Comprehensive credit reporting will soon leave unprepared finance providers with unprofitable business models while it spurs those ahead of the curve to further success, says credit and risk consultant Andrew Tierney, via AustralianBroker.
The news that most consumers can now
benefit from comprehensive credit reporting should come as a wake-up
call to finance providers who have yet to embrace the digital era.
All four major banks are now providing
credit bureaux with detailed customer transaction data relating to
credit card usage, personal loans, mortgages and other financial
commitments.
CCR is poised to reshape our industry.
‘Game changer’ may be an overused phrase – but in this case it’s
accurate. For this reason, it surprises me that there are a large number
of credit providers still stuck in the analogue era, who show no signs
of wanting to change. They aren’t benefiting from CCR and don’t seem to
want to.
For example, while talking to a subprime
lender just last week about what he was doing to meet this new
challenge, he said his company already treated all applicants as
subprime, with an interest rate that reflected the level of risk. He
didn’t need transaction data direct from the applicant’s current account
to help him make a decision, so why fix something that had been
generating profits for as long as he could remember?
I can’t imagine how those with this
mindset, determined to carry on as they have done, will still be in
business in 10, maybe even five years’ time.
While many don’t see it at first, there’s
eventually a light-bulb moment that arrives once you spell out how CCR
is going to impact their business.
For the lender I mentioned, all it took
was me pointing out that legislation requires lenders to use all the
tools available to understand the risk a loan presents to the client.
Without tapping into CCR, is he really doing this?
What defence will he have for not
utilising CCR when the regulator comes knocking on his door? Cost isn’t a
factor. There is no need for any major investment in back-office
infrastructure or IT when you can tap into CCR and open data at little
cost via platforms provided by tech companies.
Was he prepared for legal action that he could face, as a result of not fully checking affordability?
Further, there is the risk exposure that
comes from not knowing the size that your liability could be in the
future. As we all know, the regulator has been moving the due diligence
goalposts for us.
By the end of our talk, the time
investment he was willing to devote to this had grown exponentially.
Now, he is days away from taking full advantage of CCR.
However, CCR should not be viewed simply as a big stick when it poses many more business benefits.
As recently calculated by Kevin James at
Equifax, $20bn in extra loans could be granted to consumers over just
one year by giving lenders granular detail on customers’ debt and
repayment habits. The real-time transaction history at the point of
application gives lenders the data needed to allow loans that previously
would have been turned down.
Suddenly, a slice of business that
used consultantto be a ‘no’ could become a ‘maybe’, then a ‘yes’.
Because this decision will be largely automated, it will be possible to
use true risk-based pricing for the first time, with loan terms designed
specifically for a borrower.
Those that lag in this business are undoubtedly going to be left behind.
It won’t be long before they see a change
in demographic in their pipeline. The profile of hopeful borrowers they
are used to dealing with will change, as previous ‘nos’ find they can go
to more mainstream sources and become ‘yeses’. Why would borrowers be
willing to pay a higher rate of interest when they can get a lower one
that is specifically tailored to their situation?
Finance providers who stubbornly remain
behind the times may also find the likely ‘nos’ will begin to target
firms that do not use CCR or open data, because they know their
transaction data will not stand up to the same level of scrutiny and
they are more likely to sneak by to approval.
Those who do not embrace these changes are
going to have the rug pulled out from underneath them in the
not-too-distant future. Their business model that has always been
profitable could lose its edge overnight.
If doubt remains, remember that none of us
need to think very hard to come up with examples of analogue businesses
that have long been left behind.
In 2017 then Treasurer Scott Morrison announced a bill that would require the big four banks to participate fully in the mandatory comprehensive credit reporting regime. Via The Adviser.
The legislation passed the
House of Representatives but had not passed the Senate prior to the
dissolution of parliament due to the election.
The
revised bill has introduced a new category of information within credit
reporting, enabling hardship information to be reporting alongside
repayment history information.
