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!

Weekend reads - must see articles of the week

This week Landguide ranked Property Update as the number 1 must read real estate blog.

Great one to subscribe to - see their must read articles of the week summary here.

Thursday, 15 March 2018

Tighter lending standards set to bite

Raising the standards

The impact of APRA's latest round of tighter lending standards - initiated nearly 12 months ago - is more than evident in the most recent quarterly data. 

In the December 2017 quarter some $5.23 billion of loans were approved outside serviceability, which is by quite a margin the highest figure on this data series for authorised deposit-talking institutions (ADIs). 

This means that more than 5 per cent of housing lending by ADIs in the quarter failed to meet the agreed serviceability standards, and implies that housing finance could soften further as the year rolls on.

Some of the non-major lenders remain close to or above the arbitrary 10 per cent annual growth cap for investor loans, while $7.21 billion of loans were written in the quarter with a loan-to-value ratio (LVR) exceeding 90 per cent of the purchase price (well up from $6.68 billion in the preceding quarter). 

With apartment completions potentially tracking at or close to record highs in the fourth quarter of calendar year 2017, some prospective borrowers will be struggling to settle based upon deposit requirements and new apartments failing to value up. 

The regulator will doubtless be taking a keen interest in loans written with relatively skinny net income buffers. 

Top 55 real estate blogs

Reading resources

I began writing for Property Update in 2012, and it's been quite a journey for that website, recently being ranked the #1 real estate blog in the world.

It has also been ranked #1 in Landguide's top 55 must read real estate blogs

It's nice to look back and consider that I've contributed to or been featured in more than a dozen of these great resources over the years, most regularly so Real Estate Talk (#10), and Property Observer (#16). 

And that includes, of course, #5, which is this very blog page.

Happy reading!

Record employment growth (revised up to +414,800)

Jobs explosion

The ABS released its rebenchmarked estimates for the Australian labour force this morning. 

The statistics confirmed that 2017 was the biggest calendar year on record for employment growth and by quite a margin. 

The year to January 2018 was also confirmed as the greatest 12-month stretch on record, with seasonally adjusted employment growth hitting +414,800 year-on-year. 

It's interesting to look back four years to when the trend figures for annual employment growth sank to below +43,000.

Perhaps it's no surprise that permanent and long term arrivals have also now followed to hit a record high

Australia Inc. is very popular right now

Populating, not perishing

Lots of news articles about immigration in the past fortnight, so here's a brief look at some very timely figures. 

Figures just released in the past half hour by the Australian Bureau of Statistics (ABS) showed permanent and long term arrivals surging +4.9 per cent higher over the year to the highest ever level at 787,710. 

Seasonally adjusted short-term arrivals also hit a record 760,200 in January 2018, up from 710,200 a year earlier. 

It seems quite possible that this number will increase sharply next month since Lunar New Year fell deep into February this year (as opposed to late January in 2017), so this may wreak a bit of havoc with the seasonal adjustments. 

Finally, another interesting trend to watch, the number of short term arrivals for education purposes jumped +18.3 per cent year-on-year in January, and also hit an annualised record.

Again, February is the key month for international student intake in Australia, so next month's numbers will warrant watching closely. 

Rapid expansion

Looking through the monthly ups and downs, any way you look at it Australia's capital cities are populating very quickly at the present time. 

A final interesting point of note is how the growth in the overseas-born population is set to be almost exclusively accounted for by immigrants of Asian origin. 

As some recent British, Irish, and New Zealander arrivals opt to dribble home - and as European-born Baby Boomers 'drop off' the figures, to use an awkward euphemism - this will leave Asian-born migrants as the sole major driver of the growth in overseas-born Australians. 

And Australia is a very popular destination of choice right now. 

Wednesday, 14 March 2018

Loan switching helping to head off reset risk

Interest-only out of favour

Investor mortgage debt outstanding is no longer increasing quickly according to APRA's latest ADIs data, while owner-occupier credit is growing at an annual rate of about 7 per cent.

Interest-only (IO) mortgages as a share of new housing loans approved fell to just 15.2 per cent (from 45.6 per cent at the 2015 peak), in doing so declining to about half the level of the regulatory 30 per cent cap across the three months leading up to Christmas. 

IO debt is also now quickly declining as a share of all outstanding mortgages as many borrowers voluntarily switch to principal and interest products for the materially cheaper rates now on offer.

As a share of residential term loans by value IO loans have dropped from 38.5 per cent to a 5¾ year low of 32.3 per cent in only nine months, with a rapid decline in evidence over the last six months of the 2017 calendar year. 

Indeed, there's arguably headroom for banks to start angling for more investor and IO loans this year and beyond.

This seems to be already happening to some extent, with all four of the major banks cutting rates over the past week or so, in addition to some other lenders, although borrowers will continue to face stringent serviceability tests.

