Real estate sector 'turns on dime' as housing prospects lift via @TheAge

The outlook for Australia’s property developers has "turned on a dime" following the weekend's shock election result and dramatic interventions from the Reserve Bank and the banking regulator.

Big developers like ASX-listed Stockland, which a week ago were anxiously eyeing the housing downturn, are now facing starkly different conditions according to analysts.

Reserve Bank governor Philip Lowe, in a speech in Brisbane, says the RBA will "consider the case for lower interest rates" when it meets in June.

Experts predict the re-elected Coalition's new First Home Buyer Deposit Scheme, proposed changes to the interest rate stress test for borrowers and the RBA's indication it may lower interest rates would all help underpin the property market.

On Tuesday the Australian Prudential Regulatory Authorities' signalled it would likely remove a requirement for banks to assess a borrowers' ability to repay a loan if interest rates rose to 7 per cent.

"Turns on a dime," Macquarie analysts said of Stockland's prospects in the new environment.

"Whilst there is likely to still be near-term attention on defaults, we believe [buyers'] ability to settle will also improve in light of a potential increase in borrowing capacity."

Property Developer Nigel Satterley has welcomed APRA's action.

Nigel Slattery.jpg

Property Developer Nigel Satterley has welcomed APRA's action.CREDIT:PAT SCALA

Perth-based Nigel Satterley, who runs the country's biggest private land developer Satterley Property Group, agreed, saying APRA's proposal would give confidence and certainty to the sector.

Mr Satterley said he and other developers had met with APRA officials to discuss its proposal.

"Banks are telling us they are in a strong position to lend to creditworthy customers," Mr Satterley said. "Early modelling is indicating people can borrow $40,000 to $50,000 more."

Deutsche Bank banking analyst Matthew Wilson said the relaxation in lending standards was an instructive turnaround from APRA, which in January had said measures to maintain mortgage lending standards were “designed to be permanent.”

The market will likely embrace the signal with gusto, whilst the taxpayer will incur the moral hazard.

"APRA is now showing a willingness to fold and consider 'unnatural acts'. The market will likely embrace the signal with gusto, whilst the taxpayer will incur the moral hazard," Mr Wilson wrote.

Stockland managing director Mark Steinert said credit was the lifeblood of the economy, but over the last 18 months it has become increasingly hard to access for everyday Australians.

"This announcement provides a much needed boost for the housing market and the broader economy, and gives more people the opportunity to realise the dream of home ownership," he said.

APRA's move would go further than just deepening borrowers' pockets, said Citi, who noted only a small cohort of borrowers take loans up to their maximum capacity.

"More meaningful is the flow-on impact to confidence. Upgraders and investors alike may be spurred to increase their loan size still within the increased capacity, bringing more firepower to asset markets," Citi analysts said.

The prospect of cash rate cuts by the Reserve Bank this year could accelerate any lift in confidence, they said.

Sydney-based developer, Crown Group chairman and chief executive, Iwan Sunito said he expected a lift in confidence and a surge in buyers.

Treasurer Josh Frydenberg and Prime Minister Scott Morrison at leave the Reserve Bank after meeting governor Philip Lowe on Wednesday.

"The fundamentals in the Australian economy are sound – economic growth is solid, interest rates and inflation are low, unemployment is low – so greater flexibility by lenders will make a big difference to property buyers’ decisions to purchase this year," he said.

APRA's proposed change "clearly reduces the downside risks to housing activity" and is likely to put a bottom under house price falls this year, according to UBS analysts.

The construction sector is also hoping the changes will create new demand, a time when data reveals the industry has hit a slump.

In the March quarter, residential building fell by 2.5 per cent and was down 3.2 per cent over the year, according to the Australian Bureau of Statistics. Alterations and additions fell by 4.4 per cent in the quarter, while new residential work fell by 2.3 per cent.

Craig James, chief economist, CommSec said builders and developers need to watch fluctuating activity levels across regions while at the same time taking action to trim costs where possible.

