September 2014 – Page 2 – Digital Finance Analytics (DFA) Blog

Capital Rules Likely To Be Sharpened

In an important speech given today by Wayne Byres, Chairman of APRA, “Perspectives on the Global Regulatory Agenda”, there are some important pointers which indicate to me that we should expect some changes to the capital regulatory framework quite soon. We highlighted the capital questions recently.

Whilst talking about the global agenda, he did confirm the FSI Inquiry view that local and global cannot be separated. Whilst Basel III was focusing on systemically important banks, the current agenda is to minimise the impact of bank failure. He comments that the role of internal models now being used by the large banks to calculate capital requirements is being questioned. “The Chairman of the Basel Committee has made it clear that there is a problem, and something must be done about it”. APRA recently indicated that the route would likley be an increase in the risk weightings.

Next he discussed the need to bolster the ability of banks to handle losses should they arise.

Finally, he also highlighted concerns about bank culture, and the incentives which drive behaviour within these organisations.

These are important issues, and as we showed, the major Australian banks now hold less capital to assets than they did before the GFC, and before Basel II and III were implemented. This is a concern.

How might this play out?

Well, we would expect banks using the advance internal methods of capital calculation will be required to hold more capital than they do today. This will reduce their ability to lend, and raise the costs of loans to borrowers. Second, we would expect the concept of creating additional categories of capital using subordinated instruments to be blocked (many of the banks have been calling for this, as it would reduce their capital costs further). Finally, we we expect lending standards to be examined, and especially serviceability, or loan to income criteria be established.

Whether this will be triggered by the findings from FSI, or directly by APRA is an open question. But it looks to me as if capital just got more expensive for the large players. Some would say, better late then never!

But strangest of all is the apparent disconnect between the RBA minutes today which highlighted the banks strong capital position, and the APRA discussions. They cannot both be right.

RBA And Property Speculation

The RBA published the notes from their last meeting today. The theme was similar to previous ones, “Members considered that the most prudent course was likely to be a period of stability in interest rates,” but in the variations, there was a sub-text relating to property prices. I have extracted just those paragraphs:

Members noted that Australian banks continued to report improving asset performance and strong profits, which had contributed to further increases in their capital ratios. Australian banks and non-banks had both benefited from easier wholesale funding conditions globally. This in turn had encouraged stronger competition in lending for housing and to large businesses, but members noted that this had not, to date, led to a general easing in mortgage lending standards and policies. For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and, to a lesser extent, Melbourne.

Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later. The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending. Members were also updated on some of the recent actions by the Australian Prudential Regulation Authority in this area.

Members noted that commercial property markets in Australia had also been quite buoyant recently. Australian property had been yielding higher rental returns than were available overseas, which had attracted strong demand from both local and foreign investors. This had boosted prices even though rents for some types of commercial property had declined. In contrast, demand for finance from other parts of the business sector remained subdued, although business credit growth had picked up a little in recent months.

Members noted that the current setting of monetary policy was accommodative. Interest rates remained very low and had declined a little for borrowers since the cash rate was last changed. Investors continued to look for higher returns in response to low rates on safe instruments and were accepting more risk in doing so. Credit growth had picked up, including to businesses. Credit growth for investor housing was running at around 10 per cent per annum. Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation. On the other hand, the exchange rate remained above most estimates of its fundamental value, particularly given the declines in key commodity prices and, overall, had offered less assistance to date than would normally be expected in achieving balanced growth in the economy.

I would tell the story rather different:

Banks have reduced the capital held against their growing pool of mortgage debt, so we hope the new advanced methods of capital calculation will support any risk of a down-turn. Still, the growth in investment lending at 10% is probably not an issue, after all, banks lending standards are just fine, no concerns apparently about the fact that half of new lending in the month was for investment purposes, nor the rise in interest only loans, or loans outside normal approval criteria. House prices continue to rise fast in (some of the cities) but we will just watch what happens, despite all the data showing prices are out of kilter with income, and other measures. Remember that interest rates are at rock bottom, well below the long term trend. They will correct at some point, and when the average mortgage rate is 7%, the chickens are likely to come home to roost. This is the key to potential falling prices later as with income growth below inflation, any lift in rates would have direct macroeconomic effects on borrowing households.