Attorney-General Christian Porter
also introduced new hardship arrangements to allow consumers to reveal
hardship arrangements to other credit providers.
“Proposed
changes to the Privacy Act will make sensible changes to allow for
transparent and responsible lending practices where people are subject
to hardship arrangements,” Mr Porter said.
“The amendments will
benefit consumers by making sure credit products are suitable, and
ensuring consumers are encouraged to seek hardship arrangements if they
are struggling to meet repayments under their credit contract.”
The draft legislation has just been released for public consultation which will introduce these changes.
“These
changes balance the needs of both credit providers and consumers. They
are intended to give credit providers relevant information about
consumers who are in financial hardship, or have recently experienced
hardship, in order to facilitate better and informed lending decisions,”
said Mr Porter.
The consultation period is open until September with interested parties welcome to comment on the draft legislation.
Australians are still confused about what goes into their
credit report, despite it being an important record of their credit health,
according to research by consumer education website, CreditSmart.
The CreditSmart survey found that nearly three quarters of
Australians assume their credit score is included in their credit report. One
in five mistakenly believe that marital status, income, insurance claims and
even traffic fines form part of their credit report.
Commenting on the findings, Geri Cremin, Credit Reporting
Expert at CreditSmart, said: “If you are applying
for a credit card, a personal loan or even applying to change your mobile phone
provider, your credit report can make or break your application.
Your credit report is a snapshot of your credit history and
current credit health – so lenders do look at your credit report, and you
should too.”
“Your credit report is a way for lenders to see how you
handle the credit you currently have and assess whether the credit you’re
applying for is right for you. Better still, a good credit report might open
the door to better deals.”
Who’s accessing your credit report?
How credit reports are used is also unclear to many
Australians. The majority of consumers know their credit report can be checked
when they apply for a home loan, however:
Less than 50% are aware that it can also be checked when taking out a new mobile phone contract or opening a new gas or electricity account.
Four in ten also wrongly believe their credit report is checked when applying to rent a property.
30% believe that their credit report is checked when they take out home insurance.
13% also think that a future employer checks their credit report when they apply for a job.
“By law, your credit report can only be accessed by others
in limited circumstances. For example, your credit report can’t be accessed by
a real estate agent when you apply to rent a house, an insurer when you apply
for car or home insurance or by a potential employer when you apply for a job,”
added Ms Cremin.
Aussies love credit, but feel it’s getting
harder to access
CreditSmart’s research showed that Australians are
enthusiastic users of credit, with three quarters (76%) currently using some
form of credit product.
Credit cards (56%), home loans (29%), vehicle finance
(12%), Buy Now Pay Later services (12%) and personal loans (12%) were the most
popular types of products used by Australian consumers who responded to the
CreditSmart survey.
The survey also found that four in 10 Australians think it
is harder to get credit now than it was 12 months ago. They say the reasons
are:
lenders doing tighter credit checks (57%)
tougher regulation around credit (54%) and
lenders looking at bank statements and daily expenses more closely (41%)
declining property market (22%)
“As Australians feel credit is getting harder to access,
it’s important to take charge of your individual credit health. A great first
step is to check your credit report – understand what’s on it and get on top of
your monthly repayments. Lenders look to your credit health to determine your
attractiveness as a customer, so it is important to know where your credit
health stands,” Ms Cremin said.
“We recommend checking your credit report annually and
really treat it as an asset that will help you access the right credit if and
when you need it.”
So, what is included in my credit report?
At a minimum, your credit report will include identifying
information about you, such as your name, birth date, address and employment
history.
More importantly, it includes:
A list of any applications you’ve made for credit over the last five years – regardless of whether your application was approved or not. This information is listed as an “enquiry” by the credit provider you applied to and it includes the type of credit you applied for.
A breakdown of your current credit accounts such as your home loan or credit card.
