Already time for more macroprudential?

Via Westpac:

PulseAugust2017

― Getting a precise fix on Australia’s housing markets remains tricky. Sentiment and lead indicators continue to point to a material slowdown and turnover is showing a renewed decline. However the picture around price growth is much less clear cut, with some moderation overall but trends varying greatly across capital cities – ranging from double digit growth to persistent declines.

― The situation continues to have many moving parts. The main drivers are the ‘macro-prudential’ measures deployed in March and weaker foreign buyer demand. However, there are numerous ‘sub-plots’ driving variations across sub-markets including: state government policy changes affecting foreign investors and first home buyers; differing exposures to investor activity and the mining downturn; and differences in the supply-demand balance including across wider metropolitan areas and specific sub-markets such as those being more heavily affected by surging ‘high rise’ construction.

― Sentiment-wise, the last 3mths have seen some improvement, particularly around price expectations and, to a lesser extent, unemployment expectations. However, core buyer sentiment is still weak and risk aversion remains elevated.

― Nationally, the Westpac Melbourne Institute ‘time to buy a dwelling’ index has recovered 5% from its May low, some of which is a seasonal effect. The remainder likely reflects some bounce-back from the initial shock of macro-prudential measures and associated mortgage rate increases in Mar-Apr (although further increases for ‘interest only’ were announced in late Jun).

ousing

― Consumer expectations for house prices have shown a more substantial rebound. The Westpac–MI Consumer House Price Expectations Index fell sharply in Apr-Jun, down 12.7% but regained most of the decline in Jul-Aug, rising 9.2%. Indeed, allowing for seasonality, the quarter to quarter reads are essentially unchanged.

― Confidence around the labour market has been mixed, improving slightly but with choppy monthly moves. The Westpac Melbourne Institute Unemployment Expectations Index fell 2.3% from 135.5 in May to 132.5 in Aug (recall that lower reads mean fewer consumers expect unemployment to rise over the next year). The Index is now at its lowest level since November 2011. The measure is a proxy for consumers’ job-loss fears. As such it suggests that, at the margin, job security is becoming less of an inhibiting factor for buyers.

― More generally, consumer attitudes towards risk remain a restraining factor. The Westpac Consumer Risk Aversion Index – a proxy based on consumer responses to questions on the ‘wisest place for savings’ – held at 43.9 in Jun, vs 44.2 in Mar and 20 at the end of 2015. Notably, the detailed responses underlying the measure show consumers remain more inclined to pay down debt and wary of investing in residential real estate.

― Auction markets have continued to cool, Sydney in particular is tracking a slowdown almost identical to that following the regulator’s previous round of macro prudential tightening in 2015. Adjusting for seasonal variations, clearance rates have pulled back to around 65% in Sydney and just over 70% in Melbourne, both still marginally above long run averages.

The full report is here.

There’s certainly been a cooling in interest but nowhere near enough and the 10% per annum trend growth in Sydney and Melbourne prices is so far uninterrupted:

It’s still too early to judge the efficacy of macroprudential 2.0. The full impact of the June rate hikes won’t have flowed through yet. June investor lending numbers showed some progress with CBA hitting the brakes but others hits the accelerator:

ANZ CBA MAC NAB WBC BOQ BEN SUN Total
Jun-17 0.4 -0.4 0.0 0.7 1.1 -0.5 -0.9 1.5 0.4
May-17 0.3 0.1 -0.8 0.6 0.8 0.3 0.2 0.5 0.4
Apr-17 0.3 0.3 0.3 0.4 0.4 0.1 0.2 -0.2 0.3
Mar-17 0.5 0.2 -0.2 0.6 0.4 0.0 0.0 -2.4 0.3
Feb-17 0.3 0.4 -0.8 0.5 0.3 -1.4 0.9 0.0 0.3
Jan-17 -0.1 0.6 -0.7 0.5 0.2 -0.7 0.9 0.2 0.3
Dec-16 0.5 0.8 -0.9 0.5 0.7 -0.4 1.2 0.8 0.6
Nov-16 0.3 0.8 -0.8 0.4 0.7 -0.6 1.8 0.4 0.6
Oct-16 0.2 0.7 -0.6 0.6 0.6 -0.7 1.9 -0.2 0.5
Sep-16 -0.1 0.7 -0.7 0.4 0.7 -0.7 0.7 -0.4 0.4
Aug-16 -0.3 0.6 -1.0 0.4 0.6 -1.1 1.0 -0.3 0.3
Jul-16 -0.6 0.7 -0.6 0.3 0.4 -1.1 0.5 -0.1 0.3

Year on year is still rising at 4.9% in the majors:

ANZ CBA MAC NAB WBC BOQ BEN SUN Total
Jun-17 1.8 5.7 -6.6 6.0 7.2 -6.3 8.8 -0.3 4.9
May-17 0.9 7.3 -6.6 5.3 6.7 -6.5 3.3 -0.1 4.8
Apr-17 0.2 8.2 -6.0 5.1 6.1 -7.2 3.7 1.5 4.7
Mar-17 -0.4 8.4 -6.3 4.9 5.7 -6.9 4.4 2.8 4.6
Feb-17 -1.1 8.4 -6.1 4.6 5.5 -6.4 5.6 5.2 4.4
Jan-17 -1.7 7.9 -5.7 4.6 5.1 -3.2 4.9 4.5 4.2
Dec-16 -1.7 7.2 -5.2 4.5 5.1 -0.8 3.6 3.8 4.0
Nov-16 -2.1 6.3 -4.8 4.5 4.3 1.1 2.2 1.9 3.4
Oct-16 -2.4 5.1 -3.4 5.1 3.9 2.8 0.2 0.6 3.0
Sep-16 -2.9 3.4 -3.0 4.9 -6.9 4.5 -1.4 -0.1 0.9
Aug-16 -3.4 1.8 -1.9 5.2 -8.6 5.3 -1.9 -0.1 -1.7
Jul-16 -3.7 1.4 -1.1 5.0 -12.0 8.7 -2.3 -5.1 -3.0

And the chart:

But the signs are not great. The Council of Financial Regulators should be cooking up the next round of tightening.

I’d look at cutting the investor lending growth ceiling to 5% for all banks. They’ll be forced to operate clearly under it.

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