New home sales

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  New house sales figures up for September.

  Home sales lift: New home sales rose by 6.4 per cent in September. The number of sales stand at a 27-month high. The lift in sales is the biggest in 17 months. And the annual growth rate of 33.3 per cent is the fastest in 11½ years.

What does it all mean?

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According to Rice Warner Actuaries’ latest Direct Life Insurance Report, Australia’s direct life market has experienced growth over the past year that has seen it ‘come of age’.

The report reveals a dramatically changing landscape that features new, more sophisticated marketing, wider public acceptance, multi-channel distribution and an increasingly accepted online sales mode.

Richard Weatherhead, Director and Head of Life Insurance of Rice Warner Actuaries, believes the growing market is due to a shift in mindset from major insurers.

“The number of direct life insurance products sold in Australia has increased from 109 in 2008 to 164 today, an increase of 50 per cent in three years,” said Mr. Weatherhead.

“Major insurers have been devoting significant resources to direct distribution and direct life business over the past year, because they are viewing it as an integral part of most business planning rather than being a ‘blue sky’ venture.”

Today, direct life insurance constitutes around 17.8 per cent of overall risk insurance sales and 11.8 per cent of in-force business. Overall, from 2009 to 2010, sales were up 3.3 per cent to $403.1 million and in-force annual premiums increased by 9.7 per cent to $1,108.5 million as at 31^st December 2010.

While many factors can affect direct sales, the report has credited increasingly sophisticated target marketing and a focus on cross selling and up-selling to existing customers as being major drivers.

Despite the increase in sales and in-force premiums, there was a slight (0.2 per cent) decrease in mortgage and loan risk insurance. According to Mr. Weatherhead, this is a result of a general downturn in housing and a tightening of credit policies among home lenders.

“Mortgage and loan risk insurance is down, reflecting the slowdown in the housing market, the tightening of rules for loan approvals and rises in interest rates that made insurance less affordable in relation to borrowers’ overall budgets,” said Mr. Weatherhead.

Several emerging trends, outlined in the report, will continue to reshape the market over the next few years. In particular, the big marketing push through TV, which is leading to greater uptake and more widespread acceptance of the need for insurance, is closing the market to new players wanting to use that marketing method who may find it difficult to compete with substantial advertising spend of the well established competitors.
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“All distribution channels have seen significant growth in the past year, except direct mail and branch sales, the latter reflecting the downturn in the mortgage market,” said Mr. Weatherhead.
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“Particularly, we’ve seen increasing acceptance of the new online model. We know a high proportion of customers research products online before buying and over the past twelve months this has began to translate into real online sales, with $44 million of sales either online or as a result of a telephone call triggered by an online enquiry.”
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Mr. Weatherhead believes that the many challenges and changes facing the direct life insurance market over the next few years will lead to further evolution of the industry.
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“Life companies will be looking increasingly to customer engagement rather than sales as various segments of the market become saturated,” said Mr. Weatherhead.
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“Despite concerns arising from FoFA and some general views to the contrary, we consider that the move to direct represents a real opportunity for advisers to build new revenue streams via ‘no advice’ offers on the practice or dealer group website.”
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For more information on the report, click to view the Rice Warner Actuaries website

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Loans for the purchase of newly erected dwelling slumped by 12 per cent in February. Over the past three months loans are down almost 36 per cent – marking the biggest three monthly fall in records going back 32 years.

Overall, the value of housing loans fell by 4.0 per cent in February. The value of loans to owner occupiers was down by 4.8 per cent (number of loans down 5.6 per cent), while the value of investment loans fell by 2.3 per cent.

The proportion of first home buyers in the market fell from 15.2 per cent to 14.9 per cent of all lending in February – the lowest reading in 6½ years. The size of the average home loan was $281,500 – the lowest level in a year.

Even excluding Queensland the number of housing finance commitments have only been lower on one other occasion in the past ten years.

What does it all mean?

• There is no doubt that conditions are tough in the housing sector. Home prices have been easing, albeit modestly, while new construction in the sector has slumped to multi-year lows. Buyers seem to be holding off on purchases in all areas. Loans for the construction of new dwellings – a key forward looking indicator for housing activity – recorded a modest rise, but remained just above the lowest levels in two years. Even more concerning is that loans to purchase newly established dwellings have now slumped by almost 36 per cent in the past three months – marking the biggest three monthly slide in records going back 32 years.
• The natural disasters earlier in the year have no doubt had a negative effect on the housing sector, but rather than being the primary reason for the sharp downturn in housing activity it is more a peripheral issue that has compounded an already weak housing sector. In fact if Queensland is excluded housing finance fell by a much more profound 6.7 per cent in February. Keep in mind the data is for February and the double whammy November rate hike is the clear underlying driver behind the weakness across Australia.
• It is not only owner occupied loans that are falling, with even investor finance on the slide. The slump in investment loans is yet another sign that potential property investors believe that property prices are in for a period of consolidation, and as such can afford to take their time on investment decisions – especially given the Economic Insights Home loans fall to near decade lows likelihood of further rate hikes over the coming year.
• Interestingly the size of the average home loan is at a one year. The higher home loan interest rates have resulted in potential home buyers reworking their sums and being able to afford less. Higher interest rates have also resulted in the proportion of loans taken up by first home buyers falling to the lowest levels in 6½ years. The weakness in dwelling activity will no doubt result in more subdued economic growth in the near term.

What do the figures show?

