Proposed Negative Gearing Changes Only Minor Impact

The ABC is reporting that a Treasury  FOI request has shown that Federal Labor’s negative gearing overhaul would likely have a “small” impact on home values, official documents reveal, contradicting Government claims the policy would “smash” Australia’s housing market.

The previously confidential advice to Treasurer Scott Morrison from his own department said the Opposition’s plan might cause “some downward pressure” and could have “a relatively modest downward impact” on prices.



ABC Radio Does Housing

I had the chance to discuss at some length the latest dynamics of the housing and property markets with ABC’s Jules Schiller on ABC Radio last night.

You can listen to the discussion.

We discussed the concept of affordability to first-time house buyers and the latest Bankwest study which shows how budget-friendly the Australian housing market is today. North says that the country has an existing dilemma to repair in able for younger people to buy houses easily.

North says that giving incentives to first-time buyers will only lessen the interest of the house they are set to buy, adding that it might not help those people. He believes that reforms in the housing sector are needed to solve this issue of unaffordable housing among new buyers. He talks about the different housing prices in the East coast where Sydney resides and the West Coast where Perth is located. He gives advice to first-time buyers when is the right time to buy houses in capital cities in Australia.

He believes that there are several uncertainties concerning the current set-up of the housing market. He says that a Housing Royal Commission is more needed than a Banking one, though this inquiry can affect the housing industry but he is not sure whether first-time buyers will feel the effect once the inquiry is finished. He says that the inquiry should look into how banks are dealing with mortgage payments and other transactions.

He cannot say whether foreign ownership of some houses and lands in the country are largely affecting the first-time buyers but it is a factor. He says that there are many markets where first-time buyers can invest like Adelaide, Hobart and Brisbane.

Banking royal commission: The questions commissioner Kenneth Hayne needs to ask and the banks must answer

From ABC News.

The Government and major banks were staunchly against a royal commission until it became all but inevitable that an inquiry would happen with or without their imprimatur.
That has led many to question whether the terms of reference have been designed to reduce the scope of the commission in a way that limits the amount of wrongdoing that might be uncovered.

“It is carefully crafted to avoid a lot of the potential bear traps,” said banking analyst Martin North from Digital Finance Analytics.

“It’s probably the one you have to have, I’m not sure it’s really going to add much to the real debate and I’m not sure the outcomes will be really significant.”

CLSA banking analyst Brian Johnson concurs the terms of reference are weaker than what Labor, the Greens and some dissident Nationals had in mind.

But he also noted the extensive and compulsive investigative powers of royal commissions tend to mean they turn up surprising findings — the “unknown unknowns” as former US defence secretary Donald Rumsfeld famously put it.

“If it doesn’t actually turn up anything that we don’t know already then it is really a waste of time,” Mr Johnson said.

“This does provide a mechanism for aggrieved parties to basically purge themselves, so that’s where the risk basically lies [for the banks].”

What skeletons remain in the cupboard?

The Government’s main argument against a royal commission is that it has already held a range of inquiries and undertaken a number of reforms to improve financial sector regulation and accountability.

Martin North agrees a lot of progress has been made.

“Over the last 18 months or so, there have been a whole series of improvements in the regulatory framework in and around banks,” he said.

“A lot of the things that should have been done have been done already.”

Mr North cited the Productivity Commission review of so-called vertical integration (where banks cross-sell a wide range of products and services to their customers), the ACCC’s investigation into bank price setting and the Banking Executive Accountability Regime as examples.

However, Mr North said the biggest elephant in the room remains largely ignored.

“The critical question for me is about lending, and about lending standards,” he said.

“I have a view that we are at a very early stage of understanding just how far from where we should have been have the lending standards been … that is the real black hole at the moment.”

Mr North said there may be a ticking time bomb of bad loans that could turn into rising defaults over the next three to five years.

“If you look at the lending standards today and you compare them to two or three years ago, there are many people holding mortgages today who would not now have got those mortgages,” he said.

“But I also believe that even today, the lending standards are still too loose and there are households today who are able to get mortgages and committing to mortgages that they shouldn’t be getting.”

Mr North said there was also a lot more to be discovered in the areas of financial planning and mortgage broking.

“I also think that we’ve still got some questions around the conflicts of interest, for example, from mortgage brokers and financial advisers and how they back-end into the overall financial services sector,” he said.