Shane Garrett, Master Builders Australia’s chief economist, said despite the fact that Australia’s population expanded by almost 400,000 during the past 12 months, fewer new homes are being built due to the negative impact of micro-factors including the slow motion credit environment following the Hayne royal commission.

"We look forward to the quick implementation of the government’s election pledges around First Home Buyer home loans and support for small businesses," Mr Garrett said.

Source: The Age

Reserve Bank interest rate cut just the beginning in moves to boost home loans via @abcnews

Australia's lowest ever Reserve Bank cash rate — 1.5 per cent — is about to be consigned to history.

On Tuesday, Governor Philip Lowe made it clear he plans to cut it in two weeks' time. The money market cash rate (from which all other rates derive) will then fall to 1.25 per cent.

After that, if betting in the market is right, he will cut the cash rate to just 1 per cent by Christmas.


Speaking in Brisbane, Lowe said the Reserve Bank board was of the view that:

Inflation was likely to remain low relative to the target, and that a decrease in the cash rate would likely be appropriate.

A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at its meeting in two weeks' time the board would consider the case for lower interest rates.

The bank is forecasting a tick up in economic growth from the present 2.3 per cent to 2.75 per cent by the end of the year and a fairly steady unemployment rate.

But here's the thing. He was keen to emphasise that those forecasts only applied if he cut rates twice this year — that's twice, before the end of the year.

He is planning to do it because the economy is weak, much weaker than his political masters suggested during the election campaign. Consumer spending is "unusually soft".

Over the past three years, household disposable income has increased at an average rate of just 2.75 per cent. This compares with an average of 6 per cent over the preceding decade.

As this period of weak income growth has persisted, it has become harder for households to dismiss it as just a temporary development — as something that will pass quickly. The lower rate of income growth has also made it harder for households to pay down debt. The end result has been that many people have decided to adjust their spending plans.

The cuts are just the start

It isn't much good cutting interest rates if mortgage rates don't follow. That will be up to the banks.

But until this week, even if they had passed it on, there would have been so many would-be borrowers it wouldn't have helped.

That's because, whatever the interest rate and whatever a would-be borrower's ability to make payments, banks have generally refused to lend to anyone who couldn't cope with a rate of 7.25 per cent.

It's been the doing of the Australian Prudential Regulation Authority — one of the Reserve Bank's sister organisations.

It regulates banks and super funds and other institutions in order to keep the financial system stable.

In December 2014 it directed the institutions it supervises to impose serviceability assessments that incorporated a buffer of at least two percentage points above the loan product rate they were offering and a minimum floor rate of at least 7 per cent.

That meant that if new mortgage rates were 5 per cent, as they were at the time, the lenders had to satisfy themselves that the borrower could cope with 7 per cent. As new mortgage rates fell to 4.5 per cent they still had to satisfy themselves that the borrower could cope with 7 per cent.

Banks have needed unreasonably high buffers

APRA's directive stated that "prudent practice would be to maintain a buffer and floor rate comfortably above these levels", meaning that in practice most lenders wouldn't lend to anyone who wasn't able to cope with the mortgage rate climbing to 7.25 per cent, no matter how unlikely that was becoming.

On Tuesday this week, a few hours before Governor Lowe delivered his speech, it wrote to the institutions again, telling them that:

the low interest rate environment is now expected to persist for longer than originally envisaged. This may mean that the gap between actual rates paid and the floor rate may become unnecessarily wide.

It was proposing to remove "reference to a specific 7 per cent floor".

The required serviceability buffer would climb from 2 per cent to 2.5 per cent, and it would no longer expect lenders to use a rate "comfortably above" that buffer.

Soon, they'll be able to lend more…

While strictly speaking the letter notified lenders of a one-month consultation period, what it really did was notify them that the changes were about to be implemented.

In recent months most new mortgage rates have been below 4.5 per cent, with some high-quality borrowers able to get rates as low as 3.6 per cent.

The new arrangements will allow banks to assess them on their ability to make payments on a 6 per cent to 7 per cent loan instead of a 7.25 per cent loan.

Should the next two cash rate cuts be passed on, it would allow them to assess lenders on their ability to repay a 5.5 per cent to 6.5 per cent loan.

