Monthly Archives: November 2013

UBS: Banks waiving servicing criteria not LVR

 

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UBS: Banks waiving servicing criteria not LVR.

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PROPERTY INVESTOR OPPORTUNITIES QUEENSLAND MARKET FOCUS!

I have no doubt that Brisbane will be the big improver among the capital city markets in 2014. And, in terms of the states and territories, Queensland is where investors should be concentrating.

Brisbane ranked well down the list of capital cities for house price growth this year. Data for the end of the September quarter had Brisbane fifth (ABS House Price Indexes), sixth (RP Data Home Value Index) and seventh (APM’s House Price Report), depending on whose figures you prefer.

Brisbane has lagged Sydney, Perth, Melbourne and Darwin in house price growth because of a triple whammy of events. As well as the national downturn that hit after 2010, there were the 2011 floods and later the extensive jobs and spending reductions by the state government.

As 2013 has worn on, there has been gradually improving evidence of recovery in the Brisbane market. The ABS recorded a 4.1% rise in the Brisbane House Price Index in the 12 months to the end of September. I expect growth to build as we get into 2014.

One piece of supporting evidence is the significant rise in sales volumes in many Brisbane suburbs.

Suburbs such as Alderley, Algester, Aspley, Bridgeman Downs, Carindale, Camp Hill, Clayfield, Darra, Deagon, Ferny Hills, Holland Park, Moorooka, Morningside, Nundah, Paddington and many of the suburbs of Ipswich City have recorded consecutive quarters of rising numbers of house sales, with the biggest uplift coming in the June quarter.

Early results for the September quarter (it takes time for all the sales to work through the system) suggest the pattern is continuing.

That sprinkling of suburbs listed as examples indicates that the recovery is widespread, including expensive and affordable suburbs, and locations in the inner, middle and outer rings of the Brisbane metropolitan area.

The suburb of Moorooka provides a good illustration of the pattern: for four consecutive quarters, the number of house sales has been 39, 46, 54 and 68. So far, median house price growth in the suburb has been moderate (about 7% in the past 12 months, according to APM figures). Why? Because there is usually a time lag before an uplift in sales volumes translates into strong price growth.

There’s evidence, too, that other Queensland markets are strongly mounting comebacks. That’s particularly so of regional economies based on tourism. Cairns, the Sunshine Coast and Hervey Bay have had struggling property markets for the past three to four years, because of their lack of economic diversity, a faltering tourism industry and dwelling over-supply.

Now, they’re all showing signs of recovery. Previous surpluses have been largely absorbed, there is increased spending on infrastructure and the tourism industry is strong again.

Other rising markets in Queensland include strong regional cities like Toowoomba, Townsville and Rockhampton.

Gladstone will take time to work through its over-supply issues and should be approached with caution in 2014. Both Mackay and Emerald have also suffered because an injection of new supply has coincided with a reduction in demand, while the Bowen Basin coal mining industry works through its problems with rising costs.

Of those central Queensland locations, Emerald is likely to recover first, as Galilee Basin coal projects get under way, with the state government offering financial incentives to the first ventures to get under way,

 


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Affordable Housing Argument Article courtesy of Linda & Carlos Debello

By Leith van Onselen

Canstar has come out with some rather dubious analysis today attempting to justify Australia’s high housing costs:

AUSSIE mortgage sizes may have quadrupled in the past few decades but experts say today’s borrowers are enjoying far better economic conditions.

New research by financial ratings firm Canstar found the national average mortgage size is 4.5 times higher than it was in 1990 – $305,000 compared to $69,100 – but current lower interest rates and increased wages have made housing more affordable.

The data showed the average wage for a male in 1990 was $28,407 compared to $70,569 – about 2.5 times higher – but repayments as a proportion of income were then 42 per cent, compared to the current 36 per cent.

And the average standard variable rate in 1990 was 17 per cent compared to just 5.95 per cent now.

Canstar’s research manager Mitchell Watson said the changed conditions have made mortgage conditions better now when comparing the average mortgage size and repayments as a proportion of income.

“Back then loan amounts were much lower, housing prices were lower as well but interest rates were extremely high compared to now,” he said.

“It did place further stresses on the household income than it did at this point in time.

