Virgin cuts investment rates

Virgin Money has announced multiple rate reductions on its new fixed rate investment products.
This reflects easing on funding rates (now future expectations of higher rates have eased) and competitive pressure for share of lending.  Expect more banks to follow. Existing borrowers are still paying the higher amount of course.
The changes, which come into effect tomorrow (19 December), will decrease rates on the 1-5 year fixed rate interest only investment products and the 4 year fixed rate principal and interest product.

Changes are as follows:

Term Current rate (p.a.) New rate (p.a.) Change
Investment – Fixed interest only
1 year 4.49% 4.39% -0.10%
2 year 4.39% 4.14% -0.25%
3 year 4.39% 4.29% -0.10%
4 year 4.59% 4.29% -0.30%
5 year 4.69% 4.59% -0.10%
Investment – Fixed principal and interest
4 year 4.44% 4.29% -0.15%

S&P Says Mortgage Arrears Lower In Oct 2017

The latest report from S&P Global Ratings covering securised mortgage pools in Australia to end Oct 2017, showed 30 day delinquency fell to 1.04% in October from 1.08% in September. They attribute part of the decline to a rise in outstanding loan balances during the month, and many older loans in the portfolios (which may not be representative of all mortgages, thanks to the selection criteria for securitised pools).

+90 Day defaults are still elevated, see the chart below.

Here is their state summary

Overall trends across the states show the differences across states, with WA and NT still significantly above other states.

The ACT recorded the lowest arrears levels, at 0.58%. QLD and WA, where arrears have been more elevated for some time, recorded another month-on-month decline in mortgage delinquencies. In QLD, arrears fell to 1.39% in October from 1.47% in September. In WA, they declined to 2.12% from 2.21% a month earlier, against a backdrop of increasing loan balances. Home loan arrears also declined in NSW and VIC, but by smaller  magnitudes. In NSW, arrears fell to 0.75% in October–the second lowest in the country–from 0.79% in September. In VIC, arrears declined to 0.94% from 0.96% the previous month.

In terms of the outlook, they say:

“improving employment conditions and low interest rates have helped to keep mortgage arrears low, but risks remain. Australia’s high household indebtedness, which has outpaced income and GDP growth for some time, leaves borrowers vulnerable to a change in economic circumstances. We do not expect arrears to increase much above current levels while these relatively benign economic conditions persist, particularly given the high level of seasoning in the Australian RMBS sector”.

CBA to Change Mortgage Broker Commission Structure

From The Adviser.

The Commonwealth Bank of Australia expects to have the CIF-recommended changes to broker commissions instated “ahead of 30 June” next year, according to its general manager for distribution strategy and execution.

Speaking to The Adviser following CBA’s announcement that it would no longer accept accreditations from new mortgage brokers with less than two years of experience (or from those that only hold a Cert IV in Finance & Mortgage Broking), CBA’s general manager for third-party banking, Sam Boer, and Matthew Dawson, general manager for distribution strategy and execution, revealed that they expect to change broker commissions next winter.

Mr Boer and Mr Dawson both welcomed the Combined Industry Forum’s reform package, which was released last week (and to which Commonwealth Bank was a contributor) and included recommendations that lenders pay brokers commission on a utilisation basis (i.e., based on facility limit drawn down by the customer and, in cases where the loan has an offset account, on the amount drawn down net of offset account balances).

General manager Boer said: “The whole industry got behind that one and we thought it addresses the concern raised around the potential conflict of interest and we’re very much supportive of that and working through our solution with our business partners on how we might go about implementing that in the new year.”

Mr Dawson added: “We are still working through the how of the commission changes, but we expect that we will still have it implemented ahead of 30 June.”

The CIF reform package states that it expects the commission changes to be implemented by lenders by “end 2018”.

Changes to CBA accreditation for new brokers

Last week, the major bank revealed that it would be making major changes to the way it accredits new brokers.

From “the first quarter of 2018”, new mortgage brokers will be required to meet new minimum education standards to be able to write Commonwealth Bank loans and demonstrate a commitment to professional development and on-the-job experience.

