Weekly Economic Briefing: What do recent trends in housing credit mean for house prices?

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

What do recent trends in housing credit mean for house prices?

The RBA’s lowering of interest rates, which commenced in late 2011, ushered in a renewed boom in both housing credit and in Australia’s housing prices.

In recent years, the extent of that surge in housing credit became an increasing concern for financial regulators, given the housing credit risks perceived to be building in the financial system and Australia’s already high level of housing debt.

The Australian Prudential Regulation Authority (APRA) eventually set a 10% ‘speed limit’ on investor loan growth in late 2014 and implemented a range of additional macro-prudential measures, including those to rein in interest-only lending in early 2017.

It is in that context that APRA Chairman Wayne Byres delivered a speech last week on housing lending standards in Australia. Byres noted that APRA has been focused for some time on strengthening mortgage lending standards. This has now resulted in a reduction in higher risk lending, which can be seen across a number of different metrics.

For example, the share of interest-only new housing loans by banks has dropped from a peak of 46% in June 2015 to only 16% in March 2018 (see Chart 1). Interest-only lending at high loan-to-valuation ratios (LVRs) and at long terms has also declined significantly, as has the proportion of new lending at high LVRs, for both owner-occupiers and investors.

 

Chart 1: Banks’ new interest only loans (% of total new housing loans)

Source: APRA, Deloitte Access Economics

 

So, what impact has this had on the flow of new credit for housing?

Byres notes that it can be difficult to distinguish between the impact of APRA’s actions, which primarily influence the supply of credit, and a range of other factors primarily influencing the demand for credit, such as affordability constraints, and changes to tax policy and foreign investment rules.

ABS housing finance data released last week showed that new lending to investors continued to slow up to May (see Chart 2). Indeed, the level of new investor lending is now down by almost a third from its peak in mid-2015. In contrast, and despite some softening, new lending to owner occupiers has held up relatively well. The end result is that the composition of new lending for housing has shifted from investors to owner-occupiers. And while total new lending for housing has fallen, it has held up considerably better than the trends seen for investor lending alone.

 

Chart 2: New home loans to owner occupiers and investors

Source: ABS, Deloitte Access Economics

 

Byres suggested in his speech that the “heavy lifting” on lending standards has now largely been done, with any tightening in lending standards from here on expected to be at the margin. Even so, the big banks are now being more careful with their credit in the wake of the matters raised, and publicity driven, by the Royal Commission. Whereas previously the brakes were being put on credit by APRA and its focus on interest-only lending, banks are now applying the brakes themselves.

What does this mean for housing prices? After very strong growth around the country, but particularly in Sydney and Melbourne, conditions in the housing market have cooled substantially. And the latest data indicate that subdued conditions are continuing. CoreLogic data for June, for example, showed that national dwelling prices fell 0.8% over the year, with nine consecutive month-on-month falls in national home values. Sydney prices have fallen by 4.5% over the past 12 months, and Melbourne price growth has slowed to just 1.0% over the past year, down from 13.7% a year earlier.

Auction clearance rates – a good leading indicator of house price growth – have also trended down in recent months across Australia. Sydney’s auction clearance rate has fallen to around 50% from 69% a year ago, while Melbourne is down to around 57% from 72%.

With affordability already stretched in markets such as Sydney and Melbourne, ongoing restrained housing credit growth suggests a subdued outlook for housing prices, at least in the near term.

For more information on the Australian brief, please contact co-authors David Rumbens and Neal Sarma.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

