Pete Wargent blogspot

PERSONAL COACH | PROPERTY BUYER | ANALYST

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Saturday, 25 May 2019

Lowest ever mortgage rates (rate cut spesh)

Deep cuts

Australia's lowest ever mortgage rates.

Coming soon, to a brokerage near you.

Variable rates are now being rolled out from 3.29 per cent (Early Bird spesh, with cash back).

Via RateCity:


Source: Rate City

And there's plenty more to come here between now and Q2 2020, with markets taking on board the Evans call for three rate cuts. 


Friday, 24 May 2019

Capitulation complete

Just cuts

It's been a long time coming, but the capitulation is now complete.

Bloomberg's latest survey of economists showed that all concerned see interest rates falling at least to 1 per cent over the year ahead. 


Notably, Westpac now sees three cuts this year, with further risks to the downside beyond that.


Bill Evans is usually ahead of the pack too.

Funding cost pressures are nowhere to be seen, so this should largely be passed on to borrowers.

Slow news day, you may have gathered, especially after the week we've had.

Thursday, 23 May 2019

Bond yields sink to record lows

Yields hit new lows

Plenty of feedback and questions about 'when interest rates go up again' and the mortgage rate buffer.

An interesting point of note is that as and when interest rates do go up again, a buffer of 2½ percentage points would actually constrain the capacity to borrow (should the proposed rules remain in place, which they may not). 

But that's not something that's going to happen any time soon in any case. 

Of course, we all agree it is important to allow for changes in circumstances. 

Which is, after all, what the buffer is for. 

But you also need to look at the likelihood of 250 basis points of hikes, which - as market pricing shows - over the near term is effectively zero. 

Meanwhile bond yields across the curve have continued to decline to their lowest ever levels. 


Source: Bloomie

The 5 year bond yield is just 1.23 per cent, while the 10 year bond yield is at a record low of just 1.58 per cent.

Heck, even the 15 year bond yield is only at 1.85 per cent, so the squawking about rate hikes should be put into a bit of perspective. 

Or, looked at graphically.


An interest rate buffer of 250 basis points is very prudent, all things considered.

---

Addendu,: further declines in yields overnight.

Mortgage rates heading to record lows (in memes)

Labour force in detail

The ABS released its (largely ignored) detailed labour force survey today for the month of April 2019. 

I've jotted down a few points of general interest below, with a couple of memes to brighten up an otherwise predictably wonkish post. 

Unemployment rates are no longer trending lower in Sydney and Melbourne. 


In several other capital cities annual average unemployment rates are floating well above 6 per cent.


Sydney has had such a tremendous run in this respect; yet so many construction projects are winding down now that it's difficult to see much in the way of improvement from here, even for an eternal optimist such as my good self. 


And still there's not been too much in the way of wages growth, though perhaps we are through the trough now. 

Gizza job...

The median duration of job search has improved moderately over the past year in New South Wales (13 weeks), and quite significantly in Victoria (12 weeks).

But it remains relatively higher in Queensland and South Australia (both 18 weeks).

The Northern Territory is highly seasonal but you'd better allow for six months up there in the present climate.

Here's the national picture: 


With inflation decelerating there's realistically nowhere for interest rates to go but down, and down again. 

Funding costs plunge again

Interestingly, as a sundry observation, bank funding costs have also receded to record lows, meaning that we may see out-of cycle cuts to fixed rate mortgages too. 


This represents a remarkable turnaround from last year when all the talk was about spiralling funding costs and how many times the Fed might hike.

Instead, borrowers look set to enjoy the lowest mortgage rates on record. 

Wealth Ways for the Young

For the young

My newest book, and the fifth in the series, is now available in all good book stores...


...and newsagents (it's the one on the right, hey)...


...and online now.

It's a book in two parts, for parents and for teenagers.

Big short

Cash burn

After the fundraising analysts continue to debate whether Tesla is going to zero due to its mountain of debt and appetite for burning cash.

The share price is now down 49 per cent since mid-December.


Funding secured.

Incoming windfall

Also of interest overnight, the benchmark spot price for 62% Fe iron ore was up another 3.4 per cent to fresh 5-year highs at $105.78/t.

The price is up by more than 12 per cent in a week as stockpiles are run down in China.


The low point was just $38.30/t in December 2015. 

Rivers of gold here for the government's receipts, given that even $10 above the Budget assumptions sustained through the year can add $12 billion to nominal GDP and $3.6 billion to tax receipts.

The 2019/20 Budget had assumed that the free-on-board (FOB) spot price would fall through the fiscal year to US$55/tonne by the end of March 2020. 