Up to 24 months of repayment history – which shows your monthly repayment behaviour on financial credit accounts (phone or utility companies do not report repayment history, so your telco and utility repayments won’t be on your credit report).
Any defaults listed by a credit provider on financial loans as well as telco and utility accounts. A default can occur if you miss your payment of at least $150 by at least 60 days. A default stays on your credit report for 5 years.
Research from credit information website, CreditSmart.org.au, has
revealed that one year on from the adoption of Comprehensive Credit Reporting
(CCR), most Australian consumers are still unaware of the changes that are
impacting their credit health, and may not know how it can impact their future
credit applications.
The research found that in the last 12 months, only one in
four consumers checked their credit report. More worryingly, consumers who are
struggling with their credit health said they were just as likely to seek
advice from credit repair or debt management services as they would from their
lender or free financial counsellor.
“Consumers are still largely unaware of credit reporting,
what information is contained in their credit report, and what that means about
their borrowing behaviour and overall credit health,” said Mike Laing, CEO of
the Australian Retail Credit Association (ARCA), which founded CreditSmart.
“Our research has found that while awareness has actually
increased 11% from last year, less than 1 in 3 consumers are aware that credit
reporting has changed. Importantly however, awareness is higher among those
with a real need to know – with one in two consumers who are planning to make a
significant purchase in the next 12 months being aware of the changes,” added
Mr Laing.
The rollout of comprehensive credit reporting has
accelerated rapidly in Australia since last year, with more data shared than
ever before. By September this year, comprehensive credit information for 80%
of consumer loan accounts will be available.
“CCR allows lenders to share and view more detailed credit
information about consumers to provide a clearer view of a consumers’ credit
history. This is a positive move for consumers who have a strong history of
making payments on time.” added Mr Laing.
Consumer awareness highest for users of riskier
credit products
According to CreditSmart, credit cards make up the majority of
accounts currently in the CCR system at around 87%, followed by mortgages at
9%.
Yet, people who hold these mainstream types of accounts are
the least aware of the changes to credit reporting and may not be aware of the
value it adds to their credit history, if they have a strong record of making
payments on time.
It was also found that those consumers with products that
are sometimes seen as riskier, such as leases for household goods (61%), cash
loans (54%) and payday loans (79%), plus personal loans (55%), are all far more
aware of the changes to credit reporting[1] This could indicate the users of
those products have been given more information about the changes, or that they
have taken more time to understand the changes.
Consumers using these riskier products also rated their
credit health as significantly worse than users of home loans and credit cards.
Interestingly, Buy Now Pay Later (BNPL) users have
relatively low awareness of credit reporting changes despite significant
numbers rating their credit health as poor.[2]
Consumer awareness a work in progress
Awareness of credit reporting changes is not the same as
understanding the detail behind their credit report, according to Mr Laing.
“It is easy to understand how consumers may become confused
about what’s important when it comes to credit reporting and their credit
health. There’s a lot of information out there and it’s important to bring it
back to a simple, straightforward message.
“We want consumers to be aware of the importance of their
credit history to their credit health – and how that history may impact their
financial future. The steps are to understand how the credit reporting system
has changed, to get your credit report to see your credit history and to manage
the credit that you have responsibly” added Mr Laing.
For more information on the changes to credit
reporting and where to get your free credit reports you should go to www.creditsmart.org.au, which provides clear information on the credit
reporting system to assist consumers to optimise their credit health.
Australian women are missing opportunities to optimise their credit health and make themselves look good to lenders, according to research from consumer education website, CreditSmart.
The study was conducted online between 15-18 March 2018, with a sample size of 1,026 of Australians aged 18 years and older throughout Australia, out of which 51% of the sample were women.
A huge 89% of women are unaware of changes currently happening in the credit reporting system, and a third of these feel the changes will not impact them in any way. A quarter of Australian women are completely unaware of what a credit score is, and 65% have never checked their credit report.
