Over the 2009/10 financial year there were 1,751,679 individuals that received rental income (owned investment property).  The number had increased by 3.5% from the previous financial year.  Of these 1,751,679 individuals, 1,110,922 individuals or 63% made a loss on their rental income; the remaining 37% of individuals turned a profit on their rental properties.

Of those 63% of investors that had made a loss on their rental income, the typical loss was $9,132 over the year or $176/week.  The most concerning sign is that individuals that earn less than $6,000 a year are carrying a loss of $207/week with only those on an annual salary of more than $180,000 carrying a greater loss each week ($399).  It is difficult to determine what this actually means however, you could assume that a portion of those on incomes of less than $6,000 p.a. are self funded retirees.  Of course a portion of these people are likely to not be self funded retirees either.  If the current housing market conditions persist and these people are essentially making no annual income having a negatively geared property is of limited benefit and they may in fact be looking to sell these homes in an already soft market.  Even for those that are self funded retirees, if they have no personal income there is no benefit to them having a negatively geared property asset.

Somewhat worrying is the fact that 825,284 investors making a loss on their rental income are earning $80,000 a year or less.  These owners are typically making a loss of $8,111/year ($156/week).  For most of those in the lower income brackets the need to negatively gear a property to offset their tax is typically lower than those on a higher income.  This leads me to believe that many have got into investment housing initially for the taxation benefits but obviously with a view to experiencing capital gains and the subsequent positive cash flow benefits in the future.  The statistics also show that 285,638 persons (26%) making a loss on their rental property are earning more than $80,000 a year.  These individuals recording a tax loss on their rental property are typically losing $12,082 a year or $232/week.

The news is much more positive for those investors that are achieving a profit from their rental property.  The typical owner with a net rental income of more than or equal to $0 is making $160/week from their property as opposed to the -$176/week loss many others are making.

The results highlight that most property investors are negatively geared.  Of course some will be quite happy to be negatively geared with the cost offsetting tax elsewhere while others, particularly those nearing retirement or at retirement, will be hoping the property starts to turn a profit in the near future.  Given the current economic and housing market conditions, it seems as if these investors will be reliant on a pick-up in rental growth to propel them to positive gearing rather than capital gains.  This is the reason why investors that are interested in purchasing in the current market must be careful and should focus on buying for long term capital gains while maximizing their rental return or even positive gearing rather than short-term capital gains.

I’ve provided a summary of the top earning postcodes below across both the capital cities and regional markets as well as those capital city postcodes where mean incomes are the lowest.  We’ve also put together a bunch of thematic maps which are probably the best way to highlight the wealth trends across the capital cities.

The top earners are the usual suspects, mostly clustered around Sydney Harbour, the Western Suburbs of Perth and a few bayside/inner eastern suburbs of Melbourne.  Nationally there are 47 postcodes with a mean taxable income of more than $100,000; that’s 11 more than recorded across the previous financial year.  More than half (57%) of these high income postcodes are located in Sydney, 21% are in Melbourne and 15% are in Perth.  Canberra and Brisbane showed only one postcode each recording a mean taxable income of at least $100,000, while the only regional postcode made the high earners list:  3441 which is home to the Macedon Ranges suburb of Mount Macedon.

The highest income postcodes outside the capital cities are typically located in resource rich areas like Queensland’s Bowen Basin and the Western Australia’s Pilbara.

The lowest income capital city postcodes are primarily located in the outer fringes of Melbourne and Adelaide with these locations comprising 40% and 35% respectively of the top 20 list for lowest capital city mean taxable incomes.  Even though these postcodes have comparatively low taxable incomes, you can see that each one has recorded an increase in mean taxable income over the most recent financial year.

According to the RBA, the standard variable mortgage rate at the end of March this year was 7.4%, just 6 percentage points higher than the ten year average which is 7.33%.  Even if lenders don’t pass the full rate cut on (as most expect they will not), it is safe to assume that next Tuesday we will see variable mortgage rates fall below the 10 year average once again (variable mortgage rates were below average between December 2008 to April 2010, a period of significant house value appreciation).

Lower mortgage rates are certainly a positive for the housing market.  Affordability has already improved on the back of lower dwelling values (values are down 5.3% across the combined capital cities since peaking back in October 2010) and the two rate cuts in November and December last year.  Of course housing affordability will improve further after a rate cut.

