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Australian housing markets report

APRA acts - market gamechanger?

Dr Andrew Wilson – Domain Group senior economistDecember 2015

Copyright 2015 Dr Andrew Wilson – all rights reserved

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Understanding the impacts of change to housing finance

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APRA

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APRA - Australian Prudential Regulation Authority

Prudential regulator of the Australian financial services industry.

Oversees Australia’s banks, credit unions, building societies, life and general insurance companies and reinsurance companies, friendly societies and most of the superannuation industry

Funded largely by the industries that it supervises

Member of the Council of Financial Regulators (CFR) that includes ASIC, Treasury and RBA

What is ARPA?

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In December 2014 APRA determined that

…..prudential risks in the housing market appear to be increasing

…..with lending to property investors particularly strong…leading to imbalances in the housing market

…..forces have contributed to strong house price growth, particularly when viewed against the more subdued growth in household incomes

ARPA acts to reduce bank risk from housing market exposure

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APRA informed banks that due to increased risk it would monitor specific areas of prudential concern

higher risk mortgage lending — high loan-to-income loans, high LVR loans, interest-only loans to owner occupiers, and loans with very long terms

strong growth in investor lending with growth above 10% an important risk indicator

loan affordability tests for new borrowers including an interest rate buffer at least 2% above loan product rate, and a floor lending rate of at least 7%, when assessing borrowers’ ability to service their loans.

The 10% benchmark was established after advice from members of the Council of Financial Regulators, taking into account a range of factors including income growth and recent market trends

ARPA acts to reduce bank risk from housing market exposure

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In July 2014 APRA announced that:

The average risk-weighting for home loans to be raised from 16% to 25%

Banks required to lift capital reserves by 0.8% on average to cover credit risk

This would enhance the resilience of banks and the broader financial system reducing the risk from housing as mortgages were the biggest exposure for Australian banks

The new weightings to come into force July 1 2016 to allow banks time to raise the estimated $11 billion required

ARPA acts to reduce bank risk from housing market exposure

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Bank actions from APRA policies

Banks initiated: For investors - to cap lending growth at 10%

Tighter income tests Lower LVR’s Higher interest rates

For owner-occupiers – to fund increased capital reserves and maintain profitability Higher interest rates

ARPA acts to reduce bank risk from housing market exposure

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APRA impact on housing markets

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Investor market

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Market response to ARPA – investor lending down sharply (ABS national monthly)

$15.5b

$14.2b

$12.8b$12.5b

$4

$6

$8

$10

$12

$14

$16

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15

Bill

ion

s

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ARPA rates rise investors fall – for now (ABS monthly investor loan changes)

-10.2%

-4.5%

-2.0%

-21.8%

-13.1%

-8.9%-9.9%

-16.7%

-5.0%

-7.3%

0.6%

-7.0%

6.0%

17.6%

-20.2%

NSW VIC QLD SA WA

Jul-15 Aug-15 Sep-15

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Net investor market contraction (ABS loans aggregated monthly changes 3 months to Sept)

-18.5%

-21.4%

-12.8%

-9.2%

-40.6%

NSW VIC QLD SA WA

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47.2%

24.8%

14.8%

3.8%

6.7%

NSW VIC QLD SA WA

NSW investors nearly half but ARPA policies impact all (ABS Sep. investor loan national market share)

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51.7%

43.1%

41.6%40.6%

35.4%

46.1%

41.8%

39.4%

35.8%37.1%

NSW VIC QLD SA WA

September market share 15 year average

Local investor market share still above average (ABS loans)

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NSW highest investor share above average – the rest modest (ABS Sep. loans)

5.7%

1.3%

2.2%

4.8%

-1.7%

NSW VIC QLD SA WA

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Investor growth highest of buyer types everywhere (ABS Jan-Sep 2015 vs. Jan-Sep 2014 )

25.5%

20.8%

16.8%15.0%

-8.8%

18.5%

13.9%

4.5%2.8%

-11.2%

NSW VIC QLD SA WA

Investor Owner-occupied exc.ref.

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Investor vs owner-occupied growth - stable relationship (ABS Jan-Sep 2015 vs. Jan-Sep 2014 )

7.0% 6.9%

12.3% 12.2%

2.5%

NSW VIC QLD SA WA

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APRA impact on general residential market

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House prices growth flat or falling most capitals (Sep qtr)

5.2%

3.3%

0.1%

2.5%

-0.8%

7.7%

6.0%

0.1%

2.0%

-0.9%

3.2%2.8%

0.8%0.3%

-2.4%

Sydney Melbourne Brisbane Adelaide Perth

March June September

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Net quarterly house price growth change falling most capitals (Sep qtr)

-4.5%

-3.2%

0.7%

-1.7%-1.5%

Sydney Melbourne Brisbane Adelaide Perth

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Auction clearance rates reflect market prices and falling in Sydney (Sep qtr)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Median house price ACR

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Auction clearance rates also falling in Melbourne (Sep qtr)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

