Mortgage Refis and Mortgage Application

Mortgage applications increased 1.3 percent from the prior week, according to the weekly report from the Mortgage Bankers Association’s (MBA). The Purchase and Refinance indexes increased 0.1 percent and 0.2 percent respectively. Refinance volume also climbed 1.3%, while the Purchasing index increased by 1.1% during the week ended Friday, mostly as a result of increased government loan activity.

Chart.1 Refis Surge and Mortgages are flat

The purchase index has been relatively flat or stabilizing between levels of 165 and 210 since the July 2009 bottom. Tight lending standards and declining house prices have curtailed growth in purchase volume.

Chart.2 Refi Driven by Low Interest Rate Levels

Conversely, mortgage refinancing has surged by 112%, since early April 2010.


We expect purchase index volumes to remain subdued until house prices begin to improve. However, interest rates are likely to low levels for an extended period due to Federal Reserve’s monetary policy and the Maturity Extension Program and Reinvestment Policy (operation twist). Terefore, we anticipate that refinancing activity may continue on an upward trend.

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Australian GDP Growth Slows

Australian Q1 2011 GDP release, reported the largest quarterly contraction of 1.2%. Farm GDP declined by 10%, while non-farm GDP declined 1% on a quarter-to-quarter basis. “Flooding, which began in late December 2010 combined with cyclones in both Queensland and Western Australia have had a significant impact on the March quarter activity,” according to the Australian Bureau of Statistics (ABS).

 Chart.1 GDP Growth Slows in Q1 2011

Farm GDP has declined for second consecutive quarters.  Non-farm GDP similar to overall GDP has fallen inQ1 2011. Chart.2 shows the contribution to the GDP growth rate of various GDP categories.

Chart.2 Australian GDP Contributions

“Net exports were the largest negative contributor. On the expenditure side, the decline this quarter (in seasonally adjusted volume terms) was driven by Net exports (detracting 2.4 percentage points) and Changes in inventories (detracting 0.5 percentage points). Partially offsetting these falls were Private gross fixed capital formation (adding 0.7 percentage points), Household final consumption expenditure (adding 0.3 percentage points) and Government final consumption expenditure (adding 0.2 percentage points)”, reports the ABS.

Chart.3 shows that the growth rate has begun to slow

Chart.3 shows that GDP growth on an annual basis has decelerated since peaking in June 2010. Non-farm GDP growth more closely correlated to overall GDP growth has been a significant contributor to the slow down in economic expansion. Conversely, the more volatile farm GDP has been growing at faster rate, albeit showing tentative signs of peaking.

Chart.4 Private Residential Investment growth  Stalling

Pace of growth in private residential investment is slowing. This deceleration in private residential investment could be a result of house price growth easing. Chart.5 reports the quarterly and annual house price inflation. House prices declined by 1.4% from 2010 Q2 levels.  The eight capital cities average house price index increased by 0.7% from Q1 2011. However, the capital cities average house price index is 1.7% lower in June 2011 when compared to June 2010.

 Chart.5 Australian House Price Inflation 

eight  capital cities averagehouse price index


General economic activity appears to have slowed in the recent quarters. ABS suggests that the hurricane and cyclone in late December are still influencing the data. In addition, signs that global economic activity is waning have emerged. On one hand, this will dampen demand for houses, but may also result in an improvement in affordability via lower interest rates. Strong domestic demand will be an important factor in cushioning the economy against a fall in exports as global demand weakens. In its latest meeting, the Reserve Bank of Australia maintained cash rate at 4.75% and cited the deceleration in the pace of global economic growth as a factor.

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Mortgage Approvals Stabilising at Low Levels

Bank of England Lending to Individuals publication released June 29, reported a mortgage approvals increased in the month of May 1.1% but down 1.4% for the quarter and 7.4% for the year. Mortgage approvals appear to be trending sideways and stabilizing, albeit at low levels.