For CBA accreditation, all new brokers will soon be required to meet the following standards:

– Hold at least a Diploma of Finance and Mortgage Broking Management

– Have at least two years’ experience writing regulated residential loans

– Be a current member of either the Mortgage and Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA)

– Be a Direct Credit Representative or employee of an approved Aggregator/Head Group or Australian Credit License (ACL) holder

Mr Dawson told The Adviser: “We will absolutely be building a training framework and ongoing professional development framework as part of the rollout of the new strategy coming in to ensure that the brokers we’re partnering with feel assured and comfortable when they are sitting down in front of a customer to have really deep conversations around appropriate products for them.

“We will be providing that and equally working with the head group programs to ensure that the head groups that have their own professional development programs… that we support each other…. We provide content for their platforms and, where appropriate, we will rely on their platforms as a means of us getting comfort over the professional development of brokers.”

Mr Dawson continued: “I think, for us, this has been about working with the [Combined] Industry Forum and we have played a key lead role in that.

“It has been really important for us, and we are really supportive of the industry forum and the consultation process that we ran in terms of the engagement with brokers.”

He revealed that the bank surveyed 12,000 brokers in July and got nearly 2,000 respondents.

“We’ve had focus groups with many brokers right throughout the country over the last couple of month. We’ve met with every head group. This has been, for us, all about residential and making sure we support a robust industry and support the longevity of the industry.”

ANZ completes sale of 20% stake in Shanghai Rural Commercial Bank

ANZ today announced it has completed the sale of its 20% stake in Shanghai Rural Commercial Bank (SRCB), originally announced in January 2017.

As part of the Group’s broader capital management plan, ANZ now intends to buy-back up to $1.5 billion of shares on-market.

ANZ Chief Financial Officer Michelle Jablko said: “ANZ’s strong capital position combined with the progress made in simplifying our business means we are now in a position to commence returning surplus capital to shareholders while still complying with APRA’s unquestionably strong capital requirements.”

ANZ’s CET1 capital ratios as at 30 September 2017 will remain broadly unchanged on a pro forma basis with the ~40 basis point benefit from the completion of SRCB offsetting the impact of the on-market share buy-back.

ANZ has already purchased ~$500 million shares on-market to neutralise the effect of the dividend reinvestment program for both the interim and final 2017 dividends as well as the impact of ANZ’s share-based employee compensation plans.

The divestment of non-core businesses, including the sale of our Australian life insurance business last week, should provide ANZ with flexibility to consider further capital management initiatives in the future.

ANZ will continue to manage its capital prudently. Further capital management initiatives will only be undertaken while ensuring sufficient capital is available to support growth as well as being subject to business conditions and regulatory approval after the actual receipt of the relevant sale proceeds.

In order to comply with regulatory requirements, the purchase of shares will likely begin in January 2018, subject to market conditions.

Its All About Momentum – The Property Imperative Weekly 16 Dec 2017

This week, it’s all about momentum – home prices are sliding, auctions clearance rates are slipping, mortgage standards are tightening and brokers are proposing to lift their business practices – welcome to the Property Imperative Weekly, to 16 December 2017.

Watch the video, or read the transcript. In this week’s edition we start with home prices.

The REIA Real Estate Market Facts report said median house price for Australia’s combined capital cities fell 0.8 per cent during the September quarter. Only Melbourne, Brisbane and Hobart recorded higher property prices and Darwin prices fell the most sharply, dropping 13.8 per cent.

The ABS Residential Property Price Index (RPPI) for Sydney fell 1.4 per cent in the September quarter following positive growth over the last five quarters. Hobart now leads the annual growth rates (13.8%), from a lower base, followed by Melbourne (13.2%) and Sydney (9.4%). Darwin dropped 6.3% and Perth 2.4%. For the weighted average of the eight capital cities, the RPPI fell 0.2 per cent and this was the first fall since the March quarter 2016. The total value of Australia’s 10.0 million residential dwellings increased $14.8 billion to $6.8 trillion. The mean price of dwellings in Australia fell by $1,200 over the quarter to $681,100.

