[+] Inflation Fuels Interest Rate Hike Exposure

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>The Reserve Bank of Australia has hosed down speculation of a rates rise as inflation grows globally.</p><p>But it is not just homeowners wringing their hands over the ripple effect of a prospective interest rate increase. </p><p>UBS analyst Grant McCasker said some of Australia’s biggest real estate investment trusts could face a 4 per cent drop in earnings if interest rates increased 1 per cent. </p><p>“Purely from [the perspective of] a movement in interest rates and resultant impact on debt costs, the REITs impacted the most are Centuria Industrial REIT (CIP), Charter Hall Long WALE REIT and HomeCo Daily Needs REIT,” McCasker said.</p><p>“AREIT earnings have never been more exposed to interest rate moves as many AREITs reduced debt costs by increasing exposure to floating rates with 35 per cent currently unhedged, increasing to 50 per cent in 2024 financial year.”</p><p>McCasker said REITs including BWP, VCX and SGP would see minimal impact to earnings. </p><p>Centuria was approached for comment but was unable to respond before deadline. </p><p>Central bank governor Philip Lowe <a href="https://www.theurbandeveloper.com/articles/economy-charts-strong-growth-rba-remains-watchful">maintained his dovish stance on interest rate rises</a> despite Australia chalking up a “higher than expected” lift in inflation.</p><p>“Inflation was 0.7 per cent in the September quarter and 2.1 per cent over the year to the September quarter,” Lowe said.</p><p>“While this outcome was higher than expected, it is important to remember that at 2.1 per cent, underlying inflation is only just above the bottom of the 2 to 3 per cent target band and remains lower than the average for the past three decades.</p><p>“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year. </p><p>“It is likely to take time to meet the condition we have set for an increase in the cash rate and the board is prepared to be patient.”</p><p>But this patient, softly-softly approach has not quelled fears in the market.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/cbdd9b10-a3e2-44f8-a7ec-36b2855b7378.jpg" width="1600"/></picture><div><span style="align-content:center;opacity:0.8">▲ Centuria&#x27;s industrial fund, which has been focused on acquisition in an overheated industrial sector, could face earnings losses if interest rates go up by 1 per cent according to a UBS analyst. </span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>The results of a Finance Brokers Association of Australia survey on mortgage and rent affordability found most borrowers and renters could not meet a mortgage or rent increase equivalent to a rate rise of just 1 per cent. </p><p>FBAA managing director Peter White has been in the industry for more than 40 years and said he feared Australians were “sleepwalking into disaster” and had grown complacent after almost 11 years without a rate rise. </p><p>“Many Australians are clearly on the brink … living in the false hope that rates will stay this low,” he said.</p><p>“This survey is a wake up call and shows that even a small rise in rates—which is looking more likely next year with rising inflation—could be catastrophic for our nation.”</p><p>More than half of respondents said they would have to look at <a href="https://www.theurbandeveloper.com/articles/anz-house-prices-forecast-2022">refinancing their home if interest rates rose</a>.</p><p>“One per cent is not a large increase. It will happen and with the RBA recently deciding not to intervene to stop increasing yields on three-year government bonds, it will likely happen soon,” White said.</p><p>“The housing market has soared and there is a reasonable chance it will undergo a correction, meaning that those with low deposits who have stretched themselves to make large repayments could see themselves with negative equity, owing more than the value of the property.</p><p>“Add a mortgage increase they can’t pay and there could be a lot of people in real trouble.”</p><p>Speaking at a federal government <a href="https://www.theurbandeveloper.com/articles/house-prices-rise-through-interest-rate-hikes">committee hearing on housing affordability</a>, the RBA assistant governor Luci Ellis acknowledged that low inflation and low interest rates in concert with stimulus packages including HomeBuilder had reinforced a housing bubble. </p><p>“At some level, that was our doing,” Ellis said. </p><p>“With lower interest rates, people could service a bigger mortgage with the same repayment.</p><p>“Some of this extra buying capacity financed an increase in the quality of the housing stock … but, because most of the housing stock was already in place, the main effect was to bid up housing prices.”</p><p>Ellis said there was an “inter-generational component” to housing affordability that needed further investigation.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/2182e265-d006-4011-9e36-8d491e104405.jpg" width="800"/></picture><div><span style="align-content:center;opacity:0.8">▲ Assistant governor Luci Ellis said low inflation and low interest rates had resulted in house prices being bid up. </span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>At a UBS conference earlier this week, Australian Prudential Regulation Authority chairman Wayne Byres outlined the three macroprudential frameworks that he said would act as “reinforcing architecture designed to fortify the financial soundness of the Australian banking system”.</p><p>Byres said a counter-cyclical capital buffer would be adopted as part of the framework to provide banks and regulators with more flexibility to respond in periods of stress. </p><p>“As we settle into the new system, we see benefit in having a requirement that can be dialled up, and down, in response to the peaks and troughs of the economic cycle,” he said. </p><p>“So, we propose to utilise a default setting of 1 per cent for the counter-cyclical capital buffer, giving us scope to adjust this over time in response to conditions.</p><p>“And taken together, [the frameworks] provide the critical foundations for continuing to deliver Australia a strong and stable financial system throughout the economic and financial cycle.” </p><p>Property Investment Professionals of Australia chairman Peter Koulizos said he believed interest rate rises were unlikely to put downward pressure on house prices. </p><p>A PIPA analysis of five periods of increasing cash rate movements since 1994 has shown house prices continued to rise despite rate rises of up to 2.75 per cent in just six months.  </p><p>“There has been much conjecture over the past 18 months that record low interest rates are the singular reason why property prices have skyrocketed, when the cash rate was already at a former record low of 0.75 per cent before the pandemic hit,” he said.</p><p>“One of the main reasons for our booming market conditions is easier access to credit, which was simply not the case two years ago when rates were also low.</p><p>“At the end of the day, even when interest rates are low, as they have been for years now, if people don’t have access to finance, it really doesn’t matter what the cash rate is.”  </p></div></div></div></div></div>