Chart.1 Mortgage Approvals and Real House Price

Chart.4 shows the correlation between UK RICS new enquiries and mortgage approvals. New enquiries herald the changes in mortgage approval by some 4-6 months. We would expect new buyer enquiries to be coincident to leading. In fact, new buyer enquiries indicate that mortgage approvals will remain flat for the next 4-6 months.

  Chart.2 New Buyer Enquiries Lead Mortgage Approvals


Typically, mortgage approvals are a leading indicator of the direction of house prices. Mortgage approvals appear to be stabilizing. This may point to house prices stabilizing in the next 3-6 months. New buyer enquiries that lead mortgage approvals by 4-6 months are also stabilizing. A prior blog using the sales-inventory ratio as a gauge of supply imbalance, highlighted a continued slide in house prices. Conversely, on the activity side new buyer enquiries and mortgage approvals indicate that house prices may stabilize or trend sideways. Mortgage approvals are a demand side proxy in the PropRate Residential Scorecard. The PropRate Residential Scorecard applies a scorecard process to gauge market imbalances that may exist and therefore potentially act as a market-timing indicator for residential property prices. Mortgage approvals lead house prices by 3-6 months.

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Sales-to-Inventory and House Prices Update

This blog updates Proprate’s charts titled Sales-to-Inventory and House Prices and extends the prior blog with the regional sales to inventory.

 Chart.1 below illustrates the correlation of UK RICS sales-to-inventory ratio (SIR)  with that of house price inflation. Since our initial blog post in December 2010, the SIR has deteriorated. In addition, house prices have continued to creep downwards as predicted by the SIR. “The slightly weaker activity climate was also reflected in the average number of completed sales per surveyor (by branch), which fell by 3.4% in May to 14.7. Alongside the increase in new vendor instructions, the average number of stocks per surveyor (by branch) increased by 8.1% over the month to 71.3. Given the rise in stocks levels and fall in sales levels during May, the sales to stock ratio – an indicator of market slack – fell to 20.6%, well below the long run average of 33.5%”, according to UK RICS Housing Survey for May 2011.

Chart.1 Sales-to-Inventory Leads House Price Growth

UK RICS sales-to-inventory from house market survey

Chart.2 below depicts the UK RICS regional sales to inventory ratios. All regions have deteriorating sales-to-inventory ratio, with London and South East regions having the highest sales-to-inventory ratios. Unsurprisingly, these two regions are leaders in house price performance.

Chart.2 Regional Sales-to-Inventory all Declining

Table.1 below highlights the percentage deviation of the sales-to-inventory ratio at different turning points in the Halifax House price index from the long-term average (Apr-1994 to May-2011).

Table.1 Stock-to-Inventory Percentage Deviation from Trend (average:1994-2011)

The East, South East, London and Midlands regions have the highest sales to inventory ratio. All regions are trending downwards without any signs of stabilizing. Table.1 shows that London exhibits the smallest deviation in sales-to-inventory ratio from its long-term average. Currently London is the only region bucking the downward trend in house prices as highlighted by the latest Nationwide House Price Q2 2011 report and the UK RICS Housing Market Survey.

 Chart.3 illustrates the relationship between regional house prices and sales-to-inventory. The percentage change in house prices is calculated using Nationwide’s regional house price indices (from Q3 2007 to Q2 2011).

 Chart.3 Sales-to-Inventory and House Prices (2007 Peak to Current)

sales-inventory and hpi scatterplot


According to the May 2011 RICS reports, forward looking indicators (sales expectation) are weakening. Furthermore, new buyer instructions have been trending upwards. Thus, the outlook is that sales are likely to grow at a slower rate to new instructions resulting in an inventory build-up. The speed of inventory build-up will help determine the rate at which house prices decline.  Low interest rate level have propped up affordability and lessened the amount of repossession. The current trend in house prices and house market activity is likely to persist if the economic recovery remains subdued.

