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House prices tipped to fall as market cools off
Kylar Loussikian
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Journalist
Sydney
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Source: TheAustralian
[b]Three investment banking heavyweights have warned of uncertain times ahead for the housing sector, with Macquarie analysts forecasting a fall in dwelling prices from the start of next year before they start recovering in mid-2017.[/b]
Downward pressure on credit growth and the resulting lower auction clearance rates and house prices would present “multiple threats” to consumer spending, Macquarie said.
Its warning comes as Credit Suisse wrote to clients that the deterioration in home-buying conditions had been “particularly sharp in NSW”.
Credit Suisse analysts declared the residential housing sector was becoming riskier than equities and would be a worse performer than bonds as the supply of new homes increased but buyer sentiment soured.
“Macroprudential tightening, out-of-cycle rate hikes on investor mortgages and weakness in Chinese buying are having a clear impact on sentiment and demand,” they said. “It is interesting to note that the correlation between sentiment and home sales is particularly strong in NSW but much looser in other states.
“The strength of the correlation, and the extreme negativity of NSW home-buying sentiment, is a worrisome development.”
It was the first time since the mid-2000s that housing risk had eclipsed equity risk, Credit Suisse analysts wrote.
Some banks have backed away on lending for property investment and development.
Westpac will be the least affected by a housing market downturn, according to Macquarie, followed by NAB and the Commonwealth Bank.
Mark Whelan, ANZ’s head of Australia, said the bank had lowered lending to developers in areas with strong supply to avoid risks from a cooling property market. That followed August reports that the Commonwealth Bank had tightened lending standards to developers.
Housing starts, at 200,000 for the 12 months to the end of March, are expected to fall to 161,000 for the calendar year and to 150,000 in the year to June 2017.
Goldman Sachs analysts wrote: “Looking through the usual month-to-month volatility, and given our broader views on the housing market, we would be surprised if this momentum did not fade in the coming months.”
Credit Suisse said the outlook would put pressure on building materials firms, downgrading CSR and Brickworks to underperform. Both Credit Suisse and Macquarie forecast rate cuts, as early as next month.
“From a policy perspective, the RBA and the Australian Prudential Regulatory Authority welcome a cooling in the housing market, and a greater private sector appreciation of the risks from excessive housing leverage,” Credit Suisse wrote.
“But the RBA would not like to see a sharp fall in NSW housing demand, as the sentiment indicators are suggesting, as this would severely inhibit growth rebalancing efforts, and indeed, create systemic risks.”
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House prices to continue to rise in 2016: Stockland's Mark Steinert
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/1/z/0/u/image.related.afrArticleLead.620x350.gk7ipo.png/1444777444706.jpg[/img]Stockland CEO Mark Steinert believes house prices will continue to rise in 2016 Harrison Saragossi
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by Larry Schlesinger
Stockland boss Mark Steinert expects house prices to continue to rise by about 3 to 5 per cent next year, rejecting forecasts by Macquarie of a 7.5 per slump in prices starting next year and running until mid-2017.
"There has been quite a lot of talk going on for quite a long time now about the imminent downturn in housing, but no one has mentioned that it hasn't actually eventuated," said Mr Steinert at a Property Council lunch in Melbourne on Tuesday.
"The reality is the economy in Australia is growing at a moderate level of around 2.5 per cent. We have a low Australian dollar, continued population growth (albeit at a slower rate) and metro housing markets that are generally under supplied. These are not the pre-conditions for some sort of general correction in housing," he said.
In making its forecast of a 7.5 per cent correction in house prices, Macquarie said slowing population growth meant there would not be sufficient take-up of new housing supply, currently coming on to the market at a record rate of 220,000 new dwellings per year.
In a note released on Tuesday, AMP Capital chief economist Shane Oliver forecast a 5 to 10 per cent correction in house prices from 2017 centred around Sydney and Melbourne when interest rates start rising, but with house prices to rise a further 5 per cent in 2016.
HOUSING EXPENSIVE
In his note, Mr Oliver said housing was now "expensive on all metrics and offers very low income (rental) yields compared to all other assets except bank deposits and government bonds".
Mr Steinert said he was more cautious about the Sydney housing market – where apartments are twice the cost of those in Melbourne. He said there were pockets of oversupply, but disagreed there would be a nationwide correction in house prices.
"Where you are seeing high density and high volumes, that is where you can get some supply issues, but the market overall continues to be reasonably well positioned," he said.
Mr Steinert was joined on the panel by Christine Phillips, head of asset management at AustralianSuper, which has more than $6 billion invested in Australian wholesale property funds and another $2.8 billion in direct property including prime US malls and office buildings and in London's 27-hectare Kings Cross mixed-use project.
