Month: May 2017

Banks Cop It In The Budget

The budget has hit the banks hard, with a $6bn charge on bank liabilities aimed at the five biggest banks, as well as a focus on competition and executive accountability.

$6bn over four years would equate to an annual amount of around 5% of current year earnings for the big five. We estimate that the net interest margin would need to be lifted by 6 basis points to cover the costs. If this was applied to just the residential mortgage book rates would have to be lifted by around 15 basis points to achieve neutrality.

The key question will how these extra costs are recovered from the banking system. On past performance, they will simply reprice products to their consumer and small business customers.

New levy on the major banks

Consistent with its response to the Financial System Inquiry, the Government and the Australian Prudential Regulation Authority (APRA) remain committed to a range of reforms, including: setting bank capital levels such that they are ‘unquestionably strong’; strengthening APRA’s crisis management powers; and ensuring our banks have appropriate loss-absorbing capacity.

Complementing these reforms, the Government will introduce a levy on major banks with liabilities greater than $100 billion, raising $6.2 billion over four years. The levy will be used to support budget repair.

Ordinary bank deposits and other deposits protected by the Financial Claims Scheme – including those held by everyday Australians – will be excluded from the levy base. It will not be levied on mortgages.

The levy represents a fair additional contribution from our major banks. The levy will also provide a more level playing field for smaller, often regional, banks and non-bank competitors. Superannuation funds and insurance companies will not be subject to this levy.

The Government has also introduced legislation to recover the costs of financial conduct regulation by the Australian Securities and Investments Commission. It will also recover the costs of implementing a new framework for external dispute resolution. A one-stop shop for resolving financial disputes — the Australian Financial Complaints Authority — and a body for raising professional standards of financial advisers will be fully funded by industry.

Major bank liabilities are greater than the size of our economy

Major bank liabilities are greater than the size of our economy

A more accountable and competitive banking system

The Government will introduce a new dispute resolution framework that will empower bank, financial services and superannuation customers. The Government will also implement a package to increase accountability in the financial sector and make it more competitive. This will mean more choice, better services and greater protections for all Australians.

Improving accountability and competition

The financial services sector affects all Australians and is a backbone of the economy. For it to work effectively, Australians need to be confident that financial services providers will serve their interests. Too often banks and the sector have not met those expectations.

Building on the major financial sector reforms implemented last year, the Government is taking significant new action to ensure the sector meets the expectations of the Australian community.

The Government will create a new dispute resolution framework. There will be a new one-stop shop — the Australian Financial Complaints Authority (AFCA) — for external dispute resolution and greater transparency of internal dispute resolution by financial firms.

The Government will legislate a new Banking Executive Accountability Regime that will make senior bank executives more accountable and subject to additional oversight by the Australian Prudential Regulation Authority (APRA).

The Government will also introduce a number of reforms to boost competition and choice for Australian consumers in the financial system.

Improving dispute resolution

The Government will introduce major reforms to provide customers with access to fair dispute resolution in Australia by introducing a new one-stop shop.

One-stop shop

A new one-stop shop will deal with all financial disputes, including superannuation, and provide access to free, fast and binding dispute resolution.

The new body AFCA will be able to hear disputes of a higher value so that more consumers and small businesses will have their disputes heard, and if they have wrongfully suffered a loss, access fair compensation.

Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms.

AFCA will be governed by an independent board, with an independent chair and equal numbers of directors with industry and consumer backgrounds, and be wholly funded by industry.

AFCA will commence operations from 1 July 2018. The existing dispute resolution bodies will continue to operate after 1 July 2018 to work through their existing complaints.

Enhanced ASIC oversight

ASIC will be provided with stronger powers to oversee the new one-stop shop. ASIC will have a general directions power to ensure AFCA complies with legislative and regulatory requirements.

Internal dispute resolution

To increase accountability, the Government will also legislate to require financial firms to report to the Australian Securities and Investments Commission (ASIC) on internal dispute resolution outcomes.

Cameo: An improved dispute resolution framework

Sarah was a small business owner with a complaint with her bank over the interest charges on her $3 million loan. As the loan exceeded $2 million, Sarah was unable to access external dispute resolution and although Sarah was eventually successful in having her complaint resolved, she was forced to go through a lengthy and expensive court process.

Under the Government’s new framework, small business disputes related to loans of up to $5 million will be heard by the one-stop shop, which will be able to award compensation of up to $1 million. This will ensure more small businesses have access to free, fast and binding dispute resolution.

Banking Executive Accountability Regime

Registration of senior executives

Senior executives and directors of authorised deposit-taking institutions (ADIs), including all banks, will be required to be registered with APRA. The ADI will have to advise APRA prior to making a senior appointment.

This will mean APRA will have visibility of all ADI senior appointments prior to them being made.

