Monthly Banking Stats – December 2013

Today APRA published their statistics on the banking business of individual banks in Australia. We see the continued dominance of the four largest players in the market, with CBA winning out on home loans and deposits. Total housing lending now stands at $1,333 bn according to the RBA.

Turning first to owner occupied and investment loans, CBA is followed by WBC, then nab and ANZ.  However WBC wins the investment loans race, with $131m, significantly ahead of the other players.

Dec002APRATherefore we see the ratio between owner occupied and investment loans varies:

Dec001APRAWestpac, Bank of Queensland and HSBC have the highest ratio of investment loans amongst the larger players.

Turning to household deposits, in the month CBA is well ahead of everyone else. nab is behind ANZ in last place amongst the big four.

Dec04APRALooking at the ratio between household deposits and mortgages, we see that most of the majors lent out more than they took in. So they are using funds from sources, including other deposits, reserves, financial markets or securitisation to fill the gap.

Dec05APRAThe outstanding balances which were securitised (small beer in the overall picture):

Dec03APRAOf course market share data alone does not tell us about the profitability of the various businesses, but we do see some differences in strategy continue to play out, especially in the mix between investment loans (the faster growing segment) compared with first time buyers or refinance.

The RBA also updated their financial aggregates today.

RBADec01Using the seasonally adjusted data, housing credit was up 0.6% in December, making an annual change of 5.4% (4.5% in 2012). Business credit was up o.4% in December, making an annual rate of 1.7% (2.9% in 2012), so business credit continues to stagnate. There was little change in personal credit at the aggregate level (though we know some segments are more likely to borrow than others who are repaying).

The drift towards more investment home loans shows up in the aggregate data also:

RBADec02RBADec03Overall all, we still see house prices running hot compared with borrowing, despite the increased demand for investment loans. Low interest rates as a strategy for growth still disappoints. There are other reasons why businesses are not willing to borrow.

Dissecting Shadow Banking – Part 2

We continue our series on shadow banking, having outlined yesterday the size of the market. Today we look at the core financial flows which are at the heart of the system, and look at the repurchasing (repo) market, which is central to the existence of shadow banking. That said, we should again state that shadow banking covers a whole portfolio of entities and activities, not all of which function in the same way.

Here is a summary of the way the shadow baking system works, from the perspective of the cash flows involved.

Shadow1There is a lot to take in here, but it starts with companies who need to make investments use the cash to make loans. These loans are packed up, or securitised, into new financial instruments. They may be enhanced by features like tiered pricing and will often receive a credit rating from an agency, for which they pay. These new instruments, which may be bonds, or something else, are then purchased by banks, and other investors, and they may well protect their investments using derivatives – credit default swaps. These securities are then traded, an investor pays cash to get the security, and this investor can then re-use the same security to get their own repo loan. Actually, the same security can be passed on several times, creating a daisy-chain of interconnected transactions. This is called rehypothecation. Whilst repos are often overnight transactions, they may be renewed each day, but in the chain of transactions, if any one entity failed, the lender simply disappears – overnight!

In a way therefore, the core of shadow banking is the repo market. Before the GFC, the repo market was seen as best place for large players to both lend and borrow. As a result it was not unusual for the US market to see repos to the value of $6 trillion a day being transacted. Players would often get repo loans to pay for securities, CDOs, CDS or commercial paper. In addition, many central banks also operate in the repo market, using it as a mechanism to execute its money market transactions. Securities which are government backed generally are regarded as more secure, so lower risk. Today the range of securities which can be used in the repo sector has been reduced, but bankers in the sector are looking for the next class of security. So in summary,

A repo is the sale of a security with a simultaneous commitment by the seller to repurchase the security from the buyer at a future date at a predetermined price. This transaction allows one party (the seller) to obtain financing from another party (the buyer). The security is held as collateral, protecting the buyer against the risk that the seller is unable to repurchase the security as designated. In this way, a repo transaction may be thought of as a collateralised loan to the seller of the repo.

The main take-outs are that shadow banking is intertwined with normal banking and the financial markets. The daisy-chaining of transactions makes it complicated, and the risks across the system are not easy to pin down.

Next time we will look at the Australian situation.


