economic influences on the australian mortgage marketagg+services+oct+2007... · economic...

economics@

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Economic influences on the Australian mortgage marketEconomic influences on the Economic influences on the Australian mortgage marketAustralian mortgage market

Saul EslakeSaul EslakeChief EconomistChief EconomistANZANZ

BurswoodBurswood ResortResortPerthPerth

33rdrd October 2007October 2007

www.anz/com/go/economicswww.anz/com/go/economicswww.anz/com/go/economics

economics@2

Capital city house prices have been remarkably buoyant, except in SydneyCapital city house prices have been remarkably buoyant, except in Sydney

Sydney

0

100

200

300

400

500

600

86 89 92 95 98 01 04 07

A$ 000

Melbourne

050

100150200250300350400

86 89 92 95 98 01 04 07

A$ 000

Brisbane

050

100150200250300350400

86 89 92 95 98 01 04 07

A$ 000

Perth

0

100

200

300

400

500

86 89 92 95 98 01 04 07

A$ 000

Adelaide

050

100150200250300350

86 89 92 95 98 01 04 07

A$ 000

Hobart

0

50

100

150

200

250

300

86 89 92 95 98 01 04 07

A$ 000

Established house prices

Sources: Australian Bureau of Statistics; Economics@ANZ.

economics@3

Housing affordability is now close to record lows in most cities …Housing affordability is now close to record lows in most cities …

Housing affordability

50

75

100

125

150

175

200

87 92 97 02 07

Index

Sydney

Perth

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75

100

125

150

175

200

87 92 97 02 07

IndexHobart

Adelaide

50

75

100

125

150

175

200

87 92 97 02 07

Index

MelbourneBrisbane

50

75

100

125

150

175

200

87 92 97 02 07

IndexCanberra

Darwin

Note: The housing affordability index is the ratio of average household disposable income to the income required to service the mortgage required to buy a median-priced dwelling with a 20% deposit and a maximum debt service ratio of 30%. Sources: ABS; Economics@ANZ.

economics@4

… and is likely to deteriorate further over the next two years… and is likely to deteriorate further over the next two years

ANZ housing affordability index – all capital cities

Note: The housing affordability index is the ratio of average household disposable income to the income required to service the mortgage required to buy a

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85 89 93 97 01 05 09

Index

‘Housing affordability’ is now almost as low as when interest rates were at their late 1980s peak

With both interest rates and house prices more likely to rise than fall, housing affordability will deteriorate further over the next 2 years

Whereas the late 1980s problem was caused by high interest rates – to which the ‘solution’ was lower interest rates …

.. the current problem has been largely caused by high house prices – to which the only ‘solutions’ are lower house prices or higher incomes (since lower interest rates are unlikely near term)

median-priced dwelling with a 20% deposit and a maximum debt service ratio of 30%.

economics@5

Over the past 15 years the ‘borrowing capacity’ of the typical home-buyer has more than doubled …Over the past 15 years the ‘borrowing capacity’ of the typical home-buyer has more than doubled …

Note: data are for the June quarter each year.Sources: ABS; Economics@ANZ.

Maximum borrowing by couple earning average male and female earnings, repayments capped at

25% of gross income & 20% deposit

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100

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250

300

350

86 89 92 95 98 01 04 07

$'000

Since the early 1990s, average earnings have risen by over 90% while the standard variable mortgage rate has fallenThis has increased the maximum amount which a ‘typical couple’ can afford to borrow under traditional lenders’ rules from around $135 000 in 1992 to $307 000 in 2007In practice. rates actually paid by borrowers have fallen by more than the standard variable rate, the traditional ‘rules’ are much less rigorously applied, and the maximum loan term has risen from 25 to 30 years

economics@6

… while the supply of housing has barely kept pace with the increase in underlying demand… while the supply of housing has barely kept pace with the increase in underlying demand

Number of households and number of dwellings

Note: Dwelling stock estimates for 1991, 1996, 2001 and 2006 based on census figures; other years interpolated using completions data. Sources: RBA; ABS; Economics@ANZ.