Will the rate cut be enough to inject a confidence boost in the economy?  Probably.  Of course it depends on other factors, particularly how labour market conditions pan out and any announcements in the federal budget that affect the household balance sheet.  Overall it makes sense that we should see some gradual improvement in the consumer mindset which will have a positive flow on for retail sales and property sales.

Despite the fact that there was no improvement in sales activity for residential land, values have continued to rise over the quarter.  The weighted median residential land price increased by 1.7% over the quarter to $193,171 and across the capital cities, the increase was larger at 2.8% for the quarter.

Across the capital city markets analysed, median prices increased over the December 2011 quarter in each market except for Melbourne where they fell by -1.1%.  Across the other capitals the quarterly increases were largest in Adelaide (14.1%) followed by Brisbane (3.9%), Hobart (3.8%), Sydney (3.6%) and Perth (3.1%).

Hobart had the highest median lot size of the capital cities analysed over the quarter at 665m² while median lot sizes in Adelaide were the lowest at 375m².  Based on the median land price and median land size, vacant land in Sydney is the most expensive on a rate/m² basis at $533m², slightly higher than Perth ($527m²).  On a rate/m² basis, Hobart land enjoys a significant discount ($225m²) compared to other capital cities with Brisbane having the second cheapest value at $398m².

Over the 10 years to December 2011, the rate/m² on residential land has increased at a significant rate across each capital city.  The compound growth rate over the past 10 years is detailed below for each city:

• Sydney – 5.4%pa
• Melbourne – 11.7%pa
• Brisbane – 12.9%pa
• Adelaide – 14.4%pa
• Perth – 13.7%pa
• Hobart – 16.5%pa

Interestingly, if you compare the compound growth rate for land prices over the period to growth in overall house values it appears that the land component is becoming much more expensive while the value of the house is becoming comparatively more affordable.  Listed below are the ten year compound growth rates for capital city houses:

• Sydney – 3.9%pa
• Melbourne – 7.3%pa
• Brisbane – 8.3%pa
• Adelaide – 7.9%pa
• Perth – 9.9%pa
• Hobart – 9.7%pa

These figures lend weight to the argument that excessive charges on new development are inflating the cost of purchasing homes, particularly new homes.   So too is the limited supply which is highlighted by the fact that although the volume of transactions has collapsed we continue to see an increase in the value of vacant residential land.

Overall, it looks as if the supply side constraints in the new land market are going to persist over 2012.  Building approvals data which is available to February 2012 showed that the number of detached houses approved for construction (7,214) was at its lowest level since October 2011 and was -18.2% lower than the 10 year average level.  As yet there has been no significant or sustained improvement in these figures, in fact they have been trending lower since the year 2000.

With successive interest rate cuts delivered in November and December of last year and probably more cuts to come over the coming months, we may see some improvement in the volume of transactions in 2012.  However, despite the fact that volumes are at such low levels, median prices continue to rise highlighting that the limited supply is leading to increased prices.  A supply side response is therefore likely to result in lower levels of growth in values or potentially a reduction in the price of vacant land.

Let me know what you think, what should or could be done to improve the affordability of vacant land?

As most people will know, official interest rates are currently sitting at 4.25%.  Now over the past 20 years, the cash rate has sat at an average of 5.15%, much higher than its current setting.  Although the cash rate is at above average levels, standard variable mortgage rates are sitting at 7.4% which is fairly close to the 20 year average level (7.35%).  In recent years the major banks have sought to de-couple mortgage rates from official interest rates.  As a result, we now have a situation where the official cash rate is almost 100 basis points below the long-term average however; mortgage rates are sitting at average levels.  As a result, the amount by which the RBA is able to influence repayments on our largest asset class (housing) has been lessened over recent years.

Looking at the RBA website, their official role is detailed at this link.  A lot of the data suggests that we are pretty close to full employment and that we still enjoy economic prosperity and welfare.  However, many would argue that the current high currency is providing instability.  Although these are stated as their official role, in their agreement with Federal Government this ostensibly means keeping inflation between 2% and 3% over the economic cycle.

