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Home lending still biased toward investors

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Recent changes to investor lending is failing to have a significant impact on home loan demand, new data has revealed.

According to the July Housing Finance Data from the Australian Bureau of Statistics, the value of overall home lending rose 0.5% in the month. Within that, owner occupied lending rose 0.8%, refinancing rose 0.7% and investment lending increased by 0.1%. In seasonally adjusted terms, the total value of home lending, excluding alterations and additions, rose 1.5%.

According to Australian Broker Online, while the number of investment purchases by individuals fell 0.5%, the number investment purchases for construction rose 4.3% and investment by other entities (including SMSFs) rose 2%.

The value of lending to investors constructing new homes jumped by 11.7% in the month, reaching a new all-time high.

Looking at the overall stock of loans, investment loans now make up a record 38.9% of the total portfolio.

Martin North, principal of Digital Finance Analytics says this is partly due to the recent restatement of loan types by some banks, however, it is still too much leverage.

“We think this is too-higher share of housing lending (it is more risky in a down-turn) and the banks 60% total loan portfolio in housing is also too high, sucking finance from business sectors which might contribute to real economic growth.”

Dwelling values fall

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Half of Australia’s capital cities have recorded falling dwelling values, according to the latest report from CoreLogic RP Data.

The value for houses in the combined capital cities rose 10.6 per cent on the previous year to reach a median price of $600,000, while units were up 7.4 per cent to $509,900, according to The Adviser.

In Perth the value of houses fell 1.5 per cent to $520,000 and units dropped 5.2 per cent to $415,500.

In Darwin houses dropped 4.8 per cent to $580,000 and units fell 3.7 per cent to $450,000.

Houses in Canberra fell 1 per cent to $587,800 and units were up 0.9 per cent $415,000.

In Hobart houses rose 1.7 per cent to $320,000 while units fell 0.6 per cent to $280,000.

Houses in Adelaide were up 1.8 per cent to $430,000 and units climbed 1.2 per cent to $350,000.

In Brisbane houses jumped 4.3 per cent to $482,400 and units were up 0.5 per cent to $382,200.

Melbourne houses were up 11.5 per cent to $620,000 and units were up 2.9 per cent to $475,000.

In Sydney houses climbed 18.6 per cent to $900,000 while units jumped 12.7 per cent to reach $670,000.

Mortgage delinquencies report – declining

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Strong house price growth and current low interest rates have helped to bring down Australia’s mortgage delinquency rate over the 12 months to the end of March, reports Australian Broker Online.

According to Fitch Rating’s Australian Mortgage Delinquency by Postcode report, Australia’s average national delinquency rate at 31 March was 0.99%, 0.36% lower than it was at 31 March 2014.

While the national rate may be down over the 12 month period, it did increase over the six months from the end of September 2014 when it sat at 0.9%.

That increase is likely the result of overspending by households during the Christmas period, but that was tempered by low interest rates and climbing dwelling values.

Sydney in particular has benefitted from the rising house prices, with the historically poor performing areas in the west of the city not experiencing the usual deterioration in mortgage delinquency rates caused by Christmas spending.

The report shows there is new location with the worst delinquency rate by the value of mortgages in arrears as of 31 March 2015, with Budgewoi in the 2262 post code on the New South Wales Central coast recording a delinquency rate of 3.2%.

Budgewoi’s rise to the top of the list saw the previous worst performer, Queensland’s Kingston in the 4114 post code drop to second with a delinquency rate of 3%.

Queensland also claims second spot on the list with Petrie (4502) recording a delinquency rate of 2.8%.

Victoria’s Corio (3214) claimed fourth spot at 2.7%, while Greenacre in NSW came in at fifth at 2.6%.

On a regional basis Queensland’s Mackay is the country’s worst performer with a delinquency rate of 2.01%, followed by WA (excl. Perth) at 1.88%.

