Insolvent abuse

All stressed out

Such a huge volume of garbage is being written, filmed, podcasted, Facebooked, and blogged about about mortgage stress right now that it's nigh on impossible to keep up!

A million looming defaults I saw on TV this week!

Oh, really, and always just a year away, I'm sure.

One of the biggest stresses right now from my perspective is trawling through all the tripe.

Time for a social media hiatus for me, I think!

The most important metric to watch is the health of the labour market, with jobs growth still firing along and the unemployment rate continuing to decline to the lowest level since 2012, with further improvements expected over the next year or two.

Resetting the clock

So that's the good news. 

The latest 'flavour of the month' - and there's always a flavour of the month - is presently the reset of Australia's interest-only mortgages, an issue I wrote a detailed report on last year.

Things have panned out a little differently in terms of timing than might have been expected at that time. 

One interesting thing of note is that with much lower interest rates now available on principle-and-interest loans there has already been a material voluntary swing towards the repayment of debt, and ahead of schedule in many cases. 

By the end of March 2018 the share of outstanding interest-only loans by value had already dropped quite close to 30 per cent.

This is well down from 39 per cent in Q3 2015. 

Given that it's now nearly August (where has this year gone, eh?) based upon the present trajectory it seems likely that the share of IO loans is now well below the average levels seen over the past decade. 

Of course, some borrowers may not be able to roll over existing IO loans under the new tighter lending standards.

And, yes, some borrowers may even be forced to sell a property (although lenders aren't incentivised in any way to send borrowers to the wall), while higher repayments are sucking some of the energy out of the housing market and the wider consumer economy. 

This is old ground, of course, well covered previously in speeches by the Reserve Bank of Australia and APRA.

The big picture is that 30-plus day mortgage arrears rates are tracking at about 1 per cent in New South Wales, and about 1.2 per cent in Victoria. 

After around half a decade in recessionary conditions following the resources downturn Western Australia has an arrears rate running at about 2.7 per cent, and the Northern Territory about 2.8 per cent. 

Personal insolvency

Another interesting metric to follow is personal insolvency activity as reported by AFSA.

Bankruptcies have fallen sharply over the past decade, broadly as expected after the financial crisis.

Total personal insolvency activity did show a meaningful year-on-year increase of 5.6 per cent over the financial year. 

This was mostly driven by Western Australia as shown in the graphic below (you can click to expand).

Note that the population of Australia has also increased strongly by about 4 million over the past decade, so in absolute terms something of a rise in total activity shouldn't be entirely unexpected. 

Around the traps

Indeed, although insolvency activity at the state and territory level is often reported as being at 'record highs', it is often only at record highs in the same way that my age is at a record high today.

After all, the estimated resident population is at all-time highs too.

Looking instead at a more sensible personal insolvency rate per 1,000 heads of population shows that Western Australia has recorded the sharpest increase since 2013.

Elsewhere insolvency activity levels have largely either improved or barely budged.

If you look with a magnifying glass activity levels in New South Wales are just off their lows, albeit only back to the levels seen in 2015 (and about half the levels seen in 2009).

Queensland typically records the highest levels of insolvency per capita, in part due to the severity of its tropical climate, including regular Cyclones, flooding, and drought. 

There are also elevated levels of mortgage arrears apparent  in Gladstone and some parts of Central Queensland heavily influenced by the resources sector, which is not unexpected given the magnitude of dwelling price declines. 

Panic attack city!

Personally, I can't say I'm all that worried about the medium term impacts on the housing market of tighter lending standards, interest-only loans, higher mortgage rates, or whatever else is supposed to cause a crash. 

But let's suppose I'm totally wrong - always possible, believe it or not! - and for some reason the housing market collapses into the assumed horrible cascade of defaults.

What happens then if we sink into a horrible recession?

Well, nobody knows for sure, but I've run through some scenarios with far more intelligent people than me in Australia and overseas, and here's what they think.

Firstly the Aussie dollar falls sharply, helping to rebalance the economy relatively quickly and encouraging foreign investment in Australia.

Secondly, interest rates are cut hard and fast, encouraging consumers to borrow again.

So there are two dynamics that present a different range of scenarios from Spain or Ireland (don't ask - it's always supposed to be Spain and Ireland).

And thirdly, the government has any number of levers it can pull to stimulate housing market activity, including grants for homebuyers, incentives for downsizers, stamp duty discounts, relaxing foreign buyer rules, and so on.

People don't like to hear this, preferring to argue that housing should be allowed to become cheaper. 

This sounds good on paper, and I don't necessarily disagree in theory, but in reality it's not a route that governments like to go down voluntarily.

And remember prospective first homebuyers don't want dwelling prices to fall either after they've bought a first home!

For these reasons policy is more likely to be directed at encouraging demand with first homebuyer incentives and pushing for higher household incomes to improve affordability.

Not that affordability is a pressing issue in many areas outside the two largest capitals, and certainly not in the doomsday housing market scenarios now being reported on a daily basis.

When the interest-only reset issue passes, it'll be on to the next big thing. Probably rising mortgage rates.