6.0

6.5

7.0

7.5

8.0

8.5

95 96 97 98 99 00 01 02 03 04 05 06

Number of dwellings

Number of households

Mn

Over the ten years to June 2006, the stock of housing increased by 1.22 million

– 1.46 mn new dwellings were completed during this period, but around 259,000 old dwellings were demolished

Over the same period, the number of households rose by 1.31 million or 18%

– faster than the 13.1% increase in population because of falling average household size

The increase in the supply of housing was more than absorbed by increased demand

economics@7

Rising immigration, both permanent and temporary, is also boosting housing demandRising immigration, both permanent and temporary, is also boosting housing demand

Net permanent & long-term settler arrivals

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20

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180

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87 92 97 02 07

'000 (annual moving total)

-60

-40

-20

0

20

40

60

87 92 97 02 07

'000 net (annuall)

Temporary migration ‘for employment’


economics@8

Changes to the tax system have stimulated investor demand for housingChanges to the tax system have stimulated Changes to the tax system have stimulated investor demand for housinginvestor demand for housing

Taxpayers with rental income Net rental income

Note: Data are for fiscal years ended 30 June.Sources: Australian Taxation Office; Economics@ANZ .

9

10

11

12

13

14

94 95 96 97 98 99 00 01 02 03 04 05

% of total no. of personaltaxpayers

Interest paid by property investors

2468

101214

94 95 96 97 98 99 00 01 02 03 04 05

$bn

-5.0-4.0-3.0-2.0-1.00.01.0

94 95 96 97 98 99 00 01 02 03 04 05

$bn

50

55

60

65

94 95 96 97 98 99 00 01 02 03 04 05

% of total

Loss-making property investors

Capital gains taxrate halved




economics@9

Upward pressure on house prices reflects strong demand combined with limited supplyUpward pressure on house prices reflects strong Upward pressure on house prices reflects strong demand combined with limited supplydemand combined with limited supply

Sources: ABS: Economics@ANZ.

Housing finance commitments

Investors

Residential building approvals

4

6

8

10

12

14

01 02 03 04 05 06 07

A$bn per month

Apartments, etc.

708090

100110120130140

01 02 03 04 05 06 07

'000 (annual rate)

Trend

Actual

Owner-occupiers

2

4

6

8

10

01 02 03 04 05 06 07

A$bn per month

Houses

30

40

50

60

70

80

01 02 03 04 05 06 07

'000 (annual rate)

Trend

Actual

economics@10

-75

-50

-25

0

25

50

75

100

125

150

175

200

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 100

25

50

75

100

125

150

175

200'000 units'000 unitsUnderlying demand

(right scale)

Completions(right scale)

Surplus"Shortage"(left

scale)"Surplus"(left scale)

National housing market balance

The imbalance between housing demand and supply is likely to get worseThe imbalance between housing demand and The imbalance between housing demand and supply is likely to get worsesupply is likely to get worse

Note: ‘Surplus’ or ‘shortage’ is the cumulative difference between completions and underlying demand from an historical starting point. The direction of movements in this measure is more significant than the level. Sources: ABS; Economics@ANZ.

Underlying demand for housing is running at around 165K units pa, driven by strong immigration and declining average household size

Completions are likely to fall below 150K pa over the next 3 years

So the shortage of housing is likely to get worse

Commencements need to pick up to around 180K pa to begin making meaningful inroads into this shortage

economics@11

Housing shortages will be particularly acute in the larger States …Housing shortages will be particularly acute in the larger States …

-25

0

25

50

75

100

00 01 02 03 04 05 06 07 08 09 100

10

20

30

40

50

60'000 units'000 unitsUnderlying requirements (right scale)


Surplus (-) or shortage (+)(left scale)

New South Wales

-10

0

10

20

30

40

00 01 02 03 04 05 06 07 08 09 100

10

20

30

40

50'000 units'000 units

Underlying requirements (right scale)

Completions


Victoria

-10

0

10

20

30

40

50

00 01 02 03 04 05 06 07 08 09 100

10

20

30

40

50


Underlying requirements(right scale)

Completions


Queensland

-10

-5

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09 100

5

10

15

20

25

30'000 units'000 unitsUnderlying requirements

Completions (right scale)


Western Australia

Note: see footnote to previous slide.Sources: ABS, Economics@ANZ.

economics@12

-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 100

1

2

3

4'000 units'000 unitsUnderlying requirements (right scale)

Completions


… though smaller States and Territories will also have housing shortages… though smaller States and Territories will also have housing shortages

-10

-5

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09 100

2

4

6

8

10


Underlying requirements

Completions(rt scale)


