The Council Of Financial Regulators Speaks

The Council just updated their charter, and published their latest minutes. At least there is some minimal disclosure now, though high-level. Note the fact that Treasury is one of the members, alongside the RBA, ASIC and APRA.

The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.

The updates charter says:

The Council of Financial Regulators (CFR) comprises APRA, ASIC, the RBA and Treasury. It aims to facilitate cooperation and collaboration between member agencies, with the ultimate objectives of promoting stability of the Australian financial system and supporting effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the CFR recognises the benefits of a competitive, efficient and fair financial system.

The CFR provides a forum for:

  • identifying important issues and trends in the financial system, with a focus on those that may impinge upon overall financial stability;
  • exchanging information and views on financial regulation and assisting with coordination where members’ responsibilities overlap;
  • harmonising regulatory and reporting requirements, paying close attention to regulatory costs;
  • ensuring appropriate coordination among the agencies in planning for and responding to instances of financial instability; and
  • coordinating engagement with the work of international institutions, forums and regulators as it relates to financial system stability.

The CFR will draw on the expertise of other non-member government agencies where appropriate for its agenda, and will meet jointly with the ACCC, AUSTRAC and the ATO at least annually to discuss broader financial sector policy.

Their latest minutes:

At its meeting on 5 July 2019, the Council of Financial Regulators (the Council) discussed systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:

  • Financing conditions and the housing market. The Council discussed credit conditions and ongoing adjustment in the housing market. Housing credit growth has stabilised at a relatively low level, with lending to investors remaining weak, particularly from the major banks. Demand for housing credit has been subdued, though there has also been some tightening in credit supply. Business credit growth has weakened recently, with lending to small businesses declining over the past year. Lenders are themselves applying stricter verification of expenses and income to small businesses, and lending may be affected by declining collateral values as housing prices decline.
  • Council members discussed the signs of stabilisation in the Sydney and Melbourne housing markets, evident in both housing prices and auction clearance rates. They observed that the adjustment over the past two years has been sizeable and conditions in most other capital cities continue to be soft. Risks to lenders from housing price falls have to date been limited by the strength of the labour market, low interest rates and the improvement in lending standards in recent years. Housing loan arrears have continued to edge higher, but with significant variation between regions.
  • Members were updated on ASIC’s public consultation on its responsible lending guidance. The responsible provision of credit is a cornerstone of consumer protection and is important to the Australian economy. It was noted that the consultation is not about increasing requirements; but rather, clarifying and updating guidance on existing requirements. For example, ASIC may further clarify areas where the law does not require responsible lending requirements to be applied (e.g. in small business lending). The Council agencies will continue to closely monitor developments in financing and the housing market.
  • ASIC’s product intervention powers. ASIC updated the Council on its proposed approach to the new product intervention power, legislation for which passed in April 2019. This gives ASIC the power to proactively intervene where a financial product has resulted or is likely to result in significant detriment to consumers. ASIC has launched a public consultation on its approach. Council members discussed possible applications of the new power given it is now available for use.
  • Product design and distribution obligations. The Council also discussed the implications of new product design and distribution obligations for retail holdings of bank-issued Additional Tier 1 (AT1) instruments. Members encouraged issuers to review their practices for issuing AT1 instruments ahead of the commencement of the new obligations in April 2021. They noted that APRA would continue to treat all AT1 instruments as regulatory capital, capable of absorbing losses in the unlikely event of a bank failure. Members discussed the importance that all holders of AT1 instruments, particularly retail investors, recognise that AT1 instruments could be written down or converted to equity.
  • Policy developments. Members discussed a number of policy developments, including the implementation of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. APRA provided an update on its policy work, including changes to its guidance on the minimum interest rate used in serviceability assessments for residential mortgage lending (announced on the morning of the meeting). APRA also updated the Council on its planned increases in the loss-absorbing capacity of ADIs to support orderly resolution. Members discussed proposals by New Zealand authorities to significantly increase Tier 1 capital ratios for banks in New Zealand.
  • Financial market infrastructure (FMI). The Council’s FMI Steering Committee provided an update on the design of a crisis management legislative framework for clearing and settlement facilities. This will ensure the necessary powers to resolve a distressed domestic clearing and settlement facility. A second consultation is now planned for late 2019. The Committee has also considered proposals for enhancements to the agencies’ supervisory powers and other changes to improve the regulatory framework in relation to market infrastructures. The results of the Council’s consultation findings will be provided to Government, to assist with policy design and the drafting of associated legislation (the draft of which would also be consulted on before being introduced to Parliament).
  • Stored-value payment facilities. The Council discussed elements of a potential regulatory framework for payment providers that hold stored value, following a public consultation in 2018. Discussion focused on suitable criteria to determine the regulatory regime that should apply to providers of stored-value facilities, along with the adequacy of consumer protection arrangements. Once completed, the conclusions of this work will be provided to the Government for consideration.
  • Competition in the financial system. Council agencies and the Australian Competition and Consumer Commission (ACCC) are developing an online tool to improve the transparency of the mortgage interest rates paid on new loans. This follows a recommendation of the Productivity Commission’s inquiry into Competition in the Australian Financial System. The tool relies on a new data collection and is expected to be available in 2020.
  • Climate change. Council members noted the work undertaken by regulators to address the implications of the changing climate, and society’s response to those changes, for the Australian financial system.
  • Updated Charter. The Council agreed to adopt an updated Charter, which is being published today. The Charter emphasises the Council’s financial stability objective, while also recognising the benefits of a competitive, efficient and fair financial system. It also highlights the Council’s focus on cooperation and collaboration to support the activities of its member agencies.

