April 9, 2017

The Financialisation Of The Housing Sector

A report from the Courier Mail in Australia. “The problems in Australia’s overheated housing market are only partly the well-documented stresses related to rising prices, affordability and soaring household debt. This is actually a product of the countervailing market, regulatory and political forces at play. On one hand you have a market where demand is high, driven in large part by investor hunger for a slice of some of the huge capital gains that have been made, and in part by access to cheap credit with interest rates at record lows.”

“On the regulatory front you have the likes of the Reserve Bank warning about the risks a housing bubble poses to the stability of the banking sector (and thus the wider Australian economy), while at the same time the Australian Prudential Regulation Authority has moved to clamp down on investor lending. At the same time Treasurer Scott Morrison – and some of the shills in the property sector – has been floating the idea that first-home buyers should be given a leg-up into the market by being allowed access to their superannuation savings.”

“In short you have regulators trying to hose down a fire, while Government policy throws more fuel (presumably lumps of coal) at the blaze. Quite simply, the way to deflate a bubble is not to pump more air into it, yet that is the only thing that providing more cash and financial capacity on the demand side will achieve.”

From Bloomberg. “Jonathan Tepper, the founder of a London-based research firm who a year ago warned that Australia had one of the biggest housing bubbles in history, has attacked regulators for acting too late to cool the market as they ignored their own warning signs and were hostile to suggestions property was too expensive, according to the Weekend Australian. The nation’s banking system was ‘unstable’ and Australians were living in ‘fantasyland’ about the impact of slowing construction on the economy, the newspaper quoted Tepper.”

“Demand from China would not stave off a housing downturn as demand for ‘vastly overpriced’ houses in working-class suburbs across the nation was questionable, the paper quoted Tepper as saying. Meanwhile, Ralph Norris, former chief executive officer of Commonwealth Bank of Australia, told the newspaper he doesn’t believe in the ‘doomsday scenario’ as banks have ’sophisticated risk-management processes’ in place. There was no evidence of mortgage stress in the banks’ provisioning, he said.”

“Home loans account for more than 60 percent of domestic bank lending in Australia.”

The West Australian. “The number of West Australians falling behind on their mortgages is skyrocketing, with more than 5 per cent of people in some Perth suburbs at least 30 days in arrears. In a sign of how the State’s weak job market and stagnant wages are hurting the broader economy, Moody’s ratings agency said the mortgage arrears rate in WA was the worst in the country and growing. Across the State almost 3 per cent of all mortgages are now 30 days in arrears, a jump of more than 60 per cent over the past year.”

“The latest Urban Development Institute of Australia State of The Land 2017 confirms Perth land prices have plummeted — and more falls are likely. The paper paints a dire picture for WA developers and the building industry, with an oversupply of land and a collapse in sales, lot prices and new releases. The slowdown in Perth land sales is also highlighted by the ‘cancellation rate,’ which refers to the number of lots that were due to come on to the market but were delayed or scrapped altogether by developers. Perth’s cancellation rate was more than a quarter of all land sales last year, compared with just 4 per cent in Melbourne.”

“Report author Robert Harley said land prices would remain sluggish as Perth developers faced ‘excess capacity relative to weak demand.’ ‘With developers competing to protect market share, prices are likely to fall further,’ he said.”

The Australian. “More than half the apartments bought off the plan in Melbourne’s CBD, Docklands and Southbank since 2011 have changed hands at a loss, while many inner-Brisbane unit buyers are also out of pocket from the resale of new apartments. The rash of losses sets a lower bar for valuers, meaning banks are willing to lend less on the next sale, according to BIS analyst Angie Zigomanis. ‘The risk is that this cascades down, setting lower benchmarks for the next round of apartment projects,’ he said.”

From Domain News. “Prosper Australia has for years been conducting research into how many of Australia’s 9.8 million homes are left vacant. Its major finding is that of the 1.7 million homes in greater Melbourne alone, about 82,000 are vacant, or 4.8 per cent. That research has been cited by a recent United Nations study on the pernicious effects of the financialisation of the housing sector, and has likely been a key reason for the adoption of a vacant housing tax, and probably in Canada as well.”

“The next question is to ask how many homes may be vacant primarily because of this speculative motive. Prosper uses water meter data to asses whether a property has been vacant. By looking at properties that have used no water over a 12 month period (25,000 dwellings), and those that used less than 50L per day over a 12 month period (82,000 dwellings), they make a judgment that these extremely-low-water-use homes are vacant.”

“As a ballpark, about 300,000 our of 9.8 million dwellings are likely to be sitting vacant each year, or about 3% of them. For the last five years the country has built about 153,000 net new dwellings each year, so these vacant homes represent about two years of new supply at our recent historically high rates of dwelling construction.”

From The Guardian. “A new penalty regime targeting foreign investors has seen 500 overseas property buyers issued with penalty notices and told to pay the Australian Taxation Office $2.7m in fines. The majority of breaches occurred in Victoria, New South Wales, Queensland and Western Australia. The Australian Taxation Office confirmed on Sunday that since then, 500 penalties were issued for 700 offences, including failing to get Foreign Investment Review Board approval before buying. Penalties were also issued to those who breached a condition of previously approved applications, for example temporary residents failing to sell their properties once their visa expired.”

“The treasurer, Scott Morrison, has also approved the required sale of 61 foreign-owned properties, worth over $107m. Overall, 20% of the properties and offences investigated resulted in a required sale or self-divestment.”

The Australian Financial Review. “Ask respected property analyst Martin North what form the coming downturn in the housing market might take and ‘orderly’ is not the description he uses. Instead North anticipates a much more significant downturn in the investor-driven, debt-laden markets like Sydney and Melbourne. ‘Orderly’ is how S&P Global Ratings director Sharad Jain described the likely unwinding of the overheated housing market, where annualised house price growth is running close to 20 per cent in Sydney and Melbourne.”

“‘Regulators have come to the party three or four years too late. They should have tackled negative gearing, not cut rates as much and focused on mortgage underwriting standards. Had they done so we would be in a position to manage the situation,’ said Mr North, who runs research house Digital Finance Analytics. ‘I have a nasty feeling we are passed the point of being able to manage this. There are not enough levers available to regulators to pull it back in line.’”

“Corelogic’s head of research, Cameron Kusher, said the ‘great unknown’ in how the current house price cycle will play out is what investors will do when the growth is no longer there. ‘If investors stay, the correction should not be too bad. But if they go away like they did in Adelaide, Brisbane and Perth and dump property for other asset classes, it could be much worse.’”

“But, Mr North sees things differently: ‘We have about 22 per cent of households in mortgage stress, which will continue to rise. There’s flat employment growth and no wages growth. I can’t see how you can hold all those elements together.’ And he believes the wealthier end of town could be most at risk: ‘My data shows the highest levels of immediate problems are not in the suburban fringe, but in the affluent suburbs, where people are really geared up with multiple properties.’”