Housing finance resumes slowdown

Slow down

Total seasonally adjusted housing finance resumed its slowdown in declining by 1.6 per cent to $31.23 billion in June 2018, with slower mortgage processing times and tighter lending procedures biting.

You might argue the toss over the classification of loans between investors and owner-occupiers, but the smoothed trend figures for total housing finance confirmed a continuing decline for an 11th consecutive month. 

Housing finance tends to have a fairly good correlation with dwelling price action, though economists try a bit too hard on this point, curve-fitting charts with warped y-axes trying to prove a faultless correlation that doesn't quite exist. 

There are more factors at play, of course, as the residents of Hobart, Geelong, or indeed many suburbs of Brisbane would attest.

The share of the stock of outstanding loans pertaining to investors continued to decline on the ABS numbers, broadly mirroring what has been reported by the Reserve Bank. 

State versus state (macropru hurts WA)

New South Wales has seen an ongoing trend decline in the number of owner-occupier commitments, with Queensland the only state to record an increase in the month of June (up 2.1 per cent). 

Sydney's housing market downturn has now spanned 12 months, the same length of time as the 2008-9 downturn, and already longer than those seen in 1985, 1994-95 and 2015-16 respectively (hat tip to Cameron Kusher of CoreLogic for the stats). 

One of the consequences of macroprudential measures has been to hinder markets that are already struggling.

In Western Australia the number of home loans dropped to 4,602 in June, the lowest figure since May 1995 (when the population of the state was 1.7 million, compared to 2.6 million today, as highlighted by Shane Wright of the West Australian). 

While some applications are clearly being knocked back, for borrowers of sound credit quality, there is robust competition from lenders.

Indeed, the average loan size remains 5.6 per cent higher than a year earlier. 

First homebuyers accounted for more than 18 per cent of owner-occupier commitments, a 6-year high, with the average loan size at $349,800 the highest figure recorded for any month to date. 

There was a sharp 4.9 per cent drop in the number of commitments for new dwellings.

Non-banks emerge

A final point for today: Commonwealth Bank's release noted a loss of market share, a trend which is being echoed across the major banks.

The trend in non-bank lending on the other hand is benefitting entities such as Liberty Financial, Pepper, Firstmac, RESIMAC, and others.

The wrap

Soft housing finance result for June, and more softness is certainly expected for July.

How long the tightness in lending persists is unclear, but it's all pointing down at the moment.

CBA hits the deck

Statutory profit down

Commonwealth Bank of Australia (ASX: CBA) reported its full year results this morning.

Cash profit for FY2018 of $9.41 billion was down 4.7 per cent. 

But overall this remained a solid underlying result with a fully franked dividend of $4.31 per share heading the way of investors (up 2 cents or +0.5 per cent...thanks!). 

Increased funding costs impacted net interest margins adversely as expected.

However, the group more than made these costs back in the financial year through changes in the funding mix and the repricing of investor and interest-only loans.

In fact, the net interest margin was up 5bps over FY2018 to 2.15 per cent.

Group loan impairment expense was also very low, at just 15bps.

Note that the Group will adopt AASB 9 from 1 July 2018, and therefore total provisions will increase to reflect forward-looking factors as required by the standard (this adjustment will will pushed through opening retained earnings and therefore will have no impact on the current year income statement). 

'As if' earnings

A number of one-off items including the $700 million AUSTRAC penalty reduced the statutory NPAT and cash NPAT.

Excluding one-off items, cash profit was up by 3.7 per cent to above $10 billion.

From the slide deck

There were so may great slides in the full year preso that's it's impossible to know where to start, but here are just a select few. 

90+ day home loan arrears were notably up a bit year-on-year from 0.6 per cent to 0.7 per cent. 

(Source: ASX: CBA)

The year-on-year increase in arrears was mainly due to Western Australia and the Northern Territory, with changes elsewhere relatively benign. 

The switching of interest-only (IO) loans peaked in September 2017. 

There is still plenty of scheduled IO expiry over the next two financial years, however, with the blue bars arguably representing the loans most at risk of arrears (being IO loans to investors). 

Home loan repayments in advance remain popular, though not for all borrowers.