In conjunction with the Council meeting, the Council agencies held their annual meeting with other Commonwealth regulators of the financial sector. This included representatives from the ACCC, the Australian Taxation Office and the Australian Transaction Reports and Analysis Centre (AUSTRAC). Topics discussed included enforcement and data initiatives affecting the financial sector.

Retail Remains In The Doldrums

The ABS released their retail turnover figures today.

The trend estimate rose 0.2% in May 2019. This follows a rise of 0.2% in April 2019, and a rise of 0.2% in March 2019.

The seasonally adjusted estimate rose 0.1% in May 2019. This follows a fall of 0.1% in April 2019, and a rise of 0.3% in March 2019.

In trend terms, Australian turnover rose 2.7% in May 2019 compared with May 2018.

The following industries rose in trend terms in May 2019: Food retailing (0.2%), Cafes, restaurants and takeaway food services (0.3%), Other retailing (0.2%), and Department stores (0.3%). Clothing, footwear and personal accessory retailing (0.0%) was relatively unchanged. Household goods retailing (-0.1%) fell in trend terms in May 2019.

The following states and territories rose in trend terms in May 2019: Queensland (0.4%), Victoria (0.3%), South Australia (0.4%), the Northern Territory (0.3%), and the Australian Capital Territory (0.2%). New South Wales (0.0%) and Tasmania (0.0%) were relatively unchanged. Western Australia (-0.2%) fell in trend terms in May 2019.

Household Debt Ratios And Mortgage Stress Continues To Rise

We have released the June 2019 mortgage stress results, based on our running 52,000 household surveys. We found that 32% of households are now dealing with mortgage stress, a record, meaning they are having cash flow issues managing their finances and mortgage repayments.

This translates into more than 1,063,000 households spread across the country, and nearly 71,000 risk default in the year ahead, even taking into account the fall in mortgage repayments represented by the recent rate cuts. Banks loses will rise.

This is because the costs of living continue to run ahead of incomes, while households have larger debts (and are being enticed to buy in the current complex risk environment).

The top post codes in stress are those in the outer suburban fringe areas, where many large estates are still being built, and households are super-highly leveraged.

The RBA released their March 2019 data on household ratios. Whilst these series include small business finance, and include households not borrowing, the trends continue to tell the story of debt, and more debt.

The household debt to income ratio is at a record 189.7, while the housing debt to income ratio was 140.1, again a record and the owner occupied housing debt to income ratio was also up, to 109.3. These are high numbers, on a trend and international comparable basis. Households are drowning in debt.

However the asset to income ratios tell another story. As home prices have fallen, so the ratio has decreased, assets are down relative to income. The exception are financial assets, which benefited from the rise in stock prices this year.