“Those are the two things that I think are the critical issues but I don’t think either of them will get touched very hard in this review.”

Mr Johnson said another key issue that may not be examined in the royal commission is the economic fallout of having such large, super-profitable major banks.

“The 10-year bond rate is something like 2.6 per cent and we’ve got banks doing an ROE [return on equity] of about 15 per cent, which is amongst the highest in the world,” he said.

“That high level of profitability, perhaps that is a tax on the rest of the economy.”

Time more limited than terms of reference

While the terms of reference give relatively broad scope for Kenneth Hayne to take a wide looks across the financial sector, he has only been given a year to do so.

This is slightly less than the Northern Territory royal commission investigating youth detention.

It is almost a full year less than the Trade Union Royal Commission, which was extended from nine months to nearly two years at the request of commissioner Dyson Heydon who found there was insufficient time to complete his inquiry into half a dozen trade unions.

This inquiry is intended to look at hundreds of financial companies, many of which are worth well over $1 billion and each sell hundreds of individual products.

Given the number of victims of the financial scandals the public have been made aware of, the royal commission looking at institutional responses to child sexual abuse may provide a better guide of how much time is needed for a genuinely thorough inquiry.

It was originally intended to take two years, however it was extended to four years due to the sheer volume of victims’ stories that needed to be told.

Will the royal commission raise mortgage rates?

As for bank claims the bad publicity and possibility of new scandals arising from the royal commission would push up overseas funding costs and therefore mortgage interest rates, Mr Johnson is sceptical.

“The cost of three-year and five-year money is back down at the low points of the cycle,” he said.

“It certainly would be more driven by what we see happening in credit markets generally than this idea that suddenly investors would desert the Australian banks.

“I just think that’s over-hyping it and it’s a somewhat convenient argument.”

Mr Johnson said where Australians choose to park their savings is a much more important factor for lending interest rates than whether international investors are investing.

“The funding costs for the Australian banks are far more sensitive to deposit pricing than they actually are to wholesale funding,” he added.

Ironic in light of the latest scandal, exposed by Ben Butler in The Australian, where the major banks rolled term-deposit customers over into much lower interest rate products after their initial deposit matured without adequate warning that this would happen.

The Business Does Rate Rises and Households

A segment from ABC’s The Business, in which I discuss with Paul Bloxham Chief Economist HSBC, the question of when the RBA may lift rates, and the potential impact on households.

In essence, will the RBA be able to wait until income growth recovers, thus protecting household balance sheets, or will they move sooner as global rates rise, and put households, some of whom are already under pressure, into more financial stress?

You can read about the results from our mortgage stress surveys here.

Commonwealth Bank inquiry: Is former APRA boss John Laker the right person for the job?

From the ABC’s Michael Janda.

It’s indisputable that the Commonwealth Bank hasn’t had a great time lately.

Sure, it recently turned in a record $9.93 billion profit, but Australia’s biggest bank has been hit by scandal after scandal.

First there was it’s involvement in lending to customers caught up by the Storm collapse, then the financial planning scandal, a series of complaints against CommInsure and finally the massive money laundering scandal, which could easily cost the bank billions of dollars in penalties.

While previous scandals were dismissed as “isolated incidents” by CBA, for regulators the money laundering scandal was the last straw.

Two weeks ago, banking regulator APRA announced an independent inquiry into governance, culture and accountability at CommBank.

On Friday, APRA announced the panel who will conduct the review.

All three panellists are eminent members of the business and financial world.

Jillian Broadbent was a long-serving Reserve Bank board member, along with stints as a non-executive director with Coca-Cola Amatil, ASX, Woodside and Qantas.

Graeme Samuel is best known for his eight years in charge of Australia’s consumer and competition watchdog, but also has extensive experience in the financial sector.

John Laker rounds out the panel — he was in charge of APRA until the end of June 2014.

And that is where the potential doubts about Dr Laker’s appointment arise.

“My first reaction when I saw his name announced was, ‘gee, that’s a bit poacher turned gamekeeper’,” said banking analyst Martin North from Digital Finance Analytics.

“I guess he also would have significant experience of CBA and the way it’s interacting with the regulator, so I guess it’s a bit of a two-way street.

The potential conflicts are obvious.

Most of CBA’s problems arose prior to July 2014.