Where senior executives have been found not to have met expectations they will no longer be able to be registered or employed in senior roles.

ADIs will be required to provide APRA with accountability maps of senior executives’ roles and responsibilities to enable greater scrutiny at the time of each person’s appointment and oversight of problems that emerge under their management.

Enhanced powers to remove and disqualify

APRA will be given stronger powers to remove and to disqualify senior executives and directors. These powers will apply to all institutions regulated by APRA.

Persons removed or disqualified under these powers would have to appeal to the Administrative Appeals Tribunal to have a decision reviewed.

Increased expectations and penalties

The new regime will establish expectations on how ADIs and their executives and directors conduct their business consistent with good prudential outcomes.

These expectations would cover matters such as conducting business with integrity, due skill, care and diligence and acting in a prudent manner.

A new civil penalty will be created with a maximum penalty of $200 million for larger ADIs, and a maximum penalty of $50 million for smaller ADIs, that fail to meet these new expectations, increasing incentives for ADIs to put in place processes to ensure they conduct their operations appropriately.

APRA will also be able to impose penalties on ADIs that do not appropriately monitor the suitability of their executives to hold senior positions.

Remuneration

The Government will mandate that a minimum of 40 per cent of an ADI executive’s variable remuneration – and 60 per cent for certain executives such as the CEO – be deferred for a minimum period of four years.

This will increase the financial consequences – by preventing bonuses being paid – for decisions which may take a long time to materialise. Executives will place greater focus on long-term outcomes than when there are shorter deferral periods.

APRA will also be given stronger powers to require ADIs to review and adjust their remuneration policies when APRA believes such policies are not appropriate.

Funding

The Government will provide $4.2 million over four years to APRA to implement these new measures.

The Government will also provide APRA with $1 million per annum for a fund to ensure it has the necessary resources to enforce breaches of the new civil penalty provisions.

Competition in the financial sector

Open data

The Government will increase consumer choice and improve competition in banking by giving customers access to and control over their banking data by introducing an open banking regime in Australia.

Increased access to data will improve the information available to consumers and better enable innovative business models to create new products tailored to individuals.

The Government will commission an independent review to recommend the best approach to implement the open banking regime to report by the end of 2017.

Competition inquiries

Productivity review

The Government has tasked the Productivity Commission to commence a review on 1 July 2017 of the state of competition in the financial system.

The Commission is to review competition with a view to improving consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and supporting ongoing financial system innovation, while balancing financial stability objectives. The Productivity Commission will have 12 months to report to Government.

This also delivers on a Government commitment in response to the Financial System inquiry for such a review.

Regular ACCC inquiries

Building on the Commission’s broad review of competition in the financial system, the Government will provide $13.2 million over four years to the Australian Competition and Consumer Commission (ACCC) to establish a dedicated unit to undertake regular inquiries into specific financial system competition issues.

It will facilitate greater and more consistent scrutiny of competition matters in the economy’s largest sector, which has been lacking to date.

This implements a recommendation of the House of Representatives Standing Committee on Economics report Review of the Four Major Banks.

 

Record numbers of home owners approaching Mortgage stress

From Ten Eyewitness News

When it comes to paying off the Mortgage, it’s a slippery slope that could see the entire house of cards come tumbling down.

New figures released by the Australian National University have found that one in five Aussies are constantly struggling to pay their mortgage, while others have admitted to falling behind.

The results showed that almost one in every four mortgage holders would face difficulty keeping up with their repayments if interest rates increased by two percentage points.

It’s an ugly picture to paint, with one of four households nationwide in mortgage stress, Digital Finance Analytics principal Martin North said the risk of default was rising, especially in areas where underemployment and unemployment were also rising.

“Mortgage stress continues to rise as households experience rising living costs, higher mortgage rates and flat incomes,” Mr North said.

“Expected future mortgage rate rises will add further pressure on households.”

Tuesday’s Federal budget is predicted to contain housing affordability measures, but the ANU poll found 68 percent of those not in the housing market are concerned they will never be able to afford a home.

It’s a stark contrast; 75 percent of those surveyed believe owning a home is part of the Australian way of life, yet 87 percent are concerned future generations won’t be able to afford to buy a house.

Associate Professor Ben Phillips said the survey showed support for an increase in the supply of housing and public housing.

“The ANU poll also found almost half of homeowners would be willing to see their property stop growing in value to improve housing affordability while only 31.8 percent would not.

“This may suggest that the issue of housing affordability is acute enough that Australians may accept policy change that could reduce prices or the rate of price growth to allow more equitable access to the housing market,” he said.

New Zealand Banking’s Deadly Australian Embrace

The IMF published their review of New Zealand, and included a Financial System Stability Assessment.  They highlight the imbalances in the housing market, banks’ concentrated exposures to the dairy sector, and their high reliance on wholesale offshore funding are the key macrofinancial vulnerabilities in New Zealand.