The ratio of interest to income continues to rise because households are borrowing at a faster rate than their incomes are growing, helped of course by lower interest rates. This ratio is below that before the GFC because rates have dropped. And this is the one ratio spruikers turn to to defend the high debt levels – but it is myopic, and going in the wrong direction.

Finally, the RBA data debt to assets shows the pincer movement as home prices fall, and debt rises. This is now heading towards the highest we have seen.

The obvious conclusion is that the debt burden is too great, mortgage stress will go on rising, until the balance between debt and income is restored.

The recent loosening of lending standards simply pours more fuel on the fire. Households are being used a canon fodder in the vein attempt to keep the faltering economy afloat.

Home Approvals Remain Weak In May 2019

The ABS released their May 2019 Building Approvals data today. The trend estimate for total dwellings approved fell 0.5% in May, while the less reliable seasonally adjusted estimate for total dwellings approved rose 0.7% in May.

As you know DFA uses the trend series in our analysis and modelling.

However, most reports will pick the seasonally adjusted series and claim a “rebound” in approvals.

In fact, on both trend and seasonally adjusted measures, private sector house approvals fell, by 1.3% in trend terms and 0.3% in seasonally adjusted terms.

On the other hand, private sector dwellings excluding houses rose 0.6% in trend terms. while the seasonally adjusted estimate rose 1.2%.

Across the states, total approvals rose a little in Queensland and South Australia, together with a big hike in Canberra (on small volumes), while there was a percentage fall in New South Wales and Victoria, as well as Western Australia and the Northern Territories.

The volume trends really highlight the declines in New South Wales and Victoria, which are not offsetting the small rises elsewhere, especially in the ACT.

In New South Wales the trend estimate for total number of dwelling units approved fell 0.7% in May, while the number of private sector houses fell 2.9%.

In Victoria the trend estimate for total number of dwelling units approved fell 1.5% in May, while the number of private sector houses fell 1.3%.

In Queensland, the trend estimate for total number of dwelling units approved rose 0.4% in May, while the number of private sector houses fell 0.1% in May.

And in South Australia, the trend estimate for total number of dwelling units approved rose 0.4% in May, while the number of private sector houses was flat in May.

Finally, In Western Australia, the trend estimate for total number of dwelling units approved fell 0.7% in May and the number of private sector houses fell 0.7% in May.

The trend estimate of the value of total building approved fell 0.2% in May and has fallen for three months. The value of residential building fell 0.6% and has fallen for 16 months. The value of non-residential building rose 0.3% and has risen for nine months.

The seasonally adjusted estimate of the value of total building approved fell 0.2% in May. The value of residential building rose 4.7%, while the value of non-residential building fell 6.7%.

The HIA said “The decline in dwelling approvals appears to be losing momentum. This is a welcome reprieve for the housing industry after the persistent declines measured throughout 2018”.

“Recent positive news relating to house prices and new home sales has started filtering through. Even if this isn’t the bottom of the cycle the pick-up in new home sales in May suggests the pace of decline is slowing”.

Westpac said ” Overall the May update was a touch firmer than expected but the detail was not great with clear questions around the sustainability of the gain in high rise approvals and weakness elsewhere”.

That is closer to the mark. Little here, yet to argue for a shift in gears.

As Westpac put it ” All of this still predates several positive developments for housing, in particular: the Federal election result, which has removed the threat of tax policy changes around negative gearing and capital gains tax; and the RBA’s interest rate cuts in June and July. More timely market measures suggest wider housing market conditions have improved, especially in Sydney and Melbourne. We suspect that shift will be slow to flow through to new dwelling construction with an overhang of stock in some segments and financing issues likely to continue restraining activity near term.

Certainly the major markets of Sydney, Melbourne and Brisbane all have a way to go before we can claim a rebound, and of course there is a significant oversupply of new high-rise under construction in these centres, despite the worries about construction standards, and the disappearing indemnity insurance in the sector.

As the ABC reported:

To be a registered surveyor with the Victorian Building Authority (VBA) a person must have professional indemnity insurance, without any exemptions.

The same rule applies in NSW and Queensland.

But insurance companies are no longer providing this option and the industry is warning work on buildings may simply stop.

Other surveyors have reported that the cost of their insurance premiums and excesses have more than quadrupled.

Building surveyors are responsible for signing off on buildings, including building permits and occupancy permits.