Australia's central bank is hosing down rates rise speculation as inflation grows, but some of the biggest REITs could face earnings losses...

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<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>With property prices on course to lift to <a href="https://theurbandeveloper.com/articles/how-long-until-housing-values-reach-a-new-record-high">record highs</a> in the first half of 2020, <a href="https://theurbandeveloper.com/articles/investors-first-home-buyers-drive-12pc-rebound-in-lending">first-time buyers</a> and those <a href="https://theurbandeveloper.com/articles/buyers-back-in-the-market-as-auctions-rebound">re-entering the market</a> could soon be priced-out, further eroding any renewed prospects of housing affordability. </p><p>After almost two years of falling prices of between 10 and 15 per cent in Sydney and Melbourne, the housing market is showing signs of <a href="https://theurbandeveloper.com/articles/house-prices-make-biggest-jump-in-4-years">bouncing back</a> driven by a number of factors including <a href="https://theurbandeveloper.com/articles/075-is-a-record-low-but-dont-think-for-a-second-the-reserve-bank-as-finished-cutting-the-cash-rate">record low interest rates</a>, easier access to credit and more certainty around tax arrangements.</p><p>Housing affordability enjoyed temporary relief over the downturn, seeing an 8.4 per cent fall in prices with dwelling values 6.5 times higher than gross annual household incomes as of June, the lowest level since December 2013.</p><p>According to the latest ANZ-CoreLogic Housing Affordability report, the 8.4 per cent falls in real estate prices nationally—seen over the past two years, has now significantly reversed, with prices in Melbourne and Sydney <a href="https://theurbandeveloper.com/articles/is-the-downturn-over-house-prices-begin-to-rise">rising</a> 6 per cent and 5.3 per cent respectively since May.</p><p>Dwelling values are now outpacing household incomes across all capital cities (with the exception of Perth and Darwin) with over-extended household debt and rising mortgage rates reversing affordability and playing a larger role influencing the broader economy.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/f9d6ab98-1e72-4824-a0a5-7fed211505a6.jpg" width="800"/></picture><div><span style="align-content:center;opacity:0.8">▲ Affordability is influenced by interest rates, the size and term of loan repayments, and household income. Image: AAP</span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>“We see more urgency coming back into the market and if this trend continues, we could see property prices reach new highs early next year,” Corelogic head of research Tim Lawless said.</p><p>“We have also seen an increase in the number of areas where it is cheaper to buy than rent, which can be attributed to the lowest interest rates since the 1950s together with lower housing prices relative to the market peak.”</p><p>The downturn has seen the number of years to save for a deposit decline drastically, back to 2014 levels, across the country.</p><p>Households are now also dedicating the smallest proportion of their incomes towards paying a new mortgage since early 2004 and renters are spending the lowest proportion of their income on accommodation since 2007.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Housing affordability in numbers</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sub>• 8.6 years - the time it takes a typical household to save 20 per cent deposit for a dwelling based on saving 15 per cent of their gross annual income<br>• 34.4 per cent - the proportion of income needed to repay a 80 per cent loan to value ratio mortgage as of June 2019, the lowest it has been since 2004<br>• 28.5 per cent - the average percentage of household income required to rent a house as of June 2019</sub></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>With prices likely to continue their upward trajectory on the back of the latest rate cut, an increasing number of Australians have little to be excited about.</p><p>The latest wages growth figures released last week by the ABS also has revealed that growth has distinctly slowed, with the worst results since the middle of last year, lifting by just 0.5 per cent.</p><p>Earnings are believed to be on course to grow by just 2.2 per cent for the year and economists expect that number to fall further as unemployment ticks up.</p><p>The ratio of household debt to disposable income is about 190 per cent, according to Reserve Bank calculations, compared to 70 per cent at the beginning of the 1990s that then rose to 160 per cent at the time of the GFC.</p><p>Sydney remains the least affordable market for buyers, followed by Melbourne.</p><p>Last month, the Morrison government has announced further details of its <a href="https://theurbandeveloper.com/articles/first-home-buyers-scheme">first-homebuyer deposit</a> election promise that stands to benefit up to 10,000 Australians each year and is set to kick off from January next year.</p><p>In an attempt to reboot housing sentiment, the government announced price caps for support through the scheme, which is $700,000 for a house in Sydney and $600,000 in Melbourne.</p><p>First homebuyers will only have to save 5 per cent of a deposit under the plan, with the federal government to guarantee the difference of a standard down payment.</p></div></div></div></div></div>