It would represent a substantial easing of credit standards for new borrowers.

Borrowers could score up to 10 per cent more

My calculations suggest it would increase the borrowing capacity of home buyers by as much as 10 per cent, enough to have a material positive impact on the housing market.

APRA's move (almost certainly taken in consultation with the Reserve Bank) both makes a cut in the Reserve Banks's cash rate less imperative and more potent.

As interest rates get lower, further cuts seem to have been losing their ability to get people and businesses spending and borrowing, something the Governor would have been thinking of when he referred in his speech to the "limitations" of relying on just one instrument to boost the economy.

It would also be up to the Government to provide "additional fiscal support" (which means extra spending or tax cuts, including through spending on infrastructure and "policies that support firms expanding, investing and employing people").

The first of his rate cuts, due in a fortnight, will have more impact than it would have had APRA not acted.

Or perhaps not as much as he would have hoped if the banks, carrying big costs as a result of the misdeeds uncovered in the Royal Commission, don't pass it all on.


What the rental market tells us about property prices via @news

It’s a gloomy time for the property market. But one set of figures shows where things might turn around first, writes Jason Murphy.

What is going to happen next to Australia’s troubled housing market?

Will the whole country keep crashing? There is a difference in the housing crashes around Australia, hidden beneath the headlines, that might provide a clue.

You’re familiar with the price falls — Australia’s capital city average house price is down around 7 per cent.

The total fall is much worse in Perth (down 18 per cent from the peak), and has been especially sharp in Sydney, where prices are down 14 per cent.

Melbourne is not far behind, down 10 per cent.

Adelaide and Brisbane are fairly steady while Hobart is up, its peak is right now.

Regional Australia is down 2.5 per cent, especially regional WA, where home prices are down 32 per cent.

But there’s another way to look at the housing market. Renters. And the renting numbers tell a fascinating story.

In Melbourne, while house prices fall, rental vacancy rates are falling.

It’s easy to find a tenant and rents are rising.

That suggests there is continuing strong demand for housing.

There may, it seems, be a limit to falling prices in Melbourne.

But in Sydney rental vacancy rates are going up. That does make sense, with house prices falling so fast.

Both of those facts suggest people don’t want Sydney housing so much any more.

Demand for housing is Sydney is weak no matter how you look at it

You can see the rental vacancy rates in Sydney and Melbourne in the graphic below, as well as the rental vacancy rates in several other markets.

rental vacancies.jpg

Renting numbers offer an insight into the real estate market. Source: RBA Statement on Monetary Policy February 2019

Renting numbers offer an insight into the real estate market. Source: RBA Statement on Monetary Policy February 2019Source:Supplied

Overall, the income Australian landlords are getting from rental properties is growing more slowly. Advertised rents are getting more expensive in Melbourne, but cheaper in Sydney.

Understanding the strength of the rental market is important for seeing the future of the housing market.

Sydney, Melbourne and Brisbane are all set to have a large number of apartments released onto the market in the next few years.

Many tall towers that had their foundations concreted in the boom time will get their final coat of paint amid the bust. Such is the cyclic nature of property development — by trying to meet peak demand, they create an oversupply that fuels the bust. What looks like a rational course of action for one developer might not be rational if every developer does the same thing at once.

Releasing those newly-built properties onto the market could have negative effects on both property prices and rents. The big question is: Who will live in all those properties?

In Melbourne, that question is not such a concern. With vacancy rates falling and strong population growth, there is apparently a willing market for those new homes.

The difference between population growth rates in Australia’s major cities is notable.

The lowest growth is in Adelaide, where its at 0.8 per cent per year and the fastest is Melbourne, which is growing at a very rapid 2.5 per cent a year.

But in Sydney and Brisbane?

The risk is a flood of new properties will struggle to find anyone to live in them — whether owner-occupier or tenant. That would push prices down further.

This is especially the case for the many Sydney apartments being built in the outer suburbs where apartments have not traditionally been built.


The future of Australia’s rental market is also affected by the future of negative gearing.

