The Development Digest | 5.8.23 | JLL Development Site Services

We are pleased to provide you with our weekly?JLL Development Site Services Market Update -?The Development Digest.

Please contact me on 0402 085 702 / [email protected] if you would like to receive our more detailed weekly updates via email each Friday morning.

This update will cover:

• J.P. Morgan – Australian housing data
• RBA – Holds rates for the second consecutive month
• JLL Asia Pacific Debt Monitor – 28 July 2023
• Headlines of the Week

J.P. Morgan - Australian housing data

The below summary was prepared by J.P. Morgan’s Jack P Stinson, and provides a succinct summary of the current state of Australian housing loans and approvals.

The value of new housing loan commitments in Australia fell 1%m/m in June, disappointing expectations (J.P. Morgan: +2%m/m, consensus: +1.8%m/m). New owner-occupier loans declined just under 3%m/m, but the fall was somewhat offset by a rise in the value of new investor loans (+2.6%m/m). Though dwelling prices rose over the month, the volume of new owner-occupier loans fell relative to May, helping to generate the slide in the overall value of new loans.

The new loans data usually does a good job of predicting housing credit data in the following months, but there have been some wrinkles in recent prints. Despite a decent lift in the value of new investor loans in the past few months, investor housing credit fell in June, which may reflect an increase in investor sales and a shift toward non-residential assets. These dynamics make the near-term path for housing credit more volatilae, and also make it harder to use housing credit as a bellwether for the broader housing market. The flow of new loan growth should be a better indicator of the trajectory of the housing market, and today’s dip, as well.

In other housing data, building approvals declined 7.7%m/m in June, about in line with consensus though below our expectation (0%m/m). Approvals for detached houses fell 1.3%m/m and high density approvals declined 21%m/m. High density approvals tend to be volatile month to month, but the very large rebound in May has helped drag the overall trend higher, even as approvals for detached dwellings have continued to grind lower. Falling borrowing capacity over the hiking cycle has helped drive sustained declines in new loans for construction and building approvals, but with the RBA nearing the end of the cycle the scope for further falls on the back of tighter borrowing conditions is limited. Still, we expect rates to remain in restrictive territory for some time, and so expect upside for approvals to be capped. In the medium term, higher rents and population growth should be supportive of new dwelling construction.????

RBA – Holds rates for the second consecutive month?

With a welcome sigh of relief from the market this week, the RBA elected to hold rates steady for the second consecutive month.

Many economists and commentators now believe that we have reached the peak of the rate rising cycle, and the next movement is likely to be a rate cut. The question is now ‘higher, for how long’ before rates begin to come back down.

The below graph prepared by JLL Research provides a global snapshot of current policy rates and rate hikes to date since the rate hike cycles began.

JLL Asia Pacific Debt Monitor – 28 July 2023

Last week, as anticipated, the Fed and ECB raised their policy rate by a quarter point to 5.5% and 4.25%. During the press conference, Powell, again as anticipated, sounded dovish, leaving the door open for both skip and hike decisions in their Sept FOMC. After the July FOMC, strong macro readings/economic forecasts including stronger than expected US 2Q GDP report and IMF’s another upward revision for the world economy, have started to heap pressure on the US 10 year treasury yield by further bolstering the US soft-landing thesis. While these reports are certainly positive to stock markets, from bond market perspective, soft landing economy means another headwind to inflation fights and required job market softening, both of which have proved to be a lot tougher.

BOJ lifted its YCC bandwidth to 1% from 0.5%

On monetary front, everything went smooth until last Friday when BOJ sent a shockwave to the world. In their policy setting meeting, on the surface, BOJ has kept everything unchanged - leaving its policy rate and 10 year government bond yield target band unchanged at -0.1% and between -0.5% and 0.5% respectively. However, the central bank essentially tweaked the cap on 10 year government bond yield, broadening the band between -1% and 1% as the bank announced a major change in its bond purchase scheme: its unlimited purchase on the long term bond won’t kick in until the 10 year yield reaches 1%.