South Australia

Tasmania

-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 100

1

2

3

4


Underlying requirements (right scale)

Completions


ACT

-2-10123456

00 01 02 03 04 05 06 07 08 09 100

1

2


Underlyingrequirements


Surplus (-) or shortage (+) (left scale)

Northern Territory

Sources: ABS, Economics@ANZ.

economics@13

House prices now look ‘over-valued’, especially in Perth …House prices now look ‘over-valued’, especially in Perth …

Note: ‘Fair value’ based on long term averages for prices, interest rates and State disposable incomes

Sydney

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-25

0

25

50

75

86 89 92 95 98 01 04 07

%

Melbourne

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75

86 89 92 95 98 01 04 07

%

Brisbane

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25

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75

86 89 92 95 98 01 04 07

%

Perth

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0

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75

100

86 89 92 95 98 01 04 07

%

Adelaide

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-25

0

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75

86 89 92 95 98 01 04 07

%

Hobart

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-25

0

25

50

75

86 89 92 95 98 01 04 07

%

Established house price deviations from ‘fair value’

economics@14

… but that doesn’t necessarily mean that house prices are going to fall… but that doesn’t necessarily mean that house prices are going to fall

Housing market pessimists have for some time pointed to the (undeniable) fact that Australian house prices are now at record highs relative to incomes or rents

– and use that to argue that, just as falls in share prices are often preceded by periods in which price-earnings ratios have been unusually high, high ratios of house prices to incomes or rents mean that house prices must ‘inevitably’ fall sharply

This line of reasoning ignores a fundamental difference between the share and residential property markets

– no-one has a ‘natural long’ position in the share market– but in cultures where home ownership is strongly preferred

(such as Australia), the household sector does have a ‘natural long’ position in the residential property market

… which means that as long as interest rates remain at reasonable levels – so that currently marginal owners do not become forced sellers – people will not sell houses simply because houses appear ‘over-valued’

In such circumstances, it will be turnover rather than prices which decline

economics@15

Turnover, rather than prices, drop when buyers are priced out but owners aren’t forced to sellTurnover, rather than prices, drop when buyers are priced out but owners aren’t forced to sell

Sydney

0

5

10

15

20

02 03 04 05 06

'000 per quarter

Melbourne

Brisbane

Perth

Adelaide

Hobart

Recorded transfers of established houses

0

5

10

15

20

02 03 04 05 06

'000 per quarter

02468

10121416

02 03 04 05 06

'000 per quarter

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02 03 04 05 06

'000 per quarter

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02 03 04 05 06

'000 per quarter

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02 03 04 05 06

'000 per quarter


economics@16

Outlook for capital city house pricesOutlook for capital city house pricesOutlook for capital city house prices

Year ended 30 June 2008

(%)

2 years ended 30 June 2010

(% pa)

Sydney 8½ 9-11

Melbourne 10 4-6

Brisbane 8 7-9

Perth 2 4-6

Adelaide 6 2-3

Hobart 2½ 3-5

Darwin 5 3-5

Canberra 6 4-6

Average 7¾ 6-8

Source: Economics@ANZ

economics@17

The housing shortage also implies further falls in rental vacancy rates and increases in rentsThe housing shortage also implies further falls in rental vacancy rates and increases in rents

Rental vacancy rate Median rents

0.0

0.5

1.0

1.5

2.0

2.5

3.0

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4.5

80 84 88 92 96 00 04 08

% (4 qtr movingaverage)

100

120

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160

180

200

220

240

260

280

300

89 92 95 98 01 04 07

$ per week (4 qtr movingaverage)

3-br houses

2-br units

Note: data are weighted average of eight capital cities.Source: REIA; Economics@ANZ.

economics@18

By the metrics that lenders use to assess housing loans, total household debt is not ‘excessive’By the metrics that lenders use to assess housing loans, total household debt is not ‘excessive’

Household debt to income

50

75

100

125

150

175

88 92 96 00 04 08

% of annual disposable income

Household debt to assets

10

12

14

16

18

20

22

88 92 96 00 04 08

% of gross household assets

456789

101112

88 92 96 00 04 08


Interest payments to incomeHousehold net worth to income

400

450

500

550

600

650

700

88 92 96 00 04 08


Sources: Australian Bureau of Statistics; Reserve Bank of Australia; Economics@ANZ.