Rebecca Murray, General Manager of Australian Retail Credit Association (ARCA), which founded CreditSmart, said the results showed a worrying gap in women’s knowledge of their credit health.
It is really important for women to be across these upcoming changes, so they can take advantage of the changes rather than potentially be negatively impacted”, Ms Murray said.
“Going forward, your credit report will become a personal asset which will hold you in good stead for when you need to take out a loan, as lenders will be able to track your account repayment habits on your accounts to assess your creditworthiness,” Ms Murray said.
It is important to understand that your credit score and credit report are both indicators of your credit health. Our research found that men are overall 10% more likely to check their credit report compared to women.
The research, undertaken by YouGov Galaxy, was done ahead of important changes to Australia’s credit reporting system which will see lenders move to comprehensive credit reporting (CCR). As part of this, the Government has introduced legislation that will mean the four major banks will be required to supply half of their customers’ comprehensive credit reporting data with credit reporting bodies by this September and the rest by September 30 next year, to ensure lenders have a complete picture when those individuals apply for credit.
Optimise your credit health
CreditSmart research found that 55% of women either don’t know or have incorrect perceptions on the cost of accessing a copy of their credit report.
Ms Murray stresses the importance of knowing your credit rights, which includes free access to your credit report annually from each of the credit reporting bodies.
“How to use credit responsibly is everybody’s business, irrespective of gender. People with good credit health will be rewarded with more choices of loan products and possibly lower interest rates, so get to know your credit report, fix it if there is something wrong and pay your accounts on time to get the credit you want, when you need it,” she added.
For information on how to optimise your credit health, Ms Murray suggested women should go to the CreditSmart website (http://www.creditsmart.org.au), set up by credit experts to help you understand how recent credit reporting reforms affect you.
CreditSmart has five top tips for keeping your credit report healthy:
Know what’s on your credit report: You can get a free copy of your credit report annually from each of the three main credit reporting bodies Experian, Illion (formerly Dun & Bradstreet), and Equifax.
Keep track of your credit score: Your credit score is like a summary of what’s on your credit report and can give you a quick indication of how credit providers see you. For free credit scores you can refer to CreditSmart.
Don’t let forgetfulness make you miss payments: Talk to your credit provider about setting up an automatic payment, i.e. direct debit, to make sure your regular payments are paid on time.
Fix anything that is incorrect: If you think something is incorrect, you can ask any credit provider or credit reporting body for help to fix that error, so long as they hold some kind of personal credit information about you. This is a free service.
Only borrow what you need: Having too much credit may make it harder for you to get credit for what you really need. If you have more credit than you can comfortably afford, try to close any accounts that you don’t use or decrease your credit limit. Your credit report will show credit providers how much credit you have available, even if you don’t use it.
The ABA says Australia’s four major banks have reached an agreement to protect vulnerable customers from being unfairly treated in the new mandatory Comprehensive Credit Regime.
The four major banks, who will be required to report the credit history of 50% of customers by the end of September, will not include customers who have reached agreement on hardship arrangements with their bank. This will continue for the first 12 months of the regime while the Attorney-General is conducting a review into this issue.
CEO of the Australian Banking Association Anna Bligh said this was a critical issue for Australia’s major banks who were united behind this arrangement to ensure all customers are treated fairly in what will be an important change in credit history reporting.
“Australia’s banks have been working closely with the Federal Government and other stakeholders to ensure we get this major reform right, without unfairly treating some customers, and implemented without delay,” Ms Bligh.
“Australia’s banks are fully behind this new regime and see the great benefit it can bring in helping customers quickly and easily get a great deal on their personal loans, home loans and credits cards. The four major banks are committed to meeting the start date of 30 September in accordance with the CCR regime.
“Currently if you have a great credit history, the only organisation who knows this is your bank.
“This new regime takes that powerful information and places it into the hands of customers who can ensure they get the best deal possible from a financial institution.
“As with all major reforms in banking it’s important we don’t leave people behind.