As APRA’s then chairman, Dr Laker was responsible for the organisation that was supposed to be keeping an eye on CBA, ensuring that its finances, governance and risk culture were shipshape.

If it turns out that the Commonwealth Bank was seriously deficient in any of these areas, the review will require Dr Laker to sign off on a report that may highlight errors or oversights by APRA and himself as its boss.

That’s not to say he can’t or won’t do that if it’s called for, but it’s a potentially awkward position to be in.

CBA not unique amongst banks behaving badly

Dr Laker’s appointment is not the only flaw with APRA’s CBA inquiry.

While the nation’s largest bank has probably been embroiled in more scandals than the others, all of the big four have been found to have acted against the interests of consumers in numerous instances.

Martin North argues that’s because the short-term profit motive reigns supreme.

“In the process of trying to maintain shareholder returns at levels that investors are wanting are they compromising customer outcomes?” he asked.

“There’s been a litany of things over the years where things seem to have gone wrong and people tend to say, ‘well these are isolated events and issues’, but when you put them all together you start to wonder whether there’s a more structural set of questions that need to be thought through.”

The banking regulators appear to appreciate there’s a wider problem.

“There’s no quick fix here, it’s a deep-seated issue in the view of the community that there is a lack of trust,” APRA’s current chairman Wayne Byers told a business lunch in Sydney last week.

“The drip feed of issue after issue after issue just reinforces the view that’s out there,” Reserve Bank deputy governor Guy Debelle said at the same event.

Unfortunately the CBA review will not deliver that.

Not only is its credibility undermined by a panellist who many will conclude has no incentive to look into the darkest, dustiest corners of the cupboard, but also by its focus on just one bank.

Mr North isn’t really sold on a banking royal commission, but he does think a much broader inquiry into retail banking and wealth management across all the major institutions is what’s needed to restore trust.

“There is a bigger question about the way that the financial services sector operates in Australia,” he said.

“At the moment, there isn’t an appetite or a willingness to really pursue that, but I think that’s what we really need.”

In the meantime, it appears the burden will remain with investigative journalists such as Adele Ferguson to continue their piecemeal exposure of the financial sector’s dirty deeds.

ABC Four Corners Does Mortgage Stress

Last night ABC Four Corners looked at the Australian housing market, and discussed the pressure on households, even at current low interest rates thanks to rising costs of living, flat wages and the risk of rising mortgage rates.

They used data from Digital Finance Analytics household surveys to create an interactive map looking at mortgage stress across the country.

You can read more about how we calculate stress in our definitive guide, or watch our video discussing the latest analysis.

The underlying mortgage data is available in our core market model.

A quick reminder, the core market model ingests data from our surveys, focus groups and other private data, as well as information from various public sources.

The core model, working off a rolling sample of 52,000 household records enables us to analyse many aspects of the market. We have clients who take a range of outputs from the model.

In this video we walk through some of the key dimensions in the model, including segmentation, mortgage profiles and locations.

Note the data is for demonstration purposes only.




Mortgages and debt: How lending culture is leaving Australians vulnerable

From ABC News.

A decade of housing price rises, low interest rates and relatively easy credit has left Australians carrying the second highest level of household debt in the world.

And despite efforts to tighten lending and to address problems in the lending culture, the ABC’s Four Corners program has learnt bank staff and mortgage brokers are still required to meet tough lending targets and some staff are threatened with dismissal if they do not meet the banks’ requirement to sign up more mortgages.

The problems in the lending culture were acknowledged by the banks themselves earlier this year in a review conducted by the former public service chief, Stephen Sedgwick.

Incentive payments and lending targets are still a primary motivator for bank staff.

Internal performance expectations for Westpac bank lenders, obtained by Four Corners, include targets of six-to-nine home-finance requests a week and between two and three home-loan drawdowns a week.

All the big banks have performance targets.

ANZ chief concedes need for further reform

Most bank CEOs, including Westpac, were unavailable for interview but ANZ chief Shayne Elliott did agree to talk to Four Corners.

Mr Elliott said changes had been made and not all the targets were simply sales targets.

“The targets are small in relation to their overall income,” he said.

Mr Elliott said, following the Sedgewick review, 70 per cent of ANZ’s targets were weighted towards good customer outcomes and customer satisfaction.

“[The targets are] not all about sales, not about the number of mortgages,” he said.

Banking regulators have also moved to tighten lending, forcing banks to make investor loans in particular harder to get — but bank staff told Four Corners they still had to meet tough performance targets.