Ms Phillips said the sheer weight of capital being poured into Australian commercial property was impacting on pricing and yields, meaning buyers had to make questionable assumptions about rent and core tenancy demand to justify their acquisitions.
"I see a potential unwinding of those assumptions, particularly in the office market," she said. In an office market like Sydney, more supply has been mooted for a market that arguably does not need any more, she said.
Ms Phillips said growth opportunities were better in offshore markets. "We have mandates to invest in UK office and retail property, US office, retail and multi-family accommodation and to invest in Europe," she said. "Access to these types of assets is just not there in Australia."
Mr Steinert said Stockland had reduced its office portfolio from $3.5 billion to just $700 million, but that other institutions were justifying acquisitions on the basis of a sub-7 per cent total return compared with low 10-year bond rates.
"We believe long-term bond rates will normalise to around four per cent, but you have deals on cap rates of 4.5 per cent."
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Housing starts hit a record 212,000 in year to June but are likely to have peaked
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/8/o/y/7/image.related.afrArticleLead.620x350.gk8kny.png/1444800722081.jpg[/img]The record housing starts in the year to June mark the probable likely peak in the current house-building cycle, as the supply of new apartments coming on to the market and weaker-than-expected population growth slows demand. Robert Shakespeare
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by Michael Bleby
New housing starts rose to a record 211,976 in the year to June, pushed by apartment construction that has doubled in volume over the past decade.
Total dwelling starts rose 17 per cent from a year earlier in seasonally adjusted terms and they were up 3.2 per cent on the 205,434 new homes begun in the 12 months to March.
The figure, just 24 dwellings less than the 212,000 Citi analyst Ross Barrows predictedlast week, marks the probable peak in the current house-building cycle – Australia's biggest ever – as supply of new apartments coming on to the market and weaker-than-expected population growth slows demand.
Macquarie Bank analyst James McIntyre said on Monday housing starts were likely to tumble to 161,000 in the current year.
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"The combination of strong supply and weak population growth means that the housing market has a period of adjustment ahead of it," Mr McIntyre wrote in the report called Aussie Macro Outlook: Population & Housing – Perishable.
New units and apartment starts jumped 28 per cent to 95,917 in the year, also a record and double the 46,482 figure of 2006.
Starts of detached houses rose 8.7 per cent year on year to 113,920, the highest figure since 2010, when starts totalled 115,860.
The industry is divided at a pivotal point in the cycle. Some expect a slowdown in approvals.
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"An orderly decline in commencements in 2015-16 remains the most likely outcome," Housing Industry Association chief economist Harley Dale said. "However, the credit rationing aimed at curbing investor activity is having a broad impact and risks generating a sharper fall."
In contrast, Master Builders Australia expects the market to get stronger.
"The residential building upturn has further to run and claims to the contrary are jumping the gun," MBA chief economist Peter Jones said.
"Master Builders expects real growth of two-and-a-half per cent in residential building in 2015-16."
The aggregate total is likely to slow, but that masks regional variations. Total housing starts in NSW totalled a seasonally adjusted 52,346 in the year to June, but that was still below the peak of 52,647 it touched 20 years ago – when the population was smaller – in the 12 months to March 1995.
Victoria reached a new high of 65,235, driven by a 49 per cent jump in apartment starts. Queensland reached an annual 43,051 starts, the highest since September 2008.
Separate figures showed that the value of total construction work done in the year to June fell 5.8 per cent to $198.8 billion from a year earlier, despite a 1.7 per cent quarter-on-quarter increase in June – the first rise in more than a year.
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Wave of Asian investment floods property market
Samantha Hutchinson
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Property Writer
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More than 30 per cent of Sydney’s office property by value is now owned by foreigner investors.Source: Supplied
[b]Australia is attracting almost twice the amount of Asian investment as Europe, with a mounting wave of Singaporean interest boosting inflows to $22 billion.[/b]
Data compiled by property agency Knight Frank has revealed Australia is now the third-biggest region for Asian investment, behind the US and Britain.
Asian investors tipped more than $22bn into Australian core property in the past two years, compared to Europe’s total of just above $12.2bn.
Singapore displayed the biggest appetite for Australian property, spending about $9.5bn, followed by Chinese investors ($8.7bn) and then Malaysia, Hong Kong, South Korea and down to Japan, which invested $3.3bn.
Agents are bullish on the outlook, arguing that investment from other parts of Asia is growing even as China is experiencing slower growth and more testing economic conditions.