While local government building surveyors can also sign off on permits, private building surveyors have been the preferred option for most of the building industry.

The chief executive of the Australian Institute of Building Surveyors, Brett Mace, warned the building industry could start to slow down over the next year.

“We think it’s a huge crisis,” Mr Mace said.

“If building surveyors are unable to be registered then you’re not going to be able to provide approvals and the construction industry will come to a stop.”

The Master Builders Association (MBA) said up to 30 per cent of building surveyors are required to renew their insurance by the end of June.

“If they are unable to obtain insurance or the insurance offered to them is non-compliant due to exclusions being imposed, many building projects could come to a standstill,” the MBA said in a statement.

One more reason to be cautious about a lift in approvals ahead.

New Home Sales Rebound In May – HIA

New home sales jumped in all four major states in May 2019, according to the HIA New Home Sales report – a monthly survey of the largest volume home builders in the five largest states – provides an early indication of trends in the residential building industry. They were up by 54.2 per cent in New South Wales, by 34.0 per cent in Western Australia, by 26.0 per cent in Queensland, by 25.3 per cent in Victoria and by 0.9 per cent in South Australia.

“New home sales in May bounced back to their highest monthly level in over a year,” stated HIA’s Chief Economist, Tim Reardon.

“The pickup in sales during May follows lacklustre results throughout the first four months of 2019,” added Mr Reardon.

“Federal Elections always impact market confidence and the discussion around new tax imposts on investors through an increase in Capital Gains Tax magnified this uncertainty in the first part of the year.

“This month’s result confirms our expectation that the decline in building activity will start to level off in the second half of 2019 and stabilise at a level below the highs achieved back in 2017.

“The resurgence in home sales was evident across all five states covered by the New Home Sales survey, suggesting a broad based improvement in housing market sentiment around the country.

“An easing of the credit squeeze, lower interest rates and an expectation that APRA will implement reforms to mortgage lending guidelines are also factors supporting the lift in sales activity.

“The slow start to 2019 has seen intense competition amongst home builders. The lift in sales shows that more homebuyers are seeing opportunities in this competitive trading environment.

“Income tax cuts, solid population growth and accelerating wage growth are necessary to ensure that the market does not decline further,” concluded Mr Reardon.

Home Value Falls Continue In June, But A Subtle Change In Places!

CoreLogic reported a 0.2 per cent fall in national dwelling values, the smallest month-on-month decline in the national series since March 2018, according to their June Home Value Index .

On a quarterly basis, every capital city housing market has recorded a drop in value, highlighting the broad geographic scope of this housing market downturn. Annually, the average fall is 6.9%, but regional WA is down one third from peak 5 years back and Darwin down 30.1%, thanks to the wider economic downturn there.

Sydney and Melbourne dwelling values have recorded their first monthly rise since 2017 with Melbourne values increased 0.2 per cent across the past month, while there was 0.1 per cent growth in Sydney.

According to CoreLogic head of research Tim Lawless, the June results presented an early sign that lower mortgage rates and improved sentiment were already having a flow-on effect for housing market conditions in Sydney and Melbourne, while most other regions of Australia continued to show relatively soft housing market outcomes.

“The subtle rate of decline was heavily influenced by trends across Sydney and Melbourne where the pace of falling home values has been consistently reducing over the year to date,” he said.

“Importantly, the improving conditions through to mid- May were largely ‘organic’, pre-dating the positive boost in sentiment following the federal election and interest rate cuts in early June.”

The only other regions to record a rise in housing values over the month were Hobart (+0.2 per cent), as well as the regional areas of South Australia (+0.1per cent) and Northern Territory (+0.2 per cent).

The largest falls over the past three months were recorded in Darwin (-3.6 per cent) and Perth (-2.1 per cent) where the weaker trend has persisted since mid-2014.

Adelaide recorded the smallest decline amongst the capitals over the quarter, with values down 0.4%.

Across the regional markets, values were 0.4% lower over the month to be down 3.1% for the financial year.

Dwelling values recorded a rise over the June quarter in Regional South Australia (+0.6 per cent) and Regional Tasmania (+1.3 per cent).

Mr Lawless said although these areas have recorded modest gains over the quarter, the trend across the regional areas of Australia is generally “one that is losing momentum”.