What a windfall incoming here!

Wednesday, 22 May 2019

This is what the election result means for you

Election result

I take a look in this short video.


Assessment changes

Changes to assessment

It's interesting to consider how a new assessment rate for mortgages might impact lending.

A simple but stylised graphic below shows that currently mortgages written under 4¾ per cent could be treated a bit more favourably under the proposed 250 basis points buffer.

Following market pricing for the cash rate - and assuming that those rate cuts are broadly passed on by lenders - then the impact would be felt far more meaningfully for loans written under 5¼ per cent. 


It makes good sense, and appears likely to keep a lid on interest-only lending to investors (typically at higher rates), while favouring homebuyers.

It's good to see a dynamic and pragmatic move.

An interesting addendum: were interest rates to increase again in the future then a buffer of 250 basis points would constrain borrowing capacity.

Buyers return: The ScoMo put

No personal grudges, but there sure are a lot of happy people in the mortgage broking, real estate, and development space that Bowen isn't going to be in charge of the coffers.

Investors may still find financing hard work if they're looking at interest-only loans, but there seems to be a good chance that homebuyers might be hoovering up idle housing stock and getting things moving again. 

To wit:


Source: Property Chat

Wow, what a difference a week makes.

Enquiries on the up too.


All eyes will be on auction markets when they fire up again. 

Sydney's gross rental yields have increased from 3.2 per cent to 3½ per cent over the past year.

But even assuming a couple of rate cuts there's a limit to what Sydney prices can do from here until rental price growth returns, and that's some way off. 

---

A noticeably brighter mood up in Queensland this week. 

I always kind of knew Labor was unpopular up here, but at the moment they are very, very unpopular. 

Construction is winding down sharply

Construction sinks

Residential building work done fell another 2½ per cent back in the first quarter of the year, to be 3.2 per cent lower than a year earlier. 

Unsurprisingly this largely continued to be driven by apartments and medium-density dwelling activity in Sydney and Brisbane. 

There'll plenty more where this came from in Q2 as well. 


More disappointingly engineering construction is also now winding down sharply again, to be some 12.4 per cent lower than a year earlier. 

New South Wales and Queensland held up relatively well on public and infrastructure works.

But this was a poor result for Western Australia with the lowest level of activity since 2005. 


In the post-Ichthys Northern Territory engineering activity is imploding towards zero.

The wrap

An ugly result, as median market expectations were for total construction activity to be flat, but year-on-year the contraction has now blown out to 6 per cent and falling fast. 

Market analysts and the most highly respected RBA-watchers are weighing up the potential for four interest rate cuts, in addition to fiscal stimulus or unconventional policies. 


The skilled vacancies figures for April showed construction jobs and trades down by between 10 and 20 per cent from a year earlier, pushing the monthly result lower once again. 

The trend for skilled vacancies nationwide is now also 6 per cent lower than a year earlier, albeit coming back down from a very high peak in New South Wales and Victoria. 

Arrears mixed as interest-only reset loan reset

IO loans pain

There was an increase in S&P's Prime SPIN mortgage index, with delinquencies up to 1.51 per cent from 1.37 per cent a year earlier.

90 plus day arrears are now 0.81 per cent, up from 0.60 per cent a year earlier. 


Arrears increased faster year-on-year for investment loans, rising from 1.19 per cent a year earlier to 1.46 per cent largely related to the interest-only reset. 

Owner-occupier arrears were also up year-on-year, though less steeply, from 1.56 per cent to 1.73 per cent. 

The bulk of the interest-only reset has about 12 to 18 months left to run. 


Arrears were flat in the month of March in New South Wales (1.24 per cent) and Victoria (1.39 per cent), and were lower over the year in Tasmania.

In Western Australia arrears are now above 3 per cent (3.03 per cent) and they're soaring in the Northern Territory (3.31 per cent) 


Unlike episodes seen overseas non-conforming loans are not a big part of this story, with arrears declining to only 3.65 per cent, down from 3.95 per cent and far below long-run averages. 


The wrap

Arrears on fringe city properties will almost certainly rise from here, with some mining regions are also still getting hit. 

There have also been anecdotes concerning those buying house and land packages having to seek finance at high rates of interest to make up the deposit shortfall at settlement. 

Arrears seem to be well contained in New South Wales and Victoria at the moment, though the devil's always in the detail.

Ding ding

Hells bells

There's an old Wall Street proverb that says nobody rings a bell at the top or the bottom of the market.

That's true, but the marginal buyer in the housing market would have to be considering having a dabble now.

What a difference a week makes, with a trifecta of positive news for property markets, kicking off with the Federal election result. 