economics@19

The increase in the debt-to-income and interest-to-income ratios reflects a variety of influencesThe increase in the debt-to-income and interest-to-income ratios reflects a variety of influences

House prices have risen from around 3½ times annual average disposable income in the early 1990s to 5¾ times today

– so (for a given loan-to-valuation ratio) households have to take on a larger amount of debt relative to income in order to buy a median-priced house

– there’s cause-and-effect in this proposition

There has been an increase in the proportion of households with owner-occupier mortgage debt

– 35½% of households had a mortgage at the 2006 census, up from 27½% at the 1996 census

– this increases the debt-to-income ratio for households as a whole even if the average debt for a household with a mortgage remains unchanged

– according to the Reserve Bank, the median debt-servicing ratio of households with owner-occupier debt has risen only marginally from 20% in 1996 to 21½% in 2006

There has also been an increase in borrowing for investment housing

economics@20

The rise in the debt service ratio over-states the rise in the ratio for households who have debtThe rise in the debt service ratio over-states the rise in the ratio for households who have debt

* Owner-occupier interest and principal repayments (including any excess principal repayments)as a % of gross household income. Source: RBA Financial Stability Review September 2007.

0

5

10

15

20

25

1981 1986 1991 1996 2001 2006

% of gross household income

Median owner-occupier debt-service ratio* of

households with owner-occupier housing debt

0

10

20

30

40

50

60

Under25

25-34

35-44

45-54

55-64

Over65

All

19962006

% of households

Share of households in each age group with owner-occupier debt

economics@21

High levels of household debt are concentrated among households who can service itHigh levels of household debt are concentrated among households who can service it

Note: Figures in parentheses show average weekly household disposable income for eachquintile. Source: ABS (HES); Economics@ANZ.

0

2

4

6

8

10

12

14

Lowest 2nd 3rd 4th Highest Average

Interest (principal residence) Principal (principal residence)

Interest (other property)

% of disposable income

($263) ($518) ($790) ($1,125) ($1,886) ($915)

Interest and principal repayments as a p.c. of disposable incomes, by income quintiles 2003-04

economics@22

The proportion of mortgage loans in arrears is rising but is still very lowThe proportion of mortgage loans in arrears is rising but is still very low

Non-performinghousing loans

Housing loan arrears

Source: Reserve Bank of Australia Financial Stability ReviewSeptember 2007.

economics@23

Mortgage arrears have risen more in NSW than in any other StateMortgage arrears have risen more in NSW than in any other State

Housing loans 90+ days past due, by State Mortgage arrears (on prime

loans) have more than doubled in NSW over the past three years, to a much higher level than in other StatesOf the 10 statistical divisions with the highest share of households with a debt-service ratio of over 30%, 8 are in Western SydneyAccording to the Reserve Bank, a disproportionately large number of households in this region took out investment housing loans at the peak of the Sydney housing cycle

Source: Reserve Bank of Australia Financial Stability ReviewSeptember 2007.

economics@24

Delinquency rates on Australian sub-prime mortgages are similar to or higher than in the USDelinquency rates on Australian sub-prime mortgages are similar to or higher than in the US

Source: US Mortgage Bankers’ Association; S&P.

90-days+ past due

Securitized sub-prime mortgage delinquency rates

Delinquency rates on sub-prime mortgages in Australia are similar to those in the US for 30-day periods …… and actually higher for 90 days past dueWhat this means is that sub-prime mortgage delinquencies are rising more rapidly in the US than in Australia …… reflecting the fact that many US sub-prime mortgages written in the past few years have been on ‘teaser’ or ‘honeymoon’ terms and which are now re-setting at much higher interest ratesSub-prime mortgages account for just 1% of all mortgages in Australia, as against 15% in the United States

30-days+ past due

0

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00 01 02 03 04 05 06 07

%

Australia

United States

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00 01 02 03 04 05 06 07

%Australia

United States

economics@25

Wholesale market interest rates have risen as a result of the US sub-prime meltdownWholesale market interest rates have risen as a Wholesale market interest rates have risen as a result of the US subresult of the US sub--prime meltdownprime meltdown

Sources: Bloomberg; Datastream.

