Pete Wargent blogspot

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

'Huge fan of your work. Very impressive!' - Scott Pape, The Barefoot Investor, Australia's #1 bestseller.

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Business Insider.

'I've been investing 40 years yet still learn new concepts from Pete; one of the finest young commentators' - Michael Yardney, Amazon #1 bestseller.

'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.

Monday, 21 March 2016

Stress less

Share market message?

Way back in the third quarter of 2014 I noted here how as a monoline mortgage insurer the initial public offering (IPO) of Genworth Mortgage Insurance Australia (ASX: GMA) could potentially represent an interesting new proxy for residential housing market sentiment, as well as a shorting vehicle for bearish observers.

On Friday in his Business Spectator piece "A house price indicator the market missed" James Kirby highlighted a "new metric" to consider, being the share market performance of real estate agents and GMA.

Kirby concludes that the share market is sending a "strong message" and "ringing warning bells" about Australia's property market, with the "fortunes of estate agents [representing] one of the best indicators".

I think everyone is in agreement that parts of the housing market have become sorely overvalued. Unfortunately no evidence is provided for why the share prices of real estate agencies are "one of the best indicators" of a property market outlook, at best a questionable assertion.

Conversely in early 2015 when the Sydney property market was absolutely tearing along the sheer dearth of stock on the market saw a number of local agencies struggling to survive, while low barriers to entry in the sector mean that competition can intensify during boom periods.

McGrath (ASX: MEA) was an optimistically priced float as confirmed by the February 24 release of its half year results, and the post-IPO share price action tells us precious little about the health or otherwise of Australia's property markets.

Kirby also cites the fortunes of GMA which floated at an IPO price $2.65 in May 2014, an IPO that "everyone lost money on", and since "the stock market tells it like it is...the writing is on the wall".

Kirby is an experienced business journo and knows his stuff, but Australia has more than one property market, and here's another take on the Genworth float: I think it's been quite a remarkable share price performance, and here's why...

Surprising Genworth resilience

Simply comparing the May 2014 float price of $2.65 to today's price of $2.45 and concluding that "the writing is on the wall" in my opinion is missing the point. If anything, the most remarkable thing about GMA's $1.5 billion market capitalisation is how well it has performed, not how badly.

Of course, GMA's share price is not literally a gauge for the property market outlook, it is a market consensus valuation of the underlying business, which in Genworth's case is the provision of lenders mortgage insurance (LMI), and there has been a twofold crunch on Genworth's business since May 2014.

Pincer movement

Firstly, in February 2015 GMA lost a material chunk of its core business as Westpac pulled its deal to take business overseas, and the loss of this major contract which had accounted for some 14 per cent of Gross Written Premium (GWP) in 2014 saw 23 per cent wiped from the share price in a jiffy.

Half year profits crumbled by 25 per cent in the six months to 30 June 2015 from the prior corresponding period.

True, there has been a bit of a rise in mortgage delinquincies in the resources states, which is pretty much what one should expect through once-in-a-century resources investment bust, but the larger capital city economies and property markets have held up remarkably well to date.

The FY15 results showed a bit of a rise in new delinquencies in Western Australia and parts of Queensland - the Mackays and the Moranbahs - but these are not core property markets, and indeed total claims paid continued to trend down to their lowest level since 2006.

Secondly, APRA's macroprudential intervention has slowed investor activity which naturally reduces GWP, while there has contemporaneously been a prodigious shift away from 90-95 per cent loan-to-value ratio (LVR) lending, which is kind of important to a company with a core business as a provider of LMI.

While the slowdown of investor lending and the use of larger deposits hurts Genworth's written premium, the point of the regulation is to lower risks in the housing market.

Recent share price action

Over the past six months's GMA's share price has reflected the outlook for its underlying business. There was a noticeable dip in sentiment before Christmas (Point A on the chart below) reflecting higher perceived risks as bulk commodity prices plumbed new depths.

On February 5 GMA released its FY15 earnings, which came in ahead of guidance for the period but revealed that net earned premium would likely decline in 2016, largely thanks to the said decline in high LVR lending. The share price dipped sharply over the next few trades (point B).

On February 17 the share price was down by a further 22 cents, not because of adverse sentiment but because GMA traded ex-dividend (Point C). A confident GMA Board had declared a fully franked final ordinary dividend of 14 cents per share and a fully franked special dividend of 5.3 cents per share, for a total of 19.3 cents per share.

However, over the past 15 trades the share price is up by more than 15 per cent as commodity prices have rebounded.

APRA intervention

What makes the GMA share price resilience so remarkable for mine is that after regulatory intervention the share of high LVR lending has nosedived, as reported by the company itself. We can corroborate this with what was reported by APRA in a speech at the end of last week.

Indeed APRA reported that by December 2015 the maximum LVR policies for investor loans had changed dramatically from only one year earlier.

One would think that in a market where so many more property buyers no longer require LMI due to having a 20 per cent deposit, then an LMI provider which carves up 40 per cent of that market would have seen its share price plummet.

Yet in fact the GMA share price has rebounded after its dividend payout. Even McGrath's share price was up by 6.3 per cent on Friday, whatever that may or may not infer.

Of course, the slowdown in investor lending will slow that sector of the property market - that's precisely the aim of the intervention - but arguably over time it makes the market less risky and prone to default, and so too does lower LVR lending.

Of much more interest are the GMA delinquency developments by book year, which despite a spike in Western Australia and regional Queensland have cascaded lower since the 2009 book year. The 2011 and 2012 book years show a slightly higher delinquency rate for Queensland due to severe flooding in that state.

Source: GMA

Certainly Aussies seem to love their mortgage buffers and offset accounts. Separate research from Westpac shows that thanks to low interest rates an incredible 73 per cent of its mortgage book is ahead of scheduled repayments. 

Source: Westpac

Including mortgage offset balances, when looking at a share of loans by value well over a fifth of borrowers are more than two full years ahead of schedule. 

According to the 2016 Money survey almost a quarter of Australians have a financial buffer of more than a year's worth of wages in in their mortgage repayments or offset, representing a huge increase from 2015. The greatest percentage buffers are in Victoria and New South Wales.

The wrap

Australia has multi-faceted and multi-speed property markets, and some are enjoying low interest rates whiles others are not. Some markets are faring considerably better than others, of course, and many of the strugglers are mining regions in Queensland as I looked at here.

A better leading indictator of property market performance in the largest capital cities than McGrath's share price is auction clearance rates.

More than 1,700 properties went under the hammer in Sydney and Melbourne this week as vendors crammed in sales before the Easter break.

Melbourne recorded an extremely strong preliminary clearance rate of 74 per cent, while Sydney went even higher at 76 per cent, with the inner suburbs recording exceptional results but the outer struggling.

House prices in inner Brisbane are demonstrably also rising.


Tomorrow, the ABS Residential Property Price Indexes for Q4 2015. Market consensus forecasts expect a flat result following a +2 per cent rise in Q3 which took annualised growth up from +9.8 per cent to +10.7 per cent.

The ABS series obviously lags somewhat given that it now nearly the end of March. CoreLogic-RP Data's more timely home value index appears set to record a gain of up to +2 per cent for the first quarter of 2016 for annualised gains of around +7 per cent.

The market expects to see an extremely strong result for February New Zealand migration today, driven by an onoging surge in international students.