After three years of polling predicting an outright Labor victory the silent voters took a sceptical look at Labor's hotchpotch of new taxes and binned them outright. 

There's little value-add in Monday morning (Wednesday morning) quarterbacking on the election results, but the retirees I saw at a recent investor conference were absolutely seething with rage on the franking issue, which presumably would have accounted for some of the Queensland voting. 

They quite probably weren't ALP voters anyway, but the vibe was not good. 

And as well as retirees between them Bowen, Shorten & Co. did quite a job of rattling the cage of mortgage brokers, real estate agents, developers, and miners, not to mention those living in mining regions, and others. 

While Labor campaigned on a range of disruptive taxes for the housing market, by contrast Morrison is effectively a 'pro-property' PM, and indeed he's already promised a first homebuyer deposit scheme to kick in from 1 January. 

Secondly, after today's speech markets are now pricing a June rate cut as a near certainty (with a 92 per cent implied likelihood), and given that the RBA is not into fine-tuning outcomes right now another is likely to follow before long. 

A third and fourth cut shouldn't be discounted given that unemployment could fall much lower than 5 per cent without bringing about inflation. 



And thirdly, the easing bias was apparently well coordinated with APRA's plan to recalibrate assessment rates, which was a welcome move. 

It wouldn't be surprising if the responsible lending piece gets a bit of a nudge as well, as scrutiny of borrower expenses has swung from one extreme (often non-existent) to the other (insanely pedantic). 

If you haven't acted yet unfortunately you've already missed the bank bounce, with Commonwealth Bank surging from lows of around $65 up to $80, and Westpac having a heck of a run this week. 

But the property market bounce shouldn't be too far behind.

To be clear we're still at the tail end of a construction boom with settlement failures commonplace, and there's a significant amount of idle stock languishing on the market, so these markets still need to clear. 

And caveat emptor applies: marginal moves in a price index are one thing, but you don't buy an index, you buy a property.

I'll do a quick post on mortgage arrears which will add some colour. 

Tuesday, 21 May 2019

RBA sets up for rate cuts

RBA capitulates

In a move nicely co-ordinated with APRA's proposed changes the Reserve Bank is now set to cut interest rates.

The RBA noted that unemployment can go lower than 5 per cent without raising inflation concerns.

And therefore it won't wait any longer, since interest rates need to be cut.

Markets are pricing at least a 90 per cent chance of rates being cut in a fortnight's time - and all four of the major banks are cut - which is as close to a lock as you'll ever see. 

Fine-tuning was never on the agenda so it's reasonable to expect at least the "double tap" to follow in August, and possibly more to follow looking at market pricing. 

The language today was explicit.


Source: RBA

It's been quite a week, with Labor's planned suite of taxes consigned to the bin, APRA getting set to recalibrate the assessment rate, and the RBA indicating rate cuts. 

The overuse interest-only loans issue has been decisively tackled.

So this just leaves RG209 and lender scrutiny of expenses as outstanding headaches in the mortgage market, but brokers and lenders will be feeling a lot happier with the world with Bowen and Shorten's changes out of the road. 

---

Heaps of volume through the majors this week.


Buffer changes

Broken record

Apologies if I've sound like a broken record in recent months, suggesting that mortgage rate buffers rather ought to reflect the mortgage rate plus 250 basis points.

For example, here and here

And on Twitter a little bit as well.


A positive move from APRA means that a 250 basis points buffer may now be considered instead, pending a 4-week consultation (with the "comfortably above" prudential guidance removed for clarity).

This could allows monetary policy to transmit a bit better by not applying a uniform assessment rate, but also allowing plenty of interest rate buffer to minimise risky lending. 

And it can make a difference, at the margin, for borrowers looking to enter the housing market too. 

Good move, and I will go back to looking at other things too!

Monday, 20 May 2019

Banks rip as Labor loses election

ScoMo boost

Stock markets are well and truly off and running this morning.

The ASX is now trading at the highest level since 2007.

The banks are faring especially well as the threat of a range of housing taxes from the ALP has been removed. 

Westpac (ASX: WBC) is up by a massive 8 per cent in early trade.

NAB and ANZ are also both up 7 per cent respectively.

Commonwealth Bank (ASX: CBA) tore 6 per cent higher to above $77, eclipsing anything seen all the way through the banking Royal Commission. 


The second tier banks saw strong gains, though not quite in the same league, perhaps indicating something of a power shift back towards the major lenders. 

There were also strong gains for private health insurers in early trade, with Medibank and NIB both recording double digit percentage gains. 