Housing Finance

• The number of new owner-occupier housing loans fell by 5.6 per cent to 45,393 new commitments. The number of loans is 7.2 per cent lower than a year ago.
• Loans for the construction of homes rose by 1.1 per cent in January to 4,571 – holding just shy of the lowest reading in two years. Loans for the purchase of established dwellings (ex refinancing) fell by 4.0 per cent, while loans for the purchase of newly erected dwelling slumped by 12.0 per cent. The slide follows a 13.6 per cent fall in January and a further 10.2 per cent fall in December. Refinancing commitments were lower by 9.3 per cent.
• The value of new housing commitments (owner occupier and investment) fell by 4.0 per cent in February. Owner occupier loans slumped by 4.8 per cent while investment loans fell by 2.3 per cent.
• Banks accounted for 90.1 per cent of all loans taken out in February up from 89.4 per cent in Janaury.
• The proportion of first home buyers in the market fell from 15.2 per cent to 14.9 per cent of all lending in February – the lowest reading in 6½ years and well below the record high of 28.5 per cent set in May 2009. Fixed rate loans accounted for 7.3 per cent of all loans, down from 8.2 per cent of loans in January. And the average home loan across Australia stood at $281,500, up 1.8 per cent on a year ago.

What is the importance of the economic data?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

• The rate hikes over the past year are having a profound impact on consumer spending patterns. The housing sector is cooling while businesses continue to highlight weak trading conditions. Given the subdued near term economic conditions it is unlikely that the Reserve Bank will be raising interest rates anytime soon.
• The long term fundamentals for the economy remain sound. The job market remains tight, wage growth is healthy and affordability is tracking sideways. The rebuilding phase after the floods will support housing activity and in turn drive up economic growth in the second half of the year. CommSec doesn’t expect the next rate hike to take place until at least August.
• Our equity analysts retain a BUY recommendation on Adelaide Brighton (ABC) highlighting that “ ABC is one of our preferred stocks within our Australian building materials coverage. Our positive view is underpinned by the recent share market overreaction around contractual lime and cement supply concerns; its significant pipeline of growth opportunities; excess franking credits expected to support a higher payout ratio and potential capital management; strong balance sheet position, suggest considerable valuation upside”.

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• Capital city home prices rose by 0.2 per cent in seasonally adjusted terms in December after falling by 0.1 per cent in November according to the RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia. Outside capital cities, prices fell by 0.3 per cent in December.
• Capital city home prices are up 4.7 per cent on a year ago – the slowest growth rate in 18 months. Prices in the ‘Rest of State’ markets were up just 0.8 per cent in 2010.
• Prices rose in just two of the seven capital cities in December with Sydney up 1.0 per cent, and Melbourne prices up 0.4 per cent. Prices fell most in Darwin (down 3.3 per cent), followed by Canberra (down 2.5 per cent), and Perth (down 0.9 per cent).
• Prices are higher than a year ago in all capital cities except Perth and Brisbane.

What does it all mean?

• Australian home prices have completed a soft landing. In March 2010, prices were seemingly going gangbusters with annual growth standing at 14.1 per cent. But home prices are now tracking at a 4.7 per cent annual rate – modestly below the long-term average pace of 8.0 per cent.
• Effectively you can strike another item off the Reserve Bank’s worry list. The rate hikes delivered over 2010 have taken the heat out of the housing market ensuring that the normal supply-demand fundamentals are ruling the roost across capital city housing markets.
• While the Reserve Bank has done its bit to restore order to housing markets, having lifted interest rates to ‘normal’ levels, now it is up to state governments to ensure that there is adequate housing stock being supplied to meet latent demand.
• There are now marked differences in home prices across the nation. Melbourne prices are up more than eight per cent over the year while Perth home prices are going backwards by more than two per cent. Certainly it is inappropriate to refer to one single national home market – conditions vary significantly from state to state and region to region.

What do the figures show?

• The RP Data-Rismark Hedonic Australian Home Value Index rose by 0.2 per cent in seasonally adjusted terms in December after falling by 0.1 per cent in the previous month.
• House prices rose by 0.3 per cent in the month while apartments fell by 0.2 per cent.
• Capital city home (dwelling) prices are up 4.7 per cent on a year ago, the slowest growth rate in 18 months. House prices are up 4.7 per cent and apartment prices are up by 4.8 per cent.
• Prices rose in just two of the seven capital cities in December with Sydney prices up 1.0 per cent, and Melbourne up 0.4 per cent. Prices fell most in Darwin (down 3.3 per cent), followed by Canberra (down 2.5 per cent), Perth (down 0.9 per cent) and Brisbane (down 0.1 per cent). Prices were unchanged in Adelaide. In Hobart, prices rose by 0.3 per cent in November (December data not yet available).
• Home prices are higher than a year ago across all capital cities except Perth (down 2.3 per cent) and Brisbane (down 1.0 per cent). Prices are up most in Melbourne (up 8.4 per cent), followed by Sydney (up 6.6 per cent), Darwin (up 4.8 per cent), Adelaide (up 3.6 per cent) and Canberra (up 2.5 per cent).
• December home prices aren’t available yet for Hobart. In the year to November, home prices in Hobart were up by 1.3 per cent.
• Across the capital cities, the rental yield on houses stood at 4.0 per cent in December with the rental yield on apartments at 4.7 per cent.

What is the importance of the economic data?

• The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database covering more than 340,000 sales during 2010. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
• The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results would compare the end of March index with the end of December index.

What are the implications for interest rates and investors?

• Home prices are off the Reserve Bank’s worry list – at least for now. But state governments can’t rest easy – they need to ensure that barriers aren’t being put in front of developers and investors and also need to ensure that markets are well supplied by affordable land.
• A softening in home prices combined with the prospect of interest rates remaining unchanged until mid year is clearly positive for budding home buyers. Less doom and gloom stories about interest rates and unsustainable home prices will be beneficial for consumer sentiment more generally, boosting the outlook for retailers.

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