“Regardless of whether Chinese investment eventually cools, there is significant potential for increased capital to flow into Australia from places such as Japan, Taiwan and also the US given the lower Australian dollar,” Knight Frank institutional sales head James Parry said.
“Quality institutional assets will continue to hold a place for offshore capital investment.”
The investment thesis for local property is clear, with Melbourne and Sydney still ranked within the top 10 cities globally for core office yields, with deals in both cities transacting on yields between 5.85 per cent and 5.71 per cent, compared with 3.5 per cent in London and Paris, and 2.9 per cent in Hong Kong.
Investors had shown an increasing willingness to take on more risk to achieve a higher yield, Mr Parry said, and were showing an openness to compromise either by taking on more risk than they originally planned, or considering alternate locations to what they originally intended.
“Two or three years ago, offshore investors were focused primarily on the Sydney and Melbourne office markets but increasingly, as prices go up and quality stock remains low in these cities, appetite is expanding to other major cities such as Brisbane, Perth, Canberra and Adelaide,” he said. “We are also seeing a trend of selling suburban assets to offshore buyers, who would previously have only been interested in CBD assets.”
The proportion of offshore ownership in Australian property has grown considerably in the past five years, according to research director Matt Whitby. More than 30 per cent of Sydney’s office property by value is now owned by foreigner investors.
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Property owners change strategy as higher rates cool investing
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/8/k/0/c/image.related.afrArticleLead.620x350.gk8b78.png/1444879105210.jpg[/img]Households upgrading into a home in the same area are going to have to spend big thanks to higher prices.
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by Duncan Hughes
Rising costs for investment borrowing mean more property owners are renovating, rebuilding or finding a new home rather than adding to their property portfolio, say property specialists involved in purchasing, financing and renovations.
Lenders are competing hard to make up for the reduction in property investors by encouraging owner-occupiers with lower rates, discounts and reduced set-up fees, mortgage brokers say.
Industry veterans, such as Christopher Koren, a director of buyers' advocate Morrell & Koren, claim a dearth of alternative properties in many suburbs is also encouraging many to consider strategies other than moving, such as major renovations.
"The difficulty is finding something to upgrade into at the right price," Mr Koren says.
For example, a small house or apartment in popular inner suburbs such as Melbourne's bayside South Yarra or Albert Park, is likely to sell for about $2 million. But a family house in the same area is likely to cost about $4.5 million.
"Those planning to move and stay in the same area are going to have to spend big, big, big," he warns.
In addition, the cost of selling a house, advertising, fees, sales tax and moving costs are likely to add up to about 7 to 10 per cent of the purchase price to the final bill.
Rich Harvey, managing director of propertybuyer.com.au, another buyers' agency, recommends "future proofing", which means buying a property that can be easily adapted to suit a family whose space requirements are likely to be continually changing over 15 to 20 years.
According to Mortgage Choice, a national network of mortgage brokers, the percentage of investor mortgages has dropped from more than one-third to about 29 per cent in the past nine months.
AMP Capital chief economist Shane Oliver agrees that investor lending is slowing and auction clearance rates falling.
This is because lenders have lowered loan-to-valuation ratios, which means buyers need a bigger deposit. They've also increased rates for property investors, removed negative gearing when calculating borrowing power, and introduced tougher scrutiny of borrowers' other commitments when considering overall borrowing capacity.
"Lenders are still hungry for business," says Jessica Darnbrough, head of corporate affairs at Mortgage Choice. "They are pushing owner-occupied incentives. Because of this we will continue to see more home-owner upgrading."
That means renovations, rebuilds or upgrading to another address.
But each strategy has its own mix of potential financial and logistical headaches.
For example, someone who decides to upgrade will discover it's rare for households to sell their home just as they find an alternative, or vice versa, says Jennifer Timm, consumer manager for ME Bank.
"Unless you can juggle settlement times, you – and the family – could be homeless," Ms Timm says. "Even if you – and the family – are able to couch-surf at a mate's place for a while, you could face two sets of furniture removal and storage fees."
Finding the "dream" house could increase pressure to sell the current home, maybe at a price below expectations, possibly adding to funding pressures.
Alternatively, selling first and then looking for a new house could mean you pay more if markets are rising.
The other option might be to use the estimated $200,000 in transaction costs for a typical sale and purchase of a $2 million property for renovations or rebuilding.
A recent survey by Westpac Bank reveals a sharp fall in consumers' confidence about whether it is a good time to buy a house or apartment.
A record $2 billion is being annually spent on renovations, an increase of about 30 per cent in the past 10 years, according to the Australian Bureau of Statistics.