I hate this type of analysis. As you can see, Canstar has drawn its conclusion by comparing repayments on mortgages taken-out today against repayments during the period when mortgage rates were the highest in Australia’s history (see next chart).

ScreenHunter_394 Nov. 25 13.43

This is misleading on a number of levels.

First, interest rates in 1990 did not stay at 17% for long and a home buyer back then got to enjoy the benefit of a massive drop in mortgage rates over subsequent years and a corresponding rise in house prices. Does anyone honestly believe that today’s first home buyer is likely to face similar conditions in the years ahead, whereby mortgage rates more than halve and values rocket?

Second, as noted by the Australian Treasury last week, average income growth is expected to be the weakest in 50 years over the coming decade, which is going to make paying-off today’s mega mortgage more difficult (see next chart).

ScreenHunter_354 Nov. 21 11.52

Third, when adjusted for inflation, real mortgage rates – 2.9% (discounted) as at September 2013 – are the lowest since late-2008 and the early-2000s, but well above levels that existed prior to the early-1980s (see next chart).

ScreenHunter_395 Nov. 25 14.13

Finally, while initial repayments on new mortgages are lower than the late-1980s and early-1990s, they remain above the 40-year average (see next chart). Therefore, current housing conditions are hardly “favourable”, particularly given the coming shock to incomes.

ScreenHunter_396 Nov. 25 14.15

What should also become clear from the above two charts is that the 1970s was a dream time to purchase a home (provided you qualified for a mortgage). Not only were homes highly affordable at roughly three times incomes, but a purchaser was in the fortunate position to have had their debts inflated away via high inflation and centrally indexed wage rises that outpaced the cost of credit.

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10 Reasons Facebook Fears Google – Business 2

 

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10 Reasons Facebook Fears Google – Business 2.

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Interesting Article from Pete.

Escaping the Rat Race


Property market predictions for 2014

Posted: 14 Nov 2013 06:37 PM PST

Look, I’m a sceptic when it comes to the ability to forecast property price movements. Firstly, because median prices by city are sometimes of questionable value and can smooth diverse trends from across different market sectors, suburbs and property types. And secondly, because of the huge range of unknown factors which must impact the market.

It doesn’t stop people trying. Over in Blighty, Savills can tell you what price growth to expect in your region in 2018! Now how’s that for a powerful crystal ball? This chart below tells you most of what you need to know about human ability to forecast the future:

That is to say, even the Reserve Bank’s “army of economists” have only around 90% confidence that we won’t slide into negative growth in the next couple of years. Meanwhile, the 90% confidence interval also comprises a scenario whereby GDP growth almost roars off the top of the chart.

The future is far more unpredictable than most seem to think. The impacts of wild volatility in currency markets, financial crises, the impact of foreign buyers, superannuation funds and plummeting interest rates may all appear obvious in the rear view mirror, but what lies ahead is inherently difficult to judge…perhaps impossible. Indeed, in recent times we have seen forecasters failing to forecast the direction of certain city dwelling prices, let alone the quantum.

Of course, it is possible to build models based upon past events, but to pretend that they are highly scientific or can predict and factor in the impacts of, for example, fiscal cliffs, debt ceiling crises, sequesters, outbreaks of war and so on, is misleading.

One thing we can say with some level of confidence is that due to total household debt in Australia being far higher than it has been in cycles past at around 150% of GDP (and levels of inflation significantly lower), over the course of a full market cycle the impact of lower interest rates and their ability to stimulate housing markets must surely be lower that of days gone by.

There are two ways to deal with this uncertainty in making property price forecasts (or guesses?). One is to produce a range of “if…then…” scenarios, thereby covering off a huge range of possible outcomes (“prices could move by between -5% and +20%…”). The other is to bite the bullet and build a range of assumptions and accept that you will probably be wrong on some or all of them, and thus your predictions will be wrong too. Let’s go with Option 2.

Assumptions for 2014

So, with the proviso that I’ll almost certainly be wrong, let’s start with some assumptions. Unemployment still seems to be in a moderate uptrend, so I’ll go with the unemployment rate ticking up to 6% through 2014. GDP growth to trundle along sub-trend at somewhere close to 2.5%.