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The big news this week is the Q2 CPI or inflation figures.

A 6 per cent jump in petrol prices this quarter may push the headline rate of inflation up a little.

However, the annual core rate of inflation could still miss the bottom of the target range, with a seasonally soft result expected for the June quarter, with electricity bills calming down a bit. 

Statistical trickery

Arguing the toss

Another substantial surge in jobs was reported for June, with total employment up by a seasonally adjusted 50,900 in the month.

This led to the usual quibbles about whether the figures are 'right' or not. 

This seldom happens when the number are below expectations.

But when there's a beat...every time!

There are even occasional calls to ditch the seasonally adjusted figures entirely in favour of the smoother trend data, but I'm not sure I buy that.

What are the trend figures, after all, but a representation of the same numbers from the survey? 

The further you disaggregate the figures the more prone they are to throwing out unusual results. 

For example, Macquarie highlighted an oddity in that the bulk of jobs growth over the past four months was accounted for by youth employment, especially from the female cohort.

The detailed labour force figures at the regional level are similarly prone to volatility, which is why the ABS reports annual average figures in addition to the original survey results. 

Labour market improving

For all of the grouching, the labour force has continued to tighten gradually over the past few years. 

For the monthly doubters, the seasonally adjusted unemployment rate has now fallen by more than one percent from 6.38 per cent in October 2014 to 5.37 per cent in June 2018.

If you prefer to use the trend rate, then that's plotted below for you too. 

The unemployment rate is now at the lowest level since 2012. 

Another piece of pessimistic statistical trickery is to highlight the underutilisation rate while neglecting to report the more telling volume measures of underutilisation.

In other words, yes lots of people want more hours of work, but the numbers of extra hours wanted has been declining over the past four calendar years too. 

This is good news, and it should be embraced as such!

Welcome to the recovery.

Past performance...

The past is in the past

Past performance - it's no guarantee of future returns.

It's often said that the next 25 years won't be the same as the past 25.

And that's no doubt true.

After all, if they were then we'd have to see something quite extraordinary happening to interest rates.

And as for the housing market, as Doc Cameron Murray's extrapolation below shows, the national median house price would rise to nearly $3 million by 2043, with a house in Sydney costing about $6.35 million.

Source: Cameron Murray

Never say never, but I'm opting for a more sedate outcome than that!

Funding costs

Short term funding

I haven't written much here about short term funding costs for Australian lenders, for the most part because the impacts to date have been so moderate.

It's tempting to channel one's inner-Churchillian spirit here ('never in the history of market commentary has so much been made...' etc.), but the point is relevant to the extent that the cost of money globally is becoming more expensive.

Australia's short term funding costs are down from their recent highs, possibly induced by financial year-end pressures, but do remain approximately 25 basis points or so above their long run average. 

This is important to homeowners given that banks and other lenders may look to pass these costs on to borrowers (gotta maintain them $10 billion profits!). 

If you listen to the fixed income gurus that really understand this stuff, the drivers of banks' funding costs can seem confusing and nebulous, but the Business Insider Devils & Details podcast is a great place to start (the proxy used above is 3-month bank accepted bills less the Reserve Bank's expected cash rate).

One of the reasons I haven't much touched on this is that Aussie banks have been obtaining only about a fifth of their funding from short term sources (sometimes more for smaller lenders), so the importance of these figures has been overstated by excitable commentators, as is the case with almost everything these days. 

The remainder of total funding composition is mainly made up of domestic deposits, equity, and long term wholesale debt. 

In March this year the Reserve Bank put out a paper to show how the funding composition of banks has changed since the financial crisis, gradually shifting towards funding sources that are considered more stable. 

Mortgage buffers

The cheapest mortgage deals on the market right now still include 5-year fixed rates from just under 4 per cent, and variable rates from about 3.6 per cent, with comparison rates somewhat higher than these advertised deals.

So mortgage products are clearly still relatively speaking very attractive in historic terms.

Of course, what's of interest is the extent and impact of mortgage rate increases when they really do filter through, so it's one to watch (and for individual borrowers, it's something to budget for).

Fortunately new borrowers are typically assessed at a rate of more than 7 per cent, so there's plenty of buffer being built in by lenders over recent years. 

Weekend reads (and something a bit different)

Weekend reads

Find your weekend must-read articles here at Property Update.

And you can subscribe for the immensely popular free newsletter here.

Have a great weekend all!

Streets in the sky

And, for something a bit different, The Guardian (UK) ran an interesting piece on Sheffield's Hyde Park and Park Hill housing developments here - including photos of the famous 'streets in the sky', which aimed to recreate the Victorian community streetscape within high-rise schemes. 

Business as usual?

Brokers processing

It's 'business as usual' for the mortgage broking industry reported AFG, the country's largest mortgage aggregator, in its media release yesterday.

Or is it?

Certainly there has been no noticeable impact from tighter lending standards on the average mortgage size, which increased to a record $504,900, up 4.3 per cent from a year earlier (and up from $360,000 at the beginning of the data series in March 2010). 

