Pete Wargent blogspot


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Monday, 31 August 2015

Stock for sale virtually unchanged from last year

Historically dwelling listings tend to begin to rise from the end of August.

However, nationally dwelling stock on market levels remain 1.3 per cent lower than a year ago.

At the capital city level stock on market has declined over the past year in Hobart (-11 per cent), Canberra (-8 per cent), Melbourne (-5 per cent), Brisbane (-3 per cent), Adelaide (-2 per cent) and Sydney (-1 per cent).

However, there have been significant increases in stock on market in the struggling markets of Perth (+18 per cent) and Darwin (+15 per cent).

More from CoreLogic-RP Data here.

Investor credit revised higher

Total credit 

The Reserve Bank released its Financial Aggregates data for the month of July 2015 which revealed a solid month for housing credit (+0.6 per cent) and business credit (+0.7 per cent).

Over the past year housing credit growth (+7.4 per cent) has continued to lead the way over business credit (+4.8 per cent) and personal credit (+0.9 per cent).

This puts total credit growth at +6.1 per cent for the year to July.

Business credit

Business credit growth ticked up to +4.8 per cent for the past year, reflecting somewhat improved commercial lending data reported by the ABS, lending finance having rebounded from "recession-like" conditions between 2009 and 2011.

Although year-on-year business credit growth remains well below the levels seen in previous cycles, of course total credit is now coming from a higher base (a similar point applies to housing credit).

Another indicator which is far from conclusive on a standalone basis but is nevertheless worth a glance is total capital raisings as reported by the securities exchange (ASX).

Another strong month of capital raisings takes the rolling annual volume of total capital raised to its highest level since May 2010 following  a number of material floats and secondary capital raisings.

Housing credit

Moving on to housing credit, at first blush investor credit seems to be slowing ticking back in response to APRA's cooling measures from +11.1 per cent year-on-year in June to +10.8 per cent in July. 

This brings investor credit growth closer to the +10 per cent threshold identified as desirable by the regulator.

However, it is worth noting here that following on from what we saw in the APRA ADIs figures a material revision was pushed through in July 2014 flipping around ~$30 billion of credit previously classified as "owner occupier" credit across to "investor credit".

The loans reclassifications related to National Australia Bank and ANZ, and you can see the net impact thereof in the chart below.

Total lending for housing increased in the month of July by +$8.5 billion or +0.58 per cent to $1,476.1 billion.

Investor share

I noted a few months ago that the trend towards investors accounting for a larger percentage share of total outstanding credit was likely "set in stone for quite some time to come", as much based upon my experiences in the market as any hard data being reported by APRA or the Reserve Bank.

After all we have tax legislation in this country which encourages investors to accumulate debt, while I've had any number of enquiries from first-time buyers opting to look at investment properties first instead of a place of residence. 

If my experiences over recent years have been anything even approaching the norm, it was inevitable that investor credit had to be growing its share of the pie.

And indeed restatements completely reshape the face of the share of housing credit, with the investor share of outstanding credit blasting higher from 36.2 per cent to 38.6 per cent. 

Whooosh! An all-time reord high...

APRA (and RBA) in "wait and see" mode

Despite this, consensus seems to be that APRA will continue to monitor the annual percentage increase in investor credit (which is now gradually slowing) rather than focussing on the above chart which suggests a huge change in the share of total credit from what had previously been believed.

Wayne Byres shed some more light on APRA's stance himself in a speech last week, seemingly indicating a "wait and see" approach for now.

In other news, there remained very few signs of inflationary pressures in the TD-MI monthly inflation report (only +0.1 per cent in August) despite the ongoing decline in the Aussie dollar.

Meanwhile, the cash rate will be kept on hold by the Reserve Bank at 2 per cent tomorrow in September's Board Meeting.

Nw home sales have passed peak

Reports the HIA, total new home sales have steadied at a "historically high level".

Multi-unit sales were 8.3 per cent higher over the quarter, but this was driven overwhelmingly by the May result, with May 2015 representing the cyclical peak for apartments sales.

New detached house sales also peaked for this cycle back in April.