The banking sector has significant exposures to real estate and agriculture, is relatively dependent on foreign funding and is dominated by four Australian subsidiaries. A sharp decline in the real estate market, a reversal of the recent recovery in dairy prices, a deterioration in global economic conditions, and a tightening in financial markets would adversely impact the system. The key risks faced by the insurance sector relate to New Zealand’s vulnerability to natural catastrophes.

There was significant commentary on the relationship between Australian and New Zealand banking.

The home-host relationships between Australia and New Zealand are well above international practice, but stronger collaboration would enhance synergies. The RBNZ could take a more proactive role in collaborative supervision. The scope of the Memorandum of Cooperation on Trans-Tasman Bank Distress Management (MOC) could be extended to include insurance companies and FMIs. Moreover, further work on the trans-Tasman framework for assessing systemic importance and discussing possible coordinated responses would support timely and effective decision-making in an actual crisis.

They highlighted the dominance of Australian banking subsidiaries in New Zealand.

The financial sector in New Zealand is dominated by banks, focuses its activities on lending to the domestic private sector, and is characterized by the importance of four Australian subsidiaries. Banks represent about 75 percent of total financial assets. The sector seems well capitalized and liquid, nonperforming assets are low, and profitability has remained broadly stable. Foreign funding accounts for almost 20 percent of banks’ liabilities.

The system is concentrated on four subsidiaries of the largest
Australian banks, whose share in the banking sector’s total assets was 86 percent at end-2016 and represent a significant share of parents’ assets. The systemic importance of these subsidiaries for the parent banks, which are all systemic for the home supervisor as well, makes New Zealand-Australian interdependence unique among other countries with high foreign bank presence.

Australian subsidiaries (including branch assets of dual-registered banks) account for 86 percent of New Zealand banking sector’s assets, compared to 41 percent for Spanish banks in Mexico and 35 percent for the Swedish bank in Finland.

Nonbank financial institutions (NBFI) have more than halved in size since 2007. Nonbank lending institutions (NBLI) are savings institutions (credit unions and building societies), deposit-taking that fund their activities via deposits or debentures issued to the public and non-deposit taking  finance companies. Most are domestically-owned.

The vulnerabilities of the New Zealand financial system are largely associated with concentrated exposures to the real estate and agriculture sectors, dependence on wholesale funding, and the similar business models of the four Australian subsidiaries. In particular:

  • The banking sector exposure to residential mortgages reached over 50 percent of total claims at end-2015. Low global and domestic interest rates for the last few years are a main driver behind the observed increases in mortgage lending.2 While low interest rates facilitate debt repayments by the existing mortgage borrowers, rising housing prices have elevated the debt-to-income ratios of new house buyers. The rise in real estate prices has been most rapid in Auckland. The property boom has been driven also by increased investor activity.

  • The banking sector has a large concentration of loans to the agricultural sector. Agriculture credit exposure, with the dairy industry accounting for more than two-thirds, stood at 15 percent of total exposures in 2015. Low global milk prices have put significant financial pressure on dairy farms, with half of the sector having experienced a second consecutive season of operating losses. However, prices have recently recovered and, according to the most recent forecasts, the effective payout for the dairy industry will increase above the break-even price in the next season. Nonetheless, the already high dairy-farm debt relative to trend income has increased recently, and remains a source of risk. Credit risk concerns in other sectors are limited, with corporate lending growing at around 5 percent in 2016 (compared to 15.6 percent during January 2007–July 2008), and low debt-to income ratios hovering around 16 percent.
  • The financial system is highly concentrated on a few Australian-owned players, with similar business models and vulnerabilities. As a result, there is a strong correlation in the financial soundness of the subsidiaries among themselves and with their parents.
  • The banking sector depends to some extent on wholesale funding, including foreigncurrency funding sourced from offshore markets, and is exposed to liquidity risk from maturity mismatch. The main liquidity risk has traditionally been a reliance on offshore wholesale funding relative to domestic deposits. Rollover liquidity risk has been mitigated by the introduction of the core funding ratio (CFR) in 2010. However, because over 50 percent of banks’ assets are long term housing financing, the maturity mismatch is still a concern. Banks have also reduced their reliance on non-NZD funding to below 20 percent of total liabilities. While this development mitigates concerns over vulnerability to FX risk and increases the availability of foreign currency swap counterparties, pushing down hedging costs, banks might be vulnerable to risks related to hedging techniques under a stress event. As New Zealand’s banks looking for offshore funding use mostly the primary market, funding liquidity on global markets is relatively more important than market liquidity. Yet, heightened volatility in global financial markets may contribute to a pick-up in wholesale funding spreads.