So, further evidence of a fall in home prices in Sydney, as lending restrictions begin to bite, and property investors lose confidence in never-ending growth. So now the question becomes – is this a temporary fall, or does it mark the start of something more sustained? Frankly, I can give you reasons for further falls, but it is hard to argue for improvement anytime soon.  Melbourne momentum is also weakening, but is about 6 months behind Sydney. Yet, so far prices in the eastern states are still up on last year!

CoreLogic said continual softening conditions are evident across the two largest markets of Melbourne and Sydney. This week across the combined capital cities, auction volumes remained high with 3,353 homes taken to auction  and achieving a preliminary clearance rate of 63.1 per cent The final clearance rate last week recorded the lowest not only this year, but the lowest reading since late 2015/ early 2016 (59.5 per cent).

The employment data from the ABS showed a 5.4% result again in November. But there are considerable differences across the states, and age groups. Female part-time work grew, while younger persons continued to struggle to find work. Full-time employment grew by a further 15,000 in November, while part-time employment increased by 7,000, underpinning a total increase in employment of 22,000 persons. Over the past year, trend employment increased by 3.1 per cent, which is above the average year-on-year growth over the past 20 years (1.9 per cent). Trend underemployment rate decreased by 0.2 pts to 8.4% over the quarter and the underutilisation rate decreased by 0.3 pts to 13.8%; both still quite high.

The HIA said there have been a fall in the number of new homes sold in 2017. New home sales were 6 per cent lower in the year to November 2017 than in the same period last year. Building approvals are also down over this time frame by 2.1 per cent for the year. The HIA expects that the market will continue to cool as subdued wage pressures, lower economic growth and constraints on investors result in the new building activity transitioning back to more sustainable levels by the end of 2018.

The HIA also reported that home renovation spending is down, again thanks to low wage growth and fewer home sales by 3.1 per cent. A further decline of a similar magnitude is projected for 2018.

Moody’s gave an interesting summary of the Australian economy. They recognise the problem with household finances, and low income growth. They expect the housing market to ease and mortgage arrears to rise in 2018. They also suggest, mirroring the Reserve Bank NZ, that macroprudential policy might be loosened a little next year.

I have to say, given credit for housing is still running at three times income growth, and at very high debt levels, we are not convinced! I find it weird that there is a fixation among many on home price movements, yet the concentration and level of household debt (and the implications for the economy should rates rise), plays second fiddle. Also, the NZ measures were significantly tighter, and the recent loosening only slight (and in the face of significant political measures introduced to tame the housing market). So we think lending controls should be tighter still in 2018.

The latest ABS lending finance data  for October, showed business investment was still sluggish, with too much lending for property investment, and too much additional debt pressure on households. If we look at the fixed business lending, and split it into lending for property investment and other business lending, the horrible truth is that even with all the investment lending tightening, relatively the proportion for this purpose grew, while fixed business lending as a proportion of all lending fell. I will repeat. Lending growth for housing which is running at three times income and cpi is simply not sustainable. Households will continue to drift deeper into debt, at these ultra-low interest rates. This all makes the RBA’s job of normalising rates even harder.

HSBC, among others, is suggesting a further fall in home price momentum next year, writing that slowdowns in the Sydney and Melbourne housing markets will continue to weigh on national house price growth for the next few quarters. They expect only a slow pace of cash rate tightening and some relaxation of current tight prudential settings as the housing market cools.

Despite this, most analysts appear to believe the next RBA cash rate move will be higher and ANZ pointed out with employment so strong, there is little expectation of rate cuts in response to easing home prices. In addition, the FED’s move to raise the US cash rate this week to a heady 1.5% despite inflation still running below target, will tend to propagate through to other markets later. More rate rises are expected in 2018.  The Bank of England held theirs steady, after last month’s hike.

The UK Property Investment Market could be a leading indicator of what is ahead for our market. But in the UK just 15% of all mortgages are for investment purposes (Buy-to-let), compared with ~35% in Australia.  Yet, in a down turn, the Bank of England says investment property owners are four times more likely to default than owner occupied owners when prices slide and they are more likely to hold interest only loans. Sounds familiar? According to a report in The Economist,  “one in every 30 adults—and one in four MPs—is a landlord; rent from buy-to-let properties is estimated at up to £65bn a year. But yields on rental properties are falling and government policy has made life tougher for landlords. The age of the amateur landlord may be over”.