But this is less about demand for rental housing, and much more about supply of it.

Negative gearing is a tax rule that allows owners of investment properties to deduct any losses they make from their total taxable income.

If for example they have a $2000 shortfall between the rent they collect and their total costs of ownership, they can subtract that from their salary or wage income.

In our example, their taxable income would then be $2000 lower.

For a person paying 45 per cent tax on the marginal dollar of income, that would save them $900 a year.

In this way, negative gearing makes losing money on owning a rental property less painful, and operates as a kind of subsidy that encourages people to invest in property.

The Labor Party is promising to get rid of negative gearing for buyers of existing property starting on January 1 next year.

If they win the election and change the law, this could cause interesting changes in the property market. It is likely fewer investors will want to buy existing homes any more. That should mean existing homes slowly move out of the hands of investors and into the hands of owner-occupiers.

If fewer rental properties are available, rents might go up. But at the same time, with fewer investors trying to buy investment properties, the price of buying an existing home might come down.

It could be a great time for a renter to become a first home buyer.

Jason Murphy is an economist. He writes the blog Thomas the Think Engine | @jasonmurphy


First-home buyer deposit guarantees likely to push up house prices, economists warn via @domaincomau

House prices are likely to increase under Prime Minister Scott Morrison’s plan to boost first-home buyer affordability by guaranteeing a 5 per cent deposit, economists warn.

The proposed $500 million scheme announced on Sunday will see eligible first-home buyers, with at least a 5 per cent deposit for a home, qualify for a loan. They’ll also save around $10,000 by not having to pay mortgage insurance to lenders under the scheme. The scheme would be capped at 10,000 loans per year.

While the scheme would enable first-home buyers to get onto the property ladder faster, there are concerns it will encourage them to take on more debt and drive up prices — ultimately making it more expensive — at a time when the lending practices of banks have been under attack.

“Policies like this tend to drive up prices,” said EY chief economist Jo Masters. “First-home buyers … will be able to borrow more than they would have done otherwise, it will generate more demand in a sense and bring prices up.”


Mr Morrison on Monday said it was “difficult to say” if prices would rise under the plan.

“We want to see more first-home buyers in the market, absolutely, and we don’t want to see people’s house prices go down,” he said at a press conference. He added that loans would be granted on a first come, first served basis.

“The scheme will ultimately be determined by the number of loans approved by the lenders and the arrangements with the National Housing Finance and Investment Corporation.”

The corporation will act as guarantor on the loans.

Labor announced on Sunday that it would also introduce the scheme if it wins Saturday’s election.

Mr Morrison announced the first-home buyer deposit policy at the Liberal campaign launch in Melbourne on Sunday. Photo: Luis Enrique Ascui

Ms Masters’ biggest concern is the initiative will simply encourage first-home buyers to borrow more, increasing debt to income ratios at a time when the banks have been pushed to reduce them.

“It seems to be encouraging first-home buyers … to take out a mortgage at a 95 per cent LVR (loan to value ratio) and that’s against a backdrop of several years of APRA and the royal commission working to improve credit standards and reduce future financial stability risks.”

It was concerning to encourage people to take on a higher LVR at a time when prices were falling across much of Australia, Ms Masters added, because it was easier for them to fall into negative equity.

AMP Capital chief economist Shane Oliver said the plan would likely help to stablise the market and would be one reason a worst case scenario, such as a 40 per cent peak to trough price decline, would not eventuate.

Dr Oliver said uncertainty surrounding the scheme, in terms of the price point of eligible properties, made it difficult to predict its impact, as did the limit of 10,000 loans a year. He added first-home buyers may also be hesitant to take on such high levels of debt.

“That’s the big uncertainty here. If it were an out and out grant people would snap it up, some first-home buyers may be wary of borrowing 95 per cent of the value of a property but I would suspect some may jump at the chance,” he said on Monday.

“There will be concerns about it encouraging households to take on more debt,” Dr Oliver added. “Skeptics might say this is just bailing out the baby boomers and generation X who don’t want to see property prices fall to far.”