Those who have experienced hardship through no fault of their own such as losing a job, sickness, natural disasters or relationship breakdown need to be protected in this new regime.
“Unexpected events happen in life, which banks understand, therefore it’s important that we can discreetly show this on credit histories to make sure customers don’t have further difficulty in the future,” she said.
The ACCC has instituted proceedings in the Federal Court against credit reporting body, Equifax Pty Ltd (formerly Veda Advantage Pty Ltd), alleging breaches of the Australian Consumer Law (ACL).
The ACCC alleges that from June 2013 to March 2017, Equifax made a range of false or misleading representations to consumers, including that its paid credit reports were more comprehensive than the free reports, when they were not.
Equifax also allegedly represented that consumers had to buy credit reporting packages for it to correct information held about them, or to do so quicker. In fact, Equifax was required by law to take reasonable steps to correct the information in response to a consumer’s request for free.
In addition, the ACCC alleges that Equifax represented that there was a one-off fee for its credit reporting services, when its agreement provided that customer’s subscriptions to the services automatically renewed annually unless the consumer opted out in advance. We allege this renewal term is an unfair contract term, which is void under the ACL.
In all the circumstances, it is alleged that Equifax acted unconscionably in its dealings with vulnerable consumers including by making false or misleading representations, and using unfair tactics and undue pressure when dealing with people in financial hardship.
“We allege that Equifax acted unconscionably in selling its fee-based credit reporting services to vulnerable consumers, who were often in difficult financial circumstances,” ACCC Commissioner Sarah Court said.
“We allege that Equifax told people they needed to buy credit reporting services from them in situations when they did not. It is important for consumers to know they have the legal right to obtain their credit report and to correct any wrong information for free.”
By law, consumers are entitled to access their credit reporting information for free once a year, or if they have applied for, and been refused, credit within the past 90 days, or where the request for access relates to a decision by a credit reporting body or a credit provider to correct information included in the credit report.
Australia’s credit rating system is failing both borrowers and lenders. Many borrowers are unaware of their own credit scores and our research shows they have trouble applying for suitable loans. Lenders are also struggling with too little information, causing them to extend loans to those they shouldn’t and restrict loans to worthy borrowers.
Upcoming changes to Australia’s credit reporting system could remedy these issues.
Under the new credit reporting regime, both lenders and borrowers will have access to more data, such as monthly payment histories on loans and credit cards. This will help consumers understand their own creditworthiness, improve their credit scores and shop around for lower interest rates.
The new data will arm banks and other lenders to make better lending decisions. But it should also level the playing field by giving new entrants more information, helping them to compete with the established lenders.
My research with Luke Deer examined loan applications to SocietyOne. This is a peer-to-peer lending marketplace that specialises in unsecured personal loans.
Borrowers are only accepted onto the SocietyOne platform if their credit scores can be verified. Substantial “underwriting” is required to ensure borrowers are of sufficient credit quality.
Underwriting involves evaluating a borrower’s income and cash flow, based on bank statements and other public information.
Despite this labour-intensive and time-consuming process, which requires individuals to submit copies of their documents to third-party lenders, lenders do not receive a complete picture of the potential borrower’s financial situation.
A borrower may report only part of their true financial situation – for example, by sharing information from only one of multiple accounts. Without an accurate picture of creditworthiness, lenders could be extending loans to borrowers that should be rejected, and others might not receive loans they should qualify for.
This is where the new credit reporting regime comes in – there will be much more data. In addition to monthly payment histories, there will be red flags on any missed payments of more than 14 days. The current system only flags missed payments of more than 60 days or bankruptcies only.
Credit reports will include information about current accounts you hold, what accounts have been opened and closed, the date that you paid any default notices, and how well you meet your repayments.
The shift towards comprehensive credit reporting should reduce the time required to underwrite loans and allow loans to be priced more efficiently. This is in part because it will reduce the risk of lending to people who are risky borrowers, and so will lower costs.