$650,000

$700,000

$750,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Median house price ACR

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Clearance rates down over November – Sydney sharpest fall since last year

60.9%

69.0%

50.0%

60.8%

66.0%

55.7%

66.5%

38.8%

56.9%

63.8%

Sydney Melbourne Brisbane Adelaide Canberra

Oct-15 Nov-15

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Weekend auction clearance rates falling sharply since July and October rate risesMelbourne now lowest since 2013 - Sydney lowest since 2012 steep decline

84.5%

79.6%

66.2%

89.2%

82.0%

58.6%

2/05/15 2/06/15 2/07/15 2/08/15 2/09/15 2/10/15 2/11/15

Melbourne Sydney

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Sydney interest rate sensitive and investor regions falling sharply since July - clearance rates and confidence collapse

43.5%

36.1%

37.0%

30%

40%

50%

60%

70%

80%

90%

100%

Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15

Canterbury Bankstown City and East Inner West

Lower North Northern Beaches South

South West Upper North Shore West

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Real prices growth in current cycle subdued except for Sydney (ABS less local inflation to Sept qtr)

49.9%

12.5%

-7.4%-5.6%

-8.7%

0.3%

-7.3%-10.8%

SydneyJune 11

MelbourneJune 10

BrisbaneJune 10

AdelaideJune 10

PerthJune 10

CanberraDec 10

HobartDec 10

DarwinMar 11

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APRA actions – lower risks for banks is a worthy goal but…..

A one-size fits all solution, Sydney-centric policy

Will lenders favour Sydney regardless as strongest investor market?

Are the impacts greater for weaker smaller markets?

Significant negative economic consequences through reduced investment particularly in underperforming economies

Sydney strongest economy – strongest housing market – strongest investor market

Will policies exacerbate the risks designed to mitigate against ?

Have policies impeded typical orderly market correction phase?

Higher rates have impacted buyer confidence in the short–term but markets will find their natural floor over the longer-term

Is the risk modelling appropriate - incomes versus house prices?

Exacerbated Sydney market easing - hardship for spring home sellers

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APRA actions – lower risks for banks is a worthy goal but…..

Reduced investor activity to translate into less rental stock in tight rental markets (most capitals)

Investors to pass on rate rises to tenants

Reduced rental stock and higher rents exacerbate already low numbers of first home buyers – particularly in Sydney

Long-term implications for market dynamics with chronically low first home buyers stuck in the queue

Lower first home buyers will continue to shift balance in favour of investors

Regardless of APRA - residential investor activity levels are likely to rise through the cycles

Disconnect between RBA settings and bank mortgage rates

Downward bias for RBA macro settings but banks likely to continue to raise rates in 2016

Mexican stand-off? – who will act first?

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8.5%

12.8%

11.0%

12.8%

21.0%

13.7%

17.4%

15.6%14.5%

18.6%

NSW VIC QLD SA WA

FHB market share Long-term average

First home buyer barriers increase rental demand – Sydney worst (ABS Sept loans)

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1.8% 1.8%

2.6%

1.9%

3.6%

2.3%

3.8%

3.2%

2.5%

4.1%

Sydney Melbourne Brisbane Adelaide Perth

Houses Units

Capital city September vacancy rates – higher rates passed on to rents

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Sydney highest investor levels but house rents keep rising (September qtr)

$530

$300

$350

$400

$450

$500

$550

2008 2009 2010 2011 2012 2013 2014 2015

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Low Sydney yields vs deposits an investor driver - plus tax breaks

3.9%

5.3%

2.2%

3.2%

4.6%

3.7%

2%

3%

3%

4%

4%

5%

5%

6%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RBA average term deposit Sydney house yield

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Yields in sync and bottom of yield cycle

3.6%

4.0%

4.9%

4.6%

4.3%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sydney Melbourne Brisbane Adelaide Perth

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Residential property investment to rise through the cycles

Strong local culture of bricks and mortar investment - safe as houses

Residential yields to remain attractive in low growth, low yield economy

Significant tax advantages for residential investors

Negative gearing, tax depreciation, capital gains tax concessions

Ongoing supply constraints for new housing

Low numbers of first home buyers driving rising demand for rentals

Rising demand from international investors – particularly from China

Foreign buyers less inclined to require rent income stream

capital safe haven - reduces available new rental stock

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Residential property investment to rise through the cycles

Capital growth will be flatter through the cycles but above inflation rate

Increased interest from super funds with new housing investment products

Residential similar to commercial investment - more yield focused, longer leases

Income-hungry governments to target residential investment tax treatments

RE Industry to target and nurture investors as growing business opportunity

One-stop residential investment management shop

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Australian capital city housing marketssynchronised, orderly growth and correction phases

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expansion

trough

peak

trough

peak

correction recovery

contraction

• Change points........

• Define phases

Housing market analysis – house price cycle model (Wilson 98)

Prices below last peak

Prices below last trough

Prices above last trough

Prices above last peak

bubble?