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UK Inflation Report for May 2011 More of the Same-

The June 17 Inflation release by the Office of National Statistics (ONS), reported a larger than anticipated annual inflation rate of 4.5% unchanged from April. Annual inflation as measured by CPI has remained above the inflation target of 2% for the 17 consecutive months

Chart.1 Contribution to Annual Inflation Rate

12 month inflation contribution

Transport remained the largest contributor with a 1.3% point increase, however this was less than the sector’s 1.53 percentage point contribution in April. The largest effects came from fuels and lubricants where prices rose by 13.7 per cent over the 12 months to May and air transport where fares rose by 13.8 per cent over the same period. Food and non-alcoholic beverages contributed 0.64% percentage points with prices up from 0.47% in April. All categories within the division contributed positively to the upward pressure to the 12-month rate.

Chart.2 Inflation fuelled by Food and Energy

cpi exlcuding food and energy

Chart.1 above shows UK CPI index all items (NSA) and all items excluding various components, rebased to Jan. 1996. The CPI all items index rose at a faster rate of 37.6% since 1996when compared to a 28% rise in the CPI excluding food energy. Interestingly, until late 2004 CPI excluding food and energy was at the same level as the overall CPI index.  The difference between the two inflation measures highlights the upward contribution that food and energy components have made on general prices in the economy.

Chart.3 Volatile CPI Components

Chart.3 shows that the utility bills annual rate of inflation has lagged the other components. Annual growth in the series began to accelerate after Q1 2010. Evident from Chart3 is the high levels of volatility exhibited by the CPI sub-components, especially the energy related components.

Chart.4 Household Inflation Expectation above Inflation Target

BOE/Gfk NOP UK Household Inflation expectation

Chart.4 reports the household inflation expectations, over 12, 24 and 60 months as surveyed by Gfk NOP on behalf of the Bank of England (BOE). Both long term and near term measures of household inflation expectations are above the BOE’s 2% target (yellow line in chart.4). Inflation expectations bottomed in late 2009.  Since 2010’snear term measure of inflation, expectations have increased at faster rate than the medium to long term measures. Long-term measures of household inflation expectations are less elevated (or are at levels closer to the inflation target) than the near term measures. This could imply that household inflation expectations are anchored to the inflation target.”What is of interest for monetary policymakers such as us in the MPC are signs that expectations have become de-anchored, which we can interpret as being the case if the public reacts to a short period of higher than expected inflation by increasing their long run expectations.”(David Blanchflower, 2008). Alternatively, if inflation is less anchored, public view the deviation of the current rate of inflation from the inflation target as being permanent.  That might make inflation itself more stubborn, via changes in price and wage-setting behaviour. Chart4 shows that after creeping upwards, inflation expectations have declined in Q2 2011. This may provide some vindication for the dovish members of the BOE.


The latest Bank of England Gfk NOP inflation expectation survey (see BOE Quarterly bulletin especially pages 100-110) reasserts the BOE’s belief that long-term expectations remain anchored to the bank’s monetary policy framework. In my view, the central bank’s current monetary policy stance is driven by the tepid economic recovery, as opposed to the extent to which long-term inflation expectations are anchored. It is unlikely that BOE will raise interest rates in the current economic climate, despite above target inflation.

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US House Price Decline-Federal Housing Finance Agency’s House Price Index

Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (monthly) was down 0.3% in March.  The FHFA quarterly index was also 2.5% lower in Q1 2011 when compared to Q4 2010.  The index is down 19.8% from the April 2007 peak.

 Chart.1 House Prices Continue to Slide

fhfa house price index

Chart.1 highlights the continued slide in the USA house prices as measured by FHFA monthly seasonally adjusted index.  In fact, house prices have declined to their January 2004 level. In addition, the annual growth rate has continued to decline. From November 2008 to November 2009, the rate of decline in house prices had slowed due to tax incentives offered to first time buyers. Post to the 2009 decline in house prices has accelerated.