Inward cross-border spillovers from distressed G-SIBs to New Zealand banks are significant. The analysis suggests that Australian banks have become increasingly exposed to European banks. The transmission of distress is more severe to tail equity returns than to market-implied asset returns during stressed times due to fire sales effects and contagion in funding costs. The reverse is true during calm periods suggesting flight-to-quality rebalancing of investors’ portfolios.

They also comment on housing exposures directly, and the current review of debt to income proposals.

Since housing loans represent more than half of banks’ assets, limits on debt-toincome could usefully become part of the macroprudential toolkit. It is still not possible to assess the full effects of the October 2016 LVR adjustments in the housing market. If the measures do not substantially reduce current risks, as the recent experience with LVR measures seems to suggest, authorities should complement the current measures with Debt-to-Income (DTI) limits. The RBNZ is discussing with the MoF the introduction of DTI limits in the macroprudential toolkit. Caps on DTI (or measures of similar nature such as debt servicing to total income (DSI)) can usefully complement the LVR restrictions and would help addressing remaining risks and targeting more directly risks derived from high household indebtedness. Considering that risks can build up relatively quickly, the expansion of the macroprudential toolkit is an important precautionary measure for the RBNZ to be ready to respond should the need arise. The reliance on multiple tools may also reduce distortions when compared to the use of one conservatively calibrated tool. Firsttime home buyers, for instance, tend to be more affected by LVR restrictions because they do not have the equity gain arising from the increase in house prices, though they tend to be in a relatively better position in terms of servicing debt in relation to investors. In addition, authorities are encouraged to maintain efforts to reduce distortionary tax benefits and facilitate housing supply.

Will The Budget Hit The Banks?

Could the budget impose an interbank levy on the big four tonight? There is certainly speculation in the media it might raise $6bn over 4 years. That would be enough to lift mortgage rates again. The weakish results in the past week, (NIM under pressure) and the threat of such a levy explains why major bank stocks are down today.

From Business Insider.

“The banks will be furious,” said one Coalition strategist of the budget that treasurer Scott Morrison will hand down tonight.

In the usual roll calls of winners and losers that follow each federal budget, the major banks are looking like they could be in the latter category in a big way.

Morrison announced yesterday that he had asked the Productivity Commission to review competition in the banking sector, warning there should “be no denying that there has been an increased consolidation of the position of the major banks.”

Then last night Sky News Business reported on plans to impose a levy on institutional inter-bank lending between the big four.

Now, the details are unclear and the Treasurer’s office isn’t commenting. But flows between the banks as they work on a daily basis to maintain their capital requirements are vast, and a levy – rather than a tax on profit – could conceivably see Treasury clipping billions of dollars over the four-year estimates period.

And the government needs the money: The Australian reports this morning that Morrison will tonight announce full funding of the National Disability Insurance Scheme beyond 2019, which will require finding $6 billion in savings.

It’s all part of a budget that’s increasingly shaping up as a comprehensive effort to reset the Coalition’s economic policy brand in the minds of voters after the Abbott/Hockey train wreck of 2014. Morrison has said the the budget won’t “tickle the ears of ideologues”. The arch-conservative thinking that shaped policy in the Abbott years to the disgust of the electorate is being jettisoned.

Instead, the budget is moving to neutralise Labor’s core political appeal on some hot issues. We’ll have:

  • Measures to support housing affordability;
  • The Gonski school funding reforms;
  • New infrastructure spending;
  • Some change on the Medicare rebate freeze;
  • Payments for pensioners to help with energy bills.

Add to this:

  • A change to the way debt is presented to distinguish between recurrent spending and investments in productive capacity, and
  • Pain for the banks.

This is a budget that aims to supports people who are struggling, recasts the dumb conversation on “debt and deficit”, and tackles the perception that the Coalition is too cosy with the top end of town. It aligns with Turnbull’s pleas to the Liberal Party to build its support base from the “sensible centre”.

The four major banks have just posted a combined interim profit of $15.6 billion, but there have been warnings that the operating environment for them is starting to look more challenging. And that was before it emerged that there’d be a Productivity Commission review and we had these reports of some kind of levy on interbank lending.

The banks might hate this, but it’s worth remembering that it’s only for the matter of a couple of thousand votes in some marginal seats that the banks are not right now facing a royal commission.

It should be an interesting night.

Taxation Revenue From Property Continues to Climb

Nice piece from CoreLogic on the growth in property related taxes. As we pointed out before, the states are major winners when property markets rise (and would be hit badly in a slowing market).

The latest data shows that state and local governments collected 51.9% of their total taxation revenue from property, a record high proportion

The Australian Bureau of Statistics (ABS) has recently released the latest taxation statistics data for the 2015-16 financial year.  From a property perspective, taxes are largely collected from state and local governments and over the year $49.567 billion in property taxes were collected nationally.  The value of property taxes collected was 9.6% higher over the year and accounted for a historic high 51.9% of total state and local government revenue.