  • The behaviour of the equity market provides useful signals about where investors think the global economy is heading. As we move into the second half of 2018 here’s our mid-year assessment of what equity markets are telling us.
  • The biggest change is in investors’ attitude to risk. In 2016 and 2017 investors made money investing in riskier assets. Emerging market equities soared and as confidence spread about the Europe’s recovery, so, too, did euro area markets. Caution has returned this year and outside the US the returns on equities have been meagre to negative. Globally equities are down 8% from their January peak.
  • US stocks have done better, returning 6% this year. The star performers have been tech and retail, up 14% and 20% respectively, supported by robust consumer demand. (Checking the numbers, I am kicking myself for not buying Netflix stock at the time I subscribed to their service. Shares have doubled in value this year and have risen ten-fold in the last five years).
  • Still, the overall performance of the US equity market, up 6% this year, looks paltry against the 22% return in 2017, especially given that the American economy is enjoying a tax-cut fuelled boom and profits are soaring (in the first quarter corporate profits rose 24%).
  • US equities have faced headwinds from the Federal Reserve’s tightening of monetary policy and the imposition of import tariffs by the Trump Administration. Ironically the effects have been felt more outside the US than within it.
  • Higher rates have led to an outflow of capital from emerging markets in search of higher returns in the US. This has put downward pressure on emerging market currencies and equities. For China, with its high levels of export to the US, these effects have been reinforced by growing trade tensions. Renminbi-denominated equities on the Shanghai stock exchange have fallen 14% so far this year.
  • Caterpillar and Komatsu, two major manufacturers of construction and earth moving machinery, benefitted from the bounce in emerging market and global growth in 2016 and 2017. But this year their shares have lost ground as uncertainties about prospects for emerging markets have mounted.
  • The threat of protectionism has also weighed on Germany’s powerful export sector, with German equities 10% down from their January peak. Shares in Daimler, manufacturers of Mercedes, and Volkswagen, have lost a quarter of their value over the same time.
  • Bank shares, one of the largest equity sectors, have suffered from the prospect of monetary tightening. Since they tend to borrow at short rates and lend long, rising interest rates squeeze bank margins. Bank shares have underperformed wider equity markets this year, most strikingly in Germany where they are down by almost 40% from January’s peak.
  • If this all sounds rather gloomy I would emphasise that we’re looking here at returns this year. If you glance at a five or ten year chart, things look great. This year’s sell off from the January peak is trivial in comparison with the major corrections of the early 2000s and 2008/09. And, of course, some sectors are going up. The oil majors are generally doing well as a result of high oil prices. And more defensive sectors, those investors turn to when things are more uncertain, including health care, utilities, pharmaceuticals and biotechnology, have been outperforming.
  • Perhaps surprisingly, the UK, where growth has slowed and Brexit uncertainties reign, has seen a marginally better stock market performance this year than the euro area. This has a lot to do with the falling value of the pound, which raises reported earnings for UK based multinationals with dollar income. But the gains for UK equities are hardly exciting. So far this year the FTSE 100 is up 2.4%.
  • In currency markets the main story has been the rise of the dollar, buoyed by strong US growth and monetary tightening. Emerging market currencies have been the big casualties. So far this year the rand, rouble and Indian rupee are down about 8% against the dollar, the Brazilian real has fallen by 15% and the Turkish lira is off by 20%.
  • In 2017 it was almost hard not to make money in equity markets. The price of pretty much everything rose. It’s been a different story this year. Rising US interest rates and an escalating tide of tariffs make for a more challenging environment for equities – and for global growth.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.6% at 7,661.

International economic briefing by Ian Stewart

Economics and business

  • In a significant escalation of trade tensions between China and the US, the US initiated a process for imposing tariffs on an additional $200bn of imports from China
  • The Chinese stockpiling of US soybeans, oil and other US exports before the imposition of tariffs is likely to bolster US growth in the second quarter
  • China’s monthly trade surplus with the US hit a record high in June
  • Brent crude oil suffered its worst one-day decline in a year, falling 6.9% to $73/b as investors fear trade tensions will hurt demand
  • Electric-vehicle manufacturer Tesla raised vehicle prices in China by between Rmb150,000 to Rmb250,000 ($22,600 to $37,600) depending on the model as a result of the tariffs imposed on imports
  • US inflation hit 2.9% in June, its highest level since 2012
  • The European Central Bank said the euro area economy is strong enough to withstand the gradual withdrawal of quantitative easing
  • Euro area house prices rose at 4.5%, their fastest pace since before the financial crisis in the year to March
  • President Trump accused Germany of being ‘a captive of Russia’ because of its dependence on Moscow’s energy supplies
  • Robert Mueller, the special counsel investigating Russian meddling in the 2016 US election, charged 12 Russian intelligence officers with hacking Hillary Clinton’s campaign
  • President Trump pressed NATO allies to increase military spending to 4% of GDP
  • Facebook was hit with a £500,000 fine from UK regulators, the first regarding the Cambridge Analytica data scandal
  • The Bank of England should be given new powers to limit mortgage approvals in order to prevent house prices from rising for the next five years, according to the Institute for Public Policy Research
  • More than 700,000 expat workers have left Saudi Arabia over the last year, reflecting a slowdown in the economy and a drive to make the country less reliant on foreign labour
  • The Office for National Statistics plan to use online prices from websites in the UK’s official inflation statistics
  • Broadcasting giant Sky plc agreed to an improved £24.5bn takeover bid from 21st Century Fox
  • UK discount retailer Poundworld will close 25 stores resulting in 242 job losses

Brexit and European politics

  • The UK government unveiled its Brexit white paper outlining its vision for a future relationship between the UK and the EU
  • Foreign Secretary Boris Johnson and Brexit Secretary David Davis resigned from the government, in opposition to the government’s new Brexit plan
  • President Trump said Theresa May’s Brexit plan is likely to ‘kill’ a UK-US trade deal
  • President Trump also criticised Theresa May’s handling of Brexit negotiations as “unfortunate”
  • Prime Minister Theresa May said that President Trump told her to sue the EU rather than negotiate over Brexit
  • The Irish government welcomed the UK’s Brexit white paper saying it was “certainly a step towards a much softer Brexit”
  • The City of London Corporation, which would have preferred closer ties to the Euro area after Brexit, called the Government’s white paper a “real blow” for financial services
  • Almost half of UK workers are worried they will be unable to work in the EU after Brexit, according to a survey from recruitment company Monster

And finally…

  • The English Football Association has been fined £50,000 because England players wore unauthorised socks during the ill-fated World Cup game against Croatia. Dele Alli, Eric Dier and Raheem Sterling wore special cushioned socks over their official kit to aid ankle support – sole-destroying

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