While this means that borrowers with good credit history will benefit from good behaviour, lower credit quality customers may face higher borrowing costs, or be left searching for alternatives.
But it also opens up more opportunity for borrowers to improve their credit rating by acting on any red flags.
More innovation ahead in mortgage lending
Australia has lagged other developed countries in adopting positive credit reporting. Up to this point, the large banks have had a significant informational advantage over new entrants. Because many of us have accounts with the larger banks, they simply had access to information that other lenders don’t.
As well as opening up the market to new borrowers and lenders, the new comprehensive credit reporting regime will also likely lead to the automation of more financial services and the inclusion of more data sources.
For higher-risk borrowers, novel techniques to assess credit risk (such as analysis of social media accounts) may be the answer to distinguish good borrowers from bad.
This will partially eliminate the need for costly processes in loan underwriting. But prior experience from an over-reliance on credit scores in the United States shows that careful assessment of borrowers remains vital.
It could also have the side effect of reducing the prospects of misconduct by either borrower or lender at this stage.
Comprehensive credit reporting should lead to, in aggregate, lower borrowing rates for lower-risk individuals and incentives for higher-risk individuals to improve their position. However, it remains to be seen whether this will lead to a greater degree of exclusion or predatory loans for riskier borrowers.
Author: Andrew Grant, Senior Lecturer, University of Sydney
NAB has today commenced Comprehensive Credit Reporting (CCR) for personal loans, credit cards, and overdrafts, as announced in October 2017.
NAB is the first major bank to start participating in CCR, well ahead of the Government’s mandatory scheme.
NAB Chief Operating Officer, Antony Cahill, says NAB has taken a leadership position on CCR since the start.
“Under Comprehensive Credit Reporting, we now have a more holistic picture of a customer’s credit situation, so we’re better able to make sure our customers receive the right type and amount of credit for their individual circumstances.
“We believe CCR is good for competition, and will mean better outcomes for customers.
“A number of smaller players have been participating in CCR already, and the Government recently released draft legislation to make it mandatory for all the major banks.
“We’re pleased to be going live with CCR today, and we look forward to seeing it roll out across the industry.”
About Comprehensive Credit Reporting:
Most Australians have a credit report. CCR will mean credit reports will represent a more balanced reflection of their credit history.
For decades, a credit report has contained only negative information – information like when someone’s defaulted on a loan, and how many credit enquiries they’ve made.With Comprehensive Credit Reporting, positive credit information will be added – including which accounts have been opened, credit limits on those accounts, and details of monthly payments made as well as missed.
This will provide a more complete picture of a customer’s situation, and mean that lenders like NAB are better able to match our provision of credit to a customer’s individual needs.
NAB has commenced CCR for personal loans, credit cards, and overdrafts. Later this year, other types of lending will also be included. NAB is phasing its roll out of CCR to ensure a smooth transition for customers
Recent events have the potential to create a revolution in Australian Finance. We explore the 72 hours that changed banking forever.
Welcome to the Property Imperative Weekly to 10th February 2018.Watch the video or read the transcript.
In our latest weekly digest, we start with the batch of new reports, all initiated by the current Australian Government – and which combined have the potential to shake up the Financial Services sector, and reduce the excessive market power which the four major incumbents have enjoyed for years.
On Wednesday, the Productivity Commission, Australian Government’s independent research and advisory body released its draft report into Competition in the Australian Financial System. It’s a Doozy, and if the final report, after consultation takes a similar track it could fundamentally change the landscape in Australia. They leave no stone unturned, and yes, customers are at a significant disadvantage. Big Banks, Regulators and Government all cop it, and rightly so. They say, Australia’s financial system is without a champion among the existing regulators — no agency is tasked with overseeing and promoting competition in the financial system. It has also found that competition is weakest in markets for small business credit, lenders’ mortgage insurance, consumer credit insurance and pet insurance. The report demonstrates the inter-linkages between difference financial entities, and their links to the four majors. They criticised mortgage brokers and financial advisers for poor advice (influenced by commission and ownership structures) and the regulatory environment, where the shadowy Council of Finance Regulators (RBA, ASIC, APRA and Treasury) do not even release minutes of the meetings which set policy direction. You can watch our separate video blog on this.