Detached house sales for the month of July were stronger in New South Wales (+4.3 per cent) but weaker in Western Australia (-4.9 per cent).


Melbourne has been ranked the world's "most liveable" city for the 5th consecutive year.

Hey, I dont' see it myself, but each to their own, I guess.

Will take Brisbane myself any day of the week!


Edit: Brisbaneites may be prone to exaggeration.

Inner suburbs hot for-evuh

It's set to be a monester week of data releases ahead, from tomorrow in particular, but before that a quick look at the weekend auction results.

Core-Logic-RP Data reported its preliminary auction stats which showed stronger initial results than one year ago in Melbourne, Brisbane, and Perth.

Sydney recorded another vigorous result of 78.1 per cent, which was stronger than the final result for last week of 76.2 per cent, but for the first time this year was below the preliminary clearance rate from one year ago at 79.9 per cent.

Sydney's incredible run which has seen house prices rising at a pace of well over 20 per cent per annum has continued right the way through until the final week before the spring selling season.

The result of 78.1 per cent this week will doubtlesss lead to some premature extrapolation, but there are a few reasons why the Sydney market probably has a bit of a way to run yet before it runs out of puff.

Firstly while auction volumes have been tracking at the highest level we have seen, total listings are still moderate, and less than those of Melbourne and even Perth.

Secondly, in the inner- and middle-ring suburbs that matter, clearance rates are still tracking at exceptionally high levels.

According to CoreLogic-RP Data the Eastern Suburbs (87.6 per cent), North Sydney & Hornsby (86.3 per cent) and the Inner West (85.1 per cent) had the strongest clearance rates, followed by Blacktown (84.6 per cent), City & Inner South (82.8 per cent) and the Northern Beaches (81.5 per cent).

Although these are only preliminary results, traditionally it is said that results above 80 per cent point towards a "boom time" property market.

And thirdly, John McGrath ignited some debate earlier this year when he claimed that Sydney's inner suburbs will be "hot forever".

While this obviously isn't set in stone, simple geometry tells you that within the inner 6km there are only 113 square kilometres of land for which there is huge demand. 

Nothing is certain, of course, but personally I wouldn't bet against it. 

It's precisely what has happened in prime central London over the last couple of decades. 

Sunday, 30 August 2015

Making waves in the Aussie housing market

Homebuyer waves

I'm in the midst of what will ultimately be my most comprehensive research project to date, and henceforth will aim to share a few high level viewpoints and findings on this blog page along the way.

There are of course a multitide of factors which impact and drive housing markets ranging from macroeconomic drivers to monetary policy, and from consumption patterns to construction rates. 

But for today let's look briefly and specifically at Australia's demographics.

Population pyramid

Looking below at an Australian population pyramid - which for the purposes of this blog post I have flipped on its side - representing the estimated resident population as at 2014, we can immediately observe a couple of salient points.

Firstly, although Australia does have an ageing population, in part thanks to our immigration program the demographic profile of Australia is markedly different to those found in some other developed countries, and considerably less "top heavy".

With skilled migration in particular often having favoured those in the 21-30 age bracket, there is presently a relative dearth of people in my age bracket, that being the 31 to 38 year old cohort (see Point A on the below chart).

Depending upon your preferred information source the average or "typical" age of first homebuyers in Australia now ranges anywhere from 31 to 34 years of age, and that figure could potentially levitate further due to a combination of lifestyle factors and increasingly stretched deposit gaps in the two major capital cities.

Of course, an "average" covers a wide range of ages and strains of buyer, but recent data has suggested that a comfortable majority of first homebuyers are now in their 30s or 40s.

Investors in the ascendancy...for now

The shape of the first chart above may therefore go some of the way to explaining the comparatively low volumes of homebuyers in the market through this cycle, with investors dominant to an an unprecedented degree, particularly in the largest capital city markets.

Naturally other factors have played a role here, particularly looser monetary policy which has encouraged those with existing equity generated through housing market ownership to redeploy it in a faithful manner.

Not only is there a relative paucity of 31 to 38 year olds where we might expect to find the bulk of first homebuyers, there is also an evident weak spot in the traditional "big spender" cohort.