Those renovating or rebuilding can tap a range of different financing options, from top-up loans to lines of credit and specialist construction loans.
Topping up the mortgage allows the owner-occupier to use their property's existing equity. The loan size will depend on the equity and the lender may require a new property valuation, says Mortgage Choice.
Also, there may be a minimum amount you can borrow, and repayments could be stretched out over the term of the existing loan.
Alternatively, a personal loan, typically between $10,000 and $25,000, often has lower upfront fees and the house is not used as security. But interest rates are likely to be higher and the borrower will be required to prove ability to repay.
Constructions loans enable the money to be drawn down as the extension, or dwelling, is built.
Another popular form of funding is a line of credit, secured with a mortgage on a residential property.
Conditions vary between lenders. Typically, funds up to a set limit can be withdrawn at any time and repayments can be made monthly or the balance paid in full.
LENDER DEALS
Lenders are prepared to negotiate better-than-advertised terms and conditions for owner-occupiers.
Lower rates and cheaper fees are some of the inducements being used by lenders to attract home buyers, says Christopher Foster-Ramsay, managing director of mortgage broker Capital Home Loans.
This will become increasingly important for the budget-conscious property buyer if other lenders follow Westpac's decision this week to increase lending rates for owner-occupiers. Westpac raised rates by 20 basis points.
Mr Foster-Ramsay says while lenders are sticking to their published rates for investor-only loans, they are providing some flexibility for owner-occupiers (which could knock a couple of percentage points off the loan rate) or cutting servicing costs.
The four major banks, Macquarie, ING Direct and AMP have promotional deals.
For example, ING Direct's "special promo" for principal-and-interest owner-occupiers for a $500,000 loan over 30 years includes a 3.99 per cent rate, offset account, no minimum redraw, additional repayments at any time, $220 application fee, $199 annual fee and total set-up costs of $220.
AMP's "essential home loan" for owner-occupiers for a similar amount and term offers the same rate and comparable banking services. The application fees are slightly higher and discharge fees lower.
Commonwealth Bank of Australia's owner-occupied "special" has a 4.19 per cent rate for three years and 4.99 per cent for the remaining 27 years. Redraws (withdrawing additional payments) cost $50 each time. There is a $200 application and $300 discharge fee but no monthly or annual fees.
Those considering refinancing need to consider all fees and charges. For example, there might be exit fees from existing loans This does not include the "break cost", which can be imposed for breaking a fixed rate.
Increasing the size of a loan through refinancing can also attract additional stamp duty.
Ask about any upfront fees, including loan application, valuation and settlement costs.
Those borrowing more than 80 per cent of a house's value might have to pay lenders' mortgage insurance.
Owner-occupiers are more attractive to lenders because they are generally keen to pay down their borrowings and more likely to use other banking services, such as insurance and credit cards.
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New supply takes heat out of Sydney land price growth
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/h/y/a/x/y/image.related.afrArticleLead.620x350.gk9ure.png/1438652423604.jpg[/img]Land for sale in Kellyville North in Sydney's western suburbs where price growth has stalled. Rob Homer
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by Larry Schlesinger
As price growth slows in Sydney's established housing market, the heat may also be coming out of the pricing of new land subdivisions with the latest HIA-CoreLogic RP Data Residential Land Report showing median lot prices unchanged at $350,000 over the June quarter.
This was the first time since September last year that Sydney lot prices have not risen sharply from one quarter to the next – surges which have pushed up Sydney lot prices 18.6 per cent over the 12 months to June and created new million dollar median house price suburbs in the outer west.
Nationally, the number of sales rose, 17.6 per cent over the quarter and the best result since the September 2014 quarter. But the median lot price was unchanged at $217,000.
On Tuesday, Reserve Bank deputy governor Philip Lowe told a business conference the rate of price growth in Sydney appeared to have slowed a little t. He said this was not surprising because "when the supply of housing increases, the rate of house growth eventually responds".
"I think we are on the cusp of seeing the supply response finally kick in, moderating price growth," Mr Lowe said.
HIA economist Diwa Hopkins said an increase in lot supply in Sydney had taken the pressure off pricing. But she said it was too early to say whether Sydney lot prices had peaked.
According to the HIA-CoreLogic RP Data report, sales of Sydney lots rose 24 per cent over the June quarter to 1222, but were still 14 per cent lower than the 1400 sales achieved over the same period last year.
MELBOURNE SURGES
By contrast, Melbourne lot prices surged 5.2 per cent over the quarter to a new record median lot price of $228,000, with lot sales rising almost 20 per cent to 2000, prompting developers like Stockland and Villawood to snap up new greenfield land parcels.