Total value of property taxation revenue to
state and local governments

2017-05-08--image1

Stamp duty on conveyances accounted for the largest overall proportion of property tax revenue. Over the 2015-16 financial year, state and local governments raised $20.607 billion in revenue from stamp duty, accounting for 41.6% of total property tax revenue.  The second chart highlights the value of revenue from stamp duty on conveyances and the proportion of total property tax revenue coming from stamp duty.  As a proportion of total property tax revenue, stamp duty has previously been higher however, over the past few years there has been a substantial increase in the value of revenue collected from stamp duty.

Value of stamp duty on conveyances tax
revenue and % of total property tax revenue

2017-05-08--image2

The third chart highlights the revenue collected from stamp duty across each of the major states.  It is pretty easy to see what booming housing markets do for state government coffers with the NSW and Vic governments seeing stamp duty revenues surge.  Of course, when the housing market isn’t booming it has a substantial impact on stamp duty revenue, see NSW and Vic in 2008-09 and WA more recently.  The uncertainty surrounding stamp duty and its dependence on stock turnover makes it an inefficient and volatile source of taxation revenue.  Because stamp duty is only collected from properties which transact, the state governments are relying on values and transactions rising across the 5% to 7% of properties which turnover in any given year to drive their major source of property tax revenue.

Value of stamp duty on conveyances tax
revenue across the major states

2017-05-08--image3

The final chart highlights the three largest sources of property tax revenue; land tax, municipal rates and stamp duties on conveyances.  Between them, these three sources of tax revenue accounted for 90.3% of all property related tax revenue to state and local governments in 2015-16 and 46.9% of total taxation revenue.  We already know that $20.607 billion in tax revenue came from stamp duty on conveyances, a further $7.237 billion came from land taxes and $16.924 billion came from municipal rates.

Major sources of property taxation revenue
over time

2017-05-08--image4

Land taxes and municipal rates are much more guaranteed income streams than the more volatile stamp duty on conveyances.  For this reason, it would make sense to move from stamp duty to a much more efficient, easier to collect and holistic land tax.  The reality is that any such move is unlikely to be supported by the NSW and Vic governments currently given how much revenue these states continue to rake in due to the ongoing housing booms in Sydney and Melbourne.

Retail Turnover Down Again In March

Australian retail turnover fell 0.1 per cent in March 2017, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures. This follows a fall of 0.2 per cent in February 2017. This continues the weakness which is related to big debt and flat incomes. QLD looks a particular concern.

In seasonally adjusted terms, there were falls in food retailing (-0.5 per cent), cafes, restaurants and takeaway food services (-0.5 per cent), department stores (-0.6 per cent) and household goods retailing (-0.1 per cent). These falls were offset by rises in other retailing (1.1 per cent) and clothing, footwear and personal accessory retailing (0.4 per cent).

In seasonally adjusted terms, there were falls in Queensland (-1.3 per cent), the Northern Territory (-1.8 per cent), South Australia (-0.1 per cent) and Tasmania (-0.2 per cent). There were rises in Victoria (0.4 per cent), New South Wales (0.1 per cent), the Australian Capital Territory (0.3 per cent) and Western Australia (0.1 per cent).

The trend estimate for Australian retail turnover was relatively unchanged (0.0 per cent) in March 2017 following a 0.1 per cent rise in February 2017. Compared to March 2016, the trend estimate rose 2.5 per cent.

Online retail turnover contributed 3.7 per cent to total retail turnover in original terms.

In seasonally adjusted volume terms, turnover rose 0.1 per cent in the March quarter 2017, following a rise of 0.7 per cent in the December quarter 2016. The main contributors to this rise were food retailing (0.6 per cent), household goods retailing (0.4 per cent) and other retailing (0.4 per cent).

CBA Q317 Trading Update

CBA released their unaudited trading update. Cash earnings were $2.4 billion in the quarter, and statutory net profit was $2.6 billion.

They say net interest income grew (pcp) supported by volume growth in key markets, offsetting margin pressures, but Group Net Interest Margin fell slightly in the quarter due to higher average liquids and competition effects. All the majors have therefore reported a NIM squeeze in this reporting round.

In home lending, growth continued to be underpinned by strong proprietary channel performance but defaults were higher, especially in WA.

Business lending growth overall remained subdued, with strongest growth in Business and Private Banking.

In Wealth Management, Average Assets Under Management and Funds Under Administration rose by 6% and 7% respectively, reflecting stronger investment markets, partly offset by exchange rate movements.

In ASB, volume growth remained strong, with lending up 10% and deposits up 8% (12 months to Mar 17).