In company news, Genworth, the Lender Mortgage Insurer announced that it had changed the way it accounts for premium revenue. ASIC had raised concerns about how this maps to the pattern of historical claims. Genworth said that losses from the mining sector where many of the losses occur, do so at a late duration, and improvements in underwriting quality in response to regulatory actions, along with continued lower interest rates, extended the average time to first delinquency. As a result, Net Earned Premium (NEP) is negatively impact by approximately $40 million, and so 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction.

CBA was in the news this week, with AUSTRAC alleging further contraventions of Australia’s anti-money laundering and counter-terrorism financing legislation. The new allegations, among other things, increase the total number of alleged contraventions by 100 to approximately 53,800. CBA contests a number of allegations but admit others.  eChoice, in voluntary administration, has been bought by CBA via its subsidiary Finconnect Australia, saying the sale will allow eChoice’s employees, suppliers, brokers, lenders and leadership team to continue to operate and deliver for customers. Finally, CBA announced that, from next year, it will no longer accept accreditations from new mortgage brokers with less than two years of experience or from those that only hold a Cert IV in Finance & Mortgage Broking, in a move intended to “lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs.”

The Combined Industry Forum, in response to ASIC’s Review of Mortgage Broker Remuneration has come out with a set of proposals. The CIF defines a good customer outcome as when “the customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.” Additionally, lenders will report back to aggregators on ‘key risk indicators’ of individual brokers. These include the percentage of the portfolio in interest only, 60+ day arrears, switching in the first 12 months of settlements, an elevated level of customer complaints or poor post-settlement survey results. Now this mirrors the legal requirement not to make “unsuitable” loans, but falls short of consumer advocates, such as CHOICE, who wanted brokers to be legally required to act in the best interests of consumers, in common with financial planners. But both the CBA and CIF moves indicate a need to tighten current mortgage broking practices, as ASIC highlighted, which can only be good for borrowers.  By the end of 2020, brokers will also be given a “unique identifier number”.

ASIC says Westpac will provide 13,000 owner-occupiers who have interest-only home loans with an interest refund, an interest rate discount, or both. The refunds amount to $11 million for 9,400 of those customers. The remediation follows an error in Westpac’s systems which meant that these interest-only home loans were not automatically switched to principal and interest repayments at the end of the contracted interest-only period.

We featured a piece we asked to write on What To Do When The Interest-only Period On Your Home Loan Ends. There is a sleeping problem in the Australian Mortgage Industry, stemming from households who have interest-only mortgages, who will have a reset coming (typically after a 5-year or 10-year set period). This is important because now the banks have tightened their lending criteria, and some may find they cannot roll the loan on, on the same terms. Interest only loans do not repay capital during their life, so what happens next?

The House of Representatives Standing Committee on Economics released their third report on their Review of the Four Major Banks.  They highlight issues relating to IO Mortgage Pricing, Tap and Go Debt Payments, Comprehensive Credit and AUSTRAC Thresholds. The report recommended that the ACCC, as a part of its inquiry into residential mortgage products, should assess the repricing of interest‐only mortgages that occurred in June 2017, and whether customers had been misled. While the banks’ media releases at the time indicated that the rate increases were primarily, or exclusively, due to APRA’s regulatory requirements, the banks stated under scrutiny that other factors contributed to the decision. In particular, banks acknowledged that the increased interest rates would improve their profitability.

So, in summary plenty of evidence home prices are slipping, and lending standards are under the microscope. We think home prices will slide further, and wages growth will remain sluggish for some time to come, so more pressure on households ahead.  You can hear more about our predictions for 2018 in our upcoming end of year review, to be published soon, following the mid-year Treasury forecast.

Meantime, do check back next week for our latest update, subscribe to receive research alerts, and many thanks for watching.


eChoice Sold To CBA Subsidiary

The Voluntary Administrators have announced that they have accepted an offer and executed an unconditional sale agreement with, Finconnect (Australia) Pty Limited (as subsidiary of Commonwealth Bank of Australia) to sell the assets of the eChoice Administration Group companies.