Another developer Five Squared Property Group said it had sold 80 per cent of land released at Bloom, its Clyde North residential community in the south east. "We're seeing a spillover of buyers, particularly young families, who have been priced out of established suburbs," said Five Squared marketing director, Ashley Lewis.
The Brisbane land market was also buoyant over the quarter with quarterly lot sales totalling more than 1500, the best result since September 2014, and lot prices up 2.2 per cent to a new high of $230,000.
In Perth, where the established housing market is weakening amid a wider economic downturn, land prices were relatively resilient, down 0.7 per cent to $268,000 with sales volumes rising to about 2500 lots.
Lot prices fell by five per cent or more in the more volatile Adelaide ($195,000) and Hobart markets ($134,000).
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Twilight of the house price boom
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/a/n/e/6/image.related.afrArticleLead.620x350.gk9e21.png/1444962112896.jpg[/img]Most expect the turbo-charged double-digit annual price growth seen in Sydney and Melbourne over the past few years to ease. Michele Mossop
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by Mark Mulligan
One-fifth of 1 percentage point might not sound like much. However, Westpac's surprise announcement this week that it would slug mortgage borrowers an additional 20 basis points represents so much more than an extra $40 or $50 a month on the average housing loan.
Coming in a week when a critical mass of investment banks and equity analysts had warned that a cooling property market imperiled Australia's vital re-balancing away from mining-related investment, Westpac's move is a sign that the fundamentals are shifting for house prices.
"Home buying conditions have deteriorated sharply," equity analysts Damien Boey and Hasan Tevfik wrote in note to clients.
"Housing is no longer the safe-haven asset relative to equities," they said.
Not all agree that prices will drop; most simply expect the turbo-charged double-digit annual price growth seen in Sydney and Melbourne over the past few years to ease.
"Nationwide price falls are unlikely until the RBA starts to raise interest rates and this is unlikely before 2017," said AMP Capital's head of investment strategy and chief economist, Shane Oliver.
"And, then, in the absence of a recession or rapid interest rate hikes, price falls are more likely to be 5 per cent to 10 per cent, as was seen in the 2009 and 2011 down cycles, than anything worse.
"In fact, the cooling in investor demand in Sydney and Melbourne are likely to provide greater flexibility for the RBA to cut interest rates again."
The Reserve Bank of Australia has long been concerned that its reduction this year of the cash rate to a record-low 2 per cent would overstimulate already-overheated residential property markets in Sydney and Melbourne. Working with the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, it addressed its main concern - the rising proportion of loans to buy-to-let and buy-to-sell investors - by capping growth rates in this market segment and making it more expensive to borrow for this type of venture.
Added to tougher rules on how much capital banks have to hold on their balance sheets against their home lending portfolios, the RBA-APRA-ASIC offensive was designed to both fortify lenders against a systemic meltdown if mortgage arrears started to climb, and take some of the heat out of the the riskier end of the housing market.
Recent credit data and home auction rates suggest this is working. New investors are paying between 1 and 1.2 percentage points more for their home loans than before the different macro-prudential measures were announced, according to calculations by Morgan Stanley. A fall-off in demand from cashed-up foreign buyers, mainly because of the slowdown in China, is also cooling the investor segment, according to Credit Suisse's Damien Boey.
Compliance or commercial decision?
Westpac's decision to make loans to own-occupiers more expensive as well, while dressed up as regulatory compliance, is designed to protect its profit margins against the inevitable slowdown in mortgage demand. Most commentators agree that some, if not all, of the other big three lenders will follow suit.
Moreover, this regulatory crackdown and mortgage repricing is working at a time when potential owner-occupiers - the good guys in this movie - are also holding back because house prices in Australia's two biggest cities have risen out of reach and they feel these are about to plateau or come down. This, in turn, could eventually lead to oversupply, which would put further downward pressure on prices.
Households are also being squeezed by falling real incomes and rattled by an unemployment rate that has not been below 6 per cent since May last year. Australian households are also among the most indebted in the world, with total average liabilities worth 160 per cent of annual disposable income.
House prices, at an average 6.4 times household income, are also among the highest in the world, and compare with 3.6 times in the US and 4.7 times in the United Kingdom.
Annual growth in Sydney dwelling prices was last measured by market monitors CoreLogic at 16.7 per cent, which was down from a peak of 18.4 per cent in July. Growth in Melbourne prices is running at 14.2 per cent, the fastest pace in five years. The median house price in Sydney is currently $930,000, according to CoreLogic, and the median unit price, $673,750. In Melbourne, they'll set you back $600,000 and $482,000, respectively.