Further High House Price Evidence – BIS

The BIS has published the latest data from their analysis of house prices across countries. “The BIS currently publishes more than 300 price series for 55 countries, among which it has selected one representative series for each country. For 18 countries, it also publishes series that span the period back to the early 1970s. House prices can serve as key indicators of financial stability risks, as property booms are often the source of vulnerabilities that lead to systemic crises.”

They show that in trend terms, after correcting for inflation and seasonality, Australian prices are relatively higher than other advanced countries. This is consisted with data from the IMF, Economist, and DFA’s own analysis. “Year-on-year residential property prices, deflated by CPI, rose by 9.5% in the United States and 6% in the United Kingdom. Real house prices also grew, by 7% in Canada, 7.7% in Australia and 2.2% in Switzerland, three countries that were less affected by the crisis, as well as in some countries that were severely affected by the crisis, such as Ireland (+7.2%) and Iceland (+6.4%)”.

They also show the relative benchmark between house price growth and price to rent. Here, overall average house price growth, after inflation, in Australia is close to zero over the last three years (because of averages across the states, the ABS shows how prices vary state by state), and Australia has high price to rent rations, but not the highest. This is because rents are more linked to interest rates and income growth than house prices directly.

Turning to their other measure, comparing house prices to income ratios (the measure we prefer as the best judge of house prices), we find that Australia is shown as the second highest, after Belgium, despite the close of zero growth in absolute prices, after inflation, in the past 3 years.

The codes for the various countries are listed below:

Their comments are important:

Work at the BIS has pointed to the early warning indicator properties of real estate prices. Leverage fuelled housing booms that turn into busts have so often been at the very heart of episodes of systemic distress. Historical experience has demonstrated that the interactions between rapidly growing house prices and excessive credit expansion are a tell-tale sign of the build-up of vulnerabilities in the household sector and the source of future losses for banks.

The Capital Conundrum

A cornerstone of banking regulation and control is the application of capital ratios, which acts a brake on their ability to write more loans. The rules are set by the Bank of International Settlement, but they may be interpreted by local regulators, like APRA in Australia to take account of local conditions. BIS has no direct control. The calculations can be quite complex, because the rules offer the banks various options based on their sophistication, risk profile, and other factors.

Recently there has been a renewed focus on capital, triggered by a series of events.

The FSI interim report made the point that smaller banks were at a competitive disadvantage in Australia because of differences in the capital required, and hinted that in the final report, they may recommend some changes.
Some of the large players responded by suggesting that smaller banks should be allowed to move towards the more complex capital mechanisms, thus enabling them to complete. Others have suggested that the right move would be to lift the required ratios amongst the big four, who all use versions of the advanced capital scheme.
In response APRA provided a further submission to the FSI inquiry, which went into significant detail around the question of capital.
Meantime, Christopher Joye has published two posts showing that capital for the Australian large banks, in absolute terms had fallen, thanks to the move to the more advanced basis, since the GFC, despite all the talk (from banks and regulators) that capital had lifted. His latest was called “The inconvenient truth about our banks”.
Two of the investment banks came out recently with estimates that revised capital arrangements might cost the industry between 12 and 24 billion.
In a recent speech on macroprudential tools, the Head of The Monetary and Economic Department, BIS said “DTI ratios and, to a lesser extent perhaps, LTV ratios are comparatively more effective than increases in loan provisions or capital requirements.” This raises the question – is capital the best regulatory tool?

So, today we wanted to spend time today on this important capital issue.

First, the capital adequacy ratio (CAR) is simply the ratio between a bank’s core capital and it risk-weighted assets. It is a mechanism to protect depositors by limiting the banks’ ability to lend. Note that in banking language, assets are loans made by the bank, and liabilities are monies received by the bank. So deposits are a liability (because the bank will need to pay the deposit funds back at some point and interest meantime), whereas Loans are assets because they generate income for the bank).

Core capital is divided into tier 1 and tier 2 capital. Tier 1 capital (which includes things like paid up capital, disclosed reserves, after adjustments for intangibles and losses) is essentially capital which a bank may loose without having to cease trading; whilst Tier 2 capital (which undisclosed reserves, hybrid capital and subordinated debt etc.) offers less protection for depositors than Tier 1 capital but can absorb losses if the bank is wound up.