This does not include the assets of the eChoice companies which have existing contracts with brokers or lenders that have not been placed into administration. The assets consist principally of the eChoice concierge platform, IT, intellectual property and staff.

The sale to Finconnect will allow eChoice’s employees, suppliers, brokers, lenders and leadership team to continue to operate and deliver for customers as they always have, but benefitting from the support of a larger financial institution, with minimal impact to current roles and leadership structure.

The Administrators will continue with their review of the affairs of the Administration Group with a view to the preparation of a report to creditors next year. This report will provide details of the Group’s financial affairs, including its background and historical trading. At this stage, the Administrators are not in a position to advise in respect to these matters or provide any further details pertaining to the sale agreement. These are issues properly considered in the report to creditors.

In accordance with the orders of the Federal Court of Australia made on 14 December 2017, this report will be forwarded to creditors to convene a meeting of creditors to be held by 29 March 2017.

Behind the 500% increase in small businesses using marketplace lending

From SmartCompany.

The number of small business customers signing onto loans through marketplace lenders has increased more than 500% over the past year, but experts say scrutiny must be put on the alternative finance sector now to ensure smaller operators get the best deal.

The Australian Securities and Investments Commission (ASIC) released its 2017 survey of marketplace lending practices this week, crunching the numbers of 12 key lenders in Australia. Marketplace lending covers a range of models, including peer-to-peer systems and other structures where investors put up funds on which they get returns when consumers and businesses borrow.

In 2015-16, ASIC’s survey of the sector put the total value of loans through this kind of model at $156 million, but that figure has doubled over the past year to now sit at $300 million. Total borrowers for the year jumped from 7,448 last year to 18,746 this year.

The pool of small business borrowers through these schemes has historically been small, but over the past 12 months there was a 509% increase, from 33 SME borrowers in 2015-16 to 201 in 2016-17. Seventy-seven percent of these business loans carried interest rates of between 12% and 16%.

Business customers borrowed $47 million through marketplace lending platforms in 2017, compared with $26 million in the year prior, according to the report.

The numbers come as regulators and Australia’s Small Business Ombudsman continue to focus on the challenges SMEs are currently experiencing when applying for finance from the big banks. In an era where property is hard to secure in Australia, Kate Carnell has told SmartCompany young business owners face big challenges ahead when applying for a bank business loan.

While options like marketplace lending provide an alternative to small businesses, Carnell has raised concerns that these models don’t always make it clear what businesses are signing up for.

The small business and fintech communities have started discussions to address these concerns, with Carnell, Fintech Australia chief executive Danielle Szetho and independent banking consultant and founder of, Neil Slonim, holding a roundtable on the issue of transparency in SME lending this week.

Slonim tells SmartCompany that while the pool of business borrowers using marketplace lending is still very small, conversations must be had about it and alternative finance models more broadly.

“The main thing businesses need to understand is that borrowing through one of these models is different from borrowing through a bank,” he says.

The larger lenders have less room to move on their loan terms and are often “more transparent” when it comes to fees than their newer fintech competitors, Slonim says, while alternative lenders can find it “difficult to convey the true cost” of a loan.

He says it’s important to find a balance when discussing these concerns with fintech companies, because areas like marketplace lending will be valuable for small businesses into the future.

“It’s a really important sector, it needs to be encouraged, but there does need to be more self regulation and the regulators. In particular, ASIC will come in if they’re not satisfied there’s progression [on regulation],” he says.

These discussions will be a long-term process, with the Small Business Ombudsman, Fintech Australia and planning on releasing a report in February 2018 with recommendations for establishing guidelines for interest rates and fees from alternative lenders.

