Australia slams brake on property investors

Saturday, 5 August 2017

Bull run: A man jogs in front of newly-constructed residential and commercial projects in Sydney. Demand from property investors has contributed to a bull run that has catapulted the city into the ranks of the world’s priciest property markets. — AFP

Curbs taking effect and home prices are starting to cool

ONE of the key engines of Australia’s five year housing boom is losing steam.

Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending.

The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest only mortgages a form of financing favoured by people buying homes to rent out or hold as an investment.

Australia’s generous tax breaks for landlords, combined with record-low borrowing costs, have made the nation home to more than two million property investors. Demand from those buyers has contributed to a bull run that has catapulted Sydney and Melbourne into the ranks of the world’s priciest property markets. Now, signs are emerging that the curbs are starting to deter speculators and home prices are finally starting to cool.

Take the case of 29-year-old Taku Ekanayake, a former IT salesman who owns six investment properties in cities including Adelaide and Brisbane. He shelved plans to add a Melbourne apartment to his portfolio after rising rates increased his annual mortgage bill by A$14,400 (US$11,360). The biggest banks have hiked rates on interest-only mortgages by an average of 55 basis points this year, according to Citigroup Inc.

“With the rate hikes I don’t think it is a very viable option for me to invest there now,” he said.

In other signs the market is cooling, property auction clearance rates in Sydney have held below 70% in seven of the past eight weeks, compared to as high as 81% in March before the curbs were imposed. And investor loans accounted for 37% of new mortgages in May, down from this year’s peak of 41% in January.

That’s helping take the heat out of property prices, particularly in Sydney, the world’s second-most expensive housing market. Price growth in the city slowed to 2.2 percent in the three months through July, down from a peak of 5% earlier this year, CoreLogic Inc said on Tuesday. In Melbourne, rolling quarterly price growth has eased to 4.2%.

“There have been some signs that conditions in the Sydney and Melbourne markets have eased a little of late,” the Reserve Bank of Australia said on Friday.

While the regulatory curbs are aimed at ensuring the financial system could weather any downturn in the property cycle, they may also make it easier for first-time buyers to break into the market.

Housing has become a popular investment for Australians, who can claim the cost of an investment property including interest payments as a deduction against other income, such as salary, and get a capital gains tax discount if they hold the property for more than 12 months.

The favourable tax treatment for investors has become a hot political issue, with young first-time buyers protesting they are being priced out of the market. The opposition Labour party has pledged to wind back the concessions if elected to office, while the government announced a range of policies in its May budget aimed at addressing housing affordability.

Now, with costs increasing, and price growth slowing, property may lose some of its luster as an investment asset.

The changes “reduce investors’ ability to pay, and means they have to pay owneroccupier values rather than investor values,” said Angie Zigomanis, senior manager, residential property, at BIS Oxford Economics in Melbourne.

The restrictions will take “some of the bubble and froth” out of the market, he said, forecasting median Sydney house prices will decline 5% by the end of mid-2019 as investors retreat.

To be sure, investors aren’t exiting the market entirely. Ekanayake, who recently quit his job to start a mortgage broking company, is now focusing on cities such as Brisbane and Adelaide where houses are cheaper, but haven’t enjoyed the price growth of Sydney or Melbourne.

He says many of his clients are now looking for properties where they can still make a profit with a principal-and-interest loan.

Even so, banks may need to get even tougher on lending standards in order to to meet the regulator’s order to restrict interest-only loans to 30% of new residential loans by September.

Interest-only loans are seen as more risky because borrowers aren’t paying down any principal and may look to sell en masse if property prices decline. Moody’s Investor Services in June cut the credit ratings of Australia’s big four banks, citing interest-only and investment loans as an indicator of rising risk.