Assets of various types will hold different weightings. For example under the original Basel I capital guidelines loans to governments may be regarded as riskless (debatable in some cases?) and so are rated 0%, secured housing loans were assigned a 50% risk weighting, whereas other lending categories were weighted 100%.

The recent changes under Basel II and Basel III (yet to be fully implemented) extended the regulatory framework, and tweaked the capital weightings. In addition, in October 2012, the Basel Committee finalised its framework for dealing with domestic systemically important banks (D-SIBs). The D-SIB framework in Australia focuses only on the larger banks, APRA has determined that Australia and New Zealand Banking Group Limited; Commonwealth Bank of Australia; National Australia Bank Limited; and Westpac Banking Corporation are D-SIBs.

APRA’s recent second submission to the Murray Inquiry cover a range of capital-related issues. Here are some important extracts.

The average risk weight for residential mortgage exposures for ADIs using the standardised approach is currently in the order of 39 per cent; the comparable figure under the internal ratings based (IRB) approach is around 18 per cent. These figures are, however, not directly comparable.

The more risk-sensitive IRB approach generates, on the whole, a lower capital requirement for residential mortgage exposures than the standardised approach.

If smaller ADIs were to successfully obtain approval for use of the IRB approach for their credit portfolios, it is unlikely that the average risk weight for residential mortgage exposures for these ADIs would automatically settle at the same level as that of the major banks.

The Basel framework does not allow for the selective implementation of the IRB approach across individual credit portfolios. This stance is critical for protecting against cherry picking; it would also undermine the ability of ADIs to demonstrate they meet the use test.

Other options canvassed in the Interim Report involve changes to risk weights under the standardised approach, which would be contrary to the Basel framework.

The Interim Report suggests that ‘standardised risk weights do not provide incentives for the ADIs that use them to reduce the riskiness of their lending’. This is not the case in Australia: a simple tiered system of risk weights already exists. By way of example, consider a standard residential mortgage loan with no mortgage insurance. If the loan-to valuation ratio (LVR) is greater than 90 per cent, the loan receives a 75 per cent risk weight. Capital requirements decrease by one third (i.e. to a 50 per cent risk weight) if the LVR is reduced below 90 per cent and by a further third (i.e. to a 35 per cent risk weight) if the LVR is reduced below 80 per cent. There are also incentives for ADIs to obtain mortgage insurance; in general, risk weights for higher LVR loans are reduced by around one quarter if mortgage insurance is obtained.The opposite is true for non-standard loans, where risk weights relative to standard loans are increased by 25 to 50 per cent.

The effect of this tiering of risk weights is that under a minimum Common Equity Tier 1 (CET1) capital ratio of 7 per cent, ADIs with low-risk housing portfolios, i.e. all loans receiving a 35 per cent risk weight, could operate with leverage of around 40:1. It is not, therefore, correct to conclude that the standardised approach to credit risk is insensitive to risk.

If the Inquiry concludes that it is appropriate for APRA to consider a narrowing of the differential in risk weights for residential mortgage exposures between the standardised and IRB approaches to credit risk, the only proposed option in the Interim Report that would ensure continued compliance with the internationally agreed Basel framework would be to increase the average risk weight used by banks operating under the IRB approach.

Increasing IRB risk weights could be accomplished in various ways, including further increases to APRA’s minimum LGD requirement for residential mortgage exposures, or preferably through revised technical assumptions within the IRB framework. This issue should be considered in the context of the broader work being undertaken by the Basel Committee, as the impact of changes to risk weights needs to be carefully analysed. Greater prescription in IRB estimates may reduce incentives ADIs currently have to invest the resources and management attention required to model these estimates accurately. It may also make risk weights potentially less risk sensitive, and may change relative capital requirements across asset classes. Any considerations on this issue also need to be viewed within the context of the Inquiry’s deliberations regarding the positioning of Australia’s prudential framework relative to the global median.

So, with that in mind let’s look at the current state of play, using the APRA quarterly statistics, last published to June 2014. First, we calculated the ratio between the gross loans outstanding, and the Tier 1 capital held, over time. We see that the big four, relative to their loan portfolios, hold lower capital buffers than their competitors. Note this is a calculation based on the ratio of the value of gross loans made, and capital held under Tier 1, so excludes any capital weighting as the normal capital calculations do.