 Chart.2 Decline is Broad Based – Since April 2007 Peak

federal Agency House price index

Chart.2 shows the house price performance of census division indices rebased to April 2007 peak. Evident, is the decline in the Pacific division. Table.1 reports the states that compromise each division. The pacific division has under-performed the all other regions. On the other hand, West South Central region has faired better than the other regions.

Table.1Census Division Regions House Price Performance since April 2007 Peak


The geographical distribution of excess housing inventory may explain the disparity in spatial house price performance. This could be due to different planning regimes. Tighter planning frequently result in lower levels of construction.. Another explanation has been that regions where the agricultural sector contributes a significant portion to economic production have experienced a moderate decline in house price.

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US Housing Market Charts

Here are some interesting charts on the USA national housing market.The charts tell an interesting story about the state of the housing market in the USA

Residential Construction data Released May 17 2011

  • Building starts fell from fell 10.6% in April. Permits fell privately owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 551,000.
  • Permits declined 4.0 percent in April and is 12.8% from the prior year (632 000)

Chart.1 Starts and Permits still at All time Low

Mortgage Bankers Association Delinquency figures released 19 May 2011

Chart.2 Delinquencies As % Of Total Residential Loans O/S

  • Q1 2011 8.32% marginally up from Q4 2010 8.25%.
  • Delinquency rates as percentage loans outstanding peaked in Q1 2010 at 10.06%

NAHB Housing Market Index released May 16 2011

Chart.3 National Assoc of Home Builders Survey points to improved Buyer Traffic

  • Buyer traffic trending upward since Sep.2010,
  • NAHB market index unchanged. Builder confidence stuck at low levels due high level of distressed properties and uncertainty about the nature of government support for housing market.

National Association of Realtors Existing Home Sales released May 19 2011

Chart.4 Sales to Inventory Declines on lower sales

  • Existing Sales down marginally for 0.8% for the month, 6.5% for the quarter and 13% from year ago levels.
  • Inventory levels are up 10% for the month and 15% for the quarter but have fallen by 4% from last year.


The improvement in delinquencies may due to the recent recovery in the employment figures. Inventory levels have yet to show significant improvement from the sub prime recession. Consequently, homebuilders are discouraged from breaking new ground. This evidenced by the anaemic levels of new building starts and permits

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UK Inflation Report for April 2011

May 17 Inflation release by the Office of National Statistics (ONS), reported a larger than expected rise in annual inflation rate. The rate of inflation rose from 4.0% in March to 4.5% in April.  Chart.1 shows that annual inflation is not too far from the September 2008 peak of 5.2 %

 Chart.1 Inflation Historical Perspective

According to the ONS, the significant upward contributors to the annual rate of inflation were transport and household services. Transport costs were rose upward due to rising fuel and lubricant prices. Domestic heating costs and were the main categories that drove the cost of household services.

Chart.2 Inflation Rate Trending Upwards in the Past Year

Even shorter measures of inflation still show strong growth. Since bottoming in Q3 2010, both monthly and quarterly rates of inflation have accelerated.


Energy Prices continue to exert upward pressure on general prices in the UK economy. This inflation report may influence the Bank of England to act sooner. The latest Monetary Policy Committee minutes showed that 6 members voted against a rate hike, while 3 members voted in favour of hike. The doves were reluctant to raise interest rates due the fragility of the real economy, especially the household sector. The hawks feared that a sustained period of elevated inflation might result in medium term inflation expectations drifting upwards. This could result in demand for higher wages by employees.

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UK Inflation

“There is a good chance that inflation will reach 5% later this year and it is more likely than not to remain above the 2% target throughout 2012, boosted by the increase in VAT, higher energy and import prices, and some rebuilding of companies’ margins.”  The April 2011 Bank of England Inflation Report

In a prior blog I reviewed the main drivers behind the current run-up in the rate of inflation. The current rise in the rate of inflation has been attributed to the surge in commodity prices, energy prices and an increase in VAT. April 12 2011 CPI release reported an unexpected slow down in the growth of the annual rate inflation to 4.05% from 4.4%.

