Another very handy speech from the Reserve Bank this week, this time from Assistant Governor Kent.
As trader Kit Lowe noted on Twitter below, there has been some tremendous hyperbole about the rising cost of borrowing in Australia.
It's obviously the case that interest rates in the US have increased, although with the yield curve recently inverting the Federal Reserve may be getting closer to a neutral setting now.
As for Australia's funding costs and housing lending rates?
The Reserve Bank summarised this neatly in one chart.
Kent noted that:
'Changes in monetary policy settings elsewhere need not, and do not, mechanically feed through to the funding costs of Australian banks, and hence their borrowers are insulated from such changes'.
There are some useful explanations of hedging practices, and how Aussie banks are not forced to acquire US dollars.
There will most likely be no hikes in the cash rate any time soon either.
The RBA's SOMP forecasts have suggested underlying inflation might get back to 2¼ per cent by the end of 2019.
There are, however, some downside risks (the oil price which has very quickly nosedived from above US$75 per barrel towards $50, for example).
Cash rate futures imply that rates may well be on hold throughout all of 2019, and most of 2020 as well.
OK, so there was a tiny increase in investor loans in October.
But seriously...it was the weakest 3-month period for half a decade for investment lending.
This now puts investment housing loans as a share of ADI loans at just 33.36 per cent of the total.
This measure now sits well below the average for the past dozen years (33.9 per cent).
And that's despite a surge of immigration over that period into the major capital cities, greatly increasing the demand for rentals.
And with Chinese investors shot out of the market by surcharge taxes the result will almost certainly be be an epic drop in apartment construction, given that significant apartment projects don't get built without investors.
AiG's latest reading for apartment construction collapsed to 31, whereby a reading of under 50 denotes contraction.
One trend that homebuyers and property investors look towards is landlocked blue chip areas where new dwelling supply is chronically limited.
An alternative approach is to look for properties with a high land value content in areas that are less than perfect today, but have the potential to gentrify significantly over the decade or two ahead.
Gabba upgrade
Here's one such example in Brisbane: Woolloongabba.
The 'Gabba' will undergo some dramatic changes over the decade ahead, including a new Gabba precinct, new apartment developments, the $600 million South City Square regeneration, a cricket ground upgrade, the exciting Cross River Rail project linking into the City, and much more.
Here's the Gabba transport precinct today (OK, I took this photo a couple of weeks ago).
It's not much to look at in 2018, admittedly, partly due to the ongoing demolition in preparation for the Cross River Rail.
And now, here are the future Cross River Rail visuals...
Source: Cross River Rail Queensland
...and those for South City Square.
Source: South City Square
And so on.
Woolloongabba is located only 2 kilometres or so from the heart of the City, so simple geometry dictates that quiet, quality streets in the suburb and land will retain an inherent scarcity value, and the suburb is becoming more liveable with each passing year.
It's important to buy the right type of property for the location, being one with a strong land value component, and ideally a property with the opportunity to add value too.
Here's an example property that we bought this week: a post-war Queenslander with a superb opportunity to raise the home up and create a 5-bedroom, 3 bathroom executive home, with parking a a pool, and greatly improved district views towards the city.
Some of the homes on the street have been renovated; but, to date, many have not.
So, that's one great example, with enormous upside potential over the years and decades ahead.
Entry level opportunities on decent-sized blocks come with a fair price tag, but it's an area where a turnkey executive home on a 500-600 square metre block that appeals to a professional family could achieve very high prices over the years ahead.
In a constrained lending environment the buy, hold, and then renovate strategy can offer tremendously powerful leverage and bang for your buck in Brisbane.
Minimum 16 perch (405 square metre) blocks are ideal for Brisbane - unless you're in New Farm or Teneriffe, in which case just the best block you can afford! - and 24 perch (or 607 square metres) is even better.
Oxley hub
What about if you have a lower budget?
Another example suburb where we've bought many properties in recent years is Oxley, which is located about 10 kilometres from the Central Business District (CBD) of Brisbane.
I know from previous industry experience that Woolworths will never invest in new stores unless a location fulfils hundreds of key criteria.
So when the new Woolies store and shopping centre was announced for Oxley I intuitively knew it would be an area that's going places.
To be frank, the locale wasn't all that appealing 10 or 15 years ago, but already today there are coffee houses, places to shop, and great connectivity to the city.
I often stop in for a caffeine shot or a brekkie these days, which says almost everything about how much the area has improved.
As is so often the case with real estate, much of this comes down to simple common sense.
When the adjacent suburb of Corinda - which has the same postcode - is consistently recording home sales of above $2 million (and considerably higher in many cases), then eventually homebuyers will ripple outwards to the next available more affordable suburb as the city population grows.
Every time you visit Oxley you'll note further improvements in the area itself, and in terms of the modernisation of the dwelling stock.
As ever, property type and especially location are key - after all, you can't change the location of a property once it's bought.
You don't want to be a 35-minute walk from the train station, or way out on the other side of the motorway, assuming the budget permits.
And you also don't want to buy generic and small apartments.
A strong land value content and future potential are ideal criteria, if the budget allows.
Here's an interview I recorded recently with James Freudigmann of PMC Property and Richard Jefferies of Newbridge Financial on the housing market in south-east Queensland.
Unlike me, James is a Queenslander born and bred, and you'll note that he too is keen on Oxley as a hub with fantastic potential over the medium to long term (and James would remember the area when it was very different!).
In fact, the whole interview is worth a listen as James adds some great advice here.
A bounce for housing finance seemed to be on the cards, as all those painfully slow mortgage applications finally grind through the arduous process.
And so it proved, with owner-occupier approvals excluding refinancing up by nearly 5 per cent in October 2018.