Finally, CBA optimistically notes that outside recessions or global financial crises modern housing downturns generally only last about 8 months on average (so on that basis, this one should be about done).

Hmm. We'll see on that one!

Very interesting presentation and well worth a read.

Capital punishment for renters

Canberra vacancies tighten again

July is a seasonally soft month for rental markets, and Sydney recorded a 2.5 per cent vacancy rate in July, well up from 2.2 per cent a year earlier, according to My Housing Market figures. 

On the other hand, internal migration is soaking up the supply in Brisbane, according to My Housing Market commentary.

Brisbane's often-discussed unit vacancies were considerably lower year-on-year at 2.3 per cent, down from 3.1 per cent last year. 

I did some groundwork on this last week for a forthcoming news article with an international financial newspaper, and it was pretty interesting to see what's going down first hand. 

The quality new inner city apartment stock in Brisbane - by which I mean the stuff that is actually built with a view to people to living in it - is now essentially fully occupied (very recent completions excepted). 

However, some of the lower grade 'investor apartment' towers with views over car parks and main roads still have dozens of vacancies to be filled. 

And it was quite apparent from discussions with rental roll managers in these blocks that negotiations on price were the order of the day for 12-month leases (often 4 weeks of free rent is a given), with free internet and other goodies readily up for grabs. 

Just as a property price boom is characterised by even the dross selling quickly, the rental market won't be considered tight until the inferior apartment stock is fully rented out. 

Source: My Housing Market

Canberra's vacancy rates just keep on dropping, now down to just 1 per cent from 1.2 per cent at the same time last year.

This has nothing whatsoever to do with land tax, as I'm regularly assured on social media, which is good to know! 

You can catch Doc Wilso's market commentary at LinkedIn here. 

Listings down in dry July

Listings decline

Residential listings fell across the board in seasonally quiet July, driving national listings 5 per cent lower to 314,229 (about 1 per cent lower than the 316,748 recorded a year earlier), according to the latest SQM Research figures. 

Sydney recorded a sharp 7 per cent drop as some potential vendors elected to sit tight. 

Despite this drop Sydney listings remain 23.5 per cent higher than a year earlier, after nearly half a decade of low stock listings. 

Interestingly asking prices in Sydney remain higher year-on-year, especially for apartments, so some vendors clearly still have lofty expectations in the face of a weaker market (or perhaps in the upper price deciles are selling more slowly). 

In Hobart there are now fewer than 2,000 listings, with stock on market plunging by a quarter year-on-year. 

Not a whole lot of fun for prospective buyers in the Tasmanian capital right now!

Spring selling season will be one to watch with interest this year...

Apartment construction implodes

Unit crunch

Some time ago I wrote  report entitled Requiem for a Construction Bubble (you gotta have a good title), wherein I noted that - with the possible exception of Melbourne - the rate of apartment construction couldn't be sustained given the prevailing market dynamics.

You can now download a copy of that report for free here. 

The note wasn't universally well received, of course, but ultimately there's not much point in such analysis unless it proves to be right. 

The latest ABS figures for attached dwellings under construction only run to the end of March, but did at last confirm the beginning of a construction downturn for New South Wales and Queensland. 

July construction index

AiG released its more timely Performance of Construction index for July this morning.

And not to put too fine a point on in the apartments sub-index crashed. 

Source: AiG

Apartment construction contracted for a fifth consecutive month - 11 of the past 12 months have now been negative readings - with the sub-index sent plunging 11.7 points lower to a reading of just 36.7.

With a reading of under 50 denoting a contraction that's the sharpest rate of contraction in half a decade. 

On the plus side, engineering, commercial, and detached housing construction were all in expansion territory, which is keeping the industry buoyant while the infrastructure boost lasts. 

Unemployment to keep falling (from 5-year lows)

Jobs ads bounce back

ANZ job ads were up by 1.5 per cent in July to a seasonally adjusted 178,322, following on from a decline in the preceding month. 

Advertisements are 7.3 per cent higher than they were a year ago. 

There has clearly been some loss of momentum lately, and not only on this index. 