First-time buyers and those re-entering the market could soon be priced-out.

House Prices Surge 500 per cent

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Australian housing prices have grown by more than 500 per cent during the past 25 years.</p><p>According to data from REIA, capital values have lifted from $160,000 in 1996 to $825,000 in 2020.</p><p>Housing prices spiked by 25 per cent in the past five years, from a median of $683,000 to $825,000, while other dwellings rose by 10 per cent to $600,000.</p><p>During the 25 years, Australian housing yields tightened from 5.1 per cent to 2.9 per cent while other dwellings recorded a drop in yields from 5.2 per cent to 3.7 per cent.</p><p>Houses in Darwin had the highest return, averaging 4.2 per cent, while Melbourne and Sydney had the lowest yields, both falling from around 4 per cent in 1996 to just 1.8 per cent in 2020.</p><p>House prices now look on track to <a href="https://theurbandeveloper.com/articles/buyer-fomo-drives-housing-surge">surge</a> again as buyers take advantage of <a href="https://theurbandeveloper.com/articles/rba-cuts-interest-rate">record low-interest rates</a>, <a href="https://theurbandeveloper.com/articles/experts-eye-end-of-homebuilder">low levels of immigration</a>, government programs and utilise money saved during the coronavirus recession.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/511a18ff-e942-4b57-ac18-06f5b4a21ccc.jpg" width="800"/></picture><div><span style="align-content:center;opacity:0.8">▲ Across the combined capital cities, 874 homes were taken to auction over the weekend making it the busiest Easter on record.</span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>The signs already look good for a strong price rally in 2021 after the east coast-dominated residential market finished 2020 strongly, with more buyers entering the market as listings remained low.</p><p>Across the December quarter, the weighted average capital city median price increased by 6 per cent to $825,205 for houses and 0.9 per cent for other dwellings. </p><p>Owner-occupiers have driven the boom with new loans up 80 per cent since May, although investor activity is starting to grow with a 9.4 per cent increase in January, the strongest monthly result since September 2016.</p><p>“Despite rising vacancies and the low yields, we are starting to see investors re-emerge as they respond to a rising market with further growth expectations and low borrowing costs,” REIA president Adrian Kelly said.</p><p>ANZ economists expect <a href="https://theurbandeveloper.com/articles/sydney-housing-market-update">Sydney</a> and Perth house prices to jump 19 per cent across 2021, with prices in Hobart expected to lift by 18 per cent, <a href="https://theurbandeveloper.com/articles/melbourne-housing-market-update">Melbourne</a> and <a href="https://theurbandeveloper.com/articles/brisbane-housing-market-update">Brisbane</a> 16 per cent and Adelaide 13 per cent.</p><p>Westpac also upgraded its forecasts for the next two years, tipping <a href="https://theurbandeveloper.com/articles/westpac-forecasts-20pc-property-gains">10 per cent gains this year and next year.</a></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/bfeed326-b240-4edd-8c2f-73ec8b775ad2.jpg" width="800"/></picture><div><span style="align-content:center;opacity:0.8">▲ Home values continue to rise on the back of ultra-low interest rates, stimulus and the nation&#x27;s adept handling of pandemic. Image: Alamy</span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>The RBA said it will keep the cash rate at 0.1 per cent until 2024, despite the bank’s own research finding a permanent cut to rates of one percentage point could push house prices up 30 per cent over three years.</p><p>The RBA has said it will only lift interest rates when inflation is sustainably within the 2-3 per cent band.</p><p>No action has been taken by regulators who say high lending standards continue to be maintained, however prices and loan activity will continue to be under scrutiny.</p><p>The last time house prices nationally lifted so much was in the late 1980s in a property boom that was ended by double-digit interest rates and the 1990-91 recession.