Dissecting Shadow Banking

Shadow Banking has become “topic de jour”. There is a need to understand what is really happening, as the snappy tag hides the complexity of the subject. So we will begin a dissection in today’s post. We will start with an international view and in following posts will drill into the Australian situation and then explore some of the implications for the banking system. This may not be an easy read, but the subject warrants careful exploration.

Traditional banking, is simple. Take deposits from people with money who want it kept safe, and lend it to people who need cash, taking a margin or turn. Regulation ensures that (in theory) banks have sufficient funds to repay deposits when needed, holding cash and other capital in liquid assets. In practice some banks were too big to fail, and had too little capital so were bailed out. Since the GFC, banks are now holding more capital to ensure they do not fall over, and work is in hand to identify systemic risks at an country and international level, buttressed by appropriate capital buffers.

Shadow banking is different because these commercial entities will lend money to people who need it, but they will so, not from deposits, but by raising funds on financial markets against various financial instruments, like bonds for example. Many of these entities are perceived as highly innovative, and will venture into deals normal banks would not consider. In the event of a problem, investors will demand the return of their funds, and the commercial entity might crash. There are no regulatory buffers. Data is often hard to find, as discussed here.

Shadow banking creates two risks. The first is regulatory arbitrage. If banks and shadow banks are operating in the same market, regulators who are trying to control finance and credit through bank regulation will find ever more funds flowing across to the unregulated shadow sectors reducing their ability to adjust and manage risks. Second, shadow banking tends to reinforce boom and bust cycles by heightening risk and masking finance structures. This creates greater system-wide risk, which in turn can feedback to the regulated sector. In addition, many of these entities are transnational and in-country regulation will not be effective, reflecting the realities of a more globalised financial system. In the event of failure, these entities may need to be bailed out, or allowed to fail. Sounds like the GFC all over again!

Shadow banks have the potential to disrupt the financial sector and the broader economy, in the event of difficulty or failure.  No surprise then for Janet Yellen to say:

“We need to increase the transparency of shadow banking markets so that authorities can monitor for signs of excessive leverage and unstable maturity transformation outside regulated banks.”

So, lets look at the history. Google trends tells us that prior to the GFC, shadow banking never made a news headline, whereas now, it features often. The term is attributed to Paul McCully from PIMCO, at the 2007 meeting of the US Federal Reserve in Jackson Hole.

Post the Financial Crisis of 2007-8, at the G20 Leaders Summit of April 2009, the Financial Stability Forum (FSF) was expanded and re-established as the Financial Stability Board (FSB) with a broadened mandate to promote financial stability. Its mandate is outlined on their web site:

The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. It brings together national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

A list of institutions represented on the FSB can be found here .

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

As part of their work, the FSB has been reporting on Shadow Banking, and its latest update was published in November 2013. I am using some of their material to describe the international scene.

Their definition of the shadow banking system is helpful:

“The shadow banking system can broadly be described as the system of credit intermediation that involves entities and activities fully or partially outside the regular banking system, or non-bank credit intermediation in short”.

Some prefer “market-based financing” as opposed to shadow banking, which has taken on perhaps a pejorative tone, but along with the FSB, we will still use the term. So, shadow banking is at its broadest, covers any credit related activities which fall partly or fully out of the regular banking system – “non-bank credit intermediation” in short. These “other financial intermediaries” (OFI’s) are under the microscope. Actually, the FSB started with the catch all broad definition, but then refined their analysis, concentrating on entities which pose bank-like risks to financial stability. 25 jurisdictions were included in the 2013 report, including Australia. In Australia, non-prudentially regulated institutions include registered financial corporations (RFCs), securitisation vehicles, money market funds and other investment funds.

FSB reported the global growth trend across all finance sectors as follows. The top light blue slice represents the OFI’s.

FSB1In 2012, around 24% of assets were held by OFI’s in the 25 countries included, compared with 47% in Banks and ADI’s. Despite a dip after the GFC, growth continues so total OFI assets are now in the order of US$70 trillion. (Based on data from 20 countries)

FSB6This is a sizable sector globally, and is not under the same strict supervision as the banks, often being treated more like any other commercial company.