Which is to say, there is a proportionate lull in the number of executives, senior managers and business owners commonly aged from around 45 to 55 (refer to Point B on the above chart).

While the wave of first homebuyers predominantly impacts dwelling prices at the entry level, it is those in these middle working years that are the heaviest spenders in the housing market, making their most material dwelling purchases at that stage in life.

As you can see in the graphic above, the demographic pyramid does not present too kindly in respect of either cohort at the current time...and nor is it likely to do so for some years.

Looking swell (2021-2027)

In fact, rolling the chart packs forward by calendar year we find that it is not until around around 2021 that the number of potential first homebuyers reaches a critical mass which might be considered compelling, with the number of 31 to 38 year olds in particular mushrooming to a total of more than 3.1 million (from around only 2.6 million in 2014).

In the period through to 2027, that number is projected to have expanded further still to more than 3.3 million. 

As this effective "spending wave" passes through 2021, therefore, the demographic factors for Australian housing market growth look to be particularly favourable from that year until around 2027 inclusive.

As you can see in the second chart below, not only will the total population of Australia have swelled significantly by 2021 to around 26.5 million, the clamour of potential purchasers in the 31 to 38 year old age bracket (Point A below) really begins to amplify.

Furthermore there will be a coinciding wave of Australians approaching the latter half of their fourth decade (Point B below), the time of life at which they are likely to make their most consequential home purchases. 

This isn't to suggest here that the demographics for homebuyer activity then deteriorate after 2027 as such, rather that the projected figures then plateau for a period of time and thereby stop improving so impressively.

City winners and losers

Drilling down to the next statistical level, it can be found that from around 2021 the demographic waves will become very favourable for Sydney, Melbourne, Brisbane and and particularly Perth (assuming the superfluity of mining boom migrants opts to stay put, and interstate migration away from Western Australia doesn't begin to bite).

Hampered by an interstate migration "brain drain" these demographic waves do not suggest a favourable environment for the Adelaide housing market, with barely any improvement discernible over the same time horizon.

Meanwhile the latest projections suggest that Tasmania's housing market demographics could potentially worsen quite appreciably in the years leading up to 2035, although such longer term projections by their very nature tend to be less than reliable.

Dwelling starts

While this is a blog post predominantly concerned with demographics, it's worth considering for a moment how the above findings tie in with the dwelling construction cycle.

Two of the "X-factors" which have impacted this housing market cycle have been an explosion in the volume of Asian capital invested in the Australian market and a hitherto unseen shift towards multi-unit construction.

Although 2015 will likely prove to be the market peak for dwelling starts, dwelling completions will remain elevated for the next few years.

In combination with a slowing rate of population growth, this will be one of the factors together with an erosion of yields which will eventually bring the current growth cycle to its end.

Since natural population growth and net overseas migration will take some time to absorb the excess dwelling stock, this also points broadly towards 2021-2027 as a likely period for housing market growth.

Long run demographics are healthy

While the latest data suggests that over the short term Australia's populaton growth is likely to continue to slow, over the very long run the demographics of Australia are exceptionally compelling, with the population potentially set to almost double by over the next half century.

Also note that immigration is projected to keep the headcount in the potential homebuyer age brackets expanding to heights that agents and other industry participants can only dream of today.

The wrap

With life expectancies increasing there will evidently be a greater number of residents living well beyond the traditional retirement date in the decades ahead, although in time we might expect to see more folk working beyond the traditional retirement age too.

The chart above implies that with the demand for capital city property likely to approximately double over the very long run, the likelihood of capital city land values in the landlocked inner- and middle-ring suburbs remaining anything less than singularly expensive appears quite remote.

Of course, it isn't possible to forecast or time markets so accurately, but over the near term there could easily be a relatively weak period ahead for housing markets as dwelling completions overtake demand, before a potentially strong rebound running broadly between 2021 and 2027. 

The most interesting and useful findings are those which incorporate the shifting composition of net migration at the suburb level, though I don't post detailed suburb research on my free blog page. 