Melton-Wyndham (VIC) is the next worst performing region at 1.75%, followed by Logan City-Beaudesert (QLD) and Caboolture Shire (QLD) at 1.71% and 1.59% respectively.

Tasmania replaced Queensland as the worst performing state in Australia for mortgage repayments with a delinquency rate of 1.33%. This figure reflects Tasmania’s high unemployment rate and low house appreciation over the past three years.

Preferred cities for auctions

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Research from CoreLogic RP Data Property Pulse shows Melbourne is the city where auctions are the most popular method of selling, with 39% of residential property listings taken to auction in the last financial year.

Along with Melbourne, Sydney and Canberra also showed more than one third of all listings being taken to auction, at 38% and 36% respectively.

According to CoreLogic RP Data head of research Tim Lawless, of the 380,000 dwellings advertised for sale across Australia’s capital cities over the 2014/15 financial year, roughly 84,000 (26%) were advertised as auction sales.

“Interestingly, when we examine the proportion of listings taken to auction across product types, Canberra and Sydney are both showing a larger proportion of auction listings for houses than Melbourne,” Lawless told Australian Broker Online.

Looking at individual suburbs, there were five all located in Sydney, where more than 95% of all house listings were taken to auction with the Waverley suburb of Queens Park coming top with 59 out of 60 house listings (98.3%) being taken to auction.

“While Melbourne, Sydney and Canberra have a well-established auction culture, other capital cities still list the vast majority of homes for sale via private treaty.”

“Auction listings have been rising since the 2008/09 financial year when back then, auctions comprised of a much lower 16% of all dwellings listed for sale.”

Business confidence down in July

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Business confidence dipped last month due to a negative outlook for the Australian economy over the next 12 months, according to a Roy Morgan survey.
The research found that business confidence declined 2.5 points in July, now down 6.8 points or 5.7 per cent from 12 months ago.

Roy Morgan stated that confidence among consumers and businesses is fragile, and significantly affected by both domestic and international events.

Roy Morgan Research industry communications director Norman Morris said there are still major headwinds in Australia, including the low iron ore price, no resolution to the worsening budget deficit, and the fact that over two million Australians are either unemployed or underemployed.

“The end result of these and other problems has been a large decline in the Roy Morgan Government Confidence Rating among consumers, which has dropped from 99.5 in July 2014 to only 91.0 currently,” he told The Adviser.

“While there were some positive external factors impacting on business and consumer confidence during July — such as reduced anxiety over the Greek financial problem, less publicity about China’s slowing growth rate, and share-market volatility — the basic problems concerning the local economy remain.”

The research also found that 49 per cent of Australian businesses expect domestic economic conditions to be bad over the coming 12 months.

“Despite recent government tax incentives for micro- and small businesses to invest, it is concerning to see that micro-businesses in particular show no real improvement in confidence, and remain well below the level of confidence of medium and large businesses,” Mr Morris said.

He noted that business confidence across states remained even in July, with Tasmania narrowly ahead, followed by New South Wales, Victoria, Queensland, Western Australia and South Australia.

Although confidence is decreasing, 57 per cent of businesses think the next 12 months will be a good time to invest in growing their business. This is above the five-year average of 56 per cent, but below June’s result of 59 per cent.

Stability more than just giving FHB a leg up

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Stability more than just giving FHB a leg up

Ensuring financial stability is more important, in a low interest rate environment, than helping first home buyers into the property market, the Reserve Bank of Australia has claimed.

Speaking to the House of Representatives Standing Committee on Economics Inquiry into Home Ownership, the RBA’s head of financial stability department, Luci Ellis recognises the importance of home ownership.

“Outright home ownership is widely regarded as key to avoiding poverty in old age. Before that life stage, home ownership is also regarded as a way to obtain the security of tenure that is so important to the wellbeing of many households…” Ellis told Australian Brokernews.

Ellis then goes on to recognise housing unaffordability despite the importance of home ownership.