So looking at inflation and keeping in mind new data will be out later this month, headline inflation is currently recorded at an annual rate of 3.0%.  The RBA’s preferred measures of ‘underlying inflation’, the trimmed mean and weighted median are both well within the target range, recorded at 2.6%.  The most recent data available shows that headline inflation is at the top end of the target range (but it is falling) and underlying inflation is right around the middle of the band.  Obviously the RBA is concerned about inflation and with good reason.  Glenn Stevens was made Governor of the RBA in September 2006 and since December 2006, headline inflation has been recorded at an average of 3.0%, right at the top of the target band.  More concerning is the fact that the RBA’s preferred measures have been recorded at an average of 3.2% (trimmed mean) and 3.5% (weighted median).  Given this, it is no real wonder that the RBA decided not to cut interest rates this month. The RBA’s track record of hitting their inflation target has not been strong and they want to be as sure as possible before making any decision.

As I see it, it is fairly clear cut that another interest rate cut is required to help the economy, particularly if you take just a quick look at some of the recent negative economic data releases:

1. GDP – Australia’s economy continues to grow however, it is growing below the long-term trend
2. Property values – despite a stabilization over the first quarter of 2012, they are down -4.4% over the year
3. Consumer sentiment – the index continues to fall with pessimism outweighing optimism and the index is -10.2% lower than at the same time last year.
4. Business conditions – improving but still not particularly strong
5. Building approvals – continue to weaken and are -15.2% lower than they were at the same time last year
6. Housing finance data:
   1. When refinances are removed the value of finance commitments has risen by just 1.7% over the past year
   2. The number of non-refinance commitments remains at low levels and has increased by just 3.6% over the year
   3. Retail trade – remains quite sluggish having increased by just 2.0% over the past year
   4. Growth in demand for credit by the private sector remains benign:
      1. Total credit has risen by just 3.5% over the past year
      2. Housing credit has risen at an historic low rate of 5.3% over the year

Of course, times have changed in the Australian economy; consumers are saving again and credit isn’t as freely available as it used to be.  Although the Australian economy hasn’t entered into a recession it certainly seems that our mind set has changed and we are at least trying to be less reliant on borrowed money.  What that is likely to mean is that property values, building approvals, housing finance, retail trade and credit demand will grow at levels lower than those we have become accustomed to.  In saying this, just because the consumer mindset has changed it doesn’t mean we have to have a recession.

In my mind, we will see an interest rate cut next month as long as inflation is within the target range.  However, I don’t envy the RBA’s position, although a lot of the economic data looks bad they have been caught out before.  The significant growth in the mining sector is boosting the overall economy, the unfortunate thing being that most of us aren’t reaping these benefits.  Factors such as falling property values and lower levels of construction feed back in to consumers showing less inclination to spend which in-turn feeds back in to lower levels of consumer and business sentiment.  If we aren’t careful it could also lead to higher levels of unemployment and lower levels of economic growth or even a recession.

Let me know what you think. Was the RBA right to leave interest rates on hold and do you think they will do so again next month?

Over the year to June 2011, the country’s population is estimated to have increased by 1.4%.  The rate of population growth across the capital city markets (1.6%) has eclipsed growth rates in regional areas of the country (1.2%).  The figures show that of Australia’s estimated population of 22,618,294 persons, 14,500,754 persons lived within the capital cities.  This equates to 64.0% of the population residing in one of the eight capital cities.  In fact, the five largest cities in the country (Sydney, Melbourne, Brisbane, Perth and Adelaide) accounted for 60.9% of the country’s population. Since 1996, there has been a steady increase in the proportion of the country’s population that is living in the capital cities.

Across Australia, it is estimated that 8,117,537 persons live outside of the capital city markets.  Across the country there is 53 non-capital city Statistical Divisions and approximately 45% of those persons living outside of the capital cities live in the ten most populous of these regions.

Across each individual state except for Queensland (45.3%) and Tasmania (42.4%) the majority of residents live within the capital city.  Even though Brisbane and Hobart don’t have more than 50% of the state population, they do still have the largest proportion of the population across all regions of the state.  Of all the states, other than the Australian Capital Territory, Western Australia is the most centralized state with 74% of residents living in Perth.  The other states which are heavily centralized include Victoria (73.6%), South Australia (73.2%) and New South Wales (63.4%).