Genworth Changes Recognition of Premium Revenue

Genworth Mortgage Insurance Australia Limited (Genworth  today advised an expected greater fall in Net Earned Premium.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Genworth said that it has finalised its annual review of the premium earning pattern (also known as the “earnings curve”). The review process included a detailed evaluation and recommendation by the appointed actuary and supporting work and recommendation by independent reviewers.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction

The modified premium earning pattern reflects an expectation of the future emergence of risk based on a consideration of all identified relevant factors, but principally:

  • losses from mining related regions, which form the majority of the incurred cost of the last 2 years, continuing to occur at late durations; and
  • improvements in underwriting quality in response to regulatory actions, along with continued lower interest rates, extending the average time to first delinquency, while continuing to be beneficial to overall loss levels.

The change will have the effect, in aggregate, of lengthening the average duration of the period over which Genworth recognises its revenue by approximately 12 months. It also has the effect of introducing a third separate earnings curve for business written in 2015 and later. The change however does not affect the total amount of revenue expected to be earned over time from premiums already written.

The two earnings curves that comprise the previous premium earning pattern were first introduced in 2012. The last time the Board approved a change to the premium earning pattern was in September 2015, with this change applied to the financial statements in the third quarter of 2015. The Company conducted an annual review of the earnings curve in 2016 but no change was made to the curve based on the information at that time.

The modified premium earning pattern will be applied to the recognition of revenue in the income statement for the fourth quarter of 2017 and in subsequent reporting periods. The Company’s Unearned Premium Reserve (UPR) balance of $1,087 million as at 30 September 2017 remains unchanged. As was highlighted in the half year (2 August 2017) and third quarter (3 November 2017) results announcements, any change to the premium earning pattern has the potential to change the Company’s 2017 full year guidance.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction.

Based on preliminary estimates, the Company expects the full year loss ratio to remain between 35 and 40 per cent as the NEP reduction is expected to be partially offset by the fourth quarter incurred loss expectations, and preliminary estimates of the Outstanding Claims Reserves as at 31 December 2017 which currently reflect more favourable recent incurred loss experience.

The change to the premium earning pattern is expected to have minimal impact on Genworth’s regulatory solvency ratio which is expected to remain above the Board’s target capital range of 1.32 to 1.44 times the Prescribed Capital Amount as at 31 December 2017. The Company has completed an on-market share buy-back to a value of approximately $50 million and following this announcement intends to continue the
buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Board continues to target an ordinary dividend payout ratio range of 50 to 80 percent of underlying NPAT and will continue to evaluate other capital management opportunities.

The Company notes that this full year outlook is based on preliminary expectations and recommendations that remain subject to completion of the year end process, including the external audit, market conditions and unforeseen circumstances or economic events. The Company expects it will be in a position to provide guidance for the 2018 financial year at the time of announcement of its 2017 full year financial year results.

Genworth notes that it has had discussions with ASIC about the premium earning pattern. The modification to the premium earning pattern announced today was determined following the outcome of Genworth’s annual review. In particular, Genworth believes that the premium recognition pattern as applied to prior released financial statements was the correct pattern to apply in respect of those financial statements. Genworth does not intend to restate financial statements already released to the market.

ASIC notes the decision by Genworth Mortgage Insurance Australia Limited (Genworth) to change the recognition of premium revenue in its upcoming financial report for the year ending 31 December 2017.

Genworth has announced that the change will negatively impact net earned premium by approximately $40 million and as a result net earned premium for the 2017 year is expected to be approximately 17-19% per cent lower than the 2016 year, instead of previous guidance of a 10 to 15 percent reduction.  The change affects the recognition of revenue for the fourth quarter of 2017 and subsequent reporting periods.  The unearned premium liability at 30 September 2017 remains unchanged.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Will APRA Loosen Lending Standards Next Year?

Interesting economic summary from Moody’s. They recognise the problem with household finances, and low income growth. They also suggest, mirroring the Reserve Bank NZ, that macroprudential policy might be loosened a little next year.

I have to say, given credit for housing is still running at three times income growth, and at very high debt levels, we are not convinced! I find it weird that there is a fixation among many on home price movements, yet the concentration and level of household debt (and the implications for the economy should rates rise), plays second fiddle.

Also, the NZ measures were significantly tighter, and the recent loosening only slight (and in the face of significant political measures introduced to tame the housing market). So we think lending controls should be tighter still in 2018.