</p><p>SQM Research managing director Louis Christopher said recent price increases had not been supported by the fundamental dynamics of supply and demand, but low interest rates.</p><p>AMP chief economist Shane Oliver said recent prices increases in the face of low immigration suggested that an impending oversupply could be on the horizon.</p><p>“Without immigrants coming in, the underlying demand will be running below supply which will lead to rebalancing,” Oliver said.</p><p>“[This] massive pandemic inspired demand for houses [has also been] helped along by HomeBuilder which ends this month,” Oliver said.</p></div></div></div></div></div>

Australian housing prices have grown by more than 500 per cent over the past 25 years...

a22754f6-82b3-48a2-bf93-6b8cfce9dfb4

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Australia’s record low interest rates are exacerbating housing wealth inequality, a new Reserve Bank research paper has found.</p><p>The <a href="https://www.rba.gov.au/publications/rdp/2020/pdf/rdp2020-02.pdf">paper</a>, released as the bank’s February <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2020/2020-02-04.html">minutes</a> suggests that further easing is in the pipeline, shows that expensive areas are more sensitive to changes in the cash rate.</p><p>Reserve Bank economists Calvin He and Gianni La Cava said that there is evidence that housing supply conditions are a factor.  </p><p>“For areas in which it is difficult to build housing—where supply is ‘tight’—most of the increase in demand will be met by an increase in the price of housing, rather than in the quantity of housing,” He and La Cava said. </p><p>Housing supply in more expensive areas tend to be more constrained, while the price distribution of detached houses is slightly more sensitive than apartments to changes in the cash rate. </p><p>The economists said that in the longer term housing supply should move in line with construction costs, but that in the short-run land availability matters. </p><p>While the property market rebound has started to <a href="https://theurbandeveloper.com/articles/approvals-resilient-as-house-prices-continue-rebound-">stir a recovery</a> in residential construction, inner-city apartment completions <a href="https://theurbandeveloper.com/articles/slow-sales-drop-apartment-supply-21pc">remain 30 per cent</a> below their 2017 peak.</p><p>Related: <a href="https://theurbandeveloper.com/articles/australias-housing-system-needs-a-big-shake-up-heres-how-we-can-crack-this">Australia’s Housing System Needs a Big Shake-Up</a></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/084a096a-d2a5-4c2d-86ab-9a12360fb911.jpg" width="800"/></picture><div><span style="align-content:center;opacity:0.8">▲ House prices tend to respond differently to monetary policy in regions where incomes are high, households are more indebted and there is a higher share of investors.</span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>Despite the significance of the downturn, Australia’s housing markets are the most unaffordable in the developed world.</p><p>And cheap debt has <a href="https://theurbandeveloper.com/articles/australias-housing-system-needs-a-big-shake-up-heres-how-we-can-crack-this">supercharged house prices</a>, according to UNSW professor Hal Pawson.</p><p>After cutting interest rates <a href="https://theurbandeveloper.com/articles/rba-two-cuts-away-from-qe">three times last year</a>, the bank’s minutes reveal that the <a href="https://theurbandeveloper.com/articles/rba-two-cuts-away-from-qe">bar for further easing</a> remains low with members “reviewing the case for further reduction in the cash rate” at its February meeting.</p><p>The board noted that a further reduction in the cash rate could encourage more borrowing at a time where there was already a “strong upswing” in the market. </p><p>“Contacts in the Bank&#x27;s business liaison program had reported an increase in sales of new homes and greenfield land in recent months.”</p><p>Separately, the board said that the coronavirus outbreak provided a “new source of uncertainty” and “presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy”.</p></div></div></div></div></div>