And then there's the demographics: nearly all the commentators warning of a quicker-than-expected housing downturn stress Australia's slowing rate of population growth, the product of both lower net immigration and ageing, as a factor.
The Australia Bureau of Statistics last month made much of the fact the country's rate of population growth is at the slowest for almost 10 years.
The cost of all this, according to Australian investment house Macquarie, is a 7.5 per cent correction in house prices after March next year.
The end of the housing boom comes at a difficult time for the wider economy. Though more a levelling-out than a bust, the so-called "wealth effect" impact of this is more important than the cold metrics.
Owners will feel less wealthy
If you're a recent buyer who has leveraged to the gunwales to purchase a property that is already losing value, you'll be skimping on discretionary items such as holidays, dining out, extra furniture or renovations until further notice.
RBA governor Glenn Stevens has himself referred to the wealth effect of rising house prices on several occasions during the current easing cycle, and may soon voice his concerns about the impact on consumer sentiment and behaviour of falling property values.
With rental yields lower than all assets except, perhaps, term deposits and government bonds, buy-to-let investors are currently relying on capital appreciation for their returns. Once this disappears, so does their interest in property.
One of the biggest take-outs from Westpac's mortgage rate decision, assuming the other three big lenders follow suit, is that the RBA is now freer to loosen monetary conditions if it sees fit.
"A key thing to stress here is that what the RBA thinks about is end borrowing and savings rates in the real economy," said Nomura's rates strategist for Australia, Andrew Ticehurst.
"It adjusts its cash rate to try to achieve desired borrowing and savings rates in the real world.
"Nomura's house view is for a 25 basis point RBA rate cut in February and not this year.
"But, particularly if the other three big lenders follow Westpac's lead, this would of course increase the possibility that the RBA could respond this year," he said.
What could actually force the RBA's hand is open to debate. Some economic pundits warn of the impact of any further cooling in China's economic growth, while others suggest the stubbornly high unemployment rate is the one to watch. Continued vacillation by the US Federal Reserve on when it may start lifting interest rates is also a consideration.
RBA rate cuts won't reignite housing
Boey of Credit Suisse says that even if the RBA responds to Westpac's rate rise by cutting official rates, the housing boom is unlikely to restart. "It will be much harder to generate a bounce in property interest this time from a few RBA rate cuts."
Goldman Sachs' bearish, but most times prophetic, economist for Australia, Tim Toohey, this week warned of another shadow about to darken Australia's economic door: severe drought.
The forecast is based on expectations of a particularly intense El Nino cycle and a positive phase in the so-called Indian Ocean Dipole. Combined, these add up to much lower than average rainfall, which could, according to Toohey, shave between 50 and 100 basis points off gross domestic product growth next calendar year.
"The combination of pre-emptive independent interest rate hikes by the banking system and the emergence of a new and significant threat to Australia's economic growth comes at a particularly uncomfortable time in Australia's economic cycle," Toohey wrote following the Westpac decision.
"Economic growth remains well below the RBA's downwardly revised measure of 'potential' and pressures are well contained.
"Moreover, declining commodity prices, weak income growth, sharp declines in investment expectations and a peaking in the contributions to economic growth from housing have long suggested that the risks to economic growth were skewed to the downside.
"The unexpected and large interest rate hike by the banking system could also be expected to result in a significant decline in consumer confidence heading into the crucial trading period for the retail sector," he said.
The RBA, which had wanted to clip the pace of property price growth in Sydney and Melbourne, might have been more careful of what it wished for.
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RBA sees signs of Sydney, Melbourne property markets cooling down
DateOctober 16, 2015 - 1:08PM
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Jonathan Shapiro
Senior Reporter
The Reserve Bank has once again flagged its concerns about a build up in risks in the property market, but it says tighter lending standards and $18 billion of new equity capital raised by the nation's largest lenders this year has made the system safer.
The RBA document released on Friday singled out property development in certain cities that will lead to oversupply of apartments and aggressive investment in commercial property by foreigners, even as tenancy rates are weak.
There are a "few tentative signs that sentiment may be turning" in Sydney and Melbourne's housing markets, the RBA said, one of several signs "that the banking system was better placed to manage the risk environment" than it was a year ago.
"While the housing market remains a long way from oversupply nationwide, some geographic areas appear to be reaching that point, particularly the inner-city areas of Melbourne and Brisbane."
The additional capital, which included $3.5 billion raised this week by Westpac, was "timely because banks are facing an environment of heightened risk in their portfolios," the central bank said in its semi-annual review of threats to the financial system.