“We’ve already seen developers start to shift their efforts and focus more on owneroccupiers and less on investors,” said Sophie Chick, head of residential research at Savills Australia. “The restrictions have really made investors think twice.” — Bloomberg

Read more at http://www.thestar.com.my/business/business-news/2017/08/05/australia-slams-brake-on-property-investors/#tIFGMsUVdSiTMCr6.99

How stagnant house prices are sapping spending

Leith van Onselen

May 24, 2011 - 1:37PM

Comments 24

Your home as an ATM Photo: Glen Hunt GTH

Feedback loops are an important concept in finance and economics. In a nutshell, positive feedback loops are pro-cyclical in that they act to make an economy more volatile by accentuating booms and then busts.

By contrast, negative feedback loops are counter-cyclical in that they act to reduce volatility and make an economy more stable by mitigating boom/bust cycles.

Positive feedback loops come in various forms. With respect to the Australian housing market, there are two positive feedback loops that can dramatically impact the Australian economy via their effect on the level of credit growth, aggregate demand, and employment:

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Australian home equity withdrawals

1.mortgage hypothecation – the process whereby increases (decreases) in home values result in decreases (increases) in bank capital adequacy requirements, leading to increases (decreases) in mortgage lending; and

2.wealth effect - the process of rising (falling) asset prices leading to rising (falling) consumer confidence, borrowing, household expenditure and employment.

The topic of mortgage hypothecation has been explained in detail elsewhere on MacroBusiness, and I will not expand on it further in this column.

New Zealand home equity withdrawals

Rather, I want to focus on the second point – the link between Australian home values and consumer confidence, borrowing, household expenditure and employment.

As I have argued before throughout the 2000s, when global credit conditions were benign, household debt levels and asset prices rose continually. These conditions made Australians feel richer (the "wealth effect"), spurring consumer confidence, spending and employment growth.

With house prices rising inexorably, Australians began using their homes as ATMs, withdrawing large amounts of their new found home equity…Much of this money was spent on consumption, thus further boosting incomes and employment.

UK home equity withdrawals

However, the process of debt feeding asset prices feeding confidence, consumer spending and employment growth appears to have stalled now that house prices have flat-lined. Australians have, instead, begun reducing consumption and repaying debt…

The golden era for retailing that was 2000 to 2008 is now over and the age of frugality has begun.

Wealth effect loops

Recently, a number of reports have explained the "wealth effect" positive feedback loop in greater detail.

First, today's Australian Financial Review contains an interesting article entitled Falling house prices stifle shopping, which draws on research by Citigroup showing that changes in home values are a leading determinant of household consumption expenditure:

Retailers can blame the poor housing market for lacklustre consumer spending and should expect the weakness to continue…

Citigroup…found that changes in personal wealth, together with income and interest rates, play a big role in spending…

The largest determinant of household consumption is income… But changes in the value of household assets are a leading determinant too. Houses comprise about 60% of household assets…

A 10% increase in wealth translates to 1.7% growth in final consumption expenditure in the following quarter.

This means that when house prices go up, people spend more.

The problem for retailers has been that most peoples largest asset is their home, and property values have been falling, or have been at best flat in recent months.

Citigroup's findings are supported by recent experience in Australia, New Zealand and the United Kingdom (see charts showing home equity withdrawals), where the rapid rise in household net worth up until 2007, most of which was on the back of rising home values, led to households withdrawing large amounts of home equity between 2001 and 2008. Much of this borrowing was spent on consumption, which further boosted incomes and employment.

GFC and consumption

In all three countries, rising home values between 2002 and 2008 created a positive feedback loop whereby households borrowed against their homes to fund consumption expenditure.

However, as soon as the Global Financial Crisis hit, and housing prices corrected, households began reducing consumption and repaying debt, as evident by the increasing home equity injection.

Another recent report by Deutsche Bank also lends weight to the positive feedback loop created by rising (falling) asset values. The report argues that wealth and the terms of trade have been key determinants of household savings over the past 40 years, and sees these factors as being behind the recent rise in the household saving rate.

In regards to the "wealth effect"' discussed above, Deutsche provides data plotting the household savings rate against private sector wealth. Much of the decline in the household saving rate (the flip-side of which is increased borrowing) since the early 1980s can be attributed to a rapid increase in wealth over that period, much of which was due to rising home values. With the negative wealth shock seen during the GFC there's an associated increase in saving.