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Sydney annual house price growth orderly growth and correction phases

22.2%

-4.5%

17.0%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Thisyear to

Sep

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Melbourne annual house price growth orderly growth and correction phases

23.4%

-4.1%

12.6%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Year sofar

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Interest rates and housing markets

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Interest rates drive the cycle – for ALL capitals in sync

Rates rise 09-10(FHOGB – mining boom 2)

Rates fall 11-12-13(economy fades)

Rates fall 08(GFC)Rates rise 06-07

(mining boom 1)

Rates fall again 2015(economy still flat)

1%

2%

3%

4%

5%

6%

7%

8%

$25 0,000

$35 0,000

$45 0,000

$55 0,000

$65 0,000

$75 0,000

$85 0,000

$95 0,000

$1, 050,00 0

$1, 150,00 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sydney Melbourne Brisbane Adelaide Perth Interest rate

market-view

Sydney house prices and interest rates – clear underlying relationship

7.25%

3.00%

4.75%

2.00%

$1,032,433

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Interest rate Sydney median house price

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Rates drive Sydney affordability and prices

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Falling repayments enable prices growth (Reserve Bank indicator rate, 30 year variable, ABS)

$579

$410

$618

$493

$595

$531

$400

$450

$500

$550

$600

$650

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

NSW average repayment Sydney median Overall average repayment

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Incomes rise, repayments fall, affordability improves and prices rise (ABS)

40.3%

28.2%

39.9%

27.6%

31.7%

33.2%

20%

25%

30%

35%

40%

45%

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

NSW loan % of Sydney income Sydney median Average NSW loan % of Sydney income

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Capital city affordability

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Affordability remains below average in ALL capitals

33.2%

31.6%

29.5%

30.9%30.3%

31.7%

29.6%

25.5%26.1%

24.2%

NSW VIC QLD SA WA

Average Sep-15

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Indexed affordability declining in most capitals but remains below average

89.3 88.285.2

80.3 80.8

95.6 93.5

86.0 84.479.5

Sydney Melbourne Brisbane Adelaide Perth

Jun-15 Sep-15

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Income vs prices measures misleading

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550

414

31.7%

33.2%

20%

25%

30%

35%

40%

45%

340

390

440

490

540

590

2007 2008 2009 2010 2011 2012 2013 2014 2015

Weekly Sydney income as a factor of Sydney price Average income % of price

NSW loan % of Sydney income Average loan % of income

Incomes, prices, loans – which is the effective affordability benchmark? (ABS)

Income factor at record levels ?

But loan proportion still below average!

market-view

Income versus prices imbalance reflects higher priced capitals (previous peak)

414

355

294

342355

550

412

299

337320

Sydney(538)

Melbourne(404)

Brisbane(313)

Adelaide(376)

Perth(453)

Average Sep-15

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Higher interest rate exposure puts pressure on prices

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Sydney home owners higher interest rate vulnerability – just 4.3% (ABS)

32.6%

31.4%

31.7%

4.3%

Non-owners Outright owners

Repayments 30% or less than income Repayments 30% or more than income

market-view

Households with higher interest rate vulnerability - prices falls modest in correction phase

4.3%2.7%

3.8% 3.6%4.5%

31.7%

35.4%34.1% 34.4%

36.6%

Sydney Melbourne Brisbane Adelaide Perth

Repayments plus 30% Repayments less 30%

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National housing market outlook

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Current state and future prospects of the national housing market

Sydney – sharply down after record growth Auction clearance rates down sharply since record autumn as cycle wanes

Lower activity in budget areas to the west but inner city and middle suburbs still solid

Underlying drivers remain strong

Melbourne - still robust but falling Market rises with local economy but easing since autumn - clearance rates down – now the leading market

Buying now across all regions – not just east - with west and north suburbs reviving strongly

Brisbane - modest and flat Weak year so far as local economy and confidence continue to impede activity – better signs to end year

Mid and higher priced inner and middle suburbs solid – outer north, west and south still flat

Adelaide – solid and steady despite…… Prices growth to exceed last year despite nations worst economy with highest jobless

Resilient market but outer north the clear underperformer

Perth – weak and falling but early signs of flattening out Prices down as local economy deteriorates and sharp end to FIFO but early signs of bottoming

All market segments weaker – short term crisis of confidence sidelining buyers and sellers

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Housing Market Barometer

12%

2%

1%

0%

0%

Perth 2%

RISING

FALLING

2016 forecasts

4%8%

6%

4%

2%

2%

3%

4%

5%

Boom

Strong

Robust

Solid

Moderate

Moderate

Solid

Robust

Strong

Bust

Flat

Melbourne 5%

Brisbane, Darwin 3%Sydney, Adelaide, Canberra, Hobart 4%

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The rising tide

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House price history lesson

• Australian housing markets are historically trend-linked

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Sydney Melbourne Brisbane Adelaide Perth

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If you require any further information regarding Australian property

market analysis I may be contacted by email at

andrewwilson@domain.com.au or phone 0427 410 240

For all the real-time housing market insights follow me on twitter at

@DocAndrewWilson

Australian property market analysis

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Thank you