Friday, 02 October, 2020
AFR: AUST Housing bears are becoming an extinct species
AFR: Housing bears are becoming an extinct species
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AFR: Housing bears are becoming an extinct species
In the AFR today I write that Aussie housing bears are quickly becoming an extinct species, as we had previously predicted. Read the full column here (or try this twitter link here). Full excerpt enclosed:
In terrific news for the post-COVID-19 recovery, house prices have started climbing again across six of Australia’s eight capital cities and throughout non-metro regional markets. This accords with our heterodox March 2020 forecast for the local market to suffer negligible losses of between zero and negative 5 per cent over a six-month period followed by capital gains of 10 per cent to 20 per cent.
Throughout Australia’s eight capital cities, the cumulative loss to date has been just 2.8 per cent according to CoreLogic, and would have been a lot less were it not for Melbourne’s entirely unnecessary second COVID-19 wave.
In September, dwelling values recorded capital gains in Perth (0.2 per cent), Canberra (0.4 per cent), Hobart (0.4 per cent), Brisbane (0.5 per cent), Adelaide (0.8 per cent), and Darwin (1.6 per cent). Home values also appreciated in all non-metro regional areas (0.4 per cent). The tide is similarly turning in Sydney, which registered its smallest capital loss (minus 0.3 per cent) since the market rolled over in May.
Given a jump in purchasing power care of lower mortgage rates and higher incomes, bullish auction clearance rates, and the advent of “positive gearing” (where rents more than cover mortgage repayments), we expect Sydney home values to start punching out capital growth again soon.
The laggard is the locked-down Melbourne metropolis where dwelling values dropped another 0.9 per cent in September, making for cumulative losses of 5.5 per cent since its March peak. Yet with Melbourne likely to come out of lock-down shortly, stability should return as the auction market comes online.
Australia’s resilient housing performance has again made a mockery of the consensus’s extremely bearish forecasts for large price falls of 10 per cent, 15 per cent, 20 per cent, or 30 per cent. Housing bears are becoming an extinct species with the likes of CBA and Westpac discarding their dire outlooks for much more bullish perspectives. The latest bear to drop is Capital Economics, which was anticipating losses of up to 10 per cent, but now predicts only a 3 per cent correction. And next year it believes home values will surge 7 per cent higher. Other bears like ANZ, NAB and UBS should roll-over soon.
Australians have a lot to be confident about given our exceptional management of the COVID-19 crisis (save Victoria’s government) and the enormously successful policy coordination between the Commonwealth, the Reserve Bank of Australia, Treasury, key regulators like APRA and ASIC, and the core banking system.
Remember all the doom and gloom about the September JobKeeper cliff, which this column argued would be a non-event? So it has proved. Prime Minister Scott Morrison, Treasurer Josh Frydenberg, RBA governor Phil Lowe, APRA boss Wayne Byres and lenders like CBA’s Matt Comyn have risen to the occasion and done outstanding jobs. We could not have asked for more.
And while there is much negativity about population growth in lieu of the absence of net overseas migration, I would “fade” this as well. We’ve encouraged the government to embark on a war for top global talent and capital, positioning Australia as a destination of choice for new migrants and the key Indo-Pacific trading and financial services hub. Morrison and Frydenberg have given every indication they are going to do exactly that.
With Pfizer revealing overnight that they expect “a conclusive readout on [the] efficacy [of its vaccine]…by the end of October”, Australia should be able to start welcoming both foreign students and migrants back early next year. A flood of money (and people) will likely come in from embattled Hong Kong, Taiwan, and mainland China. The canary in the coal-mine is the Sydney property that went to auction last week with a $14 million reserve, which traded for $24.6 million. Allegedly 22 of the 25 contracts were Chinese buyers…
The upside surprise on housing is crucial for Australia’s AAA credit rating, which Standard & Poor’s put on “negative outlook” on April 8 despite the nation’s outperformance over other AAA countries such as Canada, Germany, Sweden, Norway, and Denmark. S&P was predicting a 10 per cent draw-down in home values, which it will be forced to revise upwards. Other key economic variables, like iron ore prices, the current account surplus, and Australia’s low 6.8 per cent jobless rate have similarly surprised S&P.
Some believe Frydenberg’s overdue move to repeal Australia’s ridiculous responsible lending laws—which bizarrely shifted legal liability for repaying a loan from the borrower to the lender—is a game-changer that now rationalises a more constructive housing outlook. While the removal of the laws is certainly “credit positive” for banks insofar as it eliminates litigation risks, APRA’s much more prescriptive, 34 page residential mortgage lending guide is far tougher than the obligations imputed by the law.
During the week S&P released an important new paper examining the role state governments have to play in powering the post-COVID-19 recovery. What was especially interesting was the emphasis S&P placed on the policy intersection with the RBA. Beyond predicting that the RBA “might expand its unconventional policy toolkit in the coming months”, S&P highlighted the RBA governor’s recent remark to parliament that “I have no concerns at all about the state governments being able to borrow more money at low interest rates—the Reserve Bank is making sure that’s the case”. (This column excerpted the same quote on September 18.)
Amusingly, S&P did manage to excise Governor Lowe’s preceding comment that “preserving the [state government] credit ratings is not particularly important”. With all due respect, dismissing credit ratings is easy for Martin Place to do, but harder for investors that rely on them and politicians that bear responsibility for such losses.
S&P noted that “central banks in other advanced economies have active purchase programs for state, provincial, and municipal government bonds”. “These purchases are mostly in secondary markets, but in some countries they’re in primary markets, too.”
The rating agency draw attention to the fact that while the RBA has continued buying Commonwealth government bonds, keeping downward pressure on the federal government’s cost of capital, it stopped purchasing state government bonds in early May and today holds less than 3 per cent of the total securities outstanding.
One of the most profound insights in S&P’s analysis was that the RBA’s purchases of state government bonds—and the Commonwealth’s previous explicit guarantee during the GFC—is actually a buffer that protects the states’ AAA and AA ratings. “Given the RBA’s intercession, we think the Commonwealth would step in again to offer a guarantee if needed,” S&P said. “This adds further weight to our view that Australian states have strong access to external liquidity.” And liquidity, which S&P awards the state governments the highest-possible score on, is one of six key factors that determines a state’s rating.
Liquidity is closely related to debt serviceability and solvency. During illiquidity shocks, the cost of servicing state government debts soars. The RBA explicitly acted to inject liquidity into both the Commonwealth and state government bond markets during the COVID-19 crisis, which meaningfully reduced their cost of borrowing. It makes sense, therefore, that active ongoing efforts by the RBA to enhance the liquidity of state government bond markets would contribute to reduced credit rating pressure.
One final comment on the US presidential debate. As grotesque as Donald Trump can be, he made for a strikingly energetic and youthful contrast to a very sickly-looking Joe Biden, who struggled to string sentences and thoughts together. Biden looked like he was death warmed up. Without prompting, my nine-year old son asked me whether he had suffered a brain injury. It’s hard to see how many could entrust their futures to a man who is not in control of his faculties, although, ironically, it is not clear which candidate I am actually referring to! Are these really the two best leaders America can find?
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