Once the positive feedback loop caused by rising (falling) home values is understood, it's easy to dismiss the common misconception that unemployment would need to rise before home values would fall. Rather, rising (falling) home prices tends to lead decreases (increases) in unemployment simply because of the wealth effects described above.

Put simply, as long as Australian housing values remain stagnant or falling, consumption expenditure, credit growth and job creation will remain subdued, even with Australia's terms of trade at 140-year highs.

Leith van Onselen writes daily as the Unconventional Economist at MacroBusiness (www.macrobusiness.com.au), Australia's economic superblog. He has held positions at the Australian Treasury, Victorian Treasury and currently works at a leading investment bank. This article was republished with permission.

Read more: http://www.brisbanetimes.com.au/business/how-stagnant-house-prices-are-sapping-spending-20110524-1f1uf.html#ixzz1NJRY73vu

Australia: The Year in Review

Why Australian home prices are not about to crash and burn

James Kirby
October 10, 2010

IS THE value of your house about to plunge? Macquarie Bank has tipped a 20 per cent drop in housing construction next year while commentators say the smallest lift in interest rates will pop the ''home price bubble''.

House prices have been sliding for months. Industry estimates suggest that over the past quarter Melbourne prices are down 2 per cent and Sydney is off by 0.5 per cent. But these figures are nothing compared with those for Britain and the US, or Ireland, where home prices are down 40 per cent and falling.

So it is no surprise that every time anything remotely negative happens in the wider economy - this week it was the mere threat the Reserve Bank might lift interest rates - there are suggestions home prices are about to go over a cliff.

The doomsayers' arguments have been well aired. They pivot mainly on the sheer price of our real estate in relation to average income. There is also a lot of credence given to household debt levels and the presence of incentives that prop up the market, such as negative gearing.

Invariably the doomsayers are economists, especially offshore, while the bulls are linked to the success of the property industry (mortgage financiers, builders, developers and real estate agents).

Associate Professor Steve Keen, of the University of Western Sydney, for example, who has gained national prominence for his dire warnings on house prices, is still talking about a sharp home-price downturn. On Friday he told the ABC that property investors on average incomes would not be able to endure even flat prices in the coming years. Keen estimated property investors earning less than $80,000 a year make up 20 per cent of the market and the slightest pinch in the market would prompt this sector to sell out, causing ''the bubble to burst''.

Alternatively, we get experts such as ANZ economist Paul Braddick, who made his name with a presentation he took round the country called ''the mother of all housing booms''. Braddick believes the outlook for house price appreciation is now ''soft'', but he is convinced the momentum is strongly upwards over the long term.

Fresh voices are rare in the debate. But in recent days a new perspective emerged from John Wilson, the Australian chief executive at Pimco, the world's biggest bond fund. Wilson, in a paper on Australia's housing market, argues forcefully that our market is no bubble.

He begins with some obvious points - worrying that Australia may follow the US or Britain is pointless because we have an utterly different economy with relatively strong growth and high employment. Likewise, where the US and other nations built too many houses in recent years, we have not built enough.

He follows with a range of points:

■ We have relatively high mortgage repayments but the ratio of housing costs to household disposable income (a key indicator of people's ability to finance mortgages) has remained unchanged at 30 per cent for more than a decade.

■ Australians pay a relatively high amount in cash for their homes, but a closer look shows that one-third of repayments go on principal, not interest - that's saving and investment, and because housing has risen steadily (6 per cent a year) the situation is better than you think.

■ Our household debt figures are high, but the debt relates to bricks and mortar - we are not spending any more on cars or credit cards. What's more, the average equity we have in our homes is 60 per cent and that has remained steady.

Wilson also suggests the worst of the interest rate rises may be over: a view that is gaining momentum.

Add it all up, and though it is clear home prices may be experiencing a weak patch, the merchants of doom have got it wrong so far and there's little reason to believe the local fundamentals have changed.

http://www.smh.com.au/business/why-home-prices-are-not-about-to-crash-and-burn-20101009-16d3p.html

Fixed-rate mortgage offers a safe haven

JOHN KAVANAGH

June 23, 2010

Best 1 year fixed rate loans.

