Please find below analysis from Nathan Webb on the December AFG housing finance data released last week.
It was another good month for AFG, with December figures coming in at 5912 versus expectations of 5262. This continues the trend that has been building up throughout 2012, and provides a good indication that house prices will appear to rise in the first half of 2013.
The following charts begin by making an adjustment for the number of trading days in each month, and using the difference above or below the average to predict changes in house prices. That is, when mortgage sales in any given month, adjusted for the number of trading days in that month, are above average, then you can expect prices to rise.
The first chart shows the overall view, with the bars showing the actual volumes, and the red line indicating where they should have been after adjustments. You can see in the most recent months that the green bars (Actuals) are starting to get a bit ahead of the red (Predicted). It’s not quite 2007 again, but it’s getting there.
The next chart plots the difference between the two lines, referred to as the “residuals”. This chart shows that after being pretty much at zero for the most of 2012, mortgage sales are now strongly in the positive, and well off the lows of 2010.
There’s been a lot of discussion recently about the impact of first home buyers on the overall market, particularly focused on the recent withdrawal of FHB grants in several states. A popular suggestion is that first home buyers drive the market by providing new blood, allowing prices to move higher. Recent months have seen these grants removed for purchasers of established houses in NSW and QLD. When you combine that with prices that are out of the reach for many, does that mean that first home buyers are on strike? The next chart shows the AFG percentage of first home buyers compared to the Residuals. And what’s the verdict? Well, it may not be a strike, but if I were a mortgage broker, I would be a bit concerned at the direction it’s going. How much longer will investors prop up the market by themselves?
But, for the moment, mortgage sales continue to climb. As long as that continues, then prices will appear to be rising as well. I say, “appear”, as the house prices reported today are based on sales that have taken place over the last few months, not from sales that occur today.
The chart of the residuals can be used to get an idea of where reported prices are heading. Firstly, they are compared to SQM’s stock on market report, where there is a very strong negative correlation. The third chart shows this, with the residual inverted and laid over the top of the change in Stock on Market. I’ve used the 3 month moving average to smooth things out. The AFG results lead the 3mma by 1 month. The chart is showing that after a period of stability, expect falls in the stock on market over the next couple of months. But as mentioned last month, we’re also seeing a divergence here, so this will be something to watch. It’s happened before, but only temporarily. If they’re still going in opposite directions by March 2013, then it might indicate a breakdown in any historical relationships.
Finally, the last chart shows the correlation with the RP Data house prices series. I’ve used the 3 month moving average, as there is a lot of volatility in the new daily series. This lags the AFG volumes by around 6 months, so the current strength in the Residuals won’t actually show up in any price action for a few months yet. By the middle of the year, the prediction is for growth of around 7% p.a. At that rate, there would surely have to be some pressure on the RBA to put a lid on things.
What is a “mortgage sale”? Does it include refinancing or redrawing on an existing mortgage? With interest rates falling, then perhaps existing mortgage holders are taking on some extra debt to fund lavish refurbishments.
….or, like me, just plain borrowing and sitting pat. One of 3 things is likely to happen – property prices will rise, and interest rates in tandem, to moderate the price rises, so best to get some cheap borrowing done now; property prices will fall, and those with liquidity will be able to buy at a better entry point , so good to add to liquidity now, or – nothing; in which case adding to household liquidity is just a re-investable buffer. Borrowing now, and not spending at all, makes a lot of sense to me.
Hi Janet,
would you care to explain to a non-economist what do you mean by “borrowing but not spend” strategy ? don’t you have to pay interest on that ? or do you borrow to invest ?
Thanks
I’m also curious as to what the loan is secured against if it isn’t an immediate asset purchase.
Janet hasn’t elaborated, but I believe she is borrowing and then investing the funds into a long term deposit at a higher rate than the borrowing rate.
If that is the case it must come to an end as the market rights itself, although she could put the money directly into bank shares that pay fully franked dividends above market borrowing rates – if you look hard enough – NAB is one possibility.
Borrow from the NAB at below 5% and invest in their shares at 7% with tax already paid at 30%.
It’s borrowed against an asset and kept in an offset account. As long as offset account balance = principal, no interest is paid.
I hope, for your financial health, you don’t believe what you just wrote.