Saturday, 29 August 2015

Residex: "Astonishing" Sydney boom accelerates

Residex released its data and property market update to 31 July here which showed house growth over the quarter accelerate to "an astonishing" 7.6 per cent to be 21.2 per cent higher over the year.

As the below Residex graphic shows capital growth in Sydney has continued to outstrip by far that seen in other capital cities where average growth for the quarter was under 1 per cent.

Sydney median house prices have now blasted well past $1 million at $1,017,500

Regional house price growth was relatively soft across all states and territories on this index. 

Sydney unit prices also recorded very strong 6.6 per cent quarterly growth to be 15.2 per cent higher over the year.

Residex has also recorded very strong growth in rents for houses and units over the past twelve months.

On the other hand median prices contracted in resources capitals Perth and Darwin over the past year.

These Residex updates are well worth a read.

Discussed in this newsletter is how the increasing population density of Sydney may have contributed to outperforming capital growth.

Residex considers that strong captial growth in Sydney could continue for the next few quarters before stabilising at a high level.

Weekend reads!

The most interesting articles of the week here (or click the image below).

Subscribe for the free Property Update weekly newsletter here.

Friday, 28 August 2015

US GDP revised up

US GDP for the second quarter revised up to an annualised pace of +3.7 per cent (2nd estimate) from +2.3 per cent as inventories were revised up, while the trade dficit was also revised down.

In the first quarter the US economy grew at an estimated pace of +0.6 per cent.

On Thursday a separate report from the Department of Labor showed initial claims for unemployment benefits declined by 6,000 to 271,000 for the week ending 22 August.

This means that for more than 20 weeks in a row jobless claims have printed below the 300,000 threshold which is believed to be a positive indicator for the labour market. 

Big rebounds for stocks, commodities (especially oil, copper and iron ore futures) around the globe.

Crapex again...

Actual capex

The ABS released its Private New Capex data for the June 2015 quarter yesterday, which revealed a 4 percent decline in total capex for the quarter to be 10.5 per cent lower than one year ago at $34.3 billion in volume terms.

This represents the fourth consecurive decline in new business spending on buildings, structures, equipment, plant and machinery, and follows on from a similar decline in the March quarter.

No surprises for guessing that mining investment was the main driver of the decline with a massive 11 per cent drop in the June quarter and considerably worse to come.

This wouldn't quite such a big deal if manufacturing wasn't also simultaneously going down the toilet with a 7 per cent decline in capital investment over the past year.

It has been estimated that "conservatively 25,000" jobs will be lost particularly in and around Greater Adelaide as the car assembly industry shuts up shop. 

On the plus side, "other selected industries" (data which does not capture all industries) are gradually responding to low interest rates with investment increasing by around 10 per cent over the past year.

Services investment in particular is now at its highest ever level at more than $64 billion over the year. 

State versus state

While other states such as New South Wales, Victoria, Tasmania, and especially the ACT saw an increase in actual capex, South Australia has seen new capex decline by 19 per cent over the year, which is somewhat concerning since the state never really got its boom in the first place.

A combination of residual LNG investment, project overruns and large asset purchases in Western Australia have temporarily arrested the inevitably huge decline in capital expenditure that state. 

The bulk of the capex decline has taken place in Queensland, with more than a 30 per cent decline in capital expenditure over the past year. 

As the chart below shows, the Queensland story mirrors the national narrative, this being that most industries ex-manufacturing including services are steadily responding to easy monetary policy, but mining and resources investment is heading into wipeout territory following an unprecedented investment boom.

While this will be reflected in healthy export volumes in the future, the near term story is that many mining and resources regions are already effectively in recession with demand descending into oblivion.

The outlook

At least as important as what has happened in FY2015, is what is expected to happen in FY2016.

Estimate 3 for total capital expenditure in FY2016 came in at $114.8 billion - refer to the unshaded bars as circled below. The main contributor to the decrease was a huge collapse in planned mining investment at -37 per cent. 

The positive news was that the third estimate sits some 10 per cent higher than the second estimate released last quarter, with the main contributor to this improvement once again "other selected industries" (+17 per cent).