Western Australia has been the fastest growing state over recent years and when looking at the regions with the greatest percentage growth over the most recent 12 months, Western Australian regions feature heavily.  Although population continues to grow, the rate of increase has slowed markedly over recent years with only eight regions, five of which are in Western Australia, recording population growth of 2.0% or more over the year.

Overall, the results highlight that Australia’s population remains heavily centralized with more than 60% of residents living within our five largest cities and these five cities are the only ones throughout the country that have a population in excess of 1 million persons. Given that the capital city markets tend to enjoy higher wages and have better job opportunities it is no surprise to see that so many residents choose to live in the major capital cities.  In regional markets, the population is most centralized within those coastal regions adjoining the capital cities.  This result indicates that residents that choose to live outside of the capital city tend to remain close.  This is due to the fact that they can still commute to the capital city for work and these areas also tend to have a much more adequate supply of infrastructure including: roads, schools, retail, health and essential services.  Especially when compared to those non-capital city regions in more rural areas of the country.

Of particular interest is the analysis on mortgage arrears across Australia and the comparisons with other countries.  The percentage of mortgages more than 90 days in arrears are a reasonable barometer of household mortgage stress; or what seems to be in the case of Australia, a lack thereof.

Across the entire pool of mortgages nationally the report (based on data from the Australian Prudential Regulation Authority)  shows that slightly less than 0.6% of housing loans are 90 days or more overdue.

As the graph shows, the level of mortgage arrears has been trending upwards since 2003 and has recently shown an improvement, falling from 0.7% in mid 2011.

International comparisons put this measure into perspective.   The percentage of non-performing loans are the highest in the UK at just below 7% (and the upwards trend is continuing), while the percentage in the Euro area is approaching 6% and the US shows an improving trend with non-performing loans now around the 5% mark.

From state to state it can be seen the trends are somewhat different however, it should be noted that these figures are based on securitised mortgages only and they represent around 10% of all mortgages. Based on these figures, the resource rich states of Western Australia and Queensland are showing the highest rates of mortgage arrears.  According to the RBA this is likely due to loans which originated between 2006 and 2008 “towards the end of the period of rapid housing price growth in those states which was followed by falls in prices”.

It can be seen from the applications for property possession which are a leading indicator for loan defaults, that each of the states is likely to show an improvement in arrears rates going forward.

It’s clear from the graph below which shows the regions with the highest housing loan arrears rates that most of the repayment pain in concentrated across the mortgage belts and areas with higher rates of unemployment.  Even these regions aren’t showing an arrears rate above 1%.

Overall, the findings show that the vast majority of Australians are responsibly paying down their debt.  In fact, based on the most recent Household, Income and Labour Dynamics in Australia (HILDA) Survey, the RBA Review highlights that “many borrowers are repaying substantially more than required” based on their mortgage contracts.  Additionally, the RBA Review suggests that the rate at which borrowers were making excess repayments on their mortgages increased over 2011.

The RBA also suggests that the reduction in lending rates in 2011 coupled with the fact that most borrowers don’t change their regular repayment amounts when interest rates fall provides an additional buffer to offset any potential future setbacks to their income.

The latest Financial Stability Review provides an endorsement to stability and resilience of the Australian housing market.  If arrears rates were surging, as they did in the US, UK and Euro area there would certainly be some alarm bells ringing.  In fact, the opposite is true and the leading indicators are suggesting arrears rates are likely to improve over the year.

To provide a more granular analysis, I thought it would be interesting to look at where the most sales (houses and units) were occurring under the $300,000 mark.  Interestingly, when you break the analysis down to a finer level like this, based on actual sales rather than median prices, across the country the results are a little bit different (but still highlight the low proportion of very affordable properties in some locations).

The table below shows the proportion of properties that have sold since January 2011 to now where the sale price was under $300k:

No surprises that the regional markets offer much more affordable price points, as do the smaller capital cities of Hobart and Adelaide.  Importantly, around 10% to 15% of all dwelling sales across the larger capital cities have transacted at price points under $300,000, highlighting the fact that affordable housing stock does exist… you just need to know where to look.  It also helps if you don’t mind a long commute into the CBD and/or owning an apartment rather than a house.

The tables below show the top 20 suburbs across both the capital cities and the regional markets of each state and territory based on the number of dwelling sales recorded at a price under $300,000 since January 2011.