Next, because the big four are dominant – holding more than 85% of all lending, we will look at these players specifically. The chart below shows the growth in gross assets (loans) from Jun 2004, and the relative growth in housing lending, now 62% of all loans for the majors are housing related. Next we show the tier 1 capital ratio’s as calculated using IRB Basel, showing a rise to over 10% since 2004. On the other hand, a calculation of the ratio of capital to assets shows no change, so in absolute terms Joye is right, the big banks hold less capital now against their loans than they did.

Then we can look at the mix of property loans to total loans in more detail. It has risen by 10% since 2004, so the banks are more highly exposed to the property market than ever, (before we even start to consider whether they hold investment paper from buying securitised assets issued by the smaller players and non-banks.) If we look at the ratio of capital to housing loans, again we see a fall, thanks to the IRB system which Basel allows.

So, to conclude. First, it is true the big banks hold less capital against their loans than they did, thanks to the adoptions of IRB methods. This is in line with the global formulas and the banks here are fully capital compliant. Indeed on some measures Australia is more conservative in its application of the Basel formula than some other countries. One recent analysis indicated that if we applied the rules used in the UK to Australian Banks, total capital held could rise by 2-3%. That would lift the total capital levels (tier 1 and tier 2) to 14-15%, but this is still below the 17.5% targeted by the UK. Other suggest we need to be more conservative to be fully compliant. A 2012 IMF working paper said:

“The four major Australian banks have capital well about the regulatory requirements with high quality capital. While their headline capital ratios are below the global average for large banks in a sample of advanced and emerging market economies, Australia’s more conservative approach in implementing the Basel II framework implies that Australian banks’ headline capital ratios underestimate their capital strength. For example, a comparison with Canadian banks highlights the impact of Australia’s more conservative approach. The four major Australian banks are well-positioned to meet the higher capital requirements under Basel III, and with the improvements in their funding profiles since the global financial crisis they are making good progress toward meeting the Basel III liquidity standards. Stress tests calibrated on the Irish crisis experience show that the banks are largely able to withstand sizable shocks to their exposure to residential mortgages. However, combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would bring down the banks ’ average total capital ratio below the regulatory minimum. Given high bank concentration and market uncertainty, therefore, the merits of higher capital requirements need to be considered for systemically important domestic banks, taking into account the currently evolving international standards”.

So, second, we in Australia have levels of capital lower than some other countries, even allowing for local variations.

Third, smaller players in Australia are operating in an environment, where they are holding more capital relative than the large players because of different capital rules, so they are at a competitive disadvantage. Lowering capital for these players is not the answer, the only option would be to lift the target for the larger players.

Next, the big four are heavily leveraged into property, to the point where we think there is a strong argument to insist the banks hold significantly more capital, to ensure financial stability, especially given their leverage to sky high property prices at the moment. Holding capital however costs, and holding more will reduce payouts to shareholders, and perhaps even lift rates to borrowers. We will see what The Murray Inquiry comes up with in due course.

One final thought, it appears to me that APRA has latitude under the D-SIB rules to raise the capital buffers further, this may be one neat method to address some of the capital concerns. In addition, perhaps macroprudential tools could be used to take some of the burden off capital controls, this seems to be advocated by BIS.

Strong Investment Lending In Latest Finance Data

In the final element of the monthly series, the ABS today released their lending data for July. The total value of owner occupied housing commitments excluding alterations and additions rose 0.3% in trend terms and the seasonally adjusted series was flat. The trend series for the value of total personal finance commitments rose 0.4%. Revolving credit commitments rose 0.8% and fixed lending commitments rose 0.1%. The seasonally adjusted series for the value of total personal finance commitments fell 1.3%.

Revolving credit commitments fell 4.7%, while fixed lending commitments rose 1.5%. The trend series for the value of total commercial finance commitments rose 2.7%. Revolving credit commitments rose 5.1% and fixed lending commitments rose 1.6%. The seasonally adjusted series for the value of total commercial finance commitments rose 3.7% in July 2014, following a rise of 11.8% in June 2014. Fixed lending commitments rose 20.7%, following a rise of 0.8% in the previous month. Revolving credit commitments fell 25.9%, after a rise of 37.7% in the previous month. Looking at the data in more detail, we see the concentration of lending by the banks (and mainly the big four).