As the Reserve Bank eyes the possibility of further rises in interest rates, John Kavanagh examines the pros and cons of fixing a home-loan rate.

Interest rates on a number of fixed-rate home loans are currently lower than the variable rates of about 7.4 per cent that are being offered by many lenders.

With the prospect that interest rates will go higher over the next 18 months, the question of whether to fix all or some of the borrowing should be accorded serious consideration.

Source: InfoChoice.

With signs of mortgage stress growing, borrowers need to make sure they are taking every opportunity to manage their debt burden efficiently.

Right now the best opportunity may lie in taking advantage of highly competitive fixed rates.

The financial services analyst for Infochoice, David Lalich, says most of the changes are to two- and three-year rates.

Sharer...Jacqui Booth. Photo: Stuart Quinn

The best two-year fixed rates are below 7.2 per cent, which is competitive with a number of lenders' variable rates. The most competitive are RAMS, the Bank of Queensland, HSBC, Nationwide Mortgage and Commonwealth Bank.

Borrowers can have three-year rates below 7.5 per cent from RAMS, Heritage Building Society, Westpac, National Australia Bank, Better Option Home Loans and Greater Building Society.

Fixed-rate loans usually cost more than variable rates because the borrower is paying a premium for certainty.

It is like an insurance policy, whereby the borrower pays the bank for taking over the interest rate risk.

At the moment, that premium is very low, which reduces the chances of becoming locked into a rate that could very well become unattractive a couple of years down the track.

Part of the fixed-or-variable debate has to be a consideration of where interest rates are headed.

The Reserve Bank's decision to hold off on a rate rise this month, combined with concerns that the European sovereign debt crisis is the beginning of GFC II, might lead people to think that the Reserve has taken further rate increases off its agenda.

Bank economists say it would be a mistake to think that way. All of them are forecasting higher rates later this year and throughout 2011.

ANZ forecasts that the official cash rate will rise from its current level of 4.5 per cent to 4.75 per cent in the September quarter and then to 5 per cent by the end of the year.

It expects the Reserve to have pushed cash rates to 5.5 per cent by June next year. Westpac's latest forecast is for the cash rate to hit 5 per cent by the end of the year and to reach 5.5 per cent by September next year.

The Commonwealth Bank is more bearish. It expects the cash rate to be 5 per cent by the end of the year and 6 per cent by the end of 2011. Its view is that the strength of the Asian economy is the real determining factor for Australian monetary policy, not what is happening in Europe.

The National Australia Bank has a similar view. It is forecasting a cash rate of 5.25 per cent by the end of the year and 6 per cent by the end of 2011.

Its latest commentary says: "The key driver of our upward forecast is the additional income generated by sharply higher forecasts for the terms of trade - up 18 per cent over 2010. That, in turn, flows over into additional investment, profits and consumption."

Mortgage market data from a number of sources over the past couple of weeks shows an increase in the take-up of fixed-rate home loans.

Such loans made up 3.26 per cent of the Mortgage Choice approvals in May, compared with 1.77 per cent in April.

The Australian Bureau of Statistics' housing finance data shows fixed-rate loans dropped from a peak of 8 per cent of all dwellings financed in June last year to a low of 2.1 per cent in February and March. There was a pick-up to 2.4 per cent in April.

The head of macro markets at AMP Capital Investors, Simon Warner, says fixed-rate loans are at attractive levels: "Some of them are lower now than when the Reserve Bank started putting rates up last year. This is definitely an opportunity for borrowers," he says.

"It is hard to see them going any lower than they are now. Some big economic issue would have to come into play for that to happen. If I were a risk-averse borrower, I would be locking in."

Most borrowers do take a risk-averse approach to their borrowings.

The deputy governor of the Reserve Bank, Ric Battellino, said in a speech in Sydney this month that half of all home loan borrowers have been ahead of schedule on loan repayments in recent months.

He says the current arrears rate on home loans is 0.7 per cent, which has increased over the past couple of years but is one of the lowest levels of non-performing loans among the developed economies.