It’s strange examining third quarter data when the fourth stanza has almost passed, but the Australian Bureau of Statistics isn’t known for timely national accounts data. Australia is the last major Asia-Pacific economy to release quarterly GDP numbers. Despite the tardiness, the national accounts gives valuable insight, especially on the investment front in the absence of a reliable monthly gauge.

Australia’s GDP growth hit 0.6% q/q in the September quarter following an upwardly revised 0.9% (previously reported as 0.8%) gain in the June stanza. Annual growth accelerated to 2.8% from the prior 1.8% gain. The annual growth figure is now hovering at potential, which we estimate is around 3%. However, momentum is overstated, given low base effects. In the September quarter of 2016, the Australian economy contracted by 0.5% q/q, only the fourth quarterly contraction in 25 years. This was driven by a sharp fall in investment alongside higher imports. During this period, annual growth slowed by 1.3 percentage point to 1.8%.

Private investment booms

Private investment was a bright spot in the third quarter because of a sharp rise in non-dwelling construction, which made the largest contribution to GDP growth at 0.9 percentage point.

Non-dwelling construction has often become a proxy for mining investment, and the third quarter gain is likely due to the installation of two liquefied natural gas platforms in Western Australia and the Northern Territory. LNG exports are expected to pick up late in the fourth quarter amid increased production capacity. The Wheatstone project began production earlier in October after a two-year construction phrase and
shipped its first export to Japan late in the month. Wheatstone is the sixth of eight projects included in a A$200 billion LNG construction boom that is now in its final stretch. Once the remaining two projects are finalized, Australia could topple Qatar as the world’s biggest LNG exporter. Australia has recently become the world’s second largest exporter of LNG.

Public investment didn’t score as well in the third quarter, declining by 7.5% q/q. This is mainly payback after a boost in the June quarter from the acquisition of the Royal Adelaide Hospital from the private sector.

The housing market has cooled in 2017, and price growth is expected to keep decelerating through 2018; this will keep downward pressure on dwelling investment. For instance, dwelling price growth in Sydney was 5% y/y in November, well down from its double-digit growth in 2016 and earlier in 2017.

This is the result of the lagged impact of earlier macroprudential action that has included higher borrowing costs for homebuyers, especially investors or those taking out interest-only loans. The Australian Prudential Regulation Authority has also imposed limits on bank portfolio exposure to new mortgages.

Owner-occupied housing finance commitments tend to track house price growth and are a good gauge of the underlying pulse. Data released this week show October commitments rose just 0.3% m/m on a trend basis. Growth has slowed substantially from earlier in 2017.

An interesting tidbit we have observed in recent years: Housing regulation in New Zealand tends to lead Australia’s by at least a year. The Reserve Bank of New Zealand was on the front foot trying to cool certain heated housing pockets such as Auckland well before the Australian Prudential Regulation
Authority introduced housing-targeted measures, even though both economies were experiencing strong price growth in some areas. Just recently, the RBNZ announced it had eased some macroprudential measures in light of softer house price growth. Now that Australia’s housing market has cooled, APRA may follow suit with minor reversals in the next year.

Households missing in action

At first glance it was a relief that consumption made a positive contribution to GDP growth, but the details were less pleasing, as spending was concentrated on essential items while discretionary purchases suffered. We calculated that nondiscretionary items rose an average 0.6% over the quarter, and discretionary spending fell by 0.7%.

Of the nondiscretionary items, utility spending rose 1.4% q/q, food was up 1%, rent gained 0.6%, and insurance and financial services grew 1.3%. On the discretionary front, clothing spending fell 1% q/q, recreation and culture was down 0.6%, and spending at cafes and restaurants fell by 0.9%.

All told, softness in the consumer sector was largely masked by spending on nondiscretionary items. The monthly retail trade data do not capture nondiscretionary spending as thoroughly as the national accounts; over the third quarter retail volumes were up just 0.1% q/q.