He added that while it was far from a “game-changer” and unlikely to have as much of an impact on the market as an upfront grant would, more government incentives could come to help stabilise the market.

“If the property market continues to slide away, whoever wins the election might just scale it up or adopt a grant. This isn’t necessarily the end of the story.”

Domain economist Trent Wiltshire echoed the concerns and added the scheme would likely be ineffective in helping first-home buyers long term.

“It will help some people, but in terms of trying to improve affordability, it may not be that effective,” Mr Wiltshire said.

But, he said, it would help provide a more level playing field for those without access to the bank of mum and dad, because first-home buyers increasingly turn to their parents to go guarantor.

“It will give those that wouldn’t have access to bank of mum and dad access to a guarantor, on the other hand it means people who may have used the bank of mum and dad would rely on government. The government is now taking on the risk rather than their parents,” Mr Wiltshire said.

“It’s maybe a bit of equitable policy, but it’s income limits mean it’s not as well targeted as it could be,” Mr Wilshire added, noting the income cut offs for a similar policy in New Zealand were substantially lower.

RMIT Emeritus Professor Tony Dalton, who works with the Australian Housing and Urban Research Institute, said the scheme was a “drop in the bucket” for those struggling to afford to buy a home.

The 10,000 cap meant only 1 in 10 first-home buyers would benefit from the scheme and would have no impact on the affordability of homes.

“It will have very little impact on the structural decline of housing affordability for low to moderate income earners,” Professor Dalton said.

Professor Dalton said the result of earlier schemes, like the first-home buyers grants and stamp duty concessions in Victoria and NSW, has two main effects.

“There is some house price inflation because of demand. Volume builders on the fringes crank their house building programs to meet that extra demand,” Professor Dalton said. “I don’t think that’s going to happen with this scheme though because it’s very small.

“The second effect is that is pulls through – it brings people onto the market who wouldn’t have otherwise been there.”

Those people then have to wait to upgrade for longer and this slows down the second-home buyer market, he said.

The University of Adelaide’s Chris Leishman, from the Centre for Housing, Urban and Regional Planning, said the people who would benefit most were those that already had money to buy.

“The market is really unaffordable and this doesn’t make it more affordable,” Professor Leishman said.

He said it was worrying that the ALP and opposition leader Bill Shorten was agreeing to this policy without thinking longer term about housing affordability.

“We need to rethink how we deal with housing affordability over the next 20 years – not just the next week,” Professor Leishman said.

The Real Institute of Australia on Monday joined Metricon, the Property Council and Master Builders Australia in supporting the scheme.


Climate change to wipe $571b from housing via @y7finance

Australia's property market could lose $571 billion in value over the next decade due to the impact of climate change and extreme weather, a new report warns.

The Climate Council document also found the risk for Queensland was double that of other states and territories.

Report author and climate risk expert Dr Karl Mallon argued billions would be lost by 2030 if greenhouse gas emissions remained high and adequate action wasn't taken.

"This is the largest analysis of property risk from climate change ever undertaken in Australia and uses the latest data from our universities," Dr Mallon said in a statement on Thursday.

"Queensland is on the frontline of climate change impacts in Australia and the Gold Coast, Ipswich and the Sunshine Coast local government areas have been identified as amongst highest risk to extreme weather and climate change because they are very exposed to flooding and coastal inundation."

Dr Mallon also suggested that, on current trends, one in every 19 property owners would face the prospect of "effectively unaffordable" home insurance premiums by 2030.

The report also found extreme weather events like heat waves and floods were affecting agriculture and food production.

It estimated one per cent of gross domestic product could be lost due each year to increasingly severe and more frequent drought conditions.

On current trends, climate change impacts are projected to reduce agricultural and labour productivity by $19 billion by 2030 and by $211 billion by 2050, the report says.

But fellow report author and University of Melbourne economist Tom Kompas said that figure could swell to $4 trillion over the next 80 years.

"This is not a trivial figure - it is more than double Australia's current gross domestic product," Prof Kompas said.

-Rebecca Gredley, AAP

Source: Yahoo! Finance