If balance > principal, so that you can borrow the excess to make balance = principal, what is the money doing in the offset account? This case would be like putting your savings in an offset account after the principal is paid. No bank will pay interest at the mortgage rate in this scenario.
If balance < principal, you borrow and you pay interest.
If balance = principal, you borrow and you pay interest.
-gt
Not that I’m particularly knowledgable on offset accounts, but…
Isn’t the interest on a net amount of $0 (balance – principal), going to be $0 ?
Against which asset? My interpretation is that she plans to use it to buy property if prices go down but what would be the security for the loan right now?
Thanks for the replies,
Peter : borrow to invest at or below 5% ? wow I would have never thought those were the rates to invest. I would have thought they were more like personal loans more in the 9-12% range. I learned something new today Thanks.
Nathan: borrow and put in an offset account … I didn’t know a bank will give you money unless it has an specific purpose (buy a house/shares/car etc.) Sounds interesting concept, so you are like locking in the rate at the moment because it is low, but will use it later (say when houses come down)… didn’t know you could do that either.. thanks a lot !
I keep learning, hopefully some day I will be able to use all this knowledge to secure my financial future ….
foreigner – you can borrow against your home at under 5% – personal loans are higher, as are margin loans.
But you’re not locking in the rate surely (I think Janet is in NZ – do they have long-term fixed rate loans)?
And if you are, aren’t you also locking in against the possibility that rates might keep dropping?
AB – rates are expected to be low for some years, so earning 2% or more on someone elses money could work, especially if bank shares increased in value.
Nathan,
We know AFG has been growing market share from its above system growth levels.
It added new mortgage providers in late 2011 and has been growing its own brands aggressively.
Got any idea how much this will have influenced the result?
Ta, David
Yes, and a raft of industry changes has meant a lot of part time brokers have left the industry, or come under the umbrella of AFG or similar organisations.
I don’t know what the AFG market share is now but I’m quite certain that it is well above 10%
As a matter of interest, I assume you’re not under that umbrella?
I was referring to the licencing requirements. I have my own licence so I can remain independant if I choose. The other option is to work under someone elses licence as an authorised credit representative, it save a lot of hassle and costs although you must still maintain the same education standards.
http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Credit%20licensing
On top of that a broker must be a member of either MFAA or FBAA and belong to COSL although there is another ombudsman that financial advisers use that is also deemed to be acceptable.
Whilst I am a member of AFG, I could move to another group if I chose. It’s difficult to be a true independant operator because of the endless compliance issues that groups help sort out with training and guidance.
That’s a great point – I had been tracking their market share using ABS 560901 as the measure of the market. Using that, it had been fairly flat up until the middle of 2012, which is when I forgot to look at it again. They’ve definitely added a percent or two since then, which would bring the residuals back at least to zero, if not negative!
Care to adjust your model?
That would be interesting. I’ll try to add in a trend component based on the market share growth rate. But unfortunately the market share is a few months behind, as I need the ABS stats to come through
Hopefully we’re headed for the “return to normal” phase of the bubble cycle.
+7%pa this year, love this new
, I still need to buy more, but thanks, I ll take it.
Investors are buying everything above the ground at this moment.
In many markets, commodities, stocks, etc investors (read: speculators) are a good contrarian indicator.
investors have a greater risk tolerance, so they often lead the market.
The banks don’t have th capital to fund more than 10% growth, but that’s faster than the current growth profile.
I wouln’t expect a surge in 2013, but I think that Nathan is correct in expecting some price growth in 2013.
I’m tipping (guessing) 3% growth nationally in 2013, with Perth to lead and Hobart, Melbourne and Adelaide to lag.
That sounds fair. So nominal but no real growth to speak of. I think that the RBA will be well pleased with that, although they want more housing starts, and in my view the policy is wrong in the major states.
The Govt and RBA need the jobs down the track so they need the construction sector.
I am wondering if the growth you see is enough to really buttress construction.
At the same time I am wondering if anything will return a degree of confidence (I think growth of say 3% will not feel like 3% growth of the past).
The other big Q is how long can they think that indebtedness – mortgage debt of +90% of GDP is going to increase and work as an economic driver.
Gunna
FWIW I think it will work as long as we don’t run into a Current Account crisis. Given the Chinese propensity for buying our assets with their paper USD.