United States

4.50

4.75

5.00

5.25

5.50

5.75

6.00

31-Dec 30-Mar 29-Jun 28-Sep

% pa

US Federal Reserve funds rate target

30-dayinter-bank rate

0.5% pt rate cut on 19 Sep

Australia

6.00

6.25

6.50

6.75

7.00

31-Dec 30-Mar 29-Jun 28-Sep

% pa

Reserve Bank of Australia cash rate

30-dayinter-bank

rate

The US sub-prime mortgage meltdown prompted a loss of confidence in credit ratings and in asset-backed securities –and the effects weren’t confined to the USBanks have become much more reluctant to lend to other financial institutions and more anxious to conserve liquid assetsThis has put upward pressure on short-term interest rates in wholesale markets, despite substantial efforts by central banks to ‘inject liquidity’The US Federal Reserve has cut its cash rate, but other central banks seem unlikely to follow suit

economics@26

-2-1012345

01 02 03 04 05 06 07

% change from year earlierAustralia

US

US rate cuts are warranted by slowing growth and inflation – that isn’t the case in AustraliaUS rate cuts are warranted by slowing growth US rate cuts are warranted by slowing growth and inflation and inflation –– that isnthat isn’’t the case in Australiat the case in Australia

* As defined by US Fed and RBA, respectively. Sources: ABS; US Bureau of Labor Statistics; Bureau of Economic Analysis; S&P.

Employment

Housing starts

75

100

125

150

175

01 02 03 04 05 06 07

2000 average = 100

AustraliaUS

100

120

140

160

180

200

220

01 02 03 04 05 06 07

2000 average = 100

Australia

US

House prices

0

1

2

3

4

01 02 03 04 05 06 07

% change from year earlierAustralia

US

‘Underlying inflation’*

economics@27

Most of the risks to the Australian inflation outlook seem tilted to the upsideMost of the risks to the Australian inflation Most of the risks to the Australian inflation outlook seem tilted to the upsideoutlook seem tilted to the upside

Sources: ABS; RBA.

Consumer prices

Unemployment rate

0

2

4

6

8

10

12

72 75 78 81 84 87 90 93 96 99 02 05 08

% of labour force

0

1

2

3

4

00 01 02 03 04 05 06 07 08

% change from year earlier

'Underlying'

'Headline'

RBA targetband

'Headline'

Fore-cast

Inflation tends to accelerate after the economy has been at or close to ‘full capacity’ for a while – and the Australian economy is now closer to ‘full capacity’ in many respects than at any time in 30 yearsAt the same time demand is being boosted by buoyant commodity prices and substantial fiscal stimulusParticular areas of the CPI such as food and rents are likely to exert more upward pressure on inflation than in recent yearsElectricity and water prices are also likely to rise stronglyThe Reserve Bank thinks ‘underlying’ inflation will rise to 3% during 2008

economics@28

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

01 02 03 04 05 06 07 08

% pa

90-daybill yield

Cash rate

10-yearbond yield

Official rates will remain ‘on hold’ for the rest of 2007 but could rise again next yearOfficial rates will remain Official rates will remain ‘‘on holdon hold’’ for the rest of for the rest of 2007 but could rise again next year2007 but could rise again next year

Shaded areas denote forecasts.Sources: RBA; Datastream; Economics@ANZ.

Australian interest rates The August rate increase, the first in an election year in living memory, was prompted by the higher-than-expected June quarter inflation figureThe RBA Governor has since indicated that a November election would not preclude a further rate increase should that be deemed ‘necessary’ (eg because of an uncomfortably high September quarter CPI)The rise in market interest rates over the past few weeks, if sustained, means an increase in official rates now looks unlikely this yearThe official cash rate is likely to rise again in 2008 given the inflation risks and the likelihood of an election ‘bidding contest’

economics@29

SummarySummaryHousing prices have proven (and will remain) resilient in the face of modest increases in interest rates

– reflecting the persistent excess of demand over supply– capital city house prices will likely rise by 6-8% pa on average

over the next three years

‘Housing affordability’ is likely to deteriorate further over the next few years

– and most of the proposed ‘solutions’ to this problem will make it worse rather than better

Although Australian households are carrying a lot of debt by historical and international standards, the overwhelming majority of them are well-placed to service it

– there is in fact scope for older and higher income households totake on more debt (if they wish to)

Delinquency rates on Australian mortgages are rising, but remain low by historical and international standards

– Fewer than 20 000 of the 5.3 million housing loans in Australia are 90 days or more overdue

economic influences on the australian mortgage marketagg+services+oct+2007... · economic...

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