As for interest rates, economists are split. NAB think that the next move will be down to 2.25% in mid-2014. Others are more optimistic on the outlook and are looking for a hike to 2.75% in late 2014. The best we can say is that interest rates are unlikely to apply a substantial handbrake to dwelling prices in 2014 given that the official cash rate is likely to sit somewhere between 2% and 3% which is historically a very low rate.

Source: RBA

This has led some very bullish property price forecasts in 2014. Dwelling prices look set to increase in 2013 by around 10%, but while it is possible that level of growth could continue with a low cash rate, there are a number of factors which could jam a stick in the spokes, so overall I’m going to tend towards a relatively subdued view.

Reality check

So, another investment propery book hits the shelves forecasting that “well located properties should continue to grow at 9% per annum”. Nine percent! No mucking around with all that 7-8% per annum nonsense there! And I thought I was bullish in years gone by when I suggested that a rational proxy for future dwelling price growth might be the future growth of household incomes. The speed limit on dwelling prices must ultimately be our ability to service debt.

In my opinion, some Australians need a reality check when it comes to our housing markets. Below is what is presently happening to wages in Australia, which is to say, growing at 2.7% per annum…and slowing.

While you could build an argument to say that wages growth could be approaching the bottom of a cyclical bounce, there is absolutely no suggestion that incomes are growing at anything like the rate required to support long term property price growth at the levels seen in times past.

The other factor I’d highlight for 2014 is the peak in mining capital investment. There are some suggestions that the fall in mining capex could be offset to some extent by growth in residential construction (as I read the charts, the relative numbers involved don’t really appear to stack up for this) and for other sectors of the economy being stimulated (a better likelihood of this happening).

We might also be ‘saved’ in 2014 to some extent by cost overruns on some of the mega projects, such as Gorgon where some major cost blowouts are well underway (the bean-counters being drafted in is never a good sign). However, note that the latest ‘Estimate 3’ for mining capex 2013-14 is some 13.6% lower than its 2012-2013 Estimate 3 predecessor. In other words, mining capex must fall eventually and this will represent a drag on economic growth, and probably employment too.

Property price predictions

OK, so now onto the real guesswork. Let’s run through the cities in ascending order of size.

I’m going to omit Darwin, however. I’ve lived in Darwin previously. I didn’t understand the seasonal property markets then and nor do I pretend to now. Volatile, supremely expensive and unpredictable.

Hobart is a small city with a population of a little over 200,000. I would normally find it difficult to post or make a positive case for Tasmania given that the population growth is much flatter than the Bass Strait and that until last month the unemployment rate had been well above 8%. However, the unemployment rate has fallen to 7.9% and SQM’s vendor sentiment implies that asking prices may have stopped falling.

Perhaps more important than this, the State Government appears hellbent upon forcing the property markets northwards with its proposed introduction of an incredible $30,000 first homebuilders grant. Since I don’t try to argue with market distortions (and indeed, such grants for new building may themselves distort median data) of this nature, I’ll go with -1% to 2% growth for Hobart.

The Australian Institute forecast that more than 5,000 planned job cuts in Canberra will send the city and the ACT into recession. Canberra is only a small city of around 360,000 population, and jobs cuts will hurt property markets. Amazing how times change. Only in March of this year, in spite of sky high prices in Canberra, Residex mused: “I leave you with a question to ponder – given the position Canberra is in, should we all be immediately moving to buy an investment property there?”

The Residex Canberra theory was based on high pre-tax incomes in the city and the answer from an investor’s perspective is “definitely not”. I don’t recommend investing in small cities with limited employment diversity in any case. It’s impossible to gauge the likely outcomes precisely, but SQM’s vendor sentiment index suggests that the likely trend is not good. Prices to fall -1% to -4% is my guess.

On average, at least, Adelaide has been a poor-performing property market for the past half decade. With a population of around 1.2 million and relatively sedate population growth in South Australia, it’s not a city I have ever been bullish on for property.

However, unemployment in the state has fallen back to 6.6% and a glance at SQM’s vendor sentiment index suggests that the bottom may now be in. For the aforementioned reasons, I’m still not going to go overboard on predicting capital growth, but inflation-adjusted prices in Adelaide (and Brisbane) are well below previous peaks and a generational low cash rate will surely have an impact at some point. 0% to 3% growth.