Australia’s record low interest rates are exacerbating housing wealth inequality, a new Reserve Bank research paper has found. 

ced9adb2-6c2b-47f1-abab-6b4ec2371e1e

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>The banking royal commission has not increased the factual accuracy of mortgage applications, with so-called “liar loans” rising to record levels despite the banks significantly increasing their verification requirements.</p><p>A survey from investment bank UBS has found that Australia’s mortgage market is rife with inaccurate loans, with record numbers of applicants overstating their income and understating their debt burden and living costs.</p><p>UBS analyst Jonathan Mott said that the expectation that tougher lending standards would lead to an increase in the accuracy of mortgage applications was not the case.</p><p>The number of applicants who reported their application was not “completely factual and accurate” rose to a record 37 per cent from 32 per cent in 2018, with 20 per cent overstating their income and 34 per cent understating living costs.  </p><p>In a speech at the <em>Financial Review’s</em> property summit in Sydney <a href="https://www.afr.com/policy/economy/treasurer-to-rein-in-asic-on-home-loans-20190925-p52utj">last week</a>, Treasurer Josh Frydenberg said that if responsible lending laws are applied too stringently they could adversely affect property markets.</p><p>The treasurer called for a “sensible balance” in the application of responsible lending obligations by the banks. </p><p>The survey’s findings comes as new data from the central bank <a href="https://www.rba.gov.au/statistics/frequency/fin-agg/2019/fin-agg-0819.html">released on Monday</a> shows the pace of lending to property buyers has recorded its slowest growth on record.</p><p>The financial aggregates data showed that housing credit growth slowed to 0.17 per cent despite the <a href="https://theurbandeveloper.com/articles/ubs-upgrades-its-house-price-forecasts-again-">turnaround</a> in the housing <a href="https://theurbandeveloper.com/articles/regulators-positive-about-housing-market-recovery-">market</a> and improving mortgage approvals, which have risen 10 per cent from record lows.</p><p>Mott explains that to add 1 per cent to housing credit growth, mortgage approvals would need to grow by around 10 per cent.</p><p>“Even if mortgage approvals re-accelerate to levels seen at the height of the housing bubble, system housing credit growth would only grow to [about] 5.5 per cent,” Mott said. </p><h2><strong>Credit growth in Australia</strong></h2></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/7699885d-3476-4607-b7c6-076218c99650.png" width="1188"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong><sup><sub>^ Credit growth in Australia (year-on-year basis) Source: UBS</sub></sup></strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>UBS analysts expect housing credit growth to bottom out over the next two months, as bank fundamentals are increasingly challenged by ultra-low interest rates. </p><p>Mott estimates that the banks will only pass on 30bps of <a href="https://www.rba.gov.au/media-releases/2019/mr-19-27.html">Tuesday’s 50bps cash rate</a> cut. </p><p>“The major banks continue to lose share in the housing market with CBA the only major to grow its mortgage book in August (0.3 per cent). </p><p>“APRA data showed credit card outstanding balances shrunk -3.3 per cent [over the quarter] which suggests much of the tax refunds may be being used to pay down debts,” Mott said.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div></div></div>

The banking royal commission has not increased the factual accuracy of mortgage applications...

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