018 to follow as always, in our monthly subscription reports

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Monday, 19 March 2018

How the household debt ratio can come down

Debt bomb

It's interesting to browse through the Reserve Bank's statistical tables, for despite all the talk of 'perfect storms' and 'debt crises' household wealth has blazed to unprecedented levels at around $10 trillion (from under $6 trillion in 2010), making Australia's households the second richest in the world, after Switzerland. 

Indeed, asset to income ratios have never been anywhere near as high as they are today.  

As for the perfect storm of mortgage stress, arrears remain low despite a significant increase in Western Australia, and on the measures that the Reserve Bank tracks in its statistics at least, interest repayments remain at fairly benign levels (despite a recent increase). 

The major angst, of course, relates to the green line below, being the household debt to income ratio (although this too has been revised down by about 6 per cent) sitting at 188.4 per cent, which is a high ratio in global terms.  

Reducing the debt

There are several ways in which the household debt ratio could come down, including rising incomes (we may now be seeing the very earliest signs of this, with average hourly earnings growing at the fastest pace since 2014), or through more borrowers opting to pay down debt.

The switch to principal and interest (P&I) only products is also underway, with new interest-only (IO) mortgage approvals dropping to just 15 per cent of new loans at the last quarterly count, from above 45 per cent at the 2015 peak.

More borrowers are willingly switching across in addition, in response to the mortgage rate differential. 

Commonwealth Bank estimates that some 26 per cent of its IO mortgages will be switched to P&I this year, with 29 per cent of those switching having repayment buffers of more than 6 months.

As the Reserve Bank figures in the chart above show, household deposits now sit at nearly $1.05 trillion, which is a thumping record high both in absolute terms and as a ratio of household income.

The counterargument to this is normally that the households with the debt are not those with large deposits, though the Reserve Bank might respond to this by noting that the increase in household debt since 2002 has been almost entirely accounted for by households in the two uppermost income quintiles. 

While this trend stands in stark contrast to the subprime crisis - where household debt was sometimes foisted onto those least able to repay it - I think we can all agree that some more timely data here would be both prudent and germane.

The HILDA survey data in the Reserve Bank's table relates back to 2014, and interest-only lending didn't peak until some time later than that.

Of course, household debt could also decline in the event of a sharp recession and correction in dwelling prices, but policymakers don't believe this looks very likely at this juncture with housing credit still flowing relatively cleanly.

The government could/should look also at encouraging downsizing to stimulate the economy, for although households may be sitting on about $10 trillion in net worth, almost half of it remains locked up in housing assets. 

Sunday, 18 March 2018

Funding costs flat in 2017

Cost of debt flat

Bank fund costs did not increase in 2017, affording plenty of headroom for advertised mortgage rates to be cut in recent weeks, although serviceability tests will remain as stringent. 

Reported the Reserve Bank of Australia:

"The cost of banks' outstanding wholesale funding decreased slightly over 2017, owing to a decline in short-term wholesale funding rates and the maturing and refinancing of long-term debt at lower interest rates. 

The cost of new long-term debt issuance was below the cost of outstanding debt for most of 2017, with bank bond spreads around their lowest levels in 10 years."

That said, banks have increased the average tenor of their debt, and issuance at a longer tenor tends to be a little more expensive. 

Net net, then, not much change. 

For the housing market, our direct market experience in Sydney's eastern suburbs very much points towards a soft landing, with auction clearance rates tracking at high levels, and prices remaining relatively flat over the past year. 

Saturday, 17 March 2018


Despite the crash, Bitcoin has delivered an annual return of +666.8 per cent. 

Live boutique seminar

Coming up, a boutique seminar at my Brisbane CBD office, for which we've sold two-thirds of the tickets (it's only a small event, due to limited available space). 

Please book well in advance for this one, as it's only a relatively small space and if we have any tickets left over as the day approaches we'll have allocated them elsewhere. 

Good chance to meet the speakers (and stick around for a drink afterwards, of course).

Click the image to expand it for the event details - the price is $50 and it includes two free books.

Look forward to seeing you there!