Other Banking Income was stable with higher commissions and lending fees offset by lower trading income.

Insurance income was impacted by weather events during the quarter, including Cyclone Debbie.

They continue cost discipline enabling ongoing investment.

Loan Impairment Expense (LIE) was $202 million in the quarter and equated to 11 basis points of Gross Loans and Acceptances, compared to 17 basis points in 1H17.

Corporate LIE was substantially lower in the quarter. Troublesome and impaired assets were slightly lower at$6.7 billion, with broadly stable outcomes across most sectors. Apartment development exposures (Domestic residential apartment developments >$20m) reduced in the quarter.

Consumer arrears increased in line with seasonal expectations and continued to be elevated in Western Australia. In the home lending portfolio, investment lending reduced as a proportion of total new lending in the quarter and they say new interest only lending is being closely managed, consistent with regulatory guidance.

Prudent levels of provisioning were maintained, with Total Provisions at $3.7 billion and no change to overlays for economic conditions.

Funding and liquidity positions remained strong, with customer deposit funding at 67% and the average tenor of the wholesale funding portfolio at 4.2 years.

Liquid assets totalled $143 billion with the Liquidity Coverage Ratio (LCR) standing at 124%. The Group issued $14.6 billion of long term funding in the quarter, and $37 billion year to date.

The Group’s Basel III Common Equity Tier 1 (CET1) APRA ratio was 9.6% as at 31 March 2017. After allowing for the impact of the 2017 interim dividend (which included the issuance of shares in respect of the Dividend Reinvestment Plan), the CET1 (APRA) ratio increased by 37 basis points in the quarter. This was primarily driven by capital generated from earnings, and lower risk weighted assets, partially offset by the maturity of a further $1 billion of Colonial debt8. The Group’s Basel III Internationally Comparable CET1 ratio as at 31 March 2017 was 15.2%.

The Group’s Leverage Ratio was 4.9% on an APRA basis (unchanged from Dec 16) and 5.6% on an internationally comparable basis.

Government out of touch on housing policies ahead of budget: poll

From The Conversation.

Australians are concerned about housing affordability, so much so that 45.4% say they would be willing to see the value of their home stop growing to improve the situation, only 31.8% of those polled wouldn’t. An ANU poll shows 51.7% of Australians are also in favour of removing tax concessions like negative gearing.

The poll surveyed 2,513 people (representative of the population) and found 63.6% were willing to see an increase in supply of public housing. Only 32.3% are opposed to relaxing planning restrictions.

With these numbers in mind, it is perhaps surprising that state and federal governments have done so little of any substance in housing policy for decades, if anything they’ve contributed to the problem rather than improved the situation.

Potential policy changes that many believe will improve housing affordability, including removing or reducing tax incentives such as the capital gains tax discount or removing supply impediments, have all been considered too politically difficult by the current government.

The government has justified this by playing to the fear that the value of people’s home may decline or that more liberal planning arrangements may mean that new buildings may spoil the look and feel of local neighbourhoods.

The latest ANUpoll shows Australians are very concerned that future generations may be locked out of home ownership. Three quarters believe home ownership is part of the Australian way of life.

In terms of their own investments we found that nearly 68% of homeowners cite emotional security, stability and belonging as a reason for becoming a homeowner. In terms of security factors, 51% cite financial security, 42% refer to “renting is dead money” and 41% cite security of tenure and being able to “bang nails in the wall”.

Of those families who have an investment property (17% in this poll) the primary motivation for the investment was a “secure place to store money” (27.4%) closely followed by rental income (24.3%). Only 11.9% cited negative gearing as the primary motivator and 13.7% were motivated primarily by the capital gains discount.

Housing remains easily the most popular investment vehicle, with 30% saying their preferred investment for spare cash would be an investment property, followed by 18.5% preferring to upgrade their own home. Only 12.6% preferred shares as an investment.

In spite of recent talk of a housing bubble the general population is not particularly concerned with immediate price drops, with 85% expecting house prices to rise over the coming five years. Only 5.4% expect prices to fall and just 1.7% expect prices to decrease a lot.

If interest rates were to increase by 2 percentage points, 6.4% of mortgage holders expected to be in “a lot” of financial difficulty and 16.7% in “quite a bit”. Only 27.9% would be in no difficulty. While financial difficulty does not mean default, in mortgage markets it may not take a large share of loans to default to cause financial problems for an economy.

As pointed out earlier negative gearing was the least cited reason for property investment which suggests removing the incentive would at least not make a dramatic difference to the level of housing investment in Australia.

The ANUpoll shows that the public are concerned about housing affordability and where policy is directed at improving affordability they are likely to be supportive. The policy options, be they demand side – reducing tax incentives, or supply side – building more dwellings and/or relaxing planning restrictions, are available, but greater political nerve may be required to undertake such options.

