Housing Correction

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<p>There are several possible risks facing Australia's housing markets: a change in sentiment leading people to stop buying homes, the crackdown on investor lending, rising interest rates, and a glut of new homes to be absorbed. </p>
<p>I heard Tapas Strickland of NAB note that he just can't see a meaningful housing correction coming looking at the fundamentals, and on today's evidence he will be proven right.</p>
<p>A couple of dozen lenders have dropped their mortgage rates since July 1 to entice homebuyers back into the market, and even by the end of July this was clearly working. </p>
<p>Not only have homebuyers not shunned the market, they are coming back in droves, with the number of owner-occupier commitments excluding refinancing surging 4.5 per cent higher in July, with the trend result rising to the highest level since the financial crisis stimulus. </p>
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<br><div>Loans for the purchase of established dwellings jumped 5 per cent in July, and average loan sizes are gently trending to new highs too. </div>
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<div>As a result, owner-occupier commitments rose to a record high in July 2017, helping to offset a 7-month decline in investor loans, with total monthly housing finance still tracking at around $33 billion. </div>
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<div>First homebuyer incentives are also back in play from July 2017 forth, and the number of first homebuyer loans immediately rose to the highest level in 44 months.</div>
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<br><div>The number of first homebuyer loans in New South Wales jumped to the highest level since 2012, while in Victoria the figure hit the highest level since 2013, consistently reflected in rocketing auction results in markets such as Geelong. </div>
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<div>In fact, my state level analysis, not posted here, shows that homebuyers in Victoria are by far the most ebullient of all states and territories, with new loan activity in New South Wales also rising.</div>
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<div>Finally, as for the glut of new stock, there was upbeat news here too, with the number of homebuyers financing new dwellings accelerating to the highest level in 38 years. </div>
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<br><div>New home sales are trending down, suggesting that the rate of construction will fall over the next few years, but on this evidence homebuyers will gladly mop up the new stock as it's released to the market (on the flip side, taxes will slow buyers from offshore investors, while domestic investors are finding it harder to access credit). </div>
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<div>A lot of people seem frustrated by this, but the housing juggernaut does not conform to ideologies, and for now it continues to power on. </div>
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<h3 class="post-title entry-title"><a href="https://petewargent.blogspot.com.au/2017/09/home-loans-back-in-favour"> </a></h3>
<p class="p1"><span class="s1">PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank"><span class="s2">AllenWargent</span></a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank"><span class="s2">blogger</span></a>.</span></p>
<h3 class="post-title entry-title"><a href="https://petewargent.blogspot.com.au/2017/09/home-loans-back-in-favour"></a></h3>
<p class="p2"><span class="s3"><em>His latest book is </em><a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank"><span class="s2"><em>Four Green Houses and a Red Hotel</em></span></a><em>.</em></span></p>
<h3 class="post-title entry-title"><a href="https://petewargent.blogspot.com.au/2017/09/home-loans-back-in-favour"></a></h3>
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Home loans back in favour: Pete Wargent

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<p>The ARCO fund manager George Colman is warning of a "slow-motion property market crash" as credit gets harder to secure.</p>
<p>"Broadly speaking, we think that the game has changed in terms of consumer behaviour," he told The Australian Financial Review.</p>
<p>"Bank credit is creating a steep change."</p>
<p>Property borrowers moving from interest-only to the more expensive fixed-rate mortgages was another source of market stress, Colman suggests.</p>
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<p>Colman believes the economy now suffers from declining breadth after a years-long narrowing of focus on housing and related sectors.</p>
<p>"We might limp along," he says.</p>