However, as you can see this improved estimate is still some 23 per cent lower than the equivalent estimate last year. 

Thus at this stage the the chart continues to suggests a very significant drop from what has actually happened in this financial year to what is expected to happen in the next. 

That said, the estimates have been improving moderately, and the 10 per cent jump this quarter was the biggest such leap in half a decade.

The wrap

What many of us would like to know is whether this will result in further interest rate cuts.

While the Reserve Bank would evidently prefer to hold interest rates in order to assess the impact of previously delivered cuts, there are data releases which could bring forward further easing.

On Wednesday next week the National Accounts are to be released for the second quarter with the market expecting a particulalry soft print for GDP, perhaps as low as +0.2 per cent. 

Since net exports and inventories will not contribute anything like as much to the Q2 result as they did in Q1 there is even a small chance that the print is negative (call me an old sceptic, but as an accountant I'd say a downward revision to Q1 is far more likely than an outright negative result for Q2).

Either way, as I looked at in some detail here last quarter, while the +0.9 per cent result for Q1 was superficially strong, it was overwhelmingly concentrated on net exports and new housing, and there is every likelihood that future quarters will see much weaker results.

For all of these reasons futures markets are expecting to see another interest rate cut before too long, but we'll have to wait and see on that.

Thursday, 27 August 2015

In God we trust, all others must bring data...

Some media releases from the Australian Bureau of Statistics (ABS) - particularly the jobs figures - have been suffering from a credibility deficit.

OK, so smart alec comments from eejits on Twitter don't help the cause much, but there is a serious underlying point here, and that is that the ABS needs adequate funding.

This isn't a swipe at any political party in particular, since both Labor and the Coalition have presided over under-funding the bureau.

Nothing good will come of this, although the Budget should allow for some improvement.

Take this from the ABS last week on the forthcoming 2016 Census:

“The ABS appreciates submissions received from interested parties about the retention of topics and new topics for inclusion in the 2016 and future Censuses,” Mr Kalisch said.

“To maintain important time series information and to ensure the 2016 Census can be delivered within allocated funding, 2016 Census topics will be the same as in the previous two Censuses, with minor changes to enhance some Census questions."

Thanks for your interest one and all, but we don't have the funding to do anything more in-depth.

This is not cool!

Given that crucial policy decisions are made on the back of key ABS figures, the bureau should receive requisite funding. 


Up to 28 this week.



Fitch Ratings released its latest mortgage delinquencies report for Australia Q1 2015 overnight, which showed that at a national level mortgage arrears are below their usual levels thanks to low interest rates. 

The report showed that Sydney has benefited from strong house price appreciation and low interest rates in particular. Noted Fitch:

"Sydney's mortgage performance has benefitted the most from the rise in house prices. Metropolitan regions, including those historically worst performing ones in western Sydney, have not experienced the usual deterioration in mortgage delinquency rates caused by Christmas spending."

There was of course some ordinary news in the release.

The worst performing state for delinquencies following a decade of flat house prices and high unemployment is now Tasmania at 1.33 per cent.

Mining towns such as Mt. Isa are unsurprisingly faring very badly, while Mackay is now the worst performing postcode in Australia by dollar value, with the 30 day+ delinquency rate rising to above 2 per cent. 

The mining slowdown and associated job cuts have hit non-metropolitan areas including regional Western Australia (especially Kalgoorlie, Broome), the Northern Territory, and regional Queensland (north and outback).

The worst performing postcode in terms of missed loan repayments was Budgewoi (NSW 2262) on the Central Coast of New South Wales. 

By contrast, accroding to Fitch the best performing areas were the inner suburbs of Sydney - particularly lower northern Sydney - inner Brisbane, inner Melbourne and Central Metropolitan Perth. 

No real surprises there. 

Summarised Fitch:

"On average, the delinquency rate across Australia increased 9bp to 0.99% at end-March 2015, up from 0.90% at end-September 2014. The strong house-price appreciation and lower interest rates slightly offset the negative impact of seasonal Christmas overspending, as arrears are 36bp lower than 12 months ago. "

A delinquency rate of 1 per cent - which is below the long run average - and down 36bp from one year ago  is a great result. 