On Thursday, the Treasurer released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018. They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan. This removes the current strategic advantage which the majors have thanks to the credit data asymmetry, and the current negative reporting. We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred. It does however smaller lenders to access information which up to now they could not, so creating a more level playing field. Consumers may benefit, but they should also beware of the implications of the proposals.
On Friday, Treasurer Morrison released the report by King & Wood Mallesons partner Scott Farrell in to open banking which aims to give consumers greater access to, and control over, their data and which mirrors developments in the UK. This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service. Great news for smaller players and fintechs, and possibly for customers too. Bad news for the major players. The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now. In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping. A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From the Commencement Date, the four major Australian banks should be obliged to comply with a direction to share data under Open Banking. The remaining Authorised Deposit-taking Institutions should be obliged to share data from 12 months after the Commencement Date, unless the ACCC determines that a later date is more appropriate.
Then of course the Royal Commission in Financial Services starts this coming week. We discussed this on ABC The Business on Thursday. Lending Practice is on the agenda, highly relevant given the new UBS research (they of liar loans) suggesting that incomes of many more affluent households are significantly overstated on mortgage application forms. And The BEAR – the bank executive behaviour regime legalisation – passed the Senate, and as a result of amendments, Small and medium banking institutions have until 1 July 2019 to prepare for the BEAR while it will commence for the major banks on 1 July 2018.
APRA Chairman Wayne Byers spoke at the A50 Australian Economic Forum, Sydney. Significantly, he says the temporary measures taken to address too-free mortgage lending will morph into the more permanent focus on among other things, further strengthening of borrower serviceability assessments by lenders, strengthened capital requirements for mortgage lending, and the comprehensive credit reporting being mandated by the Government.
Adelaide Bank is ahead of the curve, as it introducing an alert system that will monitor property borrowers that are struggling with their repayments. The bank and its subsidiaries and affiliates will compare monthly mortgage repayments with borrowers’ income ratios. In addition, extra scrutiny will be applied where the loan-to-income ratio exceeds five times or monthly mortgage repayments exceed 35% of a borrower’s income.
But combined, data sharing, positive credit and banking competition and regulation are all up in the air, or are already coming into force and in each case it appears the big four incumbents are the losers, as they are forced to share customer data, and competition begins to put their excessive profitability under pressure. It highlights the dominance which our big banks have had in recent years, and the range of reforms which are in train. The face of Australian Banking is set to change, and we think customers will benefit. But wait for the rear-guard actions and heavy lobbying which will take place ahead.
Of course the RBA left the cash rate on hold this week, and signalled the next move will likely be up, but not for some time. Retail turnover for December fell 0.5% according to the ABS seasonally adjusted. This is the headline which will get all the coverage, but the trend estimate rose 0.2 per cent in December 2017 following a rise of 0.2 per cent in November 2017. Compared to December 2016 the trend estimate rose 2.0 per cent. This is in line with average income growth, but not good news for retailers.