FSB2Getting at the next level detail introduces significant complexity, because not all countries were able to provide the same granular data. Nevertheless, it is possible to split out the main types of non-bank intermediaries for the 25 countries who reported.

FSB4And analysis of the 36% in other investment funds was also split out:

FSB5Roughly US$9 trillion of OFI assets were in equity funds, US$7 trillion in fixed income/bond funds, US$7 trillion in broker-dealers, US$5 trillion in structured finance vehicles, US$4.5 trillion in finance companies, and US$4 trillion in Money Market Funds (MMF). Hedge funds appear underweight compared with data in other surveys, because of their off-shore nature. Country specific entities made up the rest.

This analysis highlights the diverse nature of shadow banking entities, and that the mix will vary country by country.

One way to show this variety is to look at the relative situation of each country. We can express this as the relative ratio of banking and OFI assets to GDP. This view adjusts the absolute values by the relative economic size of each country.

FSB3Using the 2012 data, the Netherlands has the highest ratio of OFI, then UK, Switzerland, the Euro area (XM) and US. Australia is fifteenth.

To finish this first post on shadow banking let me hint at some of the issues we will touch on later.

First, not all OFI assets are equally exposed to banking risk, so needs to be adjustment for this.

Second, the OFI’s have taken up the slack as banks, post GFC hunkered down and refused to lend. Lending to SME’s for example is one area where some OFI’s are active.

Third, some argue that a reduction in the size of shadow banking is a good thing, as it reinforces financial stability, whereas others argue the shadow banking is meeting a need which otherwise would not be met by the normal banking system, and a reduction in shadow banking would reduce economic activity and outcomes.

Finally, in Australia OFI’s are shrinking, not growing. Is this a good or bad thing?

More later….



Household Spending Patterns

Today the ABS published the latest selected costs of living indexes. One interesting data point is the relative movement in mortgage and consumer credit costs being paid by households. We mapped these back to the findings for our recent household surveys, and compared households and their spending patterns.

So first, here is the data on the index of mortgage and consumer credit charges:

Household-Costs1This is an index series, but note how different the shape of the curves are for mortgage debt and consumer credit debt repayments. As you would expect, with rates being so low, mortgage repayments reduced, though this is offset by the average mortgage being twice as large as in 2005, so in absolute terms, repayments are still pretty large. Certainly runs counter the claims from some that it is an all-time low, or even lower than trend! But also look at the consumer credit trends, there repayments are as high as ever, thanks to several factors. First, consumer interest rates have not fallen as far or as fast as the banks benchmark rate, second some households are paying down debt, and third, others are taking much more debt on. My recent post highlighted this.

We then went back to our surveys, and compared spending across first time buyers and other households.

Household-Costs4As expected first time buyers are spending a greater proportion on housing, insurance and financial services (using the ABS breakdown). Their overall spend is lower than other households, because they are spending less of food, and other categories, thought more on education and communications.

We can also compare the relative distribution – for all households but first time buyers, 27% is going on housing and financial services related spend.

Household-Costs2… and first time buyers:

Household-Costs3Nearing half of their spending is going on housing and financial services related spend. In addition, we already know they are borrowing more on cards and other consumer credit to fill the gap between income and spend – and this at a time of very low interest rates. No wonder many potential first time buyers are on the sidelines!

With the next rise in interest rates likely to be up, and first time buyers from 2009 in higher mortgage stress than average, things look very tight for many households in 2014. Especially in rates were to rise.

We are running our household mortgage stress models, and we will post updated findings later in the week, it may not be pretty!

A Segmentation Cookbook

DFA uses customer segmentation to analyse our surveys to create actionable and differentiated segments. We also apply the same techniques with our client’s data. We often get asked how we arrive at the segments we use, so today I will provide some further insights into our method, which is described at a high level on our web site here. Our overall approach is summarised in the diagram below.

Segment-7One of the essential aspects of segmentation is to determine the right number of segments, and their definition to ensure adequate separation and differention. Often we find clients segment without any clear end-game in mind, so whilst it might be interesting from an analytic stand-point, it does not assist in better business decisions. We always start by asking what they want to achieve from the segmentation in the first place!