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<p>Arco was formed in 2008 at the height of the global financial crisis by Mr Colman and Peter Whiting and the Melbourne-based investment management firm had $147 million of assets under management in its long-short Absolute Trust at the end of June.</p>
<p data-gtm-vis-first-on-screen-7770372_137="63642" data-gtm-vis-total-visible-time-7770372_137="1800">The fund returned 6.5 per cent over the 2018 financial year.</p>
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"Slow-motion property market crash" coming: ARCO 

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<p>The Australian housing market will continue its downward correction on a national basis through 2018 and most of 2019, according to <span lang="EN-GB">the CoreLogic-Moody’s Analytics Australian Home Value Index Forecast</span>.</p>
<p>They see trends that will show a degree of diversity at the city and state levels.<span class="Apple-converted-space"> </span></p>
<p><span class="Apple-converted-space">Sydney values, which Moodys predict will fall 5.1 percent this year, will only rise 0.6 percent in 2019.</span></p>
<p class="x_MsoNormal"><span lang="EN-GB">National values are forecast to fall by 1.6% year on year in 2018, following a 9.5% gain in 2017.</span></p>
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<p class="x_MsoNormal"><span lang="EN-GB">In the rest of New South Wales outside of Sydney, demand has increased as areas show better affordability.</span></p>
<p class="x_MsoNormal"><span lang="EN-GB">The Central Coast, which has benefitted from Sydney's soaring house prices, is forecast to escape the correction. </span></p>
<p class="x_MsoNormal"><span lang="EN-GB">Moody's sees a 3.6 percent rise in 2018 and eight percent in 2019.</span></p>
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<p class="x_MsoNormal"><span lang="EN-GB">The growth in house values in Melbourne is forecast to decelerate sharply - after a 12.5% rise in 2017 - to 0.3% in 2018, on the back of declines in inner Melbourne areas. </span></p>
<p class="x_MsoNormal"><span lang="EN-GB">Recovery is elusive in the near-term, with Melbourne house values forecast to fall 0.2% in 2019.</span></p>
<p class="x_MsoNormal"><span lang="EN-GB">House values across Brisbane are forecast to see a mild 1.5% gain in 2018, with strength in West Brisbane and Inner Brisbane offsetting declines in South Brisbane. </span></p>
<p class="x_MsoNormal"><span lang="EN-GB">Despite stabilising commodity prices, house values in Perth – whose economy is very much tied to the mining industry -- will likely decline by 1.9% in 2018, followed by a further 0.5% retreat in 2019. However, a slow recovery is likely in 2020 as the local economy improves thanks to population growth.</span></p>
<p class="x_MsoNormal"><span lang="EN-GB">Meanwhile Adelaide’s housing market will have a stable run, with values forecast to rise 1.5% in 2018, after a 4.9% gain in 2017. Hobart’s housing market is likely at the end of its bull run. </span></p>
<p class="x_MsoNormal"><span lang="EN-GB">While values are forecast to rise 11.3% in 2018, they will fall 0.3% in 2019. </span></p>
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Sydney house values to grow 0.6% in 2019: CoreLogic-Moody’s Analytics Australian Home Value Index Forecast

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<p>EXPERT OBSERVER</p>
<p>The correction in Australian dwelling prices that has been running since late 2017 is showing clearer signs of moderating in early 2019.</p>
<p>The CoreLogic home value index, covering the eight major capital cities, fell 0.4% in May to be down 8.4%yr. After tracking a 10% annualised pace of decline between Nov and March, price slippage has been running at a more moderate 6.7% annual pace over the last two months.</p>
<p>While that is a clear improvement it is still well short of stabilisation.</p>
<p>Prices nationally are now 10.7% below their Sep 2017 peak. The current price adjustment has now been running for 20mths putting, eclipsing the much shallower 2010-11 correction.</p>
<p>More major capital cities recorded price declines in May. The moderation in price falls continues to be slightly more pronounced in the Sydney and Melbourne markets.</p>
<p>The annual pace of declines in these markets improved for the first time since early 2017 but is still tracking a solid pace, –10.7%yr in Sydney and –9.9%yr in Melbourne with cumulative declines of 14.9% and 11.8% respectively.</p>
<p>Performances across other markets continue to be more varied. Perth's longer running correction accelerated again, prices down –1%mth, –8.8%yr. Brisbane, which was stable through 2018, has continued to see price slippage in 2019, prices down –0.5%yr, –2.3%yr. Adelaide remains an isolated area of calm amid the sea of red, prices nudging 0.2% higher in the month to be up 0.4%yr, essentially stable.</p>