The latest Housing Finance Data from the ABS shows a fall in flows in December. In trend terms, the total value of dwelling finance commitments excluding alterations and additions fell 0.1% or $31 million. Owner occupied housing commitments rose 0.1% while investment housing commitments fell 0.5%. Owner occupied flows were worth $14.8 billion, and down 0.3% last month, while owner occupied refinancing was $6.2 billion, up 1.2% or $73 million. Investment flows were worth 11.9 billion, and fell 0.5% or $62 million. The percentage of loans for investment, excluding refinancing was 45%, down from 49% in Dec 2016. Refinancing was 29.5% of OO transactions, up from 29.2% last month. Momentum fell in NSW and VIC, the two major states. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 17.9% in December 2017 from 18.0% in November 2017 – the number of transactions fell by 1,300 compared with last month. But the ABS warns that the First Time Buyer data may be revised and users should take care when interpreting recent ABS first home buyer statistics. The ABS plans to release a new publication which will see Housing Finance, Australia (5609.0) and Lending Finance, Australia (5671.0) combined into a single, simpler publication called Lending to Households and Businesses, Australia (5601.0).
We continue to have data issues with mortgage lending, with the RBA in their new Statement on Monetary Policy saying it now appears unnecessary to adjust the published growth rates to undo the effect of regular switching flows between owner occupied and investment loans as they have been doing for the past couple of years. So now investor loan growth on a 6-month basis has been restated to just 2%. More fluff in the numbers! Additionally, the RBA will publish data on aggregate switching flows to assist with the understanding of this switching behaviour.
More data this week highlighting the pressures on households. National Australia Bank’s latest Consumer Behaviour Survey, shows the degree of anxiety being caused by not only cost of living pressures but also health, job security, retirement funding as well as Australian politics. Of all the things bothering Australian households in early 2018, nothing surpasses cost of living pressures. Over 50% of low income earners reported some form of hardship, with almost one in two 18 to 49-year-olds being effected.
Despite improved job conditions and households reporting healthier financial buffers, the overall financial comfort of Australians is not advancing, according to ME’s latest Household Financial Comfort Report. In its latest survey, ME’s Household Financial Comfort Index remained stuck at 5.49 out of 10, with improvements in some measures of financial comfort linked to better employment conditions – e.g. a greater ability to maintain a lifestyle if income was lost for three months – offset by a fall in comfort with living expenses.
We released the January 2018 update of our Household Financial Confidence Index, using data from our rolling 52,000 household surveys. The news is not good, with a further fall in the composite index to 95.1, compared with 95.7 last month. This is below the neutral setting, and is the eighth consecutive monthly fall below 100. Costs of living pressures are very real, with 73% of households recording a rise, up 1.5% from last month, and only 3% a fall in their living costs. A litany of costs, from school fees, child care, fuel, electricity and rates all hit home. You can watch our separate video on this.
We also published updated data on net rental yields this week, using data from our household surveys. Gross yield is the actual rental stream to property value, net rental is rental payments less the costs of funding the mortgage, management fees and other expenses. This is calculated before any tax offsets or rebates. The latest results were featured in an AFR article. The results are pretty stark, and shows that many property investors are underwater in cash flow terms – not good when capital values are also sliding in some places. Looking at rental returns by states – Hobart and Darwin are the winners; Melbourne, and the rest of Victoria, then Sydney and the rest of NSW the losers. The returns vary between units and houses, with units doing somewhat better, and we find some significant variations at a post code level. But we found that more affluent households are doing significantly better in terms of net rental returns, compared with those in more financially pressured household groups. Batting Urban households, those who live in the urban fringe on the edge of our cities are doing the worst. This is explained by the types of properties people are buying, and their ability to select the right proposition. Running an investment property well takes skill and experience, especially in the current rising interest rate and low capital growth environment. Another reason why prospective property investors need to be careful just now.
Finally, we saw market volatility surge, as markets around the world gyrated following the “good news” on US Jobs last week, which signalled higher interest rates. In our recent video blog we discussed whether this is a blip, or something more substantive. We believe it points to structural issues which will take time to play out, so expect more uncertainly, on top of the correction which we have already had. This will put more upward pressure on interest rates, and also on bank funding here.
Overall then, a week which underscores the uncertainly across the finance sector, and households. This will not abate anytime soon, so brace for a bumpy ride. And those managing our large banks will need to adapt to a fundamentally different, more competitive landscape, so they are in for some sleepless nights.
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