Welcome to our latest summary of finance and property news to the 19th May 2018.
Watch the video or read the transcript.
Today we start with bank culture and the next round of the Royal Commission.New ASIC chairman James Shipton was at the Australian Council of Superannuation Investors conference in Sydney and was asked how seriously he was taking the threat to the financial system given the failures aired at the royal commission. He said the threat is great. As a former member of the finance profession – as a person who is proud to be a financier – I find it jarring and disappointing that this is where we find ourselves,” he said. As a proud Australian who is returning from nearly 25 years overseas, it is very confronting that we find ourselves in this situation. The misconduct discussed at the royal commission “must not stand, [it] must be addressed”
Mr Shipton also highlighted the “proliferation” of conflicts of interest in parts of the financial industry. “It is clear to me that a number of institutions have not taken the management of conflicts of interest to heart,” he said. “This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the royal commission hearings.” Mr Shipton expressed his “surprise” that many Australian firms have “turned a blind eye” to conflicts of interest as their businesses have grown. “Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them .“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law,” he said.
These are relevant comments in the light of the next round of the Royal Commission which starts on 21st May. This round of public hearings will consider the conduct of financial services entities and their dealings with small and medium enterprises, in particular in providing credit to businesses. The hearings will also explore the current legal and regulatory regimes, as well as self-regulation under the Code of Banking Practice. They will use the same case study approach.
They will be considering Responsible lending to small businesses, with ANZ, Bank of Queensland, CBA, Westpac and Suncorp on the stand. They will then consider the Approach of banks to enforcement, management and monitoring of loans to businesses with CBA / Bankwest and NAB. Third will be Product and account administration with CBA and Westpac; then the Extension of unfair contract terms legislation to small business contracts with ASIC and finally The Code of Banking Practice with ABA and ASIC. This should be worth watching, as we are expecting more cases of misconduct and poor behaviour. Our Small and Medium Business surveys highlight the problem many have with getting credit and being treated unfairly. There is a link below if you want to grab a free copy.
So now to the statistics. The ABS data this week painted a rather unsettling picture. The latest unemployment data to April 2018 showed that employment growth is slowing. The trend unemployment rate rose from 5.53 per cent to 5.54 per cent in April 2018 after the March figure was revised down, while the seasonally adjusted unemployment rate increased 0.1 percentage points to 5.6 per cent. The trend participation rate increased to a further record high of 65.7 per cent in April 2018 and in line with the increasing participation rate, employment increased by around 14,000 with part-time employment increasing by 8,000 persons and full-time employment by 6,000 persons in April 2018. But as we discussed in our separate post “Jobs Aren’t What They Use To Be” underutilisation – or those in work who want more work, continues to running at very high rates, and this helps to explain the low wages growth, which was also reported by the ABS this week. This showed a showed a further fall compared with last time with the seasonally adjusted Wage Price Index up 0.5 per cent in March quarter and 2.1 per cent through the year. Seasonally adjusted, private sector wages rose 1.9 per cent and public sector wages grew 2.3 per cent through the year to March quarter.
We discussed this in our post “Some Disturbing Trends”. In fact, you can mount an argument the federal budget is already shot as a result. The gap is large, and growing. And for comparison, the Average Compensation of Employees from the national accounts which is to December 2017 is tracking even lower circa 1.3%. And the latest inflation figure is sitting at 1.9%.
An article in The Conversation this week by Stephen Kirchner, from the University of Sydney, argued that the RBA is making an explicit trade-off between inflation and financial stability concerns which is weighing on Australians’ wages. In the past, the RBA focused more on keeping inflation in check, the usual role of the central bank. But now the bank is playing more into concerns about financial stability risks in explaining why it is persistently undershooting the middle of its inflation target. In the wake of the global financial crisis, the federal Treasurer and Reserve Bank governor signed an updated agreement on what the bank should focus on in setting interest rates. This included a new section on financial stability. That statement made clear that financial stability was to be pursued without compromising the RBA’s traditional focus on inflation. But the latest agreement, adopted when Philip Lowe became governor of the bank in 2016, means the bank can pursue the financial stability objective even at the expense of the inflation target, at least in the short-term. He concluded that when the RBA governor and the federal treasurer renegotiate their agreement on monetary policy after the next election, the treasurer should insist on reinstating the wording of the 2010 statement that explicitly prioritised the inflation target over financial stability risks. If the RBA continues to sacrifice its inflation target on the altar of financial stability risks, inflation expectations and wages growth will continue to languish and the economy underperform its potential.