Within the commercial category, lending for housing investment by individuals was a significant element. Here is the absolute dollar amount by states, with a trend line, showing the relative strength in lending for investment purposes in NSW in particular, then VIC. The investment lending boom is not uniformly spread across the country. Another way to look at the data is on a per capita basis across each state. This chart shows the average amount per capita between January 2011 and July 2014. The movement is NSW in particular since May 2013 highlights both the volume and size of the average loans for investment purposes in NSW, compared with the other states. It is also worth noting the differences between NSW and some of the other states, especially TAS and SA, and we see WA, NT and VIC roughly marching together, behind the rabid pace set by NSW.

Unemployment Better Thanks To Method Change?

The ABS published their August 2014 data today, and on the surface the data appears to rebound from last months seasonally adjusted 6.4% to 6.1%, whilst the seasonally adjusted participation rate rose from 64.9 to 65.2

However, we need to be careful because the ABS introduced a new questionnaire in July 2014, so we cannot be sure how much of the change is due to a data shift. You can read all about the changes here. According to the ABS, the number of unemployed persons decreased by 33,500 to 755,100 in August 2014 following an increase of 41,800 in July 2014 (seasonally adjusted). In trend terms the number of unemployed persons in August 2014 increased by 8,000 to 764,100 and the unemployment rate was 6.2%. Because of the unusually strong increase in employment estimates, the ABS has extensively checked the data.

The seasonally adjusted number of employed persons increased by 121,000 in August 2014 to 11,703,500 persons following a decrease of 4,100 persons in July 2014. The increase in August was driven by part-time employment. The employment to population ratio, which expresses the number of employed persons as a percentage of the civilian population aged 15 years and over, increased 0.6 percentage points to 61.3% (seasonally adjusted).

Unemployment amongst those aged 15-24 remains close to 15%

At a state level, the largest absolute decreases in seasonally adjusted unemployment were in South Australia (down 10,900 persons), New South Wales (down 5,400 persons) and Victoria (down 3,400 persons). The largest absolute increases in seasonally adjusted employment were in New South Wales (up 45,300 persons), Queensland (up 26,500 persons) and Victoria (up 26,100 persons). Tasmania had the largest increase in the seasonally adjusted participation rate (up 0.7 percentage points), followed by New South Wales (up 0.6 percentage points) and Queensland (up 0.5 percentage points). Seasonally adjusted estimates are not published for the territories.

Looking at the latest month, males in Tasmania are most likely to be out of work. Females in NT, least likely.

Finally, looking at underemployment by age ranges, younger people are seriously underutilised, and we see underutilisation in the over 55’s rising. The labour force underutilisation rate increased to 14.3% whilst seasonally adjusted estimated labour force undertuilisation rate increased 1.0 pts to 14.6%. The male labour force underutilisation rate increased 1.0 pts to 12.7%. The female labour force underutilisation rate increased 1.0 pts to 16.9%.

We will see if the data next month continues to reflect the revisions this time around.

Building Approvals To July 2014

The ABS published their Building Approvals Data to July 2014 today. Statistics of building work approved are compiled from, permits issued by local government authorities and other principal certifying authorities; contracts let or day labour work authorised by commonwealth, state, semi-government and local government authorities; and major building approvals in areas not subject to normal administrative approval e.g. building on remote mine sites. The scope of the collection comprises construction of new buildings; alterations and additions to existing buildings; approved non-structural renovation and refurbishment work; and approved installation of integral building fixtures.

The trend estimate for total dwellings approved fell 0.5% in July and has fallen for seven months. The seasonally adjusted estimate for total dwellings approved rose 2.5% in July following a fall of 3.8% in the previous month. The trend estimate for private sector houses approved fell 0.2% in July after being flat in the previous month. The seasonally adjusted estimate for private sector houses rose 1.4% in July following a fall of 1.0% in the previous month. NSW appears to be underrepresented given the relative population by states.

The trend estimate of the value of total building approved fell 0.2% in July and has fallen for seven months. The value of residential building rose 0.2% and has risen for two months. The value of non-residential building fell 0.8% and has fallen for eight months. The seasonally adjusted estimate of the value of total building approved fell 10.4% in July after rising for two months. The value of residential building rose 0.8% following a fall of 3.2% in the previous month. The value of non-residential building fell 26.5% after rising for two months.