Author: Ben Phillips, Associate professor, Centre for Social Research and Methods (CSRM), Australian National University

Budget 2017: Prepare to be disappointed on housing

From The New Daily.

Despite all its huff and puff on housing, a senior economist has warned voters the government will disappoint on the one reform almost everyone wants.

Professor Richard Holden said it would be a “real shame but no surprise” if Tuesday’s federal budget failed to curb tax perks for property investors.

“There is now consensus that there should be a move away from negative gearing and to prune back the capital gains discount. I think everyone agrees except the government and maybe the Property Council,” he told The New Daily.

“It’s very hard to find anybody else. You’ve got Jeff Kennett, John Hewson, Malcolm Turnbull before he became Prime Minister. Everyone seems to agree it’s a bizarre system that’s driving up prices.”

What’s in the housing package? Click to find out

After haemorrhaging support to Labor by doing nothing to help first home buyers in his pre-election 2016 budget, Treasurer Scott Morrison spent the end of last year swearing he’d focus on housing affordability this time around.

He’s been forced to walk back some of that rhetoric, as policy options evaporated under pressure from Labor, interest groups and the Abbott faction.

What hasn’t changed is Mr Morrison’s pledge not to touch negative gearing. But he’s been less emphatic on the capital gains tax discount, which allows landlords to pay tax at their marginal rate on only 50 per cent of the capital gains they realise when they sell a property.

A wide array of experts, including Richard Holden, agree these tax perks favour wealthy investors, and contribute to the difficulty of young Australians entering the property market, at least in Sydney and Melbourne.

A new survey by CoreLogic, a property data firm, found that 87 per cent of non-home owners are concerned about affordability; 30 per cent are looking to inheritance or parents to help them buy; and 62 per cent living with parents say they can’t afford to move out. It surveyed 2010 people aged 18 to 64.

By CoreLogic’s estimate, houses cost 7.2 times the yearly income of an Australian household, up from 4.2 times income 15 years ago. And a 20 per cent deposit costs 1.5 years of household income, up from 0.8 years.

Professor Holden was more enthusiastic about incentives for older Australians to downsize to smaller homes, especially if that involves a stamp duty discount.

“Stamp duty is like the worst tax in the history of the world and everyone with a minute’s economic education thinks it should be replaced with a land tax, so anything that pushes in that direction is a good idea.”

However, if the incentive allowed wealthy individuals to exceed the superannuation balance cap, that “would be a concern, depending on how it’s structured”.

Professor Holden also praised the government’s push to invest more in affordable rental housing: “The idea that housing affordability bites at the very lowest end is a really big deal.”

But he rubbished the government’s proposal to offer subsidised savings account to help first home buyers save a mortgage deposit.

“We saw the government float the idea of accessing super. Now, myself and Saul Eslake and others all came out vociferously and angrily against that. I don’t know if it was causal, but they backed down,” Professor Holden said.

“But now they’re talking about tax-preferred savings accounts for first home buyers, and for the life of me I can’t understand why they can’t seem to get through their heads that anything of that nature is just boosting demand.”

Daniel Cohen, co-founder of lobby group First Home Buyers Australia, said he disagreed with the view that subsidised savings accounts would only push up prices.

“As a standalone policy, they are correct, which is why we want to see policies that are also decreasing demand from investors, and we want to see affordable supply also increase,” Mr Cohen told The New Daily.

“What economists are not considering, I feel, is that first home buyers still have a deposit hurdle, and with the current costs of living, average wages and stamp duty, that is a really big hurdle.”

He said the accounts would act as “financial literacy” to encourage young Australians who might not have considered it to save for a home.

For Mr Cohen, the biggest budget disappointment would be no reform on negative gearing and capital gains.

The Latest Top 10 Post Codes In Risk Of Mortgage Default

Today using our latest mortgage stress and probability of default data, we explore the top ten highest risk post codes across the country. Specifically, we look at where we expect the largest number of mortgage defaults to occur over the next few months.

We explore the latest mortgage stress and default modelling, using data to the end of April 2017. We have already highlighted that overall mortgage stress is rising, with more than 767,000 households in stress compared with last month’s 669,000. This equates to 23.4% of households, up from 21.8% last month. 32,000 of these are in severe stress. We also estimate that nearly 52,000 households risk default in the next 12 months.

But now we look at individual post codes, and explore the top ten based on the number of households we expect to default. This is calculated using our 52,000 household sample with economic overlays for employment, inflation, interest rates and costs of living.

Note the labels in the chart above are only examples of locations within the postcodes.

As a general observation, many of the worst hit post codes are areas containing large numbers of newer property in the outer urban ring. Households here have large mortgages and limited income growth relative to house prices. But there are some important differences in terms of recent house price movements across the post codes.