1. The fall in volumes was anticipated given the removal of first home buyer stamp duty concessions in the country’s largest housing market, New South Wales; and
2. The figures are not seasonally adjusted so you typically see a sharp slowdown in January each year due to many buyers and sellers being on holidays

The data shows that the number of first home buyer finance commitments fell by -21.6% over the month however, non-first home buyer finance commitments to owner occupier volumes fell by a slightly lower but similar -18.7% over the month.  At this time of year it is much more telling to look at the proportion of first home buyers compared to all owner occupier finance commitments.

Over January 2012, there were 8,172 owner occupier finance commitments to first home buyers which equated to 20.3% of all owner occupier finance commitments.  It was also right in line with the five year average proportion (20.4%) and it was much higher than the 16.2% of all owner occupier finance commitments in January 2011.  It’s also telling to look at the difference in the number of first home buyer finance commitments this January compared to last year.  The number of first home buyer commitments in January 2012 were 44.7% higher than what was recorded in 2011.  On the other hand, non-first home buyer finance commitments in January 2012 were only 10.1% higher than the previous year.

At an individual state level the proportion of first home buyers increased across all states and territories except for New South Wales and the Australian Capital Territory over the past month.  The proportion of loans to first home buyers in January 2012 varied from 14.0% in Tasmania to 23.0% in the Northern Territory.  At the same time in 2011, the proportion of first home buyer loans varied from 13.1% in South Australia to 18.2% in Western Australia.  Across each state except Tasmania the proportion of first home buyers in January 2012 was higher than in 2011.

We certainly aren’t expecting first home buyer volumes to come roaring back in 2012 however, activity has been improving on the back of an improved affordability scenario.  Next month’s data should start to provide more clarity about any trend that is developing with regard to first time buyer activity.  We would expect that lower property values and higher rental rates (which is what we are currently seeing) is likely to attract more first home buyers into the market.  The exception of course is likely to be New South Wales with much of the demand brought forward due to the incentives for first home buyers that were in place in late 2011.

A recession is technically defined as two consecutive quarters of negative economic growth.  As the above chart highlights Australia hasn’t recorded a recession since the June 1991 quarter (the recession we had to have according to Paul Keating).  Over the past 20 years, the average annual rate of economic growth has been recorded at 3.4%, as you can see economic growth is currently more than a full percentage point below this 20 year trend.  In fact, the annual rate of economic growth has consistently been below this trend level since the December 2007 quarter, four years ago and right before the onset of the Global Financial Crisis (GFC).

One of the many reasons why economic growth has been slower since the onset of the GFC can be attributed to the increase in the household savings ratio.  The latest data shows that the household savings ratio is currently sitting at 9.0% and although the ratio has eased somewhat in recent quarters it remains at much higher levels than what has been recorded over recent years.  Over the past 20 years, the household savings ratio has been averaged 4.5% indicating that current household savings levels are double the long-term average.  As mentioned, economic growth has been below average since the December 2007 quarter and since the December 2007 quarter, the household savings ratio has averaged a much higher 8.8%.

Obviously, there are many other factors that impact economic growth however, if households are saving money rather than spending money there is a flow on effect right across the economy; lower demand for retail and manufactured goods and lower demand for housing (purchase and construction).  The table below highlights how certain industries have really felt the effects of the slowdown since the onset of the GFC and subsequently since Australian’s started saving more.  Although certain industries have shown very low levels of expansion over the period, others – more essential sectors of the economy – have continued to expand.

Overall, less spending by Australian households has flow on affects right across the economy.  It also appears that a greater level of saving is a direct contributor to lower levels of economic growth.  There are other factors to consider such as the higher Australian dollar and the weakness emanating out of other international economies to consider as to why economic growth has been slower.  In stating this, it appears that industries such as accommodation and food services, manufacturing, real estate and retail are likely to continue to underperform until such time as Australian consumers once again show a preparedness to spend their disposable income.

Recent forecasts from the Reserve Bank within their latest Statement on Monetary Policy suggested that annual GDP over the December 11 quarter would be 2.75%, higher than the 2.3% recorded.  Their forecasts also show that they expect that GDP will grow between 3% and 4% on an annual basis to the June 2014 quarter.  Given that their recent forecasts have been a little high and they have commented that the Australian economy is growing at a trend rate (when it hasn’t been) we’d like to find out from you how you think Australia’s economy will perform over the next few years.