Genworth’s profit slide is a signal of more housing pain to come
Mortgage insurer Genworth (GMA:ASX) this week reported a 10.9% drop in net profit on the back of a 21% jump in bad loans. The company also warned of an apartment glut and lower prices. Meanwhile, financial counsellors are reporting rising calls from people suffering mortgage stress. Are these worrying signs? We think so.
Last year we noted that financial stress would become a headline in 2017 and perhaps because we believe the serious repercussions may yet be a year or two away, the headlines have arrived much earlier than expected.
You might recall some our many blog posts on the subject last year. We offered the following list of observations:
- The residential crane count in Australia skyrocketed by 313% between September 2013 and September 2016. There were more residential construction cranes along the east coast of Australia than across New York, Boston, Chicago, San Francisco, Los Angeles, Toronto and Calgary combined.
- Property doyens Harry Triguboff, Washington H Soul Pattinson, John Symond and John Gandel hung up the ‘For Sale’ shingle.
- There has been stunning growth in the number of practising real estate agents. 2016 Victoria, NSW and Queensland growth in the numbers of real estate agents of 8.7% versus Australia’s population is growing of 1.6% per annum.
- There has been a preponderance of property developers making the rich lists and, in particular, a mushrooming number of property developers under 40 who were still at school during the last recession.
- Borrowers are extending themselves beyond reasonable limits; surveys have found that more than a quarter of Australian home buyers who had taken out a mortgage over the past two years admitted they misrepresented some information on their loan application.
We also noted the rising vacancy rates in the 5-15km band around the Brisbane CBD could be a foretaste of the financial stress to come for those who have bought, with leverage, into an oversupplied apartment market.
Record credit card and mortgage debt, rising vacancies, higher mortgage interest rates, over-construction and oversupply combined with any slowing in the Australian economy must, we believe, lead to a lid being placed on rising property prices and even a reversal, particularly for apartments.
The writing is already on the wall with several developers already discounting their inventory with offers of free flights, frequent flyer points and 10-year rental guarantees.
For the purposes of this blog post, we last year also noted a relationship between residential dwelling commencements and full-time employment, produced by our friend and equity researcher Douglas Orr, revealing peaks in commencements have foreshadowed large drops in full-time employment in Q3-1999, Q1-1995, Q2-2000, and Q2-2008.
Back in November, the mortgage insurer Genworth – whose job it is to protect banks from the riskiest mortgage borrowers by forcing those borrowers to pay for insurance and put Genworth on the hook – flagged higher losses and ongoing delinquencies in regional areas suffering from the collapse in mining activity. Genworth stated that mining-exposed regional areas were facing “higher levels of mortgage stress” from rising underemployment and that it expected “elevated delinquencies.”
In Genworth’s profit announcement, the company noted:
“The unemployment rate has moved up slightly to 5.8%, but key labour market indicators remain mixed. Under-employment remains near record highs, implying a greater degree of spare capacity in the economy than indicated by the unemployment rate alone [Roger’s note: this is just a fancy way of saying unemployment, and by extension, debt serviceability is worse than that being reported). These dynamics are increasing mortgage stress in certain regional economies and Genworth expects elevated delinquencies in these regions in 2017.”
Genworth also noted:
“House price growth is likely to moderate in 2017, with Sydney and Melbourne continuing to outperform the other major cities. There may be wider variance in price movements of single dwellings compared to high density properties, particularly in east coast capitals.”
Large companies like the banks and Genworth have much to lose from a downturn in the economy and property in particular so it’s not in anyone’s interest for them to come out screaming the sky is falling.
It may be better instead to hear from professional financial counsellors who have to quite literally help those in dire financial straits. For example, Bloomberg this morning reported the following:
“Homeowners, consumers and property investors around Australia are making more calls to financial helplines as three warning signs back up the spike in demand: mortgage arrears are creeping up, lenders’ bad debt provisions have increased and personal insolvencies are near an all-time high.
“Its steadily out of control — I don’t know of too many financial counselling services where demand doesn’t exceed supply,” said Fiona Guthrie, chief executive officer of Financial Counselling Australia, who says the biggest increase in calls is from people suffering mortgage stress. “There are more people who have got mortgages that they can’t afford to pay.”
“There’s so much household debt that a couple of rate hikes here would completely knock the wind out of the housing market, and a lot of people would be impacted by it,” said Gareth Aird, economist at Commonwealth Bank of Australia, the nation’s largest lender. That’s partly why he doesn’t think the RBA will lift rates until 2018 at the earliest.
In the mining state of Western Australia, more than 10% of mortgage holders have little or no equity buffer, according to a Roy Morgan report last week. In South Australia and Queensland, 8% and 7.2% of borrowers respectively are in negative equity.
That may not matter if you’re a homeowner with a secure job and comfortably servicing your mortgage. But Australia’s labour market is far from solid, with the RBA citing it as one of the economy’s biggest uncertainties. The jobless rate rose for the second straight month in December to 5.8%, while underemployment — the number of workers wanting more hours — is near an all-time high. At the same time, wages growth is the lowest on record.
Lenders are watching these indicators as closely as the RBA. After a seven-year bull run, annual cash earnings at Australia’s big four banks fell last year for the first time since the financial crisis, said PricewaterhouseCoopers. At the same time, their bad debt expenses – which encompass both business and consumer lending – jumped 39% to A$5.1 billion, the highest since 2012.
But the hardest indicator to track may be borrowers worried about making their next repayment. Counsellors at the National Debt Helpline deal with such problems and are now even getting calls from property investors, said Guthrie. In the last quarter of 2016, phone calls to the service jumped 12 percent on the previous year to an average 11,079 per month, she said. That’s double the rate of increase for the same period a year earlier.
“Pockets of stress appear manageable in 2017 given the prevailing low interest rate environment,” Citigroup banking analyst Craig Williams said in a January report.
But those stresses are increasing. Moody’s Investors Service and S&P Global Ltd have both said that 30-day arrears on Australian mortgages packaged in securities they track are at multi-year highs. Unsurprisingly, the worst hit areas are in Western Australia, where 2.03% of mortgages were in arrears, up 48% year-on-year, S&P said in December. In New South Wales, the strongest economy, mortgage arrears were up 11%.
ANZ Banking Group Ltd Chief Executive Officer Shayne Elliott said in November he saw “emerging signs of stress” in the economy, citing both households and small businesses. Citigroup’s Williams pointed to potential areas of concern in apartment construction and unsecured personal lending when he said “the credit cycle has turned” last month.
“These warnings have to be taken seriously,” said Harry Scheule, professor of finance at UTS business school in Sydney and an expert in credit risk, arguing that 30-day delinquencies are a forward-looking indicator. A “bust scenario may be unlikely, but it is within reach.”
You can read the full article here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