The main strength here was driven by Victoria and Queensland, and this generally mirrors the monthly housing finance figures reported by the ABS. 

Volumes have eased, however.

Although lodgement volumes increased seasonally to $14.6 billion in the June 2018 quarter, this was only a moderate increase on the equivalent figure from a year earlier (and indeed, AFG's rapid volume growth now appears to have a slowed since 2015). 

New normal

The composition of lending has changed significantly, too.

Investors now comprise 28 per cent of lodgement volumes, well down from 40 per cent at the 2015 peak. 

And interest-only loans comprise less than a fifth of new loans, way down from 59 (fifty-nine!) per cent at peak popularity in 2015. 

Thus some 81 per cent of new borrowers through AFG brokers are now taking advantage of cheap interest rates to pay down their principal immediately, instead of using buffers and mortgage offsets.

This is a substantial behavioural change, with impacts both for the housing market and the wider economy.  

Market share shifts

Perhaps most interesting aspect of the AFG numbers to me was that the gap between major and non-major lenders continues to shrink.

The figures suggested that consumers needing to look outside the Big 4 lenders to meet their needs - be it for refinancing, upgrading, or investing - are comfortable to do so. 

The majors now accounted for just 59.3 per cent of buyers, when well above 70 per cent was seen to be typical in 2013 and 2014. 

Arrears a little higher

Arrears a little higher

Prime mortgage arrears remained below their 2011-12 peaks in May 2018 at 1.38 per cent. 

However arrears were a little higher than in May 2017 (1.2 per cent) or May 2016 (1.21 per cent), so this is more than just a seasonal affect. 

90-day prime arrears have moved a bit higher over the past two years.

Arrears have suddenly surged in the Northern Territory to 2.84 per cent, with Western Australia seeing a small improvement in the month to 2.67 per cent. 

Arrears remain benign in the two most populous states plus the nation's capital, according to S&P Global figures. 

Unemployment lowest in more than 5 years

Employment surges 51,000

With record jobs vacancies an upside surprise was always a possibility, and in the end that's what we got with employment surging by a seasonally adjusted by +50,900 in June 2018 to 12,573,600, driven by a large increase of +41,200 in full time employment.

Employment increased by +2.8 per cent over the financial year. 

To two decimal places the unemployment rate fell to 5.37 per cent, the lowest in 67 months since all the way back in November 2012, in spite of a promising jump in the participation rate, including record female participation. 

If you were to pick out a slight weakness in the numbers, the year-on-year trend growth in monthly hours worked was a tad softer at +2.6 per cent. 

Overall, though, it was an unambiguously good result.

State versus state - NSW booms

The monthly gain was driven by another +27,300 increase in New South Wales employment, taking annual employment growth to a massive +150,400 or +3.9 per cent. 

Queensland also saw an increase of +14,800 for the month of June, with only modest results recorded elsewhere.

A big chunk of employment growth in Queensland has been driven by public sector hiring, helping to explain the significant surge in total employment year-on-year. 

The bonanza year for New South Wales saw the statewide unemployment rate drop to just 4.7 per cent in seasonally adjusted terms. 

With its unprecedented construction pipeline Victoria could feasibly follow suit over the coming months. 

The smoothed trend numbers showed an improvement for South Australia too. 

The trend number of total unemployed persons has declined from 773,700 in October 2014 to 719,000 in June 2018, which is also a clear improvement, especially after accounting for the growth in the Australian population over that period. 

The wrap

Upbeat result, overall, with Sydney looking to be the likeliest candidate for nascent skills shortages and wages growth returning, with Melbourne arguably not too far behind. 

4 types of wealth (and how to balance them)

Some thoughts for the day...

Priming the pump

'Declining moderately'

An interesting little snippet from the Reserve Bank's Board Minutes yesterday. 

One might reasonably expect that the Reserve Bank is quite happy with Sydney prices declining by about 5 per cent over the past year, following a strong run. 

There's been a bit of odd discussion and reporting of these trends in recent weeks.

The most expensive sectors of the housing market by price decile do tend to be 'thinner' and more illiquid, and as such they do indeed tend to be more volatile through the cycle. 

But it's worth noting too that if the median price is down by 5 per cent, then that's the change in the median price; it can't all be driven by the top end or 'prime' properties!

The RBA is obviously clear on this point; not so sure about the burgeoning market commentariat, though!

There was also some interesting discussion of household debt trends, a subject that has been of considerable interest, both in Australia and overseas. 

Jobs preview

A bit of a slow news day, then, evidently!

But a big release is due out tomorrow morning relating to the labour force, with the market anticipating a modest increase in employment. 

The market median forecast expects the unemployment rate to remain flat at 5.4 per cent.

Hopefully there'll be an upside surprise in the offing given that jobs vacancies at the end of May were the highest in about four decades as a share of the labour force. 

Find out tomorrow at 11.30...

Skyfall?

Live on Sky News tonight discussing the housing market and what happens next.

If you miss it, catch the repeat on Saturday, or catch up with it all online at the Sky News Australia app.