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The RBA said banks had also become 'increasingly weary of lending to property developers in markets that look oversupplied". Photo: Nicholas Rider
The RBA noted that the banks had raised much of the capital required by regulators through a range of measures such as equity issuance, dividend reinvestment plans and assets but also noted that "at this point the major banks have not cut their dividend payments".
The big banks still have more work to do to meet new liquidity rules that will require them to issue longer term debt to match the profile of long-term home loans, it said.
"Despite the changes further lengthening of the banks' maturity profiles is likely to be necessary," to meet new regulatory requirements that come into effect in 2018.
The RBA also highlighted its angst that lending standards were weaker than they had initially thought after the Australian Prudential Regulation Authority found that lenders were more aggressive in their lending standards than they presented, prompting the prudential regulator to take action.
APRA's speed limit on investor lending was also working, with a strong relative growth in owner occupied loans in NSW and Victoria as borrowers resubmit their applications in the face of higher investment property loan rates.
The RBA said the subsequent "permanent" tightening of standards was important because "nominal housing price growth might be slower on average and periods of absolute price declines to more common – now that the transition to a low inflation, higher-debt state has been completed".
Risk in commercial property lending was once again highlighted by the RBA given its outsized role in previous financial crises.
"The divergence between commercial property valuations and rents has widened further, with strong local and foreign investor interest for new and existing office buildings".
The RBA said banks had also become 'increasingly weary of lending to property developers in markets that look oversupplied".
"Speculative demand could lead to an excess increase in construction activity and future supply overhang," the RBA said, identifying inner city Melbourne and Brisbane as particularly vulnerable.
Any downturn in apartment market conditions would weigh directly on developer's equity in projects under way and would increase the risk of off-the-plan sales falling through, the RBA said.
The key, the RBA said, "was to make sure lending standards at both Australian and foreign owned banks does not weaken from here"
Bank lending to the resource sector had also increased rapidly in recent years, the RBA said, while miners have also headed to the capital markets to raise debt, which it said was a low but rising risk for the banks.
And the RBA is still pinning its hopes on a rise in US interest rates "in the period ahead".
"Although investors appear to be more discerning about risk, search for yield behaviour continues to be supported by accommodative monetary policy and is evident in a range of asset markets where prices remain elevated," it said.
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Rozelle, Toorak top best places to invest in apartments
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[img=620x0]http://www.afr.com/content/dam/images/g/j/i/p/6/f/image.related.afrArticleLead.620x350.gkaz9y.png/1444980593997.jpg[/img]Apartments in Rozelle and Toorak are a good deal. Jessica Shapiro
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by Su-Lin Tan
Sydney's inner west suburb of Rozelle and Melbourne's Toorak, while more well-known for mansions and terraced houses, have topped the list for the best value in apartment investments.
Investors looking for apartments which have capital growth and rising rents include Rozelle, Toorak and Burpengary in Brisbane, according to Domain Group's senior economist Dr Andrew Wilson.
Those looking for strong rental yields should head to the western suburbs in Sydney, such as Mount Druitt or Auburn, Beenleigh and Kangaroo Point in Brisbane or Broadmeadows and Cranbourne in Melbourne.
"Rozelle is not a very apartment suburb. Most apartments are in resort-style complexes with great water views and high strata fees," Sydney inner west property agent Cobden & Hayson's Matt Hayson said.
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"But vacancy in these apartments is low and you can lease out a two-bedroom for $900 a week."
The list shows suburbs in the major capital cities with rising "asking rents" in the six-month period to September 2015.
Suburbs in Sydney that exceed the average yield of 4 per cent make the list. In Melbourne, the criteria is 4.5 per cent and in Brisbane, 5 per cent.
It also compares capital values of rental apartments between the six month period to September in 2014 and 2015.
"Rents are growing stronger in outer Sydney particularly in the west because of cheaper housing and higher affordability. There's also a shortage of rental properties out there," Dr Wilson said.
"The capital growth for these outer areas come from central Sydney tailwinds."
While Sydney is the strongest property market nationally - dwelling values in Sydney have increased nearly 20 per cent in the past year - apartment investors will find the best values in Melbourne.
Units with growth and rising rents are closer to the CBD and amenities like schools compared to Sydney. Suburbs include Ringwood, Mt Waverley and Boxhill.
Toorak was the surprising entrant on the list for Melbourne.
"People forget that Toorak has a lot of older rental stock," Dr Wilson said.
Investors should buy in Brisbane CBD, West End and Fortitude Valley if they want both good yields and growth in Brisbane.
But while Brisbane and Melbourne are more affordable, there is a fear of an oversupply of apartments in the two cities, which could drag apartment values down in the short term.