The Chain Measures series, which reflect changes in the volume of building work approved after the direct effects of price changes have been eliminated. The ABS tell us that the chain volume measures are annually reweighted chain Laspeyres indexes referenced to current price values in a chosen reference year. We see a swing up in value for both houses and other residential buildings since July 2012, impacted by lower interest rates and higher demand. However, the absolute value, was relatively similar in March 2004, to July 2014 after correcting for inflation.

Depending of whether you go with the original data or seasonally adjusted data, you can argue that residential building approvals are either up, or down.

Apple and the Payments Revolution

Apple’s latest product announcements included some details about their Apple Pay service, which as we highlighted previously is clearly part of an innovation strategy which will potentially have a profound impact on the payments business and consumer behaviour. Whilst initially US based, Apple Pay is something which has potentially broader consequences. To day we outline the main features of Apple Pay, and reflect on the future impact.

Apple Pay will be built into its new iPhone 6, iPhone 6 Plus, and Apple Watch devices to pay for items via Near Field Communications (NFC), which works by transmitting a radio signal between the device and a receiver, when the two are fractions of an inch apart or touching and will also enable online payments as well. Apple’s motivation, as explained by Tim Cook, was to completely change the current old payments technology, and remove the need to own a physical credit card. Apple said it will speed up the check out process, make payments more secure and ultimately replace physical wallets. Volumes and value of mobile payments are set to rise according to market analysts. Here is a summary from the WSJ.

Here are some of the public comments from Apple:

Gone are the days of searching for your wallet. The wasted moments finding the right card. The swiping and waiting. Now payments happen with a single touch. Apple Pay will change how you pay with breakthrough contactless payment technology and unique security features built right into the devices you have with you every day. So you can use your iPhone 6 or Apple Watch to pay in an easy, secure, and private way.

One touch to pay with Touch ID. Now paying in stores happens in one natural motion — there’s no need to open an app or even wake your display thanks to the innovative Near Field Communication antenna in iPhone 6. To pay, just hold your iPhone near the contactless reader with your finger on Touch ID. You don’t even have to look at the screen to know your payment information was successfully sent. A subtle vibration and beep lets you know.

Double-click to pay and go. You can pay with Apple Watch — just double-click the button below the Digital Crown and hold the face of your Apple Watch near the contactless reader. A gentle pulse and beep confirm that your payment information was sent.

Convenient checkout. On iPhone, you can also use Apple Pay to pay with a single touch in apps. Checking out is as easy as selecting “Apple Pay” and placing your finger on Touch ID.

Passbook already stores your boarding passes, tickets, coupons, and more. Now it can store your credit and debit cards, too. To get started, you can add the credit or debit card from your iTunes account to Passbook by simply entering the card security code.

To add a new card on iPhone, use your iSight camera to instantly capture your card information. Or simply type it in manually. The first card you add automatically becomes your default payment card, but you can go to Passbook any time to pay with a different card or select a new default in Settings.Every time you hand over your credit or debit card to pay, your card number and identity are visible. With Apple Pay, instead of using your actual credit and debit card numbers when you add your card, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element, a dedicated chip in iPhone and Apple Watch. These numbers are never stored on Apple servers. And when you make a purchase, the Device Account Number alongside a transaction-specific dynamic security code is used to process your payment. So your actual credit or debit card numbers are never shared with merchants or transmitted with payment.

Protect your accounts. Even if you lose your device. If your iPhone is ever lost or stolen, you can use Find My iPhone to quickly put your device in Lost Mode so nothing is accessible, or you can wipe your iPhone clean completely.

Apple doesn’t save your transaction information. With Apple Pay, your payments are private. Apple doesn’t store the details of your transactions so they can’t be tied back to you. Your most recent purchases are kept in Passbook for your convenience, but that’s as far as it goes.

Keep your cards in your wallet. Since you don’t have to show your credit or debit card, you never reveal your name, card number or security code to the cashier when you pay in store. This additional layer of privacy helps ensure that your information stays where it belongs. With you.

Apple Pay works with most of the major credit and debit cards from the top U.S. banks. Just add your participating cards to Passbook and you’ll continue to get all the rewards, benefits, and security of your cards.

