Pete Wargent blogspot

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

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Sunday, 1 May 2016

The Delinquents

Investor crackdown

Given that APRA's crackdown on investor lending has skimmed so many high loan-to-value ratio (LVR) investors out of the property market, it was always going to take a super-human 1Q 2016 investor update from Genworth Mortgage Insurance (GMA) to keep its share price buoyant.

In the event, GMA reported statutory net profit after tax (NPAT) of $67.3 million and underlying NPAT of $61.8 million for the quarter ended 31 March 2016.

Overall this was a solid set of results given that Gross Written Premium was down by a thumping 33.4 per cent from 1Q 2015, having declined dramatically from $127.7 million to $85 million.

This statistic is a fabulous measure of the impact of the regulatory intervention - the riskier loans have largely been crimped out of the property market.


Genworth's portfolio delinquency rate was marginally higher at 0.40 per cent, up from 0.36 per cent in 1Q 2015.

Overall mortgage delinquencies remain remarkably low, and can realistically only move in one direction from here, particularly given that numerous resources towns in regional Queensland have effectively become ghost towns.

Unfortunately many investors were sucked in to buying in mining towns and regions lured by superficially "stronger" yields, but unfortunately in many cases there is now nobody to rent the houses to, and as equity turns negative foreclosure rates will inevitably rise.

The lesson here is that "yield" and "income" are not the same thing, and that as an abstract spot calculation yield is largely useless as an indicator of future returns. This applies to all asset classes.

Even in some of the larger conurbations there are likely to be some severe challenges ahead, with unemployment in Townsville having risen to a 13 year high last month.

Despite these bleak statistics, overall delinquency developments have shaped up quite favourably since 2009, with mortgage delinquencies by book year having cascaded lower over time. 

The 2008 book year saw heightened mortgage stress among self-employed borrowers as a result of the financial crisis (0.98 per cent), while flooding in Queensland saw elevated delinquency rates in the 2011 book year.

At the state level delinquency rates are incredibly low in New South Wales (0.29 per cent).

Delinquency rates are notably higher in Queensland (0.55 per cent), in part due to mining town foreclosures, and largely related to the literal wash-up from the severe 2011 flooding in the state.

The largest year-on-year rise in delinquency rates of 16 basis points was seen in resources rich Western Australia, where portfolio delinquencies have increased to 0.53 per cent.

Nevertheless, Genworth sees the mortgage market remaining strong in aggregate, reporting in its investor update:

"The outlook for the Australian residential mortgage market remains strong, supported by sound fundamentals including low unemployment, record-low interest rates and a continued focus by regulators on lending standards."

And notably Genworth expects further constraints on high LVR lending in 2016 and beyond:

"The high LVR market continues to be constrained in 2016 and Genworth continues to expect GWP to decline by approximately 20 per cent due to these market conditions."

Share market analysts were fairly unmoved on the news, the share price steady at around $2.39.


The week ahead

It be a huuuge week ahead for finance and market news!

The Reserve Bank of Australia (RBA) will leave interest rates on hold on Tuesday, while at the end of the week we can look forward to the RBA's Statement on Monetary Policy (SOMP) which could potentially reveal weaker inflation forecasts (although not the "deflation" people seem to keep emailing me about, lol).

Despite the remarkably soft show-stopper result last week for inflation in the March quarter, we might still expect to see core CPI forecasts steady at 2.25 per cent through 2017 (marginally below previous expectations).

Growth in the economy will likely be forecast at 3 per cent for 2016, and 3 per cent for 2017 (not the "recession" people seem to keep emailing me about...etc.).

In other news, we can expect to see trend dwelling approvals continuing to meander lower in March despite a moderate rebound in February. To date the slowdown has largely been in the "high rise" apartments sector, but it seems likely that the downtrend will become more broad based over the months ahead.

Retail trade turnover is expected to rise moderately by 0.3 per cent in March. As for implications for the Q1 national accounts, the market consensus expects real retail figures for the first quarter to come in at growth of around 0.7 per cent, although the forecast range is pretty wide.

The February retail trade result saw the new IKEA send Canberrans shopping mad, but nationally year-on-year retail turnover growth is a bit slower than it was.

The International Trade in Goods & Services figures will undoubtedly reveal a 24th consecutive deficit for March.

However, the monthly trade balance result will almost certainly be much improved from February's horror show, with more coal and more LNG volume shipped, and iron ore spot prices leaping some 20 per cent higher.

After some silly results and even sillier reporting, we can expect to see New Zealand's unemployment rate jump higher again in Q1. On the other hand the US nonfarm payrolls will likely confirm a much more solid result for job creation.

Overshadowing all of this news, though, will be the domestic reporting of the Federal Budget on May 3!

The market consensus forecast expects to see a budget deficit of around $35 billion, broadly in line with the mid-year update (MYEFO).

There will be no doubt be all the usual hysteria about a budget deficit crisis and spiralling government debt, but the outlook has brightened quite considerably of late, particularly for commodity prices. Bloomberg's Commodity Price Index was set to record its strongly monthly result since 2010 in the month of April (+7.9 per cent) following a robust +3.8 per cent gain in March.

In reality we might expect to see net debt peak at around 17.9 per cent of GDP in 2017/18, some way down from the 18.5 per cent expected in the mid-year update (as compared to, say, 81 per cent for the United Kingdom).

A question for  the post-election period ahead: assuming an election victory, will the Coalition government have the balls to take on some debt while it is so cheap to fund infrastructure projects in the years ahead?

There is general distaste for government debt. Yet consider that the mining investment bust has not yet reached its nadir, while the building approvals data suggests that the residential construction boom will also soon pass its peak.

Government debt has rarely been this cheap, so it could be the time to borrow to invest.