The election result is a very significant one for banks, partly due to regulation, partly due to perception, and largely because it improves housing market dynamics by removing some of the poorly thought through reforms on negative gearing and capital gains tax. 

How good is this election to win?

Hit the ground running

Not even a day later from the Liberal election victory plenty of the media narrative has subtly shifted towards this being an effective 'hospital pass' and a bad election to win.

Hmm, if you say so.

I don't imagine the line would've been quite so much that way had Labor won as predicted.

And if there's one thing this week has shown it's that groupthink, echo chambers, and media narratives can sometimes be off the mark. 

The reality is that the preceding two elections were arguably tougher ones to win, at a time when either nominal GDP growth was weak or the collapse in mining construction was dragging mightily hard on the economy.

But the mining downturn is now over, and commodity prices have roared, just as the Aussie dollar has weakened to multi-year lows. 

Australia is thus set to benefit from an unprecedented surge in iron ore, coking coal, thermal coal, and LNG revenues, as well from its many other commodity and services exports. 


The Budget is effectively back in the black, and there is ample firepower to deliver a salvo of personal tax cuts over the coming half decade.

Labor is in disarray and back to wiping its slate clean on tax policies and reassessing its stance on coal, so ScoMo could easily get six years in power if he gets the economy humming. 

And with inflation so low real wages are finally rising again at the best pace since 2012 (all the more so when including bonuses).  

Another benefit to low inflation is that the Reserve Bank can safely deliver rate cuts, beginning with 25 basis points in a fortnight's time.

Credit where it's due

It almost goes without saying that the main hurdle for Morrison is the housing downturn and the associated drag from dwelling construction. 

There will certainly be a so-termed 'positive shock' from the lack of changes to negative gearing and capital gains taxes. 

And the government has also promised a new first homebuyer deposit scheme effective 1 January. 

Meanwhile, new fixed mortgage rates are still falling to record lows. 


Dichotomous

It's a truism to say that our housing markets are fragmented, but there's a risk of this becoming more so the case while credit restrictions remain in place. 

Stock turnover has now officially fallen to the lowest level on record at just over 4 per cent - it's hard for a labour market to fire up when people aren't moving, let alone furnishing and renovating - and new listings have plummeted. 

For example, we've seen some huge sales results for houses in the $2 million plus range in Sydney's eastern suburbs (including in Clovelly, Queens Park, Waverley, Bronte...and now even across town in Strathfield) as wealthy buyers squabble over what's close to the greatest dearth in quality new stock listings in memory.

Meanwhile on the city fringe valuations are coming up short and transactions are falling over like ninepins. 

Jobs in the development and construction industry are at high risk, with so many developers totally unable to access finance. I genuinely think the government has no handle on what's coming down the pipe here. 

The prospect of mortgage rates below 3½ per cent may be beguiling for those that can borrow, but too many wannabe market entrants are being knocked back (or, more accurately, aren't bothering to apply in the first place as they know they'll be knocked back). 

Looking at bond yields and futures markets an assessment rate buffer of 250bps should be plenty. 

Sunday, 19 May 2019

Coalition swept to victory (webinar registration)

Election webinar

Pollsters and bookies were left stunned on polling day as PM Morrison swept to victory within a few short hours.

This appears to have been another case of behavioural herding and 'shy Tory' self-censorship, roughly in the spirit of Trump's victory and the Brexit vote.

Certainly on social media most of the political voices I follow are outspoken Labor voters, but the Liberals won easily in the end. 

The Coalition ran a successful scare campaign on Labor taxes, while some material swings in Queensland and the Hunter Valley suggested that the jumbled stance on coal was a vote-killer for Labor. 

From what was observed at investor conferences over the past fortnight the proposed reforms on franking credit refunds also went down like a lead balloon with the over 65s cohort. 

Given it was essentially a one-man victory, PM Morrison will presumably hold plenty of sway in the Coalition circles for the next few years.

Stock markets will adjust quickly to any real or perceived impacts of the campaign and poll results, as they usually do, with perhaps a short-term bounce for banks and miners to follow.

Markets will likely still price in a couple of rate cuts this year, but maybe December 2019 indexed swaps which are pricing in even further easing will cop a bit of a hit. 

Naturally there are some more structural factors to consider in terms of the economy and a looming Budget surplus, personal tax cuts to land in workers' pockets effective July 1 and more to follow, property taxation, the first homebuyer deposit scheme, and the now-remaining in place capital gains tax discount. 


One of the many points we'll cover in our forthcoming webinar on Tuesday is how to build a strategy for all seasons, and for governments of all stripes. 

We've had a big subscriber response but you can still find the details and reserve your webinar seat here