<p>Across the smaller markets: Hobart is coming off its boom sharply with a second month of price declines paring annual price growth back to 3.4%yr, well down on the double digit pace nine months ago. Canberra has been steadier, prices dipped 0.2%, annual growth holding just under 2.5%yr.</p>
<p>The mining-dominated Darwin market is mirroring the difficult conditions in Perth, its long-running correction also re-accelerating with a 1.6% decline in the month taking prices down 8.6%yr to their lowest level in over 12yrs.</p>
<p>The dwelling type detail continues to show units outperforming houses slightly in recent months although both segments are showing a similar moderation in the pace of price declines.</p>
<p>The breakdown by tier shows a more pronounced moderation in price declines across properties in the top tier, albeit with this group coming from a weaker starting point. In Sydney, the three tiers have been tracking closely over the last 3mths. Bottom tiers are outperforming in Melbourne and Brisbane, with prices in these segments close to stabilisation.</p>
<p>The moderation in price declines is consistent with the improved tone from auction markets in recent months, with a notable lift post-election, the result meaning changes to the tax treatment of investor housing are now off the table.</p>
<p>With interest rates set to move lower, some relaxation in regulatory guidelines for loan assessments likely and increased Federal assistance for first home buyers, prospects for an eventual stabilisation in prices are looking considerably better, boding well for an eventual stabilisation in prices.</p>
<p>MATTHEW HASSAN is a senior economist for Westpac</p>
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Price adjustment hits 20 month mark but correction continues to slow: Westpac's Matthew Hassan

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<p>EXPERT OBSERVER</p>
<p>As the property downturn draws to an end, there are important lessons for policy-makers, lenders and investors to be learned. </p>
<p>Labor’s loss has eliminated the number one risk to the property market and this, combined with the high likelihood of interest rate cuts by the RBA this year, the introduction of the First Home Loan Deposit Scheme and APRA’s proposal to remove the 7% ‘stress test’ replacing it with a 2.5% buffer, will support the bottoming of the Sydney and Melbourne markets by the end of the year and then a gradual recovery. </p>
<p>There are six key lessons to be learned from the downturn and how to mitigate them to avoid another property crash in the future.</p>
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<li>Despite claims by some experts it had been on the verge of collapse, the market remained viable, despite price falls. And, with a “good arsenal of tools” by the policy-makers, there should be no crash.<br><br>In September last year, some experts warned of collapse due to ballooning household debt, compounded by sliding prices in Sydney and Melbourne, that would escalate to falls of 40 to 45% in the next 12 months.<br><br>Not only has it not happened - and would not even if the Labor had won the election - but more importantly, policy-makers have taken measures to boost demand. <br><br>The First Home Buyers Scheme (that could also be a larger-scale first home buyers’ grant, if needed) was introduced prior to the election by the Coalition and was adopted a few hours later by Labor. In addition, the flow-on effect of lower property prices on household wealth, consumer spending and also on dwelling commencements and, consequently, lower GDP, increases the likelihood of interest rate cuts to ‘almost certain’.<br><br>APRA’s credit restrictions to reduce investor demand had eased and it was proposing lenders scrap the 7% ‘stress test’ requirement on home loans replacing it with a buffer of 2.5% on top of the interest rates.<br><br>The important thing to remember here is that in the future don’t expect total collapse of the housing market in a US GFC-style meltdown. It is extremely unlikely, and policy-makers take actions when required.<br><br>It’s equally important that decisions should not be made under the assumption that very extreme scenarios will take place, for example, following the <em>60 Minutes </em>story in September 2018 in which it was reported there could be a 40% drop in Australia's house prices … this had an impact on sentiment and confidence to some extent.<br><br>