Japan 10 year government bond trend – its yield jumped by 11bps when the change was announced?

This measure has effectively raised Japan long term rate by 50bps, another hike following the first YCC tweak which raised the rate by 25bps last December. Nevertheless, relative to other central banks, the pace and scale of BOJ’s monetary tightening cycle has been pale in comparison – the Fed has lifted its policy rate by 525bps thus far whereas BOJ has raised 75bps only in this hike cycle. This demonstrates structurally muted price pressures in Japan – witnessed over the last three decades and thanks to this, Japan did not see any urgency or need to embrace those aggressive monetary measures adopted by other central banks. However, the BOJ has capitulated to those latest uncurbed price pressures at the end, ending up raising the long maturity yield further.

Going forward, 10 year Japan government bond yield is likely to continue to climb to 0.8-0.9% but falling short of reaching 1% - Ueda thinks the chance for the 10 year yield to reach 1% remains slim at this point and this will put an upward pressure on all yields including CRE loan rates.???

Our weekly Debt Monitor update is provided by Sungmin Park (Director, Asia Pacific Capital Markets Research).

Headlines of the Week

The AFR – RBA rate pause helps buyers step up as auctions get busier

• Robust demand from home buyers has kept pace with the rising number of properties being offered for sale, with the national clearance rate holding steady above 70 per cent even as auction listings jumped.
• The number of homes listed for auction has ticked up steadily through July, and leapt another 13.1 per cent in the past week, according to CoreLogic. Driving that unseasonable surge are vendors keen to tap into the recovery early, including investors burdened by higher borrowing costs.

The AFR – Safe and steady returns look at winning formula for build-to-rent

• Build-to-rent developments are delivering yields of 4 per cent or more, but may be prized even more highly due to the low volatility in their returns and capacity to generate inflation-beating incomes, experts say.
• A surge in foreign investment – spurred in part by more favourable tax settings – along with a crisis in housing supply and headwinds in the broader commercial property sector have combined to throw fresh attention onto the fast-growing BTR sector.

The AFR – Household deposits fall for first time in two years

• Australians withdrew nearly $7.8 billion from bank deposits in June, the first big drawdown since May 2021 and the largest on record, as interest rate increases and high inflation started to bite into savings buffers.
• While savings levels have proven a challenge for the Reserve Bank as it tries to return inflation to target, new data from the Australian Prudential Regulation Authority shows the most aggressive tightening cycle in a generation is starting to take a toll.

The AGE – Home owner’s respite as RBA holds it steady

• Home buyers, renters and businesses could be spared any further financial pain after the Reserve Bank held interest rates steady for a second month while signalling the economy is on track for a soft landing.
• Major banks including Commonwealth Bank and National Australia Bank revised down their expectations for future rate increases after the RBA kept the official cash rate at 4.1 per cent yesterday – the first time since March and April last year it has made no change at consecutive meetings.

The AFR – Melbourne now nation’s biggest hotel market

• Melbourne has leapfrogged Sydney to become the country’s biggest hotel market for the first time on the back of an ‘‘unprecedented’’ building boom that has delivered nearly 5000 new hotel rooms since 2020.
• Before the onset of the pandemic, the two cities were almost neck-and-neck with Sydney offering 21,634 rooms to Melbourne’s 21,597.
• However, with 21 new hotels and 4889 rooms opening in less than four years, including Ritz-Carlton, Hilton and W hotels, Melbourne has increased its accommodation market by 23 per cent to almost 26,500 rooms, according to a new report by JLL.b

The AFR – Big deals slump amid buyer-seller stand-off

• The flow of deals in the commercial property sector is at its lowest level in more than a decade, down 68 per cent to $5.2 million in the last quarter and disrupted by the stand-off between sellers and buyers as they grapple with rising rates.
• The scenario is particularly bleak in the country’s office market, where less than $1 billion of assets were traded in the second quarter, down 83 per cent from a year earlier.

We hope you have enjoyed another edition of The Development Digest. Please reach out to our team if there is anything we can assist you with.??

Jesse