“Whether home ownership is affordable depends on one’s definition and is open to debate. But there is no disputing that housing is expensive,” she said.

“It is clear that part of the reason for this is that demand is strong… More recently, demand has been boosted by population growth and by declines in interest rates.”

However, Ellis says maintaining prudent lending and financial stability in a low interest rate and high house price environment is what the regulators and banks should focus on, even to the detriment of first home buyers who are struggling to get onto the property ladder in such a competitive landscape.

“Nonetheless, while there has been much debate on this issue, from a financial stability point of view it is helpful that there has been no push to improve the position of first home buyers by easing lending standards,” she said.

“As recent experiences in other countries have shown, such a step would probably be counterproductive in the longer run.”

Confirming the recent action by lenders to slow the growth in their investor home loan portfolios, Ellis says property investment has been a main factor in driving up house prices and subsequently locking out first home buyers.

“Investor interest in property has been especially strong in recent years, no doubt partly encouraged by low interest rates and the prospect of (concessionally taxed) capital gains… The result has been that the housing sales market has become unusually concentrated in investor activity, particularly in the larger cities.

“At the margin this has probably priced some aspiring first home buyers from properties they could otherwise acquire.”

Oversupply coming soon

Loan Repayments

The residential building boom and slowing population growth could result in a housing oversupply by 2018, according to one industry forecaster.

A building report by BIS Shrapnel states that the undersupply of houses sits at 80,000 nationwide, but record-low interest rates have created a construction boom that will see supply overtake demand by 2018.

BIS Shrapnel associate director Kim Hawtrey said new dwelling starts reached an all-time high in 2014-15 at just over 210,000.

“Low interest rates have unlocked significant pent-up demand and underpinned the current boom in activity, but as population growth slows while construction activity remains strong, new supply will begin to outpace demand,” Dr Hawtrey told The Adviser.

“This will see the national deficiency of dwellings gradually eroded and some key markets will begin to display signs of oversupply.”
BIS Shrapnel forecasts that net immigration will continue trending downwards in response to softer employment and economic growth and building activity will begin to fall in 2015-16 as pressure is alleviated in some markets.

It predicts Western Australia will experience the sharpest decline in building activity at 13 per cent, as the economy slows following the mining boom and population growth softens sharply.

Victoria has been over-building relative to demand and is expected to experience a seven per cent decline in building activity, with some areas of Melbourne shifting to a state of oversupply as early as 2015-16.

Queensland activity is forecast to remain flat at a strong level as its market moves towards balance, while New South Wales is expected to maintain positive growth in response to its persistent dwelling deficiency.

Case for negative gearing review?

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The Reserve Bank is open to a negative gearing review after revealing that an increasing number of investors are using the tax concession.

The central bank told the federal Inquiry into Home Ownership that Australia’s tax system is relatively generous to small investors compared with some other countries, according to The Adviser.

That is because of both negative gearing and capital gains tax concessions, although other countries offer investors even more support, according to the bank’s submission.

“Australia’s treatment of property investors is at the more generous end of the range of practice in other industrialised economies, but not overwhelmingly so.

“In particular, a wider range of expenses, including some non-cash expenses, may be deducted against non-property income than is possible in some other jurisdictions,” it said.

The Reserve Bank said the share of investors taking advantage of negative gearing increased from about half in the late 1990s to just under two-thirds in 2012-13.

Negative gearing rates would probably be higher if not for a “major tax change” in 2003, which lifted the threshold for the top marginal rate.

This has reduced the proportion of taxpayers with the strongest incentive to minimise tax through negative gearing, the Reserve Bank said.

“The bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken into account.

“The ability to deduct legitimate expenses incurred in the course of earning income is an important principle in Australia’s taxation system, and interest payments are no exception to this,” it said.

The Reserve Bank said that negative gearing “may be helpful for housing affordability for tenants” to the extent that it induces landlords to accept a lower rental yield.