Four Corners has obtained letters written to lenders by bank branch managers at NAB and Bankwest — owned by the Commonwealth Bank.

The letters warned lenders who had not met their targets that their positions were under review, and both canvassed the possibility of termination.

Mr Elliot conceded there was room for further reform in the industry.

“I think, in terms of our own staff, there will always be room for further improvement,” he said.

But he said there also needed to be a greater focus on the incentives driving the mortgage brokerage industry.

“We’re accountable for the lending, but [for] future reform we need to look at the way that the broking industry is also compensated,” he said.

Some brokers agree.

Philip Dempsey, a former mortgage broker, left the industry after growing increasingly uncomfortable with the commission-only payment system.

“Brokers are under extreme pressure — most of them don’t have a base salary,” he said.

Mr Dempsey said most brokers also had lending targets they had to meet — some as high as $3 million a month.

He said if the targets were not met, the brokers were forced out of the industry.

“There have been people in the industry who have been lending clients too much money, encouraging them to borrow more than what they can comfortably afford,” he said.

A ‘perfect storm’ of issues

Australian banks now hold at least 60 per cent of their loan assets directly to housing.

Concern is growing among some economists and former bankers about the impact of any housing downturn on the banks and on the wider Australian economy.
A shaded line graph showing a rising household debt to income ratio from 1990 to 2015.

 Finance data analyst Martin North gestures with his hands as he speaks to Four Corners.  Photo: Martin North said he had never before seen what he called a "perfect storm" of issues coming together. (ABC News) 

Finance data analyst Martin North conducts a continuous survey of individual household debt and mortgage stress.

He said he had never before seen what he called a “perfect storm” of issues coming together.

“We’ve got very high household debt. We’ve got very high house prices. We’ve got households in some degree of difficulty already,” he said.

“You only need a small consequential change, a small increase in the cost of fuel and stuff, to be able to actually really create that pain point.

“There are a good number of households who are really up against it now.

“It’s a house of cards, I think. It doesn’t take much to see how it could actually go pretty bad.”

Another economist who has raised the alarm is former banker Satiyajit Das.

He said the 60 per cent exposure to mortgage debt in Australia’s banks was “extremely high”.

That figure “is at least 20 per cent higher than Norway, and also higher than Canada, which is a very comparable economy to Australia”, he said.

Australia’s feverish housing market has contributed but Mr Das said other countries that had experienced rapid house price rises did not have the same potentially dangerous exposure.

“One of the biggest housing bubbles in the world is Hong Kong, but the Hong Kong banks have only got exposure to the housing market of around 15 per cent,” he said.

Exposure to housing debt at Australian levels, Mr Das said, would leave banks more vulnerable in the case of any housing downturn.

“If there is a downturn then obviously the losses will build up quite quickly,” he said.

‘Massive affordability problem’ will exacerbate downturn

Gerard Minack, the former head of developed market strategy at Morgan Stanley, said Australia had been led down this path by current tax arrangements and lenders who had been increasingly willing to leverage up borrowers.

This, he said, had created “a massive affordability problem” that will exacerbate the pain associated with any downturn.

Australia now has a household-debt-to-income ratio of 190 per cent.

“For every $1 of household income, there’s [nearly] $2 of debt,” Mr Minack said.

“I can’t think of a single economy that’s had a downturn with that much debt where it’s not been a deep downturn.”

Mr Elliot said ANZ was comfortable with its current loan exposure.

“It is a healthy mix at about 60 per cent, ” he said.

“The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of really small loans across the country.”

Mr Elliot said the impact of a downturn on the bank would depend on its nature.

“It’s something we look at incredibly seriously because it’s in our best interest to make sure that our risk is well managed,” he said.

ABC The Business Does Superannuation Fees

The ABC The Business segment on superannuation fees underscores the recent Rainmaker report. During the last 10 years Australians have paid around $230-billion in fees to superannuation funds and over the next 10 years, those fees are set to double.

in 2016 Australians paid $31 billion in fees on $2.2 trillion of superannuation. That amount of fees is about the same as the cost to the government of superannuation tax concessions, and more than half the $45 billion spent on income support for the elderly.

Of that $31 billion in fees, the for-profit sector (which also includes self-managed super funds) ends up with $28 billion, or 91 per cent, Rainmaker found.