Perth, a city of around 1.6 million, does have low unemployment and very strong population growth, and has had a great run through 2013, recording median dwelling price capital growth of around 9% over the past 12 months.

However, there are some indications from RP Data’s index that this growth has ground to a halt along with levels of mining investment, which may be no bad thing for the city’s longer term prospects. On the plus side, SQM’s vendor sentiment index still has a moderately positive incline for Perth. 0% to 3% growth.

I haven’t been up to Brisbane for a little while, but the news I have heard from those ‘on the ground’ in the city has been positive, and the market does appear to be moving. Finger in the air guess of 2% to 5% growth.

I should probably be disqualified from guesses on Melbourne prices having previously pondered incorrectly as to whether the market had peaked. I wasn’t the only one. All I can say in my defence is that, unlike some, at least I don’t charge hard-earned dollars for my guesswork – it all comes for free (and a lot of free information is worth what you pay for it, after all).

One of the problems for Melbourne has been that although vacancy rates in certain types of inner city stock have been high, activity in much of the established stock has remained rampant, fuelled by the low interest rate environment.

I discussed with a colleague on the ground who suggested that low interest rates might see growth continue in the 5% to 8% bracket. I keep coming back to slow (and slowing) wages growth and falling mining capex and so I will have a stab at 2% to 5% growth.

The problem child – Sydney

And finally, the problem child…Sydney. After years of weak supply in the harbour city, SQM Research put the cat among the pigeons when it forecast in its base case scenario that Sydney would record housing price growth of 15-20% in 2014, and 20-30% should Australia experience a strong economic recovery and interest rate rises by mid 2014.

Being a Sydneysider, I’m a vested interest in the Sydney market, but there has never been reason to doubt SQM’s integrity (they correctly forecast market price falls in 2011, for example) and their forecast is based on some sound price-to-income logic. Sydney’s housing markets were relatively more expensive in 2003 and early 2004 than they are today and thus there is certainly a chance that prices could continue unabated at the growth levels seen in 2013 until the market hits its next irrational peak.

There is a plenty of new apartment stock due to come online in certain sectors of the Sydney market (inner south, Central Park) but this is unlikely to be enough to halt the present cycle in its tracks in my opinion. However, 12 months is a long time and a lot might happen to slow the present exuberance. I’ll have a stab at a more subdued 6% to 9% growth.

In fact, all of my numbers are lower than you’ll see forecast elsewhere, and this is based mainly upon a gut feel that Australians will be somewhat disinclined to embrace taking on significantly more household debt from today’s already elevated levels, despite low interest rates.

There will be a mass of conflicting factors such as the role of foreign capital, superannuation funds entering the residential markets and first homebuyers struggling to get aboard. But overall, a slower growth cycle is my best guess.

My best 2013 guesses therefore…

Hobart -1% to 2%

Canberra -1% to -4%

Perth 0% to 3%

Adelaide 0% to 3%

Brisbane 2% to 5%

Melbourne 2% to 5%

Sydney 6% to 9%

To be revisited in 12 months time to work out where I went wrong…

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October 2013 National Property Listings & Brisbane and Darwin were the only capital cities to record monthly vacancy rate increases, rising a 0.1 percentage point during October 2013, recording vacancy rates of 2.2% and 1.0% respectively

Research Indicates that the latest stats re level of residential property listings around the nation rose minimally during the month of October, with national stock levels increasing by 1.5% and coming to a total of 347,056.

Although the monthly change in listings is considered modest in comparison to previous months, the level of stock has been recorded a substantially lower figure than that of the corresponding period in 2012, revealing that stock is indeed being absorbed at a much faster rate during 2013.

SQM OctoberA city by city break down however, reveals that both Canberra and Sydney experienced a surge in stock during October, with for sale listings increasing by 5.9% and 4.7% respectively for these two capital cities.

That being said, Sydney’s year on year comparisons continue to record staggering decreases, with the city falling by -17.3% in stock levels since October 2012.

Of particular interest is Darwin’s 13.4% yearly increase. There is considerable rise in stock levels and a slowdown in property prices.

In summary:

October has recorded a fairly benign increase in real estate listings which was similar in magnitude to the increase recorded this time last year. Increases in listings during the spring months tend to be part of the normal seasonality of the residential property market.