I didn't think last month's plunge was too much to get excited about, and the same view applies to this month's bounce.
Yes, a seasonally adjusted $30 billion of housing finance in aggregate is apparently much more solid than $29.3 billion a month earlier.
But smoothing the results on a trend basis simply puts the ABS figures back in line with the credit impulse, and implies modest further declines in housing prices in Sydney and Melbourne into 2019.
Investment housing loans posted a small bounce, but it was still the weakest quarter for investment lending since 2013.
At the state level home loan transactions in Western Australia now look set to rise, as New South Wales and Victoria ease.
The average loan size has been trimmed back a little over the past five months, for both first homebuyers and non-first homebuyers.
The share of first homebuyers rose to a 6-year high at a tick above 18 per cent, first-timers being pulled in by grants and incentives, although tighter credit risks pushing more of them into negative equity, which is not the greatest start in life.
There are still plenty of new homes settling and being financed for now, but apartment pre-sales have dried up, suggesting that this figure is set to continue plunging for a long while to come.
Non-banks have picked up some of the slack, but here too lending volumes have been curtailed of late.
Overall, a much more upbeat release than the preceding month, but one that needs to be seen in the context of recent trends.
'Uncharted territory' says the RBA, a phenomenon not seen anywhere in the world: a decent fall in house prices, solid growth in the economy, and falling unemployment.
Well, let's see, but employment growth still appears to be defying gravity for now.
Roy Morgan reported employment up by +408,000 over the year to November 2018.
Lots of part-time jobs in that total, though, and the latest new auto sales figures were a total bloodbath, with the New South Wales figures getting roundly hammered.
The final ABS update on the labour force for 2018 is due out next week, and will command a huge level of attention.
Back in my auditing days in London, as a trainee I had to do my tour of duty in the forensic accounting department.
It's one of things that sounds a little bit exciting, and the people were great, but being involved in a fraud investigation I never found to be much fun.
Naturally, everyone is on edge - even people that have no reason to be - and the accounting concept of materiality doesn't apply in the same way.
Anything could prove to be material, so every transaction must be investigated on a painstaking, line-by-line basis.
Notably the process becomes almost as important as the result, and invariably the investigations drag on for months as ever further documentation and explanations are sought.
Pendulum swings tighter
I've spoken before about the concept of the credit cycle as a pendulum, rarely stationary in an a neutral position, and instead typically swinging towards too loose or too tight.
The AFR has reported more than once this week on the forensic analysis of mortgage applications, including borrowers with substantial 30 per cent deposits being refused a loan for having Netflix account membership, or for using Uber Eats.
I've also come across high income earners with low debt turned being down for a loan because they'd previously signed up for a credit card to earn loyalty points.
Here's how respected industry experts are reporting what they're seeing, and that one key word keeps coming up: forensic (check out the link - auditing of $20 expenses! Crazy times).
Nobody wants to see reckless lending, but this level of analysis would have to be short-lived.
Checking $20 payments is adding nothing worthwhile or of any value when lenders are already using a default assessment rate of 7.25 per cent.
If you're borrowing at a 4 and being stress-tested at a 7, who cares if you watch Netflix?
The way the forward-looking indicators such as money growth and building approvals are tracking we may not see mortgage rates that high in half a generation, let alone in the half a decade or so it takes for borrowers to make inroads into their loan and for incomes to increase.
I think back for a moment to when I bought my first home in Sydney.
Under today's rules I might well have been refused a loan despite having a strong income and secure employment, since like a lot of people in my twenties in Bondi I ate takeaways and...well, we didn't have Netflix back then, but going to bars, cinemas, and restaurants would've featured prominently.
My lender acknowledged that my spending profile after I bought a home would adjust accordingly, and the risk of mortgage arrears was always minimal.
Arrears in focus
Non-conforming and low-doc loans were rightly recognised as a risk area during and after the financial crisis, and standards here have been tightened accordingly, with arrears today at the lowest level in history.
Note that 30+ day mortgage arrears for investors are tracking comfortably below the level seen for owner-occupiers, at about 1.2 per cent (ironically the recent increase here is at least partly due to tightened lending to portfolio investors with multiple interest-only mortgages).
And in the supposed problem states of New South Wales and Victoria 30+ day arrears for all mortgages are only about 1 per cent.
The wrap
With many mortgages now taking up to six weeks or more to be processed the housing finance figures to be released this week for the month of October could yet post a small bounce as applications lodged a couple of months ago finally flow through.
That said the median market forecast is for another modest decline; and that's following on from an exceptionally weak result for September.
Investor credit growth has already been crunched to the lowest level on record.
Retail turnover increased by a seasonally adjusted 0.3 per cent to $27 billion in October 2018.
The household saving ratio has declined, as should happen with lower interest rates, and this in turn has been reflected in modest annual growth in retail turnover of 3.6 per cent.
Department stores hurting
At this stage of the housing market cycle we should expect some migratory shifts towards south-east Queensland, and to some extent this was reflected in the monthly retail turnover figures for New South Wales (-0.4 per cent) and Queensland (+1.1 per cent).
Adverse weather did negatively impact the results for some New South Wales industries in October, with the annual growth in retail turnover now being championed by Victoria and Tasmania.
Online spend
Not a remarkable set of numbers, overall, then.
The most interesting point was that online retail turnover contributed some 5.9 per cent of retail turnover this month, representing a rapid ascendancy from only 4.7 per cent a year earlier.
Consumers and stock market investors should take note of the continued poor performance of department stores, as the arrival Amazon Australia and other low-cost retailers puts further pressure on margins.
There is a long and growing list of retail failures in Australia.
But as the headline figures show, this doesn't mean people aren't spending; they are spending, but in a different way.