Construction rebounds...for now

Construction rebounds

The ABS released its Construction Work Done figures for the June quarter, which showed total construction for the quarter rebounding by +1.6 per cent to a seasonally adjusted $49.8 billion.

Over the last year total construction remained at historically very high levels at $198 billion, although this is now down from a sky-high annual figure of $211 billion one year ago.

As any good politician would, of course, smiling Treasurer Hockey immediately took to Twitter to claim credit for the rebound.

But in fact public infrastructure work has been very weak. 

Furthermore, against recent trends the rebound in the June quarter was not driven by residential construction either, rather it was a punchy quarter for engineering (i.e. resources) construction works, with expenditure rebounding by +5.6 per cent to a seasonally adjusted $25.6 billion.

Despite this positive blip, engineering construction work done was -8.8 per cent lower than a year ago, and will doubtless resume its downward trajectory in due course, as considered in more detail below.

Mining rebound in WA

The driver of the engineering construction rebound was an increase in spend of nearly +$3 billion in Western Australia to $11.3 billion for the second quarter.

In fact, anyone who was paying very close attention might have anticipated this.

Recall that the so-termed "record trade deficit" in April 2015r actually included an anomalous spike in Western Australian imports from Korea. As I noted at the time:

"No further detail is provided by the ABS, but given that there was a kahuna $1.5 billion spike in merchandise imports in Western Australia, and we can assume that this was probably related to a major mining project.

In all likelihood, one might hazard that this was rail capex for Gina Rinehart's Roy Hill iron ore project (which typically a business would treat as an investment in a fixed asset for the generation of revenue streams, rather than trading expenditure)."

In all probability, therefore, the June quarter rebound was capex driven with a large asset purchase accounting for most of the spike.

Moreover we can expect that the September quarter will see engineering construction work resuming its inevitable decline.

Building by state

At the state level, Victoria has been the king of residential building across recent years.

However New South Wales is now the one state which is benefitting from a material public sector and non-residential building contribution, thereby thrusting total building work done in the Premier State to its highest ever level in the June quarter.

Indeed, the New South Wales economy in generally is in very fine shape at the present time.

Residential building by state

Looking at specifically residential buiding we can see that the +7.4 per cent year-on-year increase has been overwhelmingly a function of "other residential" building - which is to say, the construction of units, townhouses and apartments.

As denoted by the green line below, outside Sydney major renovations activity has been very subdued through this cycle.

Although new house building has responded to low interest rates almost everywhere to a greater or lesser extent, the trend has been looking increasingly peaky over the past four quarters.

Victoria continues to lead the way on the house building front, a state which appears to suffer less from greenfield land supply constraints than other states and territories do.

On the other hand the higher density sector building work continues apace, particularly in Melbourne, Sydney and Brisbane, which is a trend you can see everywhere from West End, South Brisbane, Fortitude Valley and Newstead (Brisbane), to Mascot, Wolli Creek and Zetland (Sydney). 

The latest building approvals figures suggest that the cycle for unit and apartment approvals may also be set to peak in due course, thoughthe duration of higher density projects from approval to completion may run to several years.

Consequently the elevated levels of building activity in this sector may have quite some way to run yet.

The wrap

Overal this was a positive result for construction in the June quarter which masks an ongoing decline in resources construction that is locked and loaded for the next few years. 

Residential building remains strong for the time being, but even here Australia can only build new apartment projects for so long.

Of more significance will be today's capex intentions for the 2015/16 financial year, and specifically whether businesses are becoming more inclined towards investment plans.

If not, in a nutshell, interest rates will have further to fall.

Wednesday, 26 August 2015

Home news (video)

Domestic news, recorded quite literally from home.

Interest only loans boom

The latest APRA figures showed that loans with redraw and offset facilities have continued to flourish and become more popular than ever before. 

But check these two charts out below. 

Firstly, a massive $44 billion of loans of $96 billion new residential housing loans written in the June quarter were accounted for by interest only products.

