Pete Wargent blogspot

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

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'The most knowledgeable person on Aussie real estate - loads of good data & charts...most comprehensive analyst I follow in Oz' - Jonathan Tepper, Variant Perception, 2 x NYT bestseller.

Saturday, 23 June 2018

APRA's surgery swift and effective

Decisive action

Back in August 2017 I estimated the potential value of interest-only ('IO') mortgage resets by calendar year for loans approved outside current standards, noting that the most impacted borrowers would likely be portfolio investors. 

Both the Reserve Bank and APRA had expressed concern with the unusually high volume of IO mortgages in Australia, and a range of measures were taken to strangle the trend accordingly.

Plenty had doubted the regulator's stomach to curtail IO lending, yet the latest figures released this week confirmed that APRA's remedial surgery has been both swift and effective. 

As I detailed here earlier this week, the flow of new IO loans has been tracking at under 16 per cent of new lending for six months, a long way below the initially suggested 30 per cent limit. 

Meanwhile, rational borrowers have taken advantage of more attractive mortgage rates on principal-and-interest loans to begin paying down their debt voluntarily. 

The impact on the stock of outstanding IO loans has thus also been marked.

Indeed, over the past year the stock of IO loans has dropped by $93.2 billion or 16.1 per cent. 

IO loans by value therefore retraced very quickly to 30.8 per cent of residential loans outstanding by the end of March 2018, from 38.5 per cent year earlier.

As I write this in late June, at the prevailing rate of decline that figure will be down to a historically low ¼ of outstanding mortgages within a matter of months. 

If this class of lending product was considered to be too prevalent, that won't be the case for much longer. 

Serviceability tighter in 2018

The regulator's quarterly ADI statistics further showed that about $4.3 billion of loans were approved outside serviceability in the March 2018 quarter, down from $5.2 billion in the final quarter of 2017.

APRA notes that caution should be exercised when interpreting these figures, with consistency between different lenders and reporting periods representing a perennial challenge. 

Some lenders will report all loans referred for review via their reporting tools, for example, while others will habitually file a nil return. Such is the nature of surveys and data collection.

What these figures broadly represent is a period where lending standards have been tightened, with a pool of applications in the pipeline sometimes classified as outside serviceability - so this likely implies that tighter standards have continued into 2018.

Certainly we can say that the stock of IO mortgages have continued their precipitous decline, while loan-to-value ratios (LVRs) are the tightest we've ever seen reported across this data series.

Switch hit

Pundits seeking a familiar narrative are invariably drawn towards comparing Australia's IO loans to US subprime mortgages, despite not the dynamics not being remotely comparable (there's always something that's going to crash the Aussie lending market - in recent years it was the resources downturn, before that it was 'Ruddprime' mortgages, and before that it was 'debt pressure'). 

Liaison with mortgage brokers suggests that most borrowers are handling the switch comfortably enough, with the few looming exceptions generally relating to portfolio investors.

Investors with larger portfolios comprising multiple properties with IO loans represent a relatively small cohort, and most built their portfolios over a long period of time, improving their cashflows and equity in doing so. 

In the worst case, some investors may need to sell a property or two to reduce debt.

It's also important to note that lenders have very little incentive to force stretched borrowers into arrears or default; it serves nobody's interests. 

Foot off the brake

IO resets of the present magnitude aren't unprecedented, and alone won't pose too much of a problem. 

The bigger risk is that tighter lending standards run so far that they begin to damage the confidence of consumers to borrow and spend. Arguably this hit to confidence is already happening. 

As Treasurer Morrison rightly pointed out on Business Insider's Devils & Details podcast, the most pressing advantage of the way macroprudential measures have conditioned enthusiasm over, say, structural changes in tax legislation, is that they are immediately reversible:

'The virtue of the tools used by the regulators should not be understated. 

These are highly flexible rules; they can be reversed in an afternoon. 

If you change negative gearing and capital gains tax, then strap yourself in, because you're in for a rollercoaster ride that's only going in one direction.'

In real time, Sydney's dwelling prices are about 10 per cent off their early 2017 peaks, the stock of IO loans is likely by now about 29 per cent and falling fast, and no other major housing market is even remotely at risk of overheating.

The cycle is thus approaching a critical point.

It will soon be time for macroprudential measures to be eased back before the risks of a greater fallout loom too large. 

Weekend reads

The must see articles of the week are summarised for you here.

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Don't forget to check out this free book competition too.

Have a great weekend!

Friday, 22 June 2018

Sydney unemployment rate falls to 4.2pc

Manufacturing picks up

Construction employment declined a bit over the three months to May 2018.