Reading further about the service, clearly security is a big focus because instead of storing your card on the phone, Apple Pay creates a dynamic security code. You can add in a new card just by taking an image of it. Touch ID will be used to confirm transactions (fingerprint reading technology) for added security).

Apple Pay will start in the U.S. with Visa, American Express, and Mastercard. As with any e-wallet, the key is getting business to adopt it. Apple has six banks on board and thus far including Bank of America, Capital One Bank, Chase, Citi and Wells Fargo, with more banks later, including Barclaycard, Navy Federal Credit Union, PNC Bank, USAA and U.S. Bank. In terms of merchants, they have named Bloomingdales, Panera, Sephora, Groupon, Subway, Disney, Target, McDonald’s, Whole Foods, Macy’s, and Walgreens. Apple will also accept payments and they will integrate Apple Pay into the Apple ecosystem.

This is Apple’s first foray into NFC payments, in the USA, payments have evolved more slowly than in other countries. For example in Australia, we can use VISA’s PayWave, and Mastercard’s PayPass, collectively known as PayWave. Just touch your card and pay for anything to a limit of $100. Beyond that, you will still need to enter your PIN to confirm the payment. There have been a few phantom payments, and there is a risk of fraud if someone gets hold of your card, but it is highly convenient. In the Apple video about Apple Pay, they suggest existing PayWave devices will be able to handle Apple Pay. The current terminal standards (Ingenico and ViVOPay) are based on global standards and if Apple Pay is compliant to these, no updates to existing systems will be needed.

Consider this, already PayWave looks likely to supplement and even replace the current dedicated smartcards on transport systems like the Oyster card in London, where from mid September, PayWave will be implemented. It could be a simple step to using you phone to pay for trips directly.

There is no word on if and when Apple Pay may arrive in Australia, but the writing is on the wall for a significant shakeup, perhaps. For example, will the NSW Transport Opal transport card now be subsumed? But the real insight is the integration of consumer data, merchant data and the rest, as we highlighted in out earlier post the payments revolution around the corner.

Investment Lending Blows Its Stack

The ABS today released their home lending data to July 2014, which held a number of surprises. The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.6%. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 2.7%. In trend terms, the number of commitments for owner occupied housing finance was flat in July 2014. In trend terms, the number of commitments for the purchase of new dwellings rose 1.3%, the number of commitments for the purchase of established dwellings fell 0.1% and the number of commitments for the construction of dwellings fell 0.1%

The state variations in percentage movements of owner occupied lending are worth a quick look. Owner Occupied lending is slowing faster than many predicted, rising only 0.3%.

Most Owner Occupied transactions were for the purchase of established dwellings, though the uplift in construction and the purchase of new dwellings can be seen in the data.

Refinance accounted for a fair chunk of this, as borrowers look to churn into low rates, which probably at the bottom of the cycle.

But the strength of investment housing commitments, which rose 1.2% in the month is pretty amazing.

Looking in more detail, we see that 40% of loans in the month of July were for investment purposes if we include Owner Occupied refinance in the total OO data.

However, if you exclude refinance of existing loans, then a staggering 50% (rounded up) were for investment purposes. This is an absolute record, and represents a 4% uplift from last month. We predicted this uplift in our surveys, highlighting the second wind we saw coming through from investors. The attraction of lifting house prices and low interest rates make property investment for many compelling.

The story for first time buyers is just as concerning, but in the other direction. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 12.2% in July 2014 from 13.2% in June 2014.

Again, we need to look at the state data to see whats going on. In NSW, VIC and QLD, the first time buyer percentage of all loans written in the month is rock bottom, in NSW it is sitting at 7%, compared with a peak of 27% in 2011. WA continues to show the most momentum in first time buyers thanks to high migration, then TAS (where there are specific incentives) and SA.

But if you take the average of the slower states and faster states, we see a very stark contrast in the share of first time buyer lending.

This data again highlights the risks in the market, younger buyers excluded, masses of investment loans being written which inflate the banks balance sheets, and increases the exposure of households and banks to the heady current prices, which as we have already highlighted are high on any measure you care to look at. There may be a slight feel good factor for investing households, but we wonder about the sustainability of property at these levels.