However ANZ see the result as consistent with further declines in the unemployment rate:

"Business conditions, while down from record levels, remain well above long term averages. 

Capacity utilization and profitability also remain at high levels. 

As such we expect employment growth to continue at a pace consistent with a gradual decrease in the unemployment rate." 

The unemployment rate is already at the lowest level since 2012, with Sydney's unemployment rate falling to below 4.1 per cent. 

Australia 25 million

25 million

Australia's population clock will tick past 25 million tomorrow night at 11pm.

It's interesting to look back at the increase in the population over the years and how it has changed. 

In 1981 the population of Australia passed 15 million and was ticking along fairly consistently in absolute terms, until it began to accelerate through the resources boom from around 2005 onwards. 

And that growth has continued over the past half decade in absolute terms, although the construction phase of the resources boom has long since passed.

And in percentage terms population growth has slowed from above 2 per cent in 2008/9 to about 1.6 per cent today.. 

The composition of the population growth has changed too.

Immigration remains a major contributor, but whereas the resources states previously took a big chunk of population growth, today it's heavily focused on Greater Sydney, Greater Melbourne, and then south-east Queensland.

Since 1981 the three most populous states have accounted for a very similar share of total population growth, with New South Wales (27.3 per cent), Queensland (26.8 per cent), and Victoria (24.8 per cent) each recording strong growth. 

Indeed, for years Queensland's population growth comfortably outpaced that of Victoria due to its resources prowess - for some time being the state accounting for the highest population growth in the country.

That title is now well and truly held by Victoria as Melbourne and Geelong expand rapidly. 

Compositional change

For me the most notable change has been how capital city focused population growth has become, with the greatest share of migrants now coming from Asia, particularly China and India. 

Overwhelmingly migrants to Australia now arrive and live in the capital cities, and most will remain in the capitals too. 

The ABS reported that:

'In 2016, Sydney had the highest overseas-born population of all capital cities (1,773,496), followed by Melbourne (1,520,253) and Perth (702,545). 

The 2016 Census also reveals that those born overseas were more likely to live in a capital city (83%), a much higher percentage than people born in Australia.'

On Census night there were many more Chinese migrants in Sydney (225,000) than British (178,000), a remarkable shift in the past decade, and one that will likely continue. 

By the time of the next Census the same trend will hold true in Melbourne. 

Indian migrants in Sydney were catching up fast too at 131,000. 

With many migrants being aged under 30 this means that the traditional view of what young Australians 'are like'  will need to change as the population does. 

Australia is one of the most urbanised countries in the world, with about 90 per cent of residents in New South Wales and Victoria living in the larger towns and cities, and only 10 per cent located in small towns and rural areas. 

Sydney shifts

Quiet winter auction market

Lots of moving parts across Australia's housing markets.

Mortgage activity indicators suggest that June housing finance figures will be reported on Tuesday this week as flat following a surprisingly strong increase in May (but with slower processing times likely then contributing to a weaker month in July). 

Market dynamics have changed a lot this year. 

More borrowers are now paying down mortgage debt, Chinese buyer activity has been smashed by new taxes and restrictions, and investors are finding it harder to source credit.

But overall lending remains at quite a solid level. 

Sydney recorded a preliminary auction clearance rate of 57 per cent this weekend, down from 64 per cent for the same week last year, with volumes also well down.

It's interesting to note that generally speaking most unit markets are holding up better than expected, as credit constraints have pushed some buyers into lower price brackets. 

In fact the median price of units sold at auction in Sydney this week was as high as we've ever seen at $1,097,500 (up from $910,000 for the same week last year), with the median for houses some way lower than a year earlier at at $1,226,250. 

With the major lenders jostling for market share and cutting rates on some products for new lenders fairly aggressively, it will be interesting to see how the market responds as the detrimental impact to confidence of the Royal Commission fades. 

Very quiet overall, both for auction and rental markets - though recent seasonal trends suggest that the actual number of people in Australia will soar over the next 7 or 8 months, which might see the rental market liven up a bit. 

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The housing finance figures for June 2018 will be released on Wednesday this week, with the market median forecast anticipating owner-occupier approvals as being flat (0.0 per cent change).