As detailed in our free sample report for fund managers and investors, the looming and potentially sharp downturn in construction jobs from century-highs as a share of total employment is a key risk in Australia. 

However, there was an offsetting strong increase in manufacturing and public sector employment in the quarter. 

Manufacturing employment being on the rise again might be something of a surprise given auto industry closures, but manufacturing is quite a broad term, incorporating food manufacture for overseas consumers, for example. 

And this dynamic has helped to keep the annual average number of unemployed persons declining, albeit glacially, down to 723,900 from 768,400 at the September 2015 peak. 

Sydney's unemployment rate declined again to just 4.2 per cent in May, taking the annual average unemployment rate for the harbour city down to 4.49 per cent - that's the lowest rate since 2008, and hardly the dynamics typically associated with a protracted housing market downturn. 

At the other end of the spectrum Hobart's unemployment rate leapt to 7.3 per cent in May.

Hopefully that's an anomalous blip, rather than a surfeit of interstate migrants heading to Tassie without a job (it rarely pays to read too much into a solitary month of original figures)!

Volume measures show tightening

One final point of interest here is that although it is often reported (and how!) that the underutilisation rate in the labour force has been elevated for some time in Australia, when you look at the amount of extra work sought by Aussies, the volume measure has been gradually declining over the past three years. 

This is arguably at least as important than the headline rate of how many heads want more work, because although there are people in the serious position of wanting a full time job but only able to find part time work, equally there are also many part-timers that wouldn't mind finding a few extra hours. 

This more instructive (but almost never reported) measure of underutilisation has declined across each of the past three years from 7.88 per cent in May 2015, to 7.35 per cent in May 2018, in original terms.

It's a glacial improvement, then - but it's an improvement nonetheless!

Thursday, 21 June 2018

Regulatory foot remains on lender throats


The regulatory throttling of mortgage lending maintained its firm stranglehold in the first quarter of 2018, with interest-only lending remaining at just 15.7 per cent of new residential term loans by value (a far cry from 45.6 per cent at the September 2015 peak). 

Both the stock and flow of interest-only loans has been significantly reduced by the introduced macroprudential measures. 

Tighter loan-to-value (LVR) ratios also continued to be applied in Q1, with just 6.8 per cent of new residential lending at LVRs of 90 per cent or greater in the March 2018 quarter. 

Loans approved outside serviceability were well down from the December 2017 quarter spike, but remained at an elevated level implying that tighter standards almost certainly continued to bite throughout the first half of 2018. 

Our detailed analysis of the latest mortgage lending trends, including findings from liaison with brokers, will be loaded into the monthly reports for subscribers. 

Population growth quicker than previously estimated (slowing from higher-highs)

Population growth rate: slowing from higher-highs

A somewhat confusing set of figures from the ABS today, with a final rebasing of population estimates from the 2016 Census shaving nearly 20,000 off the estimated resident population of Australia, leaving the population clock now at just a tick over 24,950,000.

That means that the population clock is now projected to hit 25,000,000 in August 2018, a little bit later than scheduled.

Interestingly, through, the latest revised figures also showed that the growth in the estimated residential population was quicker during the first half of last year than previously reported, peaking at 408,179 over the year to June 2017, before easing back a bit to 387,969 (or 1.6 per cent) by the end of the calendar year. 

There was an unusually high number of international departures in the March quarter.

It remains to be seen if this dynamic is sustained, but it seems likely to relate to the high number of international students we are now seeing in Australia.

In effect, with more than 2 million temporary visas on issue, Australia's 'resident' population is becoming more seasonal (we are seeing this impact a lot in rental markets these days).

The revised numbers showed that net overseas migration into the three most populous states was pacier than previously reported in the early part of last year, with immigration into Sydney temporarily sending New South Wales off the top of the charts (literally so in this case).

Annual immigration into Western Australia has now increased steadily for four consecutive quarters, with the three most populous states now easing, if you take these figures at face value. 

The auditor in me has a sneaking suspicion that there might be a cut-off issue with some of these numbers - however, it does seem that the pace of immigration could be slower this year than last, for a range of reasons as better explored by Signor Pascoe at the SMH and the New Daily.

Points north

The latest estimates showed a whopping 7,733 upping sticks on a net basis for Queensland over the 3 months to Xmas 2017 alone, the highest quarterly number since the heady days of 2005.

Moving to Queensland - you can't get more aspirational than that!

Over the year to December 2017, net interstate migration to the Sunshine State exceeded 22,500, the highest in more than a decade and mainly at the expense of New South Wales. 

At least Sydney has a high number of young migrants coming in, which helps to keep a lid of the ageing of the population.