"While the housing market remains a long way from oversupply nationwide, some geographic areas appear to be reaching that point, particularly the inner-city areas of Melbourne and Brisbane," the Reserve Bank of Australia said in its latest Financial Stability Review.
"Apartment approvals remain at very high levels in these areas, even though these rental markets already look soft; apartment prices have been little changed in the past year, rental vacancy rates are relatively high and growth in rents is subdued."
Oversupply could pose a problem for investors with a short or medium term view in the two cities. Long term hold produces results, Dr Wilson said.
Over a 20-year period, apartments grew over 300 per cent in Sydney, Melbourne and Perth. In Brisbane and Adelaide, it was over 200 per cent.
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In a time of low interest rates, property froth will settle gently
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[img=620x0]http://www.afr.com/content/dam/images/1/3/b/o/9/9/image.related.afrArticleLead.620x350.gkalxf.png/1444983365632.jpg[/img]Mark Steinert, Stockland chief executive, rejects the gloomy outlook. Louie Douvis
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by Robert Harley
Property watchers are about to experience something they have not seen for decades – a housing boom brought to heel in an era of low interest rates.
The froth will subside gently. Only in pockets of marked oversupply, or economically depressed regions with high unemployment, will houses prices really take a hit.
Of course, individual home sellers may have a different experience.
The result of an auction with four desperate bidders, which is just the sort of auction that occurred in Sydney earlier this year, will be very different to the more traditional auction with two bidders, one of whom lacks commitment. The difference can be tens of thousands of dollars.
Overall, money, its price and its availability, has always been the big lever for housing.
And the lever is still working. At low rates, small movements make big differences. This year's changes to investor lending, with a rise in interest rates and tighter standards, has had a significant impact.
(The Reserve Bank is more cautious noting only "tentative signs that investor demand has started to cool," in the Financial Stability Review released on Friday.)
Westpac's 20 basis points rise announced this week will also have an impact, initially as a reminder that homeowners and investors can be exposed to out of cycle rate rises. Worryingly, it comes at a time when the economy is weakening.
The further impact will depend on what the Reserve Bank decides with the cash rate, and what the other mortgage providers do in response. If the Reserve Bank cuts the cash rate, and the other banks raise their mortgage rates, the impact, net net, could be zero.
Which returns to the initial question. How does a boom come to an end when interest rates are at record lows? The answer is in affordability, or more precisely the lack of it, and a big burst of new supply.
(On supply, more apartments will be finished in Australia in 2016 and 2017 than ever before.)
The housing cycle does vary around the country. Sydney looks to have peaked and Melbourne will follow. South-east Queensland is beginning to gain momentum whilst Perth is in downturn.
Lend Lease chief executive, Steve McCann, acknowledged at his Investor Day on Thursday that the peak was near.
"We've seen no slowdown in demand and no retreat in prices yet. But are we somewhere near the top? We have been saying we are for a while," he said.
Mr McCann did address concerns about the risks to apartment developers of over-supply, over- exposure to investors, and over-selling to Chinese buyers. The concerns, expressed by the Reserve Bank on Friday, have impacted on the Lend Lease share price.
He said the concerns about China were overstated. And he questioned the worries about buyers not settling on apartment pre-sales, which, if it did happen widely, would affect prices, developers and ultimately the banks.
"If you look at the headline data it's hard to get particularly concerned about the next three years of settlement risk," he said. "You can assume pre-sales have been achieved at reasonably attractive margins, comfortably ahead of our target margins."
"Having said that, going forward, decisions on releases of new product is a different decision to what it was two years ago."
Mark Steinert, the chief executive of leading housing developer Stockland, and a former global head of research at UBS, is one who rejects the forecasts of looming house price decline and home building collapse.
"There has been quite a lot of talk going on for quite a long time now about the imminent downturn in housing, but no one has mentioned that it hasn't actually eventuated," said Mr Steinert at a Property Council lunch in Melbourne on Tuesday.
"The reality is the economy in Australia is growing at a moderate level of around 2.5 per cent. We have a low Australian dollar, continued population growth (albeit at a slower rate) and metro housing markets that are generally under supplied. These are not the pre-conditions for some sort of general correction in housing," he said.
Mr Steinert did stress the importance of affordability, expressing caution about pricing in Sydney where apartments are twice the cost of those in Melbourne. And he pointed to pockets of oversupply.
But he dismissed concerns about a nationwide correction in house prices.
"Where you are seeing high density and high volumes, that is where you can get some supply issues, but the market overall continues to be reasonably well positioned," he said.
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