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<li>A more aggressive monetary policy is required by the RBA.<br><br>The RBA should have cut interest rates already and should not have made statements declaring the next move being upwards when there were so many economic indicators and key risk indicators that should have been taken note of, such as the strong connection between dwelling prices, household wealth and spending.<br><br>An example of this is the stronger than expected fall in dwelling commencements, as published by RiskWise in December 2018, alongside an extended period of time when inflation was consistency well below target and wage growth was poor.<br><br>
</li>
<li>Investors amplify credit and dwelling price cycles contributing to financial stability risks. <br><br>Therefore, any major reduction in investor activity has an impact on the demand of both existing and new properties.<br><br>It is unrealistic to expect an increase in dwelling commencements when investor activity is significantly reduced.<br><br>This is a key lesson for any policy-maker who proposes a policy with a major impact on investor demand, and the proposed taxation changes by Labor are a prime example for that.<br><br>
</li>
<li>Off-the-plan units mainly in high-supply areas carry a high level of risk. Since mid-2017, RiskWise has been warning that many areas subject to unit oversupply carry high risk of low demand and price reductions.<br><br>This risk is very relevant to construction lenders, developers and obviously buyers, largely investors,” he said.<br><br>Prime examples include the Brisbane CBD where, even as early as June 2016 in Statistical Area Level 4 (SA4) Brisbane Inner-City, price growth was -1.8% with 17,417 units in the pipeline, an addition of 24.5% to the current stock.<br><br>A recent <a href="https://www.afr.com/business/banking-and-finance/off-the-plan-apartments-bomb-for-investors-20190404-p51aw4" target="_blank">analysis</a> by BIS Oxford Economics also demonstrates that two out of three Melbourne apartments sold off-the-plan over the past eight years made no price gains or lost money upon resale, despite a property boom and record immigration. <br><br>
</li>
<li>It’s important to listen to mainstream economists and research houses which provide accurate and up-to-date predictions.<br><br>This was particularly the case from the end of 2017 when it was obvious property prices would materially decrease.<br><br>The only question then was ‘by how much exactly?’<br><br>This is a key lesson, mainly for lenders and investors, as the majority of the assets that were purchased in the past couple of years experienced material price reductions, and many of them with negative or very little equity.<br><br>Obviously, in some cases poor credit decisions have been made and some investors will need a number of years to see their property value increasing to the original purchase price.<br><br>Mainstream leading economists and research houses shared with the media the results of their analysis – the same results they provide to their clients, in most cases lenders and investment funds.<br><br>They have no incentive to mislead their clients and talk the market up or down.<br><br>Any major policies must be constantly reviewed and their impact reassessed according to recent developments in the housing market. Eg Labor’s proposed changes to negative gearing did not have a visible reassessment process from when it was suggested in 2016, despite major changes in the property market.<br><br>Policy-makers should have a proper process of challenge and feedback from mainstream bodies that research the market, especially if that research is saying the implications could be adverse.<br><br>
</li>
<li>Affordable areas show more resilience than the top end of the market </li>
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<p>This can be demonstrated using CoreLogic’s latest Quarterly Economic Review from February which showed despite a 7% fall across Melbourne for the last three months of 2018, the bottom end enjoyed a 0.5% increase.</p>
<p>Also, in the past 12 months houses in the lucrative areas of the Eastern Suburbs of Sydney have fallen by 10.9% and the Inner-East in Melbourne by 18.8%.</p>
<p>Investors or owner-occupiers with low equity have to reconsider purchasing a property at the top end of the market as they could suffer from high volatility in the short term.</p>
<p>For example, if you plan to refinance or sell and move to another property in three to five years expecting strong capital growth, this could be significantly impacted by major economic events.</p>
<p>However, the lower end is by far less volatile and generally less subject to such strong market movements.</p>
<p><em><strong>DORON PELEG</strong> is CEO of RiskWise Property Research.</em></p>
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