We know from earlier testing that consumer sentiment does not have a causal relationship with retail spending, but incomes do. Sentiment is a symptom of weak income growth, rather than a forward indicator of spending behaviour. The Westpac consumer sentiment index fell to 99.7 in November, below the neutral 100 that indicates optimists equal pessimists. Overall, consumers have been downbeat through most of 2017, concerned about family finances and the economic outlook. At 2% y/y, income growth is hovering near a record low, so it’s little surprise households have pulled
back on discretionary purchases, while other costs such as utilities rose in the third quarter because of seasonal price hikes. The net household saving ratio rose to 3.2% in the third quarter, higher than the decade low of 3% in the June quarter, suggesting that consumers aren’t willing to keep dipping into their savings to fund discretionary purchases. It’s concerning that household consumption is weak, given that it constitutes 75% of GDP.

Businesses are faring better than consumers at the moment. This is reflected in soaring private investment, lofty gains in company profits, and strong employment growth, particularly full-time, through 2017. Unfortunately, this has not yet flowed through to stronger income growth, and there are likely several factors at play. The first is cyclical: Low productivity is mooted as a reason for benign wages in the developed world. More Australia-specific is that underemployment has been very high in
Australia and the correlation with income growth is around -0.88. Underemployment has started to edge lower as full-time positions outpace part-time, and our baseline scenario is for the tighter labour market to yield stronger income growth by mid-2018. Although Australia’s Phillips curve has flattened in the past decade, there is still a reasonable relationship between unemployment and income growth.

Some structural factors: The rise of the gig economy has contributed to the rise in casual employment. These positions are more flexible and more easily adapt to changing demand, but there’s no union representation, which can hurt wage bargaining. Also, as the positions are more flexible, there’s more acceptance that lower wages can be a consequence.

Another structural reason for low incomes could be the higher prevalence of offshoring roles. There’s no reliable industry- or economy-wide data measuring the extent of offshoring, but we know that it is an unrelenting phenomenon, given the disparity in operating costs between Australia and the developed world. Employers are not locally replacing jobs lost offshore, so they are not potentially driving up labour costs to secure the appropriate candidate.

All told, these structural factors suggest that national income growth is unlikely to enjoy a significant rebound but rather gradual and modest improvement in 2018.

How’s the fourth quarter tracking?

Our high-frequency GDP tracker suggests a 2.7% y/y expansion in the December quarter following the barrage of October activity data this week. Retail trade came in at a strong 0.5% m/m, although this was payback for sustained weakness through the third quarter, when retail turnover fell an average 0.3% m/m.

October foreign trade data weren’t inspiring, as merchandise exports fell by 2% m/m amid lower iron ore prices and, to a lesser extent, volumes. The iron ore spot price increased by 22% from its late-October slump to US$71.51 per metric tonne in early December. We expect this will enable iron ore export receipts to improve heading into 2018 as higher global prices are incorporated into contracts; usually the lag is short. It’s too early to determine whether volumes will be adversely affected by higher prices.

We maintain our view that monetary tightening is firmly off the table for at least another year as the central bank sits on the sidelines waiting for consumption to show meaningful signs of a pickup. Our expectation is that the Australian dollar will depreciate around an additional 3% against the U.S. dollar over the next six months, serving to encourage more  consumption onshore and lift export competitiveness and helping core inflation return to and creep through the central bank’s 2% to 3%
target range.

ANZ reduces international money transfer fees for foreign currencies

ANZ today announced it was reducing international money transfer fees from Australia to foreign countries, effective immediately.

Exchange rates have also been reduced for all ANZ offered currencies, including US Dollars, Euros, New Zealand Dollars, Great Britain Pounds, Hong Kong Dollars, Japanese Yen, Philippine Pesos and Indian Rupees.
For Internet Banking there will be no fee1 for all International Money Transfers sent from Australia in a foreign currency above the equivalent of AUD $10,0002. For transfers below that level the fee has been reduced from $18 to $12.

Commenting on the decision, Group Executive Australia Fred Ohlsson said: “Australia is one of the most digitally active nations in the world, and our customers are using electronic payment methods more than ever before.”
“This decision to reduce fees and rates is great news particularly for those who regularly send money to their home countries. We’re pleased to be making these payments more affordable for our customers,” Mr Ohlsson said.