Pete Wargent blogspot

PERSONAL COACH | PROPERTY BUYER | ANALYST

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Wednesday, 17 July 2019

90-day arrears creeping higher

Interest-only cliff update

First the good news: 30 plus day mortgage arrears ticked down from 1.53 per cent to 1.52 per cent in May 2019, though they were still 13 basis points higher year-on-year, according to S&P's latest figures. 

Notably, though, 90 plus day arrears were still rising in May, albeit modestly. 


New South Wales saw arrears decline from 1.28 per cent to 1.24 per cent in May, and there were also declines for Victoria, Queensland, Western Australia, South Australia, and the Northern Territory (with only Tassie and the ACT recording increases from a low base, each to just 1.20 per cent). 


Here S&P Global puts together its usual neat pictorial representation.


There's been a lot of excitable reporting and scaremongering in the usual quarters, but an objective reading of the figures suggest that up until May arrears (not non-performing loans or defaults) remained in surprisingly good nick in most states. 

In Western Australia there have been more cases of serious arrears, both for residential and commercial exposures. 

Arrears pause for breath in winter

The deterioration dissipated in May according to S&P, but overall the recent trend has been marginally worse for investors, partly reflective of the interest-only mortgage reset.  


The interesting thing about recent arrears has been that it's not a non-conforming loans issue.


Instead mortgage arrears have largely been hiding in plain sight at the major banks, where 90 plus day arrears have continued their climb. 


Arrears are very low at the non-banks, but regionals have also seen 90+ day arrears climbing.

Normally mortgage stress is felt most acutely in the period around and following Christmas rather than in winter, so there will be a further test then.

The wrap

The mechanical interest-only reset no longer applies, but some borrowers are struggling with their transition.

Jobs growth has been very strong, but crunching through the numbers it seems difficult to get a trimmed mean reading for inflation next quarter much above 0.3 per cent, so core inflation may drift further below the 2 to 3 per cent target.

Real wages are at least rising - and on the plus side there is ample room to cut rates without stoking too much inflation - but it's hardly a ringing endorsement of an economy operating near its capacity either. 

Of course, mortgage rates have been falling significantly, and significant tax cuts are set to be delivered, in turn relieving mortgage stress at the margin. 

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Tuesday, 16 July 2019

UK wages +3.6pc

Cool Brittania

Punchy monetary policy, very low unemployment, and a lower pound are finally working some magic on UK pay packets.

Including bonuses wages growth is now +3.6 per cent, while the inflation rate has been running at around target. 


Source: Bloomberg

That's the fastest rate of wages growth in 11 years, possibly ushered along by some Polish and other European workers returning to the continent. 

England are the cricket world champions too...we just need a Prime Minister now. 

Vacancy rate 2.3 per cent in June

Winter rentals

There was the expected seasonal uptick in vacancy rates to 2.3 per cent in June 2019, according to SQM Research.

The prior year figure was also 2.3 per cent.

Sydney ticked back up to 3.5 per cent - the Sydney vacancy rate was marginally higher over Christmas, but for this time of year it's the highest since the last cyclical peak of construction around 2003/4. 


Vacancies can rise because of a lot of units completing at the same time, or because of weak demand.

It's definitely not the latter in Sydney - in fact demand for rentals has never been as high as it is today - rather it's just the new blocks of apartments hitting the market all at the same time. 

The result has been a 3 to 4 per cent decline in asking rents in Sydney. 

The 6-month moving average vacancy rate shows that Brisbane continues to tighten. 


Asking rents are now rising in Brisbane and Perth, as well as in Hobart and Adelaide. 

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Macquarie Bank announced a new floor rate of 5.30 per cent with a 250 basis points buffer, which could add up to $75,000 to servicing on a $1 million mortgage (after accounting for the newly revised HEM tables).

This more than offsets changes to household expenditure measures, and ANZ now sees housing prices rising this year.

Domain forecasts Brisbane house prices to rise 20 per cent over the coming three years. 

Out of stock

Listings well down

The cobweb model in action.

New property listings are down 32 per cent in Sydney and 32 per cent in Melbourne respectively from a year earlier.

Brisbane's new listings are down 22 per cent, and in Perth the equivalent figure is 18 per cent. 

Even the total of unsold inventory is now down by 10 per cent in Sydney, and 6 per cent in Perth.


Source: CoreLogic

There remains a big chunk of unsold inventory in in south western Sydney and in the Hills District. 

But stock levels are becoming very tight on the lower north shore and on the northern beaches. 