And secondly, to put this in its recent historical context, $44 billion reprsents an incredible 45.8 per cent of new loan exposures written.

In summary, it is true that offsets and redraw facilities are included in new loan products more than has ever been the case before.

However, with somewhere now approaching half of new loans written not requiring immediate repayments against the loan principal there appears to be an increasingly heavy reliance on borrowers managing their personal finances responsibly.

Tuesday, 25 August 2015

Investment loans power on

Total housing loans increase

APRA released its latest property exposures figures for the June 2015 quarter today, which confirmed an ongoing surge in new housing loans. 

As at June 2015 the total of residential term loans to households held by all institutions (ADIs) was $1.33 trillion. 

In total this represented an increase of +$31.8 billion (+2.4 per cent) from the prior quarter, and a solid increase of +$97.1 billion (+7.9 per cent) over the year to June.

There were a total of 5.4 million loans outstanding, with an average balance of $243,000.

Investment loans surging higher

Investment loans totalled $518.3 billion, an increase of +$17.7 billion (+3.5 per cent) from the March quarter and massive +$81.1 billion (+18.6 per cent) from one year ago.

That's huge, and well ahead of the rate that the regulator would or should be comfortable with.

Interestingly while loans held by the major banks increased by +7.5 per cent over the past year to $1,076 billion, loans held by other domestic banks increased by a much faster +18.8 per cent pace to $155 billion.

The major banks still accounted for close to 80 per cent of the domestic new housing loan market, however, with the remainder of the market comprising other banks, credit unions and particularly building societies.

It should be noted that there have been a few issues relating to the reclassification of loans between owner-occupied and investment loans, with material revisions (>10 per cent) pushed through for the September 2014 to March 2015 quarters relating to ANZ and National Australia Bank.

You can see the jump in the chart below. 

This has had the impact of accentuating the rate of increase in investment loans while dampening the growth in owner-occupier loans. 

In any case the trend in total loans outstanding since March 2008 has been more than clear, with total residential term loan exposures captured by this data more than doubling over that time.

This is at least partly because the investor segment of the market often opts to amass new debt rather than paying loan balances down, particularly because Australia has prevailing tax legislation which encourages this behaviour.

The data revealed that the overwhelming majority of new housing loans in the quarter at 89.3 per cent of new loans were of a loan to value ratio (LVR) of 90 per cent or lower. 

As denoted by the pink area in the chart below there has been a surge in the number of borrowers using 20 to 40 per cent deposits, now accounting for more than half of new housing loans in the last quarter.

This may imply that "cashed up" property owners with deep pools of equity are buying investment property at the expense of first time buyers who must save their deposits. 

More than one fifth of new loans in the quarter had a very low loan to value ratio of just 60 per cent or lower.

Higher risk "low doc" loans continued to represent only a tiny fraction of the Australian mortgage market in the June quarter at 0.4 per cent.

Market risks

With very few low doc loans written and the overwhelming majority of loans being written with deposits ranging from 10 to 40 per cent, where lies the risk?

After all, it is hardly as though the market is highly leveraged in aggregate with around ~$1.4 trillion of debt sitting against a stonking $6 trillion residential housing market.

For my money, in terms of the residential mortgage market the answer is that the risk lies in the very high percentage and concentration of interest only loans, whereby typically no repayments are made against the principal in the first five years. 

It is true that loans with offset facilities are continuing to flourish, but nevertheless a whopping 45.8 per cent of new housing loans written in the June 2015 quarter were of the interest only variety.

Although only 4 per cent of new housing loans in the June quarter were written outside serviceability, it would not be a surprise to see APRA looking more closely at the elevated percentage of interest only loans with renewed interest.

China stock plunge continues

Off another 6 per cent...

Monday, 24 August 2015

Interest rates to fall

Markets played around with the idea of the easing cycle being over for a while.

Not any more, though, as the yield curve inverts once again.

Still only a low probability of a cut in September. 

However, another rate cut is fully priced in for December, with the implied yield on August 2016 contracts sagging as low as 1.61 per cent.