Chart.1 Inflation Growth Slows Chart.1 Inflation Growth Slows

 Inflation Growth Slows

In addition, the CPI constant taxes measure also lost momentum from an annual rate of 2.7% to 2.4%. According to ONS, the main drivers behind the pull back in inflation rate were food and non-alcoholic beverages, recreation and culture, and air transport.

Chart.3 Contribution to Monthly Change in CPI All Items Index

Inflation rose by 0.3% between February and March 2011, compared to 0.6% last year and 0.7% the prior month. Chart.2 highlights that the heaviest negative contribution to the monthly change in CPI was by food and non-alcoholic beverages. The ONS reports that:” the downward effects were widespread with the most significant coming from fruit, and bread and cereals. Fruit prices, overall, fell by 4.7 per cent, a record for a February to March period. Bread and cereal prices, overall, fell by 2.6 per cent, the largest ever monthly fall.”(ONS CPI report March 2011).

Significant upward contribution came from transport costs that rose by 1.2% in March. “The largest upward effects came from fuels and lubricants where pump prices rose by 2.7 per cent to reach record levels of £1.32 for petrol and £1.38 for diesel. There were also upward effects from air transport and the purchase of second-hand cars furniture, household equipment and maintenance: the largest upward effect came from furniture and furnishings where prices rose by 3.7 per cent”. (ONS CPI report March 2011).

Chart.4 Contribution to Annual Change in CPI All Items Index

Chart.3 depicts the percentage contribution of CPI constituent annual change in CPI. All CPI constituents contributed positively to the recent rise in annual inflation rate. The largest contributor to both monthly and annual inflation rates was transportation costs. The contribution from food & non-alcoholic beverages declined from 0.69 in Feb to 0.49 in March.


Oil and energy prices continue to exert heavy upward pressure on the rate of inflation as evidenced by contributions of transport costs, housing and household services. The recent slow down in the rate of inflation does provide a boost to the doves in the monetary policy committee of the Bank of England.

However according to the BOE:“there is a good chance that inflation will reach 5% later this year and it is more likely than not to remain above the 2% target throughout 2012, boosted by the increase in VAT, higher energy and import prices, and some rebuilding of companies’ margins.”  The April 2011 Bank of England Inflation Report

The May 17 report should shed some slight on the direction of trend in the rate of inflation.

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Australian Employment and House Prices

The recent Labour force release from the Australian Bureau Statistics reported that the unemployment rate decreased from 5.0% to 4.9%. What does this mean for house price inflation?

Chart.1 Unemployment in 2011

Chart.1 shows the recent employment rate at the beginning of the year to current. Most notable is the marked improvement in the unemployment rate in mineral rich West Australia and Victoria. Surprisingly, the unemployment rate in service dominated New South Wales rose by 0.5%.Unemployment for Australia as a whole was down 0.1%

Chart.2 Employment Growth and House Price

In the latest cycle, the momentum in house price growth has slowed. The slowdown in house price growth began prior to the slowdown in employment growth. This could be due to the interest rise resulting in a lack of affordability.

Chart.3 shows the employment levels (seasonally adj.) for the different states re-based to June 1991, the bottom of the last major recession.

Australian Employment Growth since June 1991

Queensland (up 78%) and West Australia (up 69%) employment growth has outpaced the rest of the nation since the bottom of the June 1991 recession. Tasmania (up 23%) and South Australia (up 27%) have been the laggards. Employment for the entire country rose by 39%. A prior blog post reviews the house price performance of eight main cities in Australia.

Despite low levels of unemployment, house price growth has begun to moderate due to affordability issues. It will be interesting to see if the next report, due on May 12, provides further evidence of a continued slow down on house price inflation. In the future I shall look at activity in the rental market.

Posted in Affordability, australia property price, employment, House Price, Property, Property Cycle, Real Estate, unemployment | Tagged , , , , , | Leave a comment