There is no one single perfect segment approach, each case requires appropriate selection from the more 60 data elements which might be used. We look for correlations between the input data-sets and the output segmentation which should be aligned to specific goals. We use a proprietary tool for this assessment. To illustrate the point, we will post a few examples.

In the first example the output shows there is no correlation between the input data and output, so we see no clustering, no segmentation. This is the normal starting point.

Segment-2We then start running a series of correlations between the data elements looking for degrees of separation and alignment. In the example we are using, we settled on eight segments as being the best fit. As we tune the correlations, we start to see the data cluster together around the segments.

Segment-4We continue to refine the analysis to get ever better alignment, until we see separate clusters with adequate differentiation. In the case below, which is the one we used for our household segmentation, we were able to define parameters which gave clear and discrete segments. For example, first time buyers, were quite different to down traders. You can read more about our household segmentation here.

Segment-5If the analysis is pushed too hard, it is possible to end up with segments which are too small, leaving gaps. Here is an example from a client, who had spent big on developing selected a segment approach which simply could never work:

Segment-1We suggested an alternative, which has proved to be more useable, and stable. Our tool is capable of assessing different segmentation approaches, and selecting the best.

DFA is sometimes asked to remap our segmental analysis to existing segmentation within our clients. This approach can provide richer and deeper insights to our clients whilst retaining their already familiar segments.  Other clients have chosen to adopt DFA segments in total or in part. Either way, superior segmentation delivers superior results – consistently



DFA International House Price Comparison Index

DFA has published its first International House Price Comparison Index. Whilst many reports include international comparisons of property prices, using data from various sources, when you dig into them, often they do not show what you think they might, because the relative scales, and start points are often out of synch, or the data is not reported on the same basis. DFA has gone back to primary sources, including Corelogic and Federal Housing Finance Agency for the US, the Reserve Bank of New Zealand, the Office of National Statistics for the UK, and the Australian Bureau of Statistics to establish a house price index on a comparable basis.

We used data from 2000 as a baseline, and produced a relative movement index from then to the end of 2013, tracking relative movements in house prices over time. The results are in looking at data from the major centres in each country but we also include Sydney as a separate data point because of discussion about the momentum there.

Price-TrendUntil 2004, prices were moving up around average inflation rates, but then we see the US, running up to a peak, prior to the GFC, as markets ran hot, then falling significantly, and is now in recovery. The UK took a hit post the GFC, did not fall as fast, and is recovering now. New Zealand reveals high growth, some correction post GFC, but wins the growth prize relatively speaking, out-performing Australia – one reason why the Reserve Bank of NZ moved to limit credit last year.

Turning to Australia, we see the capital city markets growing relatively consistently, albeit with a GFC induced wobble. We also find the relative growth outside Sydney is higher than in Sydney, because the 2000 baseline there was higher. For example, the median price in Sydney was $310k in 2000, and is now $605k, wheres in Adelaide it was $141k (2000) and is now $395k. Hobart was $104k (2000) and is now $345k and Darwin was $161k (2000) and is now $565k. We can also look at the relative annualised growth rates over the trend period. Darwin is the winner, followed by Hobart and Perth.


So, two observations, first, by international standards, property price growth in Australia is at the high end as I discussed recently, and second, the relative growth has been a lot stronger away from Sydney, yet much of the recent talk has been about a bubble IN Sydney! We see again the impact of the structurally high property prices thanks to poor policy, easy credit and lack of supply. We have a national property problem, not a local Sydney one!

We plan to update our index regularly as new data is published.

Comprehensive Credit Reporting – Friend or Foe?

Australia’s current credit reporting regime is over twenty years old and permits the collection of only “negative” data. However in March 2014 the credit assessment of potential borrowers is set to change as a result of legislation passed in 2012. Behind the scenes, players are making changes to their systems and processes to meet the deadline, from when additional data about people will be used as part of a more comprehensive “positive” credit assessment scoring. This change has largely passed under the radar so far, but we discuss today some of the implications and issues arising, and potential consequences of the reforms.

