Weekly Reports | Nov 03 2023
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Weekly Broker Wrap: house prices rise; mortgage demand resilient; CommBank set to return; conditions sour for commercial property.
-House prices and rents continue to rise
-Mortgage growth continues, but mortgage stress is increasing
-CommBank ready to re-compete in the mortgage market
-Challenging conditions worsen for commercial property
By Greg Peel
National house prices increased 0.9% in October, notes Morgan Stanley, up 8.9% from the January trough and up 6.8% on a year-on-year basis. Auction clearance rates suggest price growth will slow over coming months, but remain positive. This trend is likely to continue as the rise in new listings remains above its usual seasonal pace, the broker suggests.
Conditions in the rental market remain exceptionally tight. Rents in capital cities continue to increase at a double-digit annual rate (10.4%) and re-accelerated in October in both monthly and annual terms, Morgan Stanley notes.
Similarly, rental vacancy rates sit near historical lows (1.1%) and tightened in the most recent month. Tightness continues to be driven by the combination of historic rates of net migration, and resilience of labour market conditions. Until either of these change, the rental market is likely to remain historically tight, Morgan Stanley warns.
Not helping is housing construction, or a lack thereof, with September data remaining at weak levels. September building approvals declined -4.6% in the month, weaker than Morgan Stanley’s -3.0% forecast, with broad-based declines in approvals across detached houses (-4.0%) and apartments (-5.8%), and both are well below their levels from a year ago.
The housing market remains an important driver of the business cycle and channel for monetary policy, the broker notes. Resilience in data this year points to lower downside risks to the economic outlook, although construction in particular is still likely to be a drag over the next twelve months, but also less disinflationary impulse from the sector.
In the October meeting minutes, the RBA noted: "The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed". Morgan Stanley sees this resilience as strengthening the case for further monetary tightening, and continues to forecast a rate hike at the RBA's meeting next week.
As do many others.
Citi notes despite higher rates, both system mortgage and business lending growth have remained healthy. For the past twelve months, mortgage growth has remained “extraordinarily” resilient, in a 4-6% range, despite the sharp rate tightening cycle. Business lending growth has remained robust since February, and momentum has been stronger in last few months.
Recent economic data, showing strong retail sales, still-low unemployment and rising house prices, have driven upgrades to GDP forecasts. A better economic outlook, notes Citi, suggests robust lending demand.
But higher growth, in an environment of elevated inflation, also brings the risk of additional rate hikes and a delay to rate cuts in outer years. This could prove to be a dampener, particularly for business lending growth and also for mortgage growth to some extent.
Yet Citi assumes bank results, which roll out over the next couple of weeks, will indicate mortgage growth is remaining around the 4-6% growth range, supported by migration, robust wage growth, rising house prices/rents and a lack of housing supply.
The latest data from Roy Morgan nevertheless provide pause for thought.
In the three months to September, a record high 1,573,000 mortgage holders (30.3%) were “At Risk” of “mortgage stress”. This period encompassed three RBA meetings at which interest rates were left unchanged. The figures for the month of September represent a new record high, up 7,000 on a month ago.
Mortgage stress is defined with regard to proportion of income required for mortgage servicing.
Over 760,000 more households are at risk of mortgage stress after a year of interest rate increases.
As a percentage, the number of mortgages at risk of stress is lower than the peak reached in mid-2008, post GFC, which was 35.6%. Nominally, the total is higher nonetheless given growth in mortgages in the interim.
The number of mortgage holders considered “Extremely At Risk”, is now numbered at 1,043,000 (20.5%) which is significantly above the long-term average over the last 15 years of 15.3%.
Extremely at risk is defined with regard just the interest on a mortgage as a proportion of income.
Mortgages “At Risk” are set to increase to over 1.58 million, Roy Morgan attests, if the RBA raises rates by another 0.25% next week.
CBA Back in the Game
Over the past few months, Commonwealth Bank ((CBA)) had consciously decided not to compete on mortgage pricing, thus ceding market share to competitors. However, as economic conditions have improved and competition has softened, Citi suggests it appears CBA is gearing up to step back into the lending market.
The bank’s mortgage run-off has decelerated and the business book has regained growth. Citi believes the mortgage book could also return to growth as early as October/November, but is likely to continue to grow below-system as funding constraints remain.
The bank has a record $68bn wholesale funding maturing in FY24, and will need to refinance at higher rates. CBA will report its September quarter results on November 14.
Unsurprisingly, notes Citi, Westpac ((WBC)) had been the key beneficiary of CBA’s retracement, but is now experiencing a proportional moderation in growth. Overall, Citi thinks system mortgage growth is likely to remain concentrated among a few banks, particularly ANZ Bank ((ANZ)) and Macquarie Group ((MQG)), which are currently driving some 60% of flow.
As noted above, Citi believes mortgage growth will remain resilient in a 4-6% range supported by improved economic conditions.
Macquarie notes domestic institutional investors switched out of Westpac and into ANZ Bank and National Australia Bank ((NAB)) over the September quarter. Investors appear most bearish on Westpac amongst the majors, the broker suggests, and Bank of Queensland ((BOQ)) remains the most shorted (9.2% as of last week) despite its recent de-rating.
Macquarie sees around a -2-8% risk to consensus bank pre-provision earnings in FY24 and remains Underweight the sector.
Since the Fed started raising rates last year, Wall Street has been fearful of the impact on the US commercial property sector, including real estate investment trusts (REIT), which borrowed in the many years of near-zero rates to fund purchases/developments but are facing refinancing at ever higher rates.
The gradual maturing of loans and the need to refinance is a major part of the “lag effect” of rising rates.
That fear has also spilt over to Australia.
NAB economists note challenging conditions weighed further on Australian commercial property market sentiment in the September quarter, with the NAB Commercial Property Index slipping deeper into the negative at -16 points (-7 in the June quarter), to sit well below the long-term survey average (-2).
Sectoral trends nevertheless continue to vary. The Office market index fell to a near three-year low at -38 points (down from -28) amid rising vacancy and weak capital growth. After bouncing in the June quarter, the Retail index slipped back to -25 from -17, as retail trading conditions remained soft and consumption growth slowed.
The volatile CBD Hotels index also fell but printed positive 10 pts (down from 38), and is below the average (14). The Industrial index rebounded to plus 30 points after having fallen in the previous two quarters, with solid fundamentals continuing to support growth in capital values and rents in this sector.
Recent data all point to continued resilience in the economy, NAB notes, but the ongoing pass-through of higher rates and high inflation still suggests consumption growth will be soft in the second half of 2023. NAB continues to expect below-trend GDP growth of 1-1.5% in 2023 and 2024.
The economists also see the RBA hiking rates a further 25 basis points in November before staying on hold until the second half of 2024 as inflation continues to moderate — domestic factors including wages will be a central focus.
Against this backdrop, overall commercial property confidence levels have also softened. The 12-month measure fell to -9 points (its lowest point since the December quarter 2020), with the two-year measure also lower at plus 9 points. Confidence in the next 12 months fell sharply in both the Office (-34) and Retail (-24) sectors but lifted noticeably for CBD Hotels (plus 40) and Industrial (plus 39) property.
Longer-term confidence levels are positive for CBD Hotels (50), Industrial (38) and Retail (2) property, but turned negative for Office (-10, down from plus 10 in the June quarter).
When commercial property sector risk first reared its ugly head, local bank analysts were quick to point out that, unlike in the US, Australia’s big banks are not big lenders to the sector. Foreign (including US) banks and other financial entities carry the bulk of loans.
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