The multi-year squeeze on higher LVR lending also seems to have run its course for now, although lending standards clearly remain much tougher than they were just a few years ago. 

Finally, reverting to the housing finance figures from the ABS, the trend growth in non-bank housing finance seems to have stalled, perhaps implying less urgent need for non-conforming lenders.

Known & unknown unknowns

Interest-only mortgages typically run for a five year period in Australia before being reset to principal & interest terms, though many have historically been rolled over into new IO mortgages.

Resets are thus expected peak in 2020, being five years after the peak of the IO lending boom (see our special market report here).

However, with many borrowers now voluntarily switching to paying down principal over a relatively short space of time - combined with fewer new IO loans being written - the risk of a huge forced mortgage reset in 2020 is dissipating. 

There are still more than $½ trillion in interest-only loans in total outstanding, so reset risk evidently remains, but at the current rate of decline the risks are lower than they were. 

Being right once

Why you may only need to be right once.

Adelaide tightening

Vacancies down in February

Something I've been flagging for a little while, Adelaide's vacancy rate is steadily tightening, now down to 1.4 per cent in February 2018, according to SQM Research's latest figures. 

Vacancy rates ticked down in Brisbane, Perth, and Canberra during the month, as seasonally higher January vacancies were filled. 

Sydney's vacancy rate was flat over the month at 2.3 per cent, but notably higher than the 1.8 per cent seen a year earlier, as a high number of apartment completions hits the market.

Melbourne's rapid population growth continues to overwhelm near-record levels of construction, with the vacancy rate dropping from 1.8 per cent to just 1.4 per cent in February.

Asking rents jumped accordingly in Melbourne.

Although Hobart's vacancy rate ticked higher to 0.5 per cent, it remains by some margin the tightest rental market for now, and here too median asking rents were seen to be rising. 

Canberra's rental market is also tight, with a vacancy rate of just 0.8 per cent recorded in the month, as workers returned to the nation's capital. 

Smoothing the figures on a 6mMA basis, although not accounting for the Christmas seasonal impacts, gives an interesting picture of the trends by capital city through this record construction boom. 

Nationally there were 69,727 vacancies, well down from 78,029 a year earlier.

You can find SQM Research's more detailed commentary here.

Tuesday, 13 March 2018

Investor loans in decline

Investor loans still easing

A quick look at half a dozen of the more interesting housing finance slides for January 2018.

Total housing finance increased by +0.7 per cent in seasonally adjusted terms to $33 billion, but was pretty flat in trend terms, with investor loans continuing to decline and owner-occupier lending growing at +7 per cent per annum to fill the breach. 

January is generally a quiet month due to summer holidays, but first homebuyers continue to be drawn into the market by concessions, now accounting for a market share of 18 per cent in the month. 

While first homebuyers are on average struggling to increase their loan sizes due to serviceability caps and stress-testing at above 7 per cent mortgage rates, established owners have been able to use more leverage. 

That's especially true in Victoria where the average loan size for non-first homebuyers hit a record high. 

Surge of completions

A number of indicators have suggested that the Sydney market saw a huge number of dwelling completions in or around the final quarter of 2017, as construction activity now drops back from record highs and a spike in vacancy rates is observed. 

The number of finance commitments for new dwellings is coming down off four-decade highs.

New South Wales has seen more new dwellings financed by homebuyers than ever before over a 12-month stretch, underscoring the point. 

The wrap

Overall, if you piece this together with other figures out recently including from APRA, the stats point toward a surge in apartment completions in Sydney, and investor lending being quelled as first homebuyers are increasingly drawn into the market by stamp duty and other concessions. 

Is your home worth more than you think?

From Sydney Morning Herald/Domain:

Monday, 12 March 2018

Healthcare drives growth

Good health?

Australia's economy isn't exactly on life support - it grew by +2.4 per cent in 2017, or +2.6 per cent in trend terms.

In per capita terms, however, the economy doesn't appear to be growing much faster than stall speed, despite some optimistic forecasts.

One of the main drivers of growth in 2017 was the healthcare and social assistance industry which grew by +6.4 per cent, driven by both public and private healthcare. 

A long-running theme of this blog - and my books - this sector has never accounted for a greater share of the Aussie economy. 

On the other hand, agriculture, forestry, and fishing contracted for three consecutive quarters. 

Manufacturing contracted in the final quarter of the year on a gross value add basis, which was probably not that much of a surprise given changes to the auto industry. 

Nobody seems to seriously believe that the economy is primed for higher interest rates.

Indeed, NAB and ANZ have joined the other major banks Commonwealth and Westpac in unleashing a suite of mortgage rate cuts of up to 50 basis points for their fixed rate product offerings. 

The new mortgage rates available differ depending on the borrower and loan type, but generally range from about 4 per cent for fixed rate home loans (principal & interest) to a bit higher for investor loans.

Westpac has also revealed a range of substantial discounts on investor loans of up to 105 basis points.