Port Kembla

Potentially huge news - and dreadful news for the NSW south coast - reports The Australian:

"BlueScope Steel says 5000 direct and indirect jobs are at risk as it considers shutting down its Port Kembla steelworks, with $200 million in cost savings needed to be found in a three-month review.
Despite profit growth from the steel business over the full year, BlueScope managing director Paul O’Malley said the steelworks is unable to compete with a growing oversupply of steel from China without the savings, which he says will probably require government assistance to achieve.
He also said BlueScope, which closed down one of its two Port Kembla blast furnaces in 2012 with 1000 job losses to abandon exports, is being hit by weak domestic demand and needed to export more, which it was not set up to do competitively."

Auctions steadying

CoreLogic-RP Data reported the week's auction results here

Melbourne recorded its weakest preliminary result since February at 73.0 per cent, which is one dynamic that is helping to pull the national average slowly downwards. 

Sydney recorded a preliminary result of 79.9 per cent from 903 homes taken to auction, up from 76.1 per cent for the corresponding weekend last year.

This is some way below the incredibly high results seen in recent months, but nevertheless a very strong result - especially for the City and Inner South which saw a 90.2 per cent preliminary clearance rate recorded. 

The preliminary auction clearance rate for Brisbane was 54.8 per cent from 130 auctions, up from 51.2 per cent on the corresponding weekend last year. 

Overall the largest two capital city property markets of Sydney and Melbourne finally appear to be steadying a little.

However, with more monetary easing looking increasingly likely, there remains every chance that auction clearance rates could revert higher again in the two most populous cities. 

According to sports betting markets you can get $11.00 on an interest rate cut at the very next Reserve Bank meeting on September 1. 

With equities and commodities markets crumbling all over the place, and Aussie stocks diving to a two year low in sympathy, I wouldn't bet against it, although later in the year is still on balance more likely at this stage.

Regional success story

When it comes to property investment I generally favour the largest capital city housing markets, which in Australia tend to have more diversified economies, the greatest population and employment growth, tighter supply, and less prime location land available for release. 

One of the regional success stories of the past half decade has been a town - or a "city" as you would say in Australia - that I went to visit this weekend.

With a population of around 162,000 it is the 16th largest city in Australia, and the largest inland city after the nation's capital, Canberra...

The city I am referring to, of course, is Toowoomba in Queensland, to the west of Brisbane.

Queensland is the one state in Australia which has a number of sizeable regional cities, and there are four others that are larger again than Toowoomba: Gold Coast, Sunshine Coast, Townsville, and arguably Cairns (depending upon where you draw the boundary). 

The Grattan Institute found in a 2014 study that Australia's capital cities have become vital to economic activity, driving most of the economy in every state .

For regional centres, Grattan found that it is their proximity to the CBD which largely drives their fortunes and thus their respective rates of economic growth. 

According to Grattan's research, regional centres stationed less than 150km from the CBD are growing at a considerably faster pace than those located further away.

This in turn suggests that the best placed regional centres over the long term might include cities such as Toowoomba which is positioned approximately 125km from Brisbane. 

Other centres which sit close to their respective capitals include Geelong (around 75km from Melbourne), Newcastle & the Hunter (Newcastle is located approximately 160km from Sydney), and Wollongong (85km to the south of Sydney). 

The end of the mining construction boom will lead to desperate times for some regional centres, but the unemployment rate in Toowoomba has remained relatively low thanks to its diversified economy, which includes defence, agriculture, food processing, energy resources, retail and construction.

There are some ongoing wages cuts disputes happening in the region, but overally the economy has held up relatively well. 

Stocks getting cheaper

Some very tasty market action today.

China stocks smashed by -8 per cent at the time of writing, the bear market returning with a vengeance despite a thousand interventionary measure.

FTSE futures have dived below 6000. 

Meanwhile back home the ASX 200 had dropped by as much as -3.91 per cent in the last half hour or so, to be more than 16 per cent lower since the first week of March. 

Some big movers, in particular look at the share prices of some of the resources companies. 


Crude now also below $40. Dalian iron ore futures limit down.

Not been a good time to be holding resources stocks, hey.