Saturday, 13 July 2019

Long-term arrivals hit record high

Population acceleration

A very timely subject for a post having given I spent a punishing amount of time sitting in south-east Queensland traffic yesterday in the new Holden.

I took the chance to catch up on a lot of great podcasts, at least!

The annual number of permanent and long term arrivals into Australia increased by 5.7 per cent over the past year from 802,830 to an all-time high of 848,570.

That, is a big, big number. 


Throw in increased life expectancy and I expect we'll see population growth accelerating towards a record high of about 450,000 per annum. 

In round numbers that would comprise more than 100,000 per annum in Sydney and Melbourne respectively, and about 100,000 per annum into Queensland, which would be the highest figure since the mining boom. 

Tourism powers on

The long drawn out surge in short-term arrivals hit a new record in May 2019, with the recent growth driven largely by Victoria.

Growth in Queensland petered out, despite the boost from the Commonwealth Games. 


This boom has resulted in record visitor and tourism spend.

What happens next is likely to be driven by the trajectory of the Aussie dollar.

Some of the commentary on Chinese visitors has spoken of numbers being 'off a cliff'.

They are down, certainly - for various reasons - but some context is germane here: to date they're down a little bit from a very high base. 


Similarly the multi-year boom in international student numbers may or may not be peaking, and this could be reflected in a recent plateau education arrivals. 


Overall, Chinese travel is a bit out of favour at the moment, but this hasn't yet slowed aggregate trip expenditure, while permanent and long term migration into Australia is at the highest level on record.

The wrap

A bit of noise from month to month, then but Australia's population will nudge 25½ million over the September quarter, and one might expect to see population becoming a political issue again as growth accelerates towards record high levels.

Friday, 12 July 2019

Westpac eases floor rate

Relaxing

Following on from ANZ yesterday, Westpac will update its floor rate for mortgage serviceability, while maintaining a wide buffer of 250 basis points. 


St. George has also mirrored Westpac's moves. 

ANZ's announced changes could lift borrowing capacity by up to 20 per cent for some borrowers according to experienced brokers. 


Welcome to the recovery!

Weekend reads

Must-read articles

This weekend, a look at the latest construction, lending, and property market trends.

See here for the must read articles of the week (or click on the image below):



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And don't forget to block out the key dates in your diary for Wealth Retreat 2020.

Thursday, 11 July 2019

AFG 'glimpses recovery'

AFG glimpses recovery

Australian Finance Group (ASX: AFG) released its mortgage index for the June 2019 quarter, which showed a 13 per cent seasonal quarterly lift and 'the first glimpses' of a recovery, although lodgement volumes were still 11 per cent lower than a year earlier. 


Investor market share inched back up to 28 per cent, while non-major lenders helped interest-only loans to increase market share for a second consecutive quarter, now back up to 20 per cent of lodgement volumes. 

After a flat period the average mortgage size written through AFG brokers hit a record high of $514,898.


New South Wales saw a record mortgage size of $627,609, though the biggest year-on-year state increase was seen in Queensland, up about $19,000. 


Non-major lender market share hit a record high in the second quarter of the calendar year, but it's hard to imagine that the majors will allow market share to keep slip sliding away without putting up a fight.

And indeed ANZ announced today via broker channels that it will amend its floor rate downwards significantly in the coming days. 


That's a significant move, and combined with rate cuts this will at last be the first meaningful positive that's been seen for housing in some time. 


And - for some borrowers - this could add significantly to borrowing power.


Source: Redom Syed, Confidence Finance

There'll be all the usual criticisms, but it's worth pointing out that a 250 basis points buffer is still the equivalent of 10 (ten) immediate and permanent rate hikes with no increase in income. 

And this when inflation expectations are at record lows. 

AFR piece: Rental pressures (paywall)

Rental trends

Following on from yesterday's building activity figures, here's me having a yarn today in the AFR today here (paywall):

Wednesday, 10 July 2019

New apartment starts plunge

Building slowdown

Building activity figures are always quite complex, with lots of moving parts. 

Let's see if we can bring some clarity to the key themes, with a particular focus today on new apartments. 

Sydney faces down glut

There was a sharp 27 per cent drop in attached dwelling completions for New South Wales in the first quarter of calendar year 2019, as the pace of construction backed off in Sydney. 


The number of new attached dwellings under construction in New South Wales has continued to fall each quarter since the end of 2017, from about 69,000 to 62,000 by the end of March 2019. 

But that's still a very substantial chunk of completions in the post, which will mean downwards pressure on Sydney rents this year. 