By way of background, Australia has lagged behind many other western countries by only using  “negative” credit data. Essentially, this means that default events like missed payments appear on the credit registers and credit scores maintained by the credit reference agencies, like Veda, Experian or Dunn and Bradstreet. In addition some of the large banks hold private data on their customers, but this is not shared.

The international situation is summarised below.

Credit1The USA has some of the most comprehensive credit reporting. According to the  Australian Law Reform Commissions (ALRC)

In the US, credit reporting is regulated under the Fair Credit Reporting Act 1970 (US) (FCRA) by the Federal Trade Commission. The FCRA does not limit the permissible content of credit information files held by credit reporting agencies or the content of credit reports.Major credit reporting agencies in the US hold and report detailed information about individuals’ credit accounts including, but not limited to, current balances, credit limits, amounts past due, payment performance and payment status pattern and account descriptions.Credit reporting agencies receive information from credit providers and others, generally every month, and update their credit files within one to seven days of receiving new information.

In Australia, data is already collated from multiple sources according to Veda.

Credit3The public record element includes:

Credit2The Privacy (Enabling Privacy Protection) Bill 2012 enacted positive credit. The timetable is:

  • November 2012: Comprehensive Credit Reporting passes Parliament
  • December 2012: Royal Assent with the signature of the Governor General
  • April 2013: Draft Credit reporting code is available for public consultation
  • June 2013: Regulations are passed
  • July 2013: Draft Credit reporting code is lodged with the OAIC: Office of the Australian Information Commissioner
  • September 2013: OAIC public consultation on Credit reporting code
  • December 2013: OAIC approves credit reporting code
  • March 2014: New Credit reporting & Privacy Laws start

The rationale for more comprehensive credit reporting is to address the so called information asymmetry between a potential borrower and a potential lender which means the lender is not able to make an accurate  assessment of the risk of a particular customer at a point in time. As a result people with good histories may be disadvantaged in terms of price, and people with poor histories may get facilities they should probably not. In addition, people with minor dents in their behaviour, for example not paying a mobile phone bill some years back, might be disadvantaged or refused credit, when they have reformed. This leads to single pricing – one size fits all.  Today most lending is done on this basis in Australia. The ALRC says:

Due to problems in assessing the risk presented by individual borrowers, credit providers may charge borrowers an average interest rate that takes account of their experience of the pool of borrowers (good and bad) to whom they lend. This may cause adverse selection so that ‘some good borrowers … drop out of the credit market’, further increasing the average interest rate ‘to cover the cost of loans that are not repaid’

Positive credit assessment can therefore increase competition, and improve the relative pricing of some products for some people. People with “thin credit files” may be more able to obtain credit more easily. As a consequence of the enhanced data, default rates may be managed down, and the broader community may benefit from lower pricing due to lower loss rates. Some suggest that positive credit assessments lead to more responsible lending, though I must say, I do not think this is proven. Overseas evidence does suggest that default rates may fall after the introduction of positive assessment. What is true is that consumers will tend to be more aware of their rating, and in some cases make proactive decisions as a result.

On the down side, privacy has been traded away. More information about individuals will be captured, with all the potential issues of accuracy and security. Additional costs will be incurred in enhancing systems, and mechanisms need to be in place to deal with inaccuracies.

The new arrangements commence on the 12 March 2014, when the additional data stored from 2012 onwards will be available to authorised customers of the credit references agencies. The new additional information will include:

  • Date account opened
  • Current Limit of account
  • Nature of credit account
  • Date account closed
  • Account payment history (licensed credit providers)

It will be interesting to see if banks and other credit providers start to offer a range of risk based priced products, based on the enhanced credit score available, and whether net margins are reduced. There is a significant opportunity for players to use data better to segment and target selected customer, based on their credit score.

According to the Office of the Australian Information Commissioner, a credit reference bureau (CRB) or credit provider that holds credit-related personal information about an individual must, on request by an access-seeker (generally, the individual or a person authorised in writing who is assisting the individual), give the access-seeker access to the information.

So, I will be looking out for disclosure by which consumers can inspect, and if necessary correct data on their files. Today, you have to pay a fee in the order of $70 with Veda to examine and check your data for a year. Experian offers a 10 day turn around on an individuals current credit report. Experian in the UK offers a free 1 month trial, then charges after that, but you can also get a 2 pound statutory credit report there.