Western Australia and South Australia continue to lose significant headcount interstate, however, largely to Melbourne where the labour market is thriving, which is a troubling trend for these states.

Population growth in the Australian Capital Territory quickened to 2.2 per cent, the fastest rate since 2012, while the Northern Territory has seen its resident population growth slow to all but zero. 

Queensland in focus (filling up)

The revised numbers for Queensland show a bit of a dichotomy, with the estimated growth in the resident population both slowing and yet quite a bit quicker than previously reported.

With residential construction activity in Queensland already nosediving by a third from the peak, this in turn accounts for the five consecutive declines in Brisbane's vacancy rates

Incidentally, you can see these impacts for yourself in inner-city Brisbane, with previously untenanted tower blocks now sporting furniture on 100 per cent of balconies, not that you can easily make this out from my casually snapped Polaroids. 

The wrap

Today's release showed population growth still tracking at around 1.6 per cent or 388,000 in 2017, but having slowed from higher-highs (if you can get your head around all of that).

Over calendar year 2017 the annual growth in Australia's estimated resident population was greatest in Victoria (143,400), New South Wales (116,800) and Queensland (81,500) respectively. 

Recently reported trends suggest that total population growth might be trimmed back a little from these levels, perhaps towards 350,000 or 1.4 per cent. 

Wednesday, 20 June 2018

'Peak fear' passes for banks

Believe, achieve

Bank share prices surged higher today as the media's apparently boundless energy for Royal Commission stories begins to ebb away.

Telstra saw its share price drop 4.87 per cent to $2.77 as the telco announced an 8,000 net reduction in employees and the monetisation of $2 billion of assets.

Showing another 8,000 staff the door will form part of a truly massive cost reduction for Telstra.

However, it must be said the company doesn't hasn't a great track record with revenue and earnings downgrades, and today proved to be no exception in disappointing the market.

There seems to be a fair chance that the FY2019 dividend gets its wings clipped too. 

Nevertheless the ASX 200 surged 70.5 points or 1.1 per cent higher to 6172.6 at the close.

The XJO hits its highest level in 10½ years, while the accumulation index sits comfortably at a record high.

Positive news here for household wealth, with superannuation funds on track to deliver double digit returns this financial year.

FY2018 will represent a 9th consecutive positive year for super fund returns, which should help to offset the quarterly decline in residential property prices reported earlier in the week. 

Crazy book competition (free to enter)

Book pack up for grabs

We haven't had enough fun on this blog page recently - far too much seriousness afoot. 

But, here's a prize worth winning.

11 books valued at a total of...hang on....just a moment...$475!

You an enter for free here, or by clicking the image below which takes you to the landing page. 

Now, I'm supposed to say in the wording to this blog post that I've read all these books and therefore you should too.

But, the truth is, I haven't read all of them. 

Not yet anyway,

Ao I'll be entering myself! 

Best of luck (although hopefully I will win and not you).

Click here for your chance to win.

Tuesday, 19 June 2018

March quarter resi prices (-0.7pc qtr, +2pc yr)

ABS reports modest price declines

The ABS released its residential property price indexes for the March 2017 quarter.

Although these figures are retrospective, they are always instructive, and reflected tighter lending conditions this quarter.

The total value of the dwelling stock was a nick lower at $6.9 billion - albeit well up from $4.4 trillion in 2011 - putting the mean price of residential dwellings at $687,700, and leaving housing market equity of around $5.1 trillion or so.

At the national level there was a quarterly decline in prices of 0.7 per cent, now leaving prices just 2 per cent higher than a year earlier.

The quarterly price decline was mainly accounted for by the most populous city, Sydney, with Melbourne also posting a moderate 0.6 per cent decline. 

Zooming in on the New South Wales capital, from a year earlier attached dwelling prices in Sydney were still 0.4 per cent higher, but house prices were 0.8 per cent lower (though all dwelling types were below their respective June 2017 cyclical peaks).  

Over the year to March 2018 the strongest price growth was seen in Hobart at 14.1 per cent, and the weakest was seen in Darwin at negative 6.5 per cent.

There was moderate year-on-year price growth in Melbourne (6.2 per cent), Canberra (3.8 per cent), Adelaide (2.6 per cent), and two-speed Brisbane (1.6 per cent), while Perth looks (-1.5 per cent) looks to be bottoming out.

Finally, there was all the usual explosive commentary about crashing transaction volumes at unprecedented lows (and imploding dwelling completions), as there is each and every quarter.

But, of course, these numbers are preliminary, and as such they are always apparently crashing or at unprecedented lows - until they are revised up next quarter.