Inflation will be another worry but we’ll continue to ignore that. So housing market looks steady to me for the moment. I wish I had the courage at my age and stage of existence to put so much money into a non-productive asset.
Edit
Given the Chinese propensity for buying our assets with their paper USD a Current Account crisis looks unlikely for the moment.
yes, I would be very surprised by a 7% pa, that would not be good, 2-3% is much more likely.
“investors have a greater risk tolerance, so they often lead the market”
Really?
“According to Mr Matusik’s findings, about 25% of the investors decided to sell within 12 months of purchasing the property and 50% sold within five years. The reasons for selling were varied. About one third of investors sold because they needed the money, a quarter due to disappointing capital growth, 20% because of low rental returns, and one in six because they believed owning an investment property was simply too much hassle.”
http://www.momentumwealth.com.au/newsletter/previous-newsletters/social-media-articles-2/the-reality-of-the-average-australian-investor.aspx
In recent history it has been first home buyers leading the market and causing a surge in price increases, not investors.
Wow, interesting article. Funny to put that 25% figure next to this old favourite:
“Mr Matusik also observed that most investors expect that property values will double every ten years.”
I notice they aren’t doing the “seven to ten years” bit so much these days lol. But in any case, surprising that a quarter of them give up after less than a year due to disappointing gains if they’re expecting a doubling over ten years. Seems it really is more about the potential for a short-term flip. Like the daytraders of the housing market…
LOL
even if that was true, which is not unless you re talking about gold which is 100% (failed) speculation on hot air, it does not concern much the current property market with its trend now clearly driven by investors not FTB.Investors make rational decisions and leave the crap/overpriced to emotional homebuyers.
with rents increasing fast and rates cut looming, everything is going CF+
happy time indeed isnt it ?
Rents have not increased strongly outside of Perth and Darwin, at least according to APM: http://www.propertyobserver.com.au/australian-capital-territory/rents-soaring-in-perth-and-darwin-apm/2013011658798
UE,
I have doubts about the alleged increase in Perth rents.
I’m just about to move a few streets away having signed a 13 mth lease for $430 pw $15 pw more than I’m paying now for a marginally better place. At the end of this lease I’d have been renting for 3 yrs, going from 400 to 430 pw. The REA has told me that rents aren’t going as the msm keep reporting and she has had to drop good places by $50pw to let.
dam, it’s certainly not specific to Gold (although Gold market exhibits same behavior). I don’t know if it’s the same in the property market, but in most other markets when investors are scrambling to get long it’s often a sign the top is near:
http://theshortsideoflong.blogspot.com.au/2013/01/entering-into-2013-part-2.html
I will have to agree with the rents increasing fast, I am not able to buy yet, and for the last few years there has been almost no growth in salaries, yet rents in sydney keep increasing at a good rate of between 4%-8% per year (well located, close to transport properties, I don’t care about the “average”)
If I search for 3 bedroom properties there is nothing for less than 650 a week , which is much more than a few years ago…. sad situation indeed, there is no way to prevent greed in real estate in this country, if properties prices look like will stagnate or fall, rents increase so that they put a floor on the said fall…
Increases in Unemployment will curb further rises.
.
I am more convinced than ever that this needs to be an excruciatingly painful crash to ward people off property speculation for at least a few generations!
Unfortunately for you, prices are a trailing indicator as they are based on settlements that have occurred several months ago.
Even the RP Data daily index is based on old data, they just update it every day to give the impression that it’s current, where as the ABS wait for the full quarter( (and then some) to publish their figures.
So if you buy now, I’m not predicting that you will get 7%p.a., I’m predicting that RPData will be consistently
*reporting* monthly growth rates above 0.5% during the middle of the year, but that’s based on old settlements.
i know Nathan, it s lagging but for what I see on the street, I have settled on one last month and since pretty much everything that was worthy a look has sold.December was a gangbuster IMO.It s very likely that ABS will report a strong increase next quarter.
but yes 7% pa is a bit ridiculous, St George is tipping 5%, which is very high also, 2-3% is my bet (especially because Melbourne could drag one or 2 years more, but sydney/perth/darwin could do 5+ that sure)
lol at that dam spruiker!
2/3%, 7%, 10% growth on already 45% overvalued house prices.
Housing debt might still be growing but its not growing quick enough.
Cut those rates again and load up punters.
C’mon Aussie