Is Lenders Mortgage Insurance A Good Thing?

The Australian Mortgage industry has a feature which is relatively unusual internationally speaking. Lenders Mortgage Insurance or LMI is an insurance scheme which protects a lender from default by the mortgage borrower. It is not the same as mortgage protection insurance, which is insurance a borrower can purchase to protect against events like illness or other adverse factors. About one quarter of borrowing households has LMI, so it is a substantial market. First time buyers are the most common type of borrower to use it. LMI is not mandated in Australia, but has become normal industry practice for loans above 80%, including investment loans.

Lender Mortgage Insurance is a policy which an insurer will write for a bank, to protect the value above 80% in case of default. Normally the premium, a one off fee on loan draw down, is paid by the borrowers directly, or added to the loan amount.  The premium varies by size of loan, and loan-to-value (LVR). Generally loans above 80% LVR require LMI, and loans up to 95% or more are covered. Loans over $1m, or 100% would require special quotations. The chart below shows a typical premium range for an existing borrower. First time buyers will be charged more. So, for example a loan of $600k, 95% LVR would incur a premium of $21,400 for an existing borrower (3.6%) whereas a first time borrower would be charged $23,800 (4%) for the same facility.

LMI1In our household survey we asked borrowers about their understanding of LMI. First time buyers, in particular, are not clear who benefits from LMI, whereas existing borrowers are slightly clearer that the insurance protects the bank. In the case of foreclosure, the bank would make a claim against the insurer, but it does not stop them also pursuing the borrowers to repay the debt!

LMI2LMI is either provided by captive insurers within the banks, or by the two major independent insurers, Genworth and QBE LMI. Genworth says:

“Most banks and financial institutions require you to contribute a deposit based on a percentage of the purchase price of your property. With Lenders Mortgage Insurance, lenders may allow you to borrow a higher portion of the purchase price, allowing you to purchase a property sooner and with a smaller deposit than would otherwise be required”.

This is the key benefit, people can borrow more, sooner, because the banks have higher levels of protection so are more willing to lend.  But as Aussie says:

“It’s really important to realise that only the lender is covered by this insurance. It offers no protection to you the borrower”.

Alternatives to LMI are to wait and save up the 20% deposit, or seek a guarantor. Our research indicates that a number of potential first time buyers are exploring these options, because one way or another, LMI costs.

There are a couple of issues we should highlight. LMI is a premium paid, or capitalised into the loan at inception. It is not portable though, so if you switch lenders, or buy a different property, the premium is foregone – unless you ask, and then only sometimes. ASIC’s Smart Money says you might get some of the premium back in the first year or so, but there is no guarantee. It is quite likely you will need to pay again. I have been advocating for truly portable LMI facilities for a few years now.

The other factor to consider is that the LMI Insurers have concentrated risks in their portfolios, so if there were a major downturn, and claims rocketed, they may have issues, just like the US had post 2007. The rating agencies are watching the insurers, and some were downgraded because of the risks implicit in the business. LMI Insurers also provide enhanced support to securitiation deals, which again enhances their exposure to risk. APRA, who regulates the LMI’s in Australia insists that the LMI business is structured as a monoline insurer, so that the systemic risks in LMI are not cross linked to broader insurance categories. With such potentially concentrated risks, will they be there if property prices fell significantly?

LMI’s may introduce additional credit cycle risks. The RBA Stability Review in September 2013 discussed the LMI industry.  They said:

“The use of mortgage insurance will not necessarily moderate the amplitude of the housing credit cycle, however. Lenders may respond by relaxing standards because they believe the LMI is assessing the risk – an unintended consequence of having a ‘second set of eyes’ – or because they believe that any loss is an LMI loss”

They also make the point that:

“Mortgage insurance is available in many jurisdictions but extensively used in only a small number, including Australia, Canada, Hong Kong, the Netherlands and the United States. The structure of the mortgage insurance industry across these and other countries varies considerably and is affected by the domestic regulatory landscape and the extent of government participation in each jurisdiction.”

So, overall, whilst LMI may allow some to access the property markets sooner, and protects the banks from risk of loss, borrowers are paying for this insurance, and if borrowing more than 80% they will have no choice as this has become industry practice.