However, there is also plenty of evidence that borrowers are getting into trouble.

Westpac reported in May that the number of mortgage customers in its hardship assistance program (people who have approached the bank to have their repayment terms varied because they are in financial difficulty) had doubled since September.

According to the most recent Fujitsu Consulting Mortgage Stress-O-Meter, released in March, the number of severely stressed households (those facing a forced sale) has risen this year as a result of higher interest rates.

Borrowers tend to shy away from fixed rates for several reasons. They are inflexible, providing no opportunity for additional repayments, offsets or redraws.

Borrowers risk being locked into a rate that ends up being higher than the variable rate if rates start to fall; and if borrowers want to get out of a fixed-rate loan they are required to pay high break costs. Break fees are set as a percentage of the loan amount or several months' interest payments. Whichever way they are calculated, they can cost thousands of dollars.

The Reserve has reported that bank-fee income on home loans increased by 17 per cent last year. In its report on fees, the Reserve says: "The available information suggests that break fees on fixed-rate loans accounted for a significant proportion of the overall growth in fees."

One lender is hoping to offer the best of both worlds with the launch of a capped-rate loan.

Opportune Home Loans has a loan with a starting rate of 7.04 per cent and a cap of 7.49 per cent for the first two years. The managing director of Opportune, Paul Ryan, says borrowers are put off fixed-rate loans because they are inflexible. "A capped-rate loan gives borrowers that flexibility with some security," he says.

KEEPING IT ALL IN THE FAMILY MAKES SENSE

Jacqui and Anthony Booth both work in the property industry and, although only in their 20s, have long had a shared interest in property investment.

So it made sense to the brother and sister from Newcastle to pool their resources and apply jointly for a loan to buy their first property.

In March they settled on a four-bedroom house in Cardiff, in the Lake Macquarie district near Newcastle, and set up a shared house with a couple of friends. They had a 10 per cent deposit and borrowed from Bankwest, through a Mortgage Choice broker.

"No one thought it was strange that my brother and I were going into this together," Jacqui says. "Lots of people my age want to get into the market but they can't get in. It is too expensive. The thing people have been saying to us is that they would like to have someone to buy with."

According to a Mortgage Choice home buyer survey, conducted earlier this year, 3 per cent of first home buyers entered into a co-operative arrangement with a family member, friend or work colleague to buy a property. Two per cent used a gift from parents or had their parents act as guarantor.

Anthony, 28, is a quantity surveyor and Jacqui, 24, prepares depreciation schedules for property investors.

Neither is married but they have talked about how they will handle things when one or the other needs a family home.

Jacqui says: "We have an agreement so that things don't get messy when either of us gets married. We see this as the first of a number of properties in a portfolio. We will definitely be buying one more."

Stress test your home loan

Banks and other financial institutions are subjected to stress tests by their regulators every year or so to make sure they are in good shape to handle sudden downturns in economic and market conditions.

Why not apply stress tests to consumers, so they could get a picture of how interest rate rises, falling asset values or loss of income would affect them?

This proposal was put to last year's Parliamentary Joint Committee of Corporations and Financial Services inquiry into financial products and services, the Ripoll inquiry, by the Institute of Actuaries (IAA), which argued that personal stress tests should be compulsory for anyone entering into a major financial commitment.

A former president of the IAA and co-author of the Ripoll submission, Geoff Burgess, says the two main problems people face when they make financial commitments are borrowing too heavily and investing where there is insufficient diversification. Another problem is loss of income.

"What we proposed was a uniform set of scenarios, to be devised by a regulator such as the Australian Securities and Investments Commission, that would show people the financial outcomes of interest rates going up, asset prices falling and so on," he says.

Lenders usually look at how borrowers would cope with interest rates up 2 percentage points but interest rates have risen 1.5 percentage points since October and may go up that much again by the end of 2011.

A stress test would study the effect of a bigger rise — maybe 3 or 4 percentage points. When asset values are falling, lenders may require extra security or cash if maximum loan-to-valuation ratios are breached.