International funding costs continue to rise with the US 10 Year Treasury rising this week, as yields were boosted after a report on U.S. retail sales for April indicated that consumer spending is on track to rebound after a soft patch in the first quarter. Yields have climbing higher since the Fed said on at its May meeting that inflation is moving closer to its 2% target. The Fed raised rates in March and projected two more rate hikes this year, although many investors see three hikes as possible.There is a strong correlation between the 10-year bond yield and the quantitate tightening which is occurring – making the point again that the rate rises are directly correlated with the change in policy.
Libor, the interbank benchmark continued to rise, as we discussed in our post “The Problem with LIBOR”. And this translates to higher mortgage rates in the US, with US headlines speaking of “the highest mortgage rates in seven years.
To be clear, we watch the US markets, and especially the capital market rates. because these movements impact the cost of bank funding and the Australian banks, especially the larger ones need access to these funds to cover perhaps 30% of their mortgage books. As a result, there is pressure on mortgage rates locally, with the BBSW reflecting some of this already.
Canada is another market worth watching, because it shares a number of the same characteristics as our own. The authorities tightened mortgage underwriting standards earlier in the year, and the results are now some significant slowing of purchase volumes, and home prices.
Significantly, the lenders are discounting new loans to try to maintain mortgage underwriting volumes in the fading market, which is similar to the dynamics here, with some Australian lenders now offering discounts to property investors for the first time in a year or so.
We hold our view that credit growth will continue to slow, as underwriting standards get tightened further. Investor lending has fallen by 16.1 per cent over the year to March, while owner-occupied lending is off by 2.2 per cent, according to the Australian Bureau of Statistics. The latest housing finance statistics show that lending to owner-occupiers fell by 1.9 per cent in March, the highest rate of decline in over two years; investor lending fell by 9 per cent over the month.
However, these figures are yet to reflect the latest round of credit tightening by the major banks, who face increased scrutiny amid damning evidence of irresponsible lending during the first round of the royal commission.
Both the major banks and the RBA expect credit growth to slow. We are now entering a “credit crunch”, which will reduce total mortgage volumes by around 10 per cent over the next year. The chances are that people will not be moving as swiftly as they had previously and not only is there lower demand now, particularly for property investors, but tighter lending criteria means that brokers will have to work a lot harder to get the information from clients and go through more hoops to get an application processed. Overall volumes will be down.
The Auction clearance rates continue lower, according to CoreLogic. Last week, a total of 2,279 auctions were held across combined capital cities, returning a final clearance rate of 58.2 per cent, the lowest clearance rate seen since late 2015. This time last year, the clearance rate was much stronger with 72.8 per cent of the 2,409 auctions returning a successful result.
Melbourne’s final clearance rate dropped to 59.8 per cent this week across 1,099 auctions making it the lowest clearance rate the city has seen since Easter 2014 (58.1 per cent).
Sydney’s final auction clearance rate fell to 57.5 per cent across 787 auctions last week, down from 63.1 per cent across 797 auctions over the previous week. Over the same week last year, 960 homes went to auction and a clearance rate of 74.5 per cent was recorded.
Across the smaller auction markets, Canberra, Perth and Tasmania saw clearance rates improve while clearance rates across Adelaide and Brisbane fell slightly. Of the non-capital city auction markets, Geelong returned the highest final clearance rate once again, with a success rate of 83.0 per cent across 50 auctions.
This week they expect to see a lower volume of auctions – 1,931, down from 2,279 last week. Melbourne is the busiest city for auctions again this week, with 948 auctions being tracked so far, down from 1,099 last week. Sydney has 637 auctions scheduled this week, down from 787 last week.
Adelaide and Perth are expecting to see a slight increase in auction volumes this week, with Adelaide tracking 102 auctions, up from 97 last week, while Perth currently has 43 auctions scheduled, up from 40 last week.
In terms of home price movements, prices are continuing to fall in all states last week, according to the CoreLogic Indices, other than Adelaide which was just a tad higher. Perth fell the most, down 0.11% followed by Sydney down 0.10%. The year to data movements, and the rolling 12-month view shows that Sydney is leading the way down. As we have said before, we think Melbourne is 6-9 months behind Sydney. But remember that the latest spate of lending tightening has yet to work though, so we expect prices to continue to fall. Of course prices are still well above those from the previous peak, with Sydney still up 60% and Melbourne up 44%. However, Perth is down 11%, and the overall average is 37% higher.
Finally, The Australian Financial Security Authority released the personal insolvency activity statistics for the March quarter 2018. In state and territory terms, personal insolvencies reached a record quarterly high in Western Australia (1,020) and the highest level since the September quarter 2014 in New South Wales (2,372). Total personal insolvencies in the March quarter 2018 increased slightly by 0.1% compared to the March quarter 2017. We discussed this data in more detail in our video “Some Disturbing Trends”
Given all the data we discussed today, we expect the insolvencies will continue to rise in the months ahead, as the impact of flat incomes, rising costs, and big debt continue to press home.