There are systemic risks to LMI, and there is some consumer confusion about the role of LMI. The fact LMI is generally not portable is problematic.

In my view LMI is at least partly responsible for the lofty property prices in Australia, and it lifts the cost of entry into the market and if capitalised increases loan amounts on which interest is paid. It is a barrier to switching. Therefore the role of LMI should be reviewed as part of any wider property or banking inquiry.

Down Trader Motivations and Needs

Today we examine the motivations of Down Traders, a household segment which we identified in our household survey. They are people looking to sell their current property and buy smaller, so releasing capital to add to their savings. We have looked further at the data from our surveys, and can paint an interesting picture, which varies across the main urban centres which we feature in this post. More than half of these households are between 50 and 70 years. As some are planning to move interstate, we use their intended destination to define their location.

DownT5We asked about their plans in terms of what type of property they planned to buy. In Sydney and Perth for example, more were looking for an apartment, whereas in Hobart and Adelaide a smaller house was preferred. Some were undecided, others considering a retirement village or residential care.

DownT1Average price varied by location. In Sydney the planned median spend was in excess of $1m. Hobart was cheaper.

DownT2We asked about the factors which would influence their decision about where and what to buy. Households in different areas had different priorities. In Sydney, convenience and life style were important, in Hobart the community rated, whereas in Perth facilities were less important.

DownT3We unpacked the convenience driver. Sports facilities were most important in Melbourne, Access to public transport varied, with Melbourne rating lower, because they have better transport. Access to shops rated in Adelaide, but was less important in Perth. Availability of high speed internet was a factor in the decision matrix.

DownT4So, we find that within the Down Traders, there are considerable variations between locations, and accurate sub-segmentation is required to really pull out the insights. We see, for example, high demand in Sydney for convenient and well appointed apartments, close to public transport and shops, with good technology. There, Down Traders will be competing with property investors for similar properties. Elsewhere, they will be looking at property which would normally be attractive to first time buyers, who are being frozen out of the market. Planners and builders would do well to understand the variations, and focus on meeting the needs of Down Traders, an important and motivated group.


Mortgage Sector Competitive Dynamics

Information about mortgage industry market share data is hard to come by, especially amongst smaller banks and non-banks. So we welcome the arrival of the Australian Financial Group (AFG) Competition Index. AFG is a substantial player in the mortgage market, as an aggregator with than 1,800 brokers nationally, processing around $3 billion of mortgage finance every month, and managing more than $70 billion in mortgage finance. They fund some of their own book through securitisation.

They just released data for the 12 months of 2013, and it makes interesting reading, with a few caveats. The data only reports loan flows via AFG, so trends are probably more interesting than absolute numbers. It includes AFG funded loans also. They split out lenders into majors and non-majors, (which include smaller banks, non-banks and building societies). Although AFG has a national footprint, it is headquartered in Perth and so its business mix may not be representative of the national picture. Not all aggregators have the same lender panel mix. That said, here are some of the key findings:

Overall, according to AFG, the majors have lost relative share to the non-major lenders.

AFG1This is especially true for fixed loans, where there has been a 10% shift away from the majors.

AFG2First time buyers are also shifting slightly away from majors.

AFG3However, AFG writes a lot of business with Keystart, the WA owned state lender who offers up to 98% loans, does not require loan mortgage insurance and will consider joint housing association type ownership. We also know that first time volumes in some states are down significantly. The chart below shows the mix, and the yellow bar is Keystart with contributing up to 11% of AFG’s first time buyer business.

AFG4Turning to investor loans, we see players like Macquarie increasing their share, and ME Bank expanding later in the year. ING and AFG are a little down. Again a shift away from the majors is evident.


My net conclusion is that there is significant competition for business at the moment, especially as demand is up, but not as much as house prices. Players are seeking to win share by offering special deals, and making changes to broker commissions. We see the presence of non-banks, like Liberty, Pepper, and AFG itself as funding options improve. As highlighted previously, there are data gaps in the national statistics relating to non-bank activity, which looks to be on the rise. We welcome the AFG data set as an additional contribution!