To this end there has been nothing too abnormal in the results other than I note what now seems to be a continued uptrend in supply for the Darwin housing market, which suggests to me a forthcoming slowdown in that city.

Hobart on the other hand is now providing a signal that there is now a bottom in the market there after nearly three years of dwelling price falls.

Going forward, listings are expected to lift for November in most cities as what is normally the case for this time of year.

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Australian Property Market Update & Research November 2013

Australian Property Market Weekly Update – 11 November 2013

11 NOVEMBER 2013 |  

Australian Property Market Gauge

Percentage growth over the last 3 months x 4
chart_9

Weekly Market Snapshot

With all the talk of Sydney and Melbourne booming it is nice to report for a change that Brisbane, Adelaide and Perth all out-performed the larger two cities this week. Melbourne’s bumpy growth continues with it declining 0.21% last week and Sydney registered relatively subdued growth of 0.05% for the week to 11 November 2013.

Of note this week was Residex publishing their quarterly update which in summary reported sub 7% growth for both units and houses in all markets, except for Sydney houses which grew 10.8% over the 12 months to 30 Sept 2013. The unit growth rates were particularly down beat with only Perth and Darwin unit prices increasing more than 4%; Sydney units increased broadly inline with inflation at 3.3% and Melbourne units grew 1.6%.

Due to relatively strong employment numbers and a potential further reduction in the cash rate John Edwards (Residex Founder) concludes that for those interested in investing in property “are looking at a period of reasonable growth and … an attractive and reducing risk profile”.

For a somewhat contrasting view Chris Joye in the weekend’s AFR raised his concern over how expensive the Australian property market has become and that this “should give all of us pause”. He states that Australia’s median dwelling price to disposable incomes per household was 2.6x in 1990 and it is now approximately 4.1x, near it’s all time high of 4.24x in June 2010. “With the risk that mortgage rates need to increase by 50 per cent off their lows of about 5 per cent to get back to the more “normal” levels … the potential for a future correction is significant.”

Market Gauge by City

Percentage growth over the last 3 months x 4
chart2(1)
Source: RP Data

Annual Property Price Growth by City

chart18

In table format:

chart2(1)1

Source: RP Data Click here to understand the limitations to the quality and timeliness of Australian real estate data.

Source: RPData, Monday 11 November 2013. 

Market Commentator Insight

  • Leith van Onselen discusses the Weekly RP Data Australian house price update. “Over the past 12 months, values have risen by 8.19% at the 5-city level, again with all major markets experiencing increase.” Click here to read more.
  • Chris Joye writes, “Two markets are at risk of significant overvaluation – Australia’s $4 trillion housing sector and the $405 billion big banks that furnish most of the funding we use to buy homes.” Click here to read more.
  • John Edwards believes that there’s No Housing Bubble on the Horizon. “I believe that while the economy is doing relatively well and sentiment is improving, it still needs a further boost as interest rate reductions have not stimulated business activity sufficiently. I think there will be a further interest rate reduction, which will probably be the last in the cycle, in the order of 0.25%.” Click here to read more.
  • Dr. Andrew Wilson says that Sydney’s record-breaking spring auction market shows no sign of waning. “Low interest rates have certainly assisted in energising the Sydney housing market this year and although signs remain mixed over the performance of the national economy, the Reserve Bank as expected decided to leave rates on hold for the third month in a row at its regular Melbourne Cup Day meeting. A rate cut however remains a possibility, particularly if unemployment continues to rise with the New South Wales October rate now up to an uncomfortable 5.9 percent.” Clickhere to read more.

Latest Official Australian Property Prices

The below table outlines the latest property prices released by Australia’s major real estate data providers. See our in-depth article for an explanation of the various indices and their pros & cons. The table has been updated to include the Residex capital city house and unit price indices for the September quarter of 2013 announced last Thursday (7/11/2013).

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  • Caution: the average mixes methodologies and sometimes time periods
  • RPData: Monthly indices. Australia = 5 capital city aggregate
  • APM: Monthly data except for Adelaide, Darwin & Hobart which are updated quarterly (Mar,Jun,Sep,Dec)
  • ABS: publishes results quarterly, and only for houses.

    Iphone photos 17-10-13 047

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