However, it also said that government policy should not unduly advantage investors at the expense of prospective owner-occupiers.

Rentals up in most capital cities

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Rental prices have risen in most Australian capital cities according to the June Domain.com.au Rental Market Report.

The quarterly report indicates rental demand is outstripping supply in most states, but suggests that relief may be on its way for tenants.

The median weekly asking rent for houses in the closely-watched Sydney market has increased sharply by 1.9% over the June quarter to a new record high of $530. Although rents for units were steady at $500 per week over the quarter, they remain also at record levels.

“We would have expected some rental relief for tenants by now. The continued increase in rental prices is indicative of the low numbers of First Home Buyers and the pressure on the rental market as a result,” Domain senior economist, Dr Andrew Wilson told Australian Brokernews.

“Unprecedented residential investor activity in Sydney over the past year and a surge in new dwelling construction have failed to provide rental relief for tenants with house rents increasing by 3.9% over the year and unit rents up by 1%.”

Down in Melbourne house rents also remained at record levels over the June quarter with a median weekly asking rent of $390 – an increase of 2.6% over the year. Melbourne unit rents, however, increased by 1.4% over the June quarter to the record high of $370 – the same recorded over the June quarter 2014.

“Although rents have increased over the past year, Melbourne remains relatively affordable compared to other capital cities. It is interesting to see that rent for units has increased over the June quarter, despite record new inner-city construction and developments,” Wilson said.

Meanwhile, Brisbane house rents have recorded no increase over the past year, but unit rents are up by 1.4$ annually. House and unit rents in Adelaide remained flat over the June quarter, however the data indicates a slight increase in house rents of 1.4% over the year, and similarly an increase in annual unit rents of 1.8%

Canberra house rents remained steady over the June quarter and were also steady over the year. Similarly, Canberra unit rents were steady over the quarter but increased by 1.3% over the year. Perth and Darwin rents, however, continued to fall over June quarter, dropping 4.4% and 7.7% respectively.

Although the Domain Rental Report indicates rents have continued to increase or consolidate in most markets, Dr Andrew Wilson suggests that there are signs of easing of vacancy rates in some capitals over June.

“The data indicates that increased investor activity and construction may be offsetting the rising demand for rental properties. The demand is driven by solid migration levels and low first home buyer numbers,” he said.

More investor crackdown needed – IMF

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The crackdown on investor lending –which has seen many lenders increase interest rates and decrease LVRs on loans to investors – may need to be intensified, according to the International Monetary Fund (IMF).

In its concluding statement describing the preliminary findings at the end of an official staff visit to Australia, the IMF said that APRA should intensify its surveillance of investor lending if growth does not slow significantly in the second half of the year.

“APRA has appropriately been taking targeted and gradual action to address areas of risk in the housing market for some time. Banks, however, seem only to have responded more recently and the results are yet to be fully reflected in the lending data,” the IMF said.

“We expect APRA’s approach to succeed, but it may need to be intensified, for example, if investor lending and house price growth do not slow appreciably in the second half of the year.

“Such intensification could include requiring banks with fast-growing investor lending to hold more capital, raising risk weights on investor lending, and restricting the duration of interest-only loans.”

APRA may need to be particularly prudent; given the IMF also said the Reserve Bank should be prepared to drop interest rates further if the wider economy doesn’t pick up.

“A sizeable output gap, elevated unemployment, subdued inflation pressure, and an exchange rate still on the strong side, call for supportive aggregate demand policies.

“While monetary policy is already accommodative and may have lost some effectiveness, it should still stand ready to ease further should the recovery fall short of expectations and provided the financial stability risks remain contained.”

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CURRENT INTEREST RATES STARTING FROM...
Variable

3.65% pa

(3.67% cpr)
Fixed

3.72% pa

(3.81% cpr)
Lo Doc

5.59%pa

(5.62%cpr)
Construction

4.23% pa

(4.31% cpr)