We will count down the top 10, from 10th down to the highest risk postcode. So stay with us to the end!

The tenth highest risk post code in Australia is 6027 in Western Australia. This is the city of Joondalup and includes places like Ocean Reef and Edgewater. It is about 25 kilometres north of Perth. It’s a fast growing area with lots of young families, lots of new homes and large mortgages relative to income. The average house price is $510,000, down from $570,000 in 2014. We estimate there are more than 1,900 households in mortgage stress in the area, and 211 are likely to default in the next few months.

In ninth spot is Victorian post code 3064. This includes Craigieburn, Mickleham and Roxburgh Park. This area is about 25 kilometres north from Melbourne. The average house price is $438,000, up from $330,000 in 2014.  Again it is a fast growing area, with more than 60% of households holding a mortgage. The average age here is 30 years. We estimate there are 4,320 households in mortgage stress, and 212 are likely to default in the next few months.

Next at number eight is 4740 in Queensland. This includes Mackay and the surround areas, including Alexandra, Beaconsfield, Richmond and Slade Point. This area is more than 800 kilometres north of Brisbane, and is the gateway to the Bowen Basin coal mining reserves of Central Queensland. The average house price is $240,000 compared with $400,000 in 2014.  We estimate there are more than 3,600 households in mortgage stress in the region, and 244 are likely to default in the next few months.

We go back to Victoria for the seventh placed postcode which is 3029, Hoppers Crossing. This is a suburb of Melbourne about 23 kilometres’ south-west of the CBD and has grown to become a substantial residential area, with about half of properties there mortgaged. The average age is around 35. The average house price is $440,000 compared with $340,000 in 2014. We estimate there to be more than 3,400 households in mortgage stress, and we expect 266 households to default in the next few months.

In sixth place in Western Australia, is 6164, the city of Cockburn. It is about 8 kilometres south of Fremantle and about 24 kilometres south of Perth’s central business district. It includes areas like Jandakot, South Lake and Success. Around 40% of homes in the region are mortgaged and the average age is 31 years. Average house prices are around $730,000 about the same as in 2014. More than 2,530 households are in mortgage stress here, and the estimated number of defaults in the next few months is 308.

Next, counting down to number five, is another WA location, 6065, the city of Wanneroo which is around 25 kilometres north of Perth on the rail corridor. Again a fast growing suburb, the city has had the largest population expansion out of any other local government area in greater Perth. The average house price is $425,000 compared with $480,000 in 2014. Nearly half of households here have a mortgage, and more than 7,400 are in mortgage stress. We estimate that 339 households are likely to default in the next few months.

In fourth spot is Cranborne in Victoria, 3977. It is a suburb in the outer south east of Melbourne, 43 kilometres from the central business district. Its local government area is the City of Casey which is one of Victoria’s most populous regions, with a population of well over a quarter of a million. The average house price is $425,000 compared with $330,000 in 2014. In 3977, close to half of all homes are mortgaged, and we estimate 2,750 households are in mortgage stress, including 344 in severe stress. We estimate around 340 households will default in the next few months.

So down to the top three. The third most risky postcode according to our analysis is Victorian post code 3030 which is the region around Derrimut and Werribee. Werribee is a suburb of Geelong and is about 29 kilometres south west of Melbourne. The median house price is $405,000, well above its 2014 level of $310,000. Here 3,730 households are in mortgage stress, and 342 are likely to default in the next few months.

In second place is another Western Australian post code, 6155, Canning Vale and Willetton. It’s a large southern suburb of Perth, 20 kilometres from the CBD. The population has been growing quickly with significant new builds, and 60% of households have a mortgage. The average house price is around $560,000, down from $610,000 in 2014. The average age is 32 years. We estimate there are 4,150 households in mortgage stress and 342 households risk default in the next few months.

So finally, in top spot, at number one, is another Western Australian postcode 6210, Mandurah. This also includes suburbs such as Meadow Springs and Dudley Park. Mandurah is a southwest coast suburb, 65 kilometres from Perth. The average home price is around $300,000 and has fallen from $340,000 since 2014. Here there are 1,430 households in mortgage stress but we estimate 388 are at risk of default in the next few months.

As a final aside, in twenty second place, is the highest risk postcode in New South Wales, 2155, Kellyville, which is 36 kilometres north-west of the Sydney central business district in The Hills Shire. The average house price here is $1.1 million, compared with $860,000 in 2014. We estimate there are 1,240 households in mild stress and we estimate 151 households risk default in the next few months.

So that completes our analysis of the current most risky postcodes. We will update our modelling next month, so check back to see how the trends develop. But in summary households in Western Australia are most exposed in the current environment, especially with house prices there falling.