CoreLogic's latest quarterly report has Sydney rents down by -2.7 per cent over the year, whereas Melbourne's rental market has been more balanced. 

Building activity for apartments and townhouses in Queensland has normalised now, after an eye-popping boom a few years ago.


Mostly these units under construction are pre-sold to investors, so the impacts will mainly be felt in the rentals market.

Meanwhile the unsold inventory in Sydney's established dwelling market is tightening quite sharply, meaning that prices in some parts of the established unit sector are already heading north. 

Piecing it together the number of dwellings under construction had fallen to about 216,000 by the end of March 2019, from 231,000 a year earlier. 

These estimated numbers are a few months out of date, so will be some way lower today in July. 


Pipeline shrinking

There's still plenty of building work to complete, then, but there's also far less coming through behind it and the pipeline is shrinking fast. 

Attached dwelling starts fell  by more than 41 per cent from a year earlier in the March 2019 quarter, and have almost halved since the March 2016 peak.

The smoothed trend chart below shows this most clearly.


And although it hasn't flowed through to the rolling annual figures yet, in New South Wales new unit starts have also halved from their respective quarterly peak. 


Finally, there were about 34,000 dwellings approved but not commenced, with almost half of these being located in New South Wales.


The wrap

The key trends then:

Firstly, as expected, there will be stacks of apartment completions in 2019 in Sydney, putting downwards pressure on rents in the short term. 

However, the rate of completions has backed off in the face of the glut, while new unit starts in Sydney have collapsed by half, meaning that there will be considerably less supply to come onstream in 2020 and beyond.

Indeed, with population growth ballooning again to +405,000 in 2018 the Reserve Bank's liaison program reported that by the end of the forecast period demand will again be outstripping the growth in the dwelling stock. 

Major renovation work also fell -4 per cent in the March quarter, although there was at least some support from non-residential building activity. 

With building defects in the news daily it's hard to see a major bounce in new apartment sales, and financial markets are still pricing the need for further support from yet lower interest rates. 

Finally, it's wise not to look at these estimates will a false level of precision: the December numbers were subject to some thumping upwards revisions, so it's likely better to observe the trends rather than get too bogged down in the exact quarterly figures. 

Monday, 8 July 2019

Shifting trends in lending

Shifting lending trends

An interesting tongue-in-cheek (I think) question from Cameron Kusher today:


The volume of interest-only (IO) mortgage lending in Australia has been decisively quashed, it's true. 

Volumes haven't been remotely as low as they are today across the entire data series. 


And an interest rate differential between products encouraged a good deal of early switching to principal repayment too, to the extent that at the time of writing in July 2019 the stock of IO loans is probably approaching just 21 per cent of the mortgage market by value, also a record low.

That represents a dramatic shift in only a couple of years. 


Meanwhile low-doc lending has been all but eliminated, and high-LVR lending was wound back beginning some years ago. 


The riskier parts of the lending market were decisively tackled some time ago, then.

However, the impacts of so many loans switching across to P&I in such a short period will be felt for some time to come, as this dynamic sucks dollars and therefore consumption out of the economy.

Furthermore, some borrowers will find the transition difficult, most notably where the economy has been weaker (and especially for borrowers with more than one loan switching to principal repayment). 


Several of the regulatory caps have now been lifted, but still some ongoing challenges remain to be played out in full. 

Living expenses

A critical outstanding issue with regards to mortgage lending relates to the treatment of household expenses. 

Expenditure benchmarks were previously used by lenders - and in the main they served their purpose  well - for the obvious reason that historic expenditure may not reflect future spending patterns even immediately post-purchase, let alone 5, 10, or 20 years down the track.

We're in the immediate aftermath of a banking Royal Commission, though, and in the midst of the confusion and paranoia lenders have often failed to distinguish between the analysis of discretionary and non-discretionary expenditure.

This lacks common sense and is doing nothing to reduce risks in the market.

Instead the process has long since degenerated into a line-by-line audit of bank statements, in the misguided belief that this is achieving anything worthwhile in terms of mitigating risk (if anything it's doing the opposite). 

A commonsense approach would be for assessments to take account of living expenses that are genuinely essential and non-discretionary, and isolate those that could be wound back easily if required.

With the technology so readily available today it's not as though this would be difficult to do. 

I noted a few more general thoughts on mortgage markets and risks in the video below. 


Sunday, 7 July 2019

Weekend reads

Must reads

Some must read articles of the week, via Property Update here, including details of the tax cuts to be delivered:


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