Author: Martin North

Martin North is the Principal of Digital Finance Analytics

Q4 Capital City Rentals Static

CoreLogic RP Data just released their rental data to December 2014. Over the 2014 calendar year, advertised rental rates on a national basis increased by 2.6 per cent for both houses and units. At a capital city level, the rental performance across the different housing stocks was more varied. House rents rose by 1.2 per cent over the year, while unit rents outperformed the detached housing market, up 2.5 per cent over the 12 months to December 2014.

RPDataRentalsDec2014Quarterly movements. Capital city advertised rents remained unchanged over the final quarter of 2014, with house rents steady at $430 per week and unit rents recorded at $410 per week. Across Australia, house rents increased by 1.3 per cent to $400 per week, while unit rents were unchanged over the three months to December at $390 per week.

For houses, the performance across each individual capital city market was varied. Hobart houses saw rents rise by the most, up 5.4 per cent over the three month period, while Brisbane (2.5 per cent), Adelaide (1.4 per cent), Canberra (1.1 per cent) and Sydney (1.0 per cent) saw rents rise by a more moderate amount. Perth (-2.2 per cent) and Darwin (-0.8 per cent) were the weakest performing rental markets for houses over the three month period. Melbourne was the only capital city market to record no change, with weekly rents for houses stable at $385 per week. The performance across the unit market at a capital city level was somewhat weaker. Hobart (1.8 per cent) and Brisbane (1.3 per cent) were the only capital cities in which rents rose over the three months to December, while all other cities saw rents fall over the last quarter of 2014 with the exception of Adelaide and Canberra where no change was recorded.

Annual movements. Nationally, advertised rents are 2.6 per cent higher than they were in December 2013 for both houses and units, while across the combined capital cities house rents have risen by 1.2 per cent, compared to a stronger level of growth for unit rents which rose by 2.5 per cent. Over the year to December 2014, for houses, the strongest performing capital city market in terms of rental increases was Hobart, where the median advertised weekly rental rate was 3.8 per cent higher. Sydney, Adelaide (both 2.9 per cent), Brisbane (2.5 per cent) and Melbourne (1.3 per cent) all had rents higher in December 2014 when compared to December 2013. Perth (-6.3 per cent) and Canberra (-5.0 per cent) were by far the weakest performing capital city markets for growth in advertised house rents.

Similar to houses, Canberra (-7.3 per cent) and Perth (-4.4 per cent) were the weakest performers amongst the capital city unit rental markets and were the only two cities to see rents fall over 2014. Unit rents for both Adelaide and Darwin remained unchanged over the year, while Hobart (3.7 per cent) and Sydney (3.1 per cent) were the strongest performers.

Retail Trade Up In November

The latest ABS Retail Trade figures show that Australian retail turnover rose 0.1 per cent in November, seasonally adjusted, following a rise of 0.4 per cent in October 2014.

In seasonally adjusted terms food retailing rose 0.6 per cent or $56.3 million in turnover. Other industries which experienced rises were cafes, restaurants and takeaway food services (0.8 per cent) and household goods retailing (0.6 per cent). Department stores remained relatively unchanged (0.0 per cent). This was partially offset by falls in other retailing (-2.1 per cent) and clothing, footwear and personal accessory retailing (-0.7 per cent).

In seasonally adjusted terms the states which displayed rises were Victoria (0.4 per cent), South Australia (0.4 per cent), the Australian Capital Territory (1.3 per cent), Tasmania (1.1 per cent), the Northern Territory (1.6 per cent) and Queensland (0.1 per cent). This was partially offset by falls in New South Wales (-0.2 per cent) and Western Australia (-0.1 per cent).

The trend estimate for Australian retail turnover rose 0.4 per cent in November 2014. Through the year, the trend estimate rose 4.5 per cent in November 2014 compared to November 2013.

Total online retail trade, in original terms, rose 5.2 percent in November following a rise of 9.8 per cent in October 2014 and a rise of 8.7 per cent in September 2014.

Will RBA Change Rates in 2015?

Until quite recently, there was something of a consensus that in 2015 the RBA was likely to lift rates, despite  their monthly mantra about a period of interest rate stability.  Some economists have argued that falling consumer confidence, slowing wage growth, and international uncertainty were all factors which would lead to lower rates, whilst on the other hand, the falling price of fuel at the pumps, and continued investment property demand might lead to higher rates.

So, interesting then that today the Commonwealth Bank of Australia  (CBA) released a note in which they have pushed out any rate rise expectations into the first quarter of 2016. In the interim period, they say, the cash rate will most likely stay at current levels – at 2.5% – the rate it has been for well over a year now. They suggest that a cut to the current low rate is unlikely, because the falling dollar and oil prices will stop the RBA dropping rates further. Previously, the CBA had been suggesting a rise in 2015 was likely.

The CBA said, a rate cut wouldn’t necessarily help produce the confidence and the stability the RBA is seeking:

“It appears that households and business now equate rate cuts with ‘bad’ economic news.”

The bank thinks a cash rate of 3.5 per cent by the end of 2016 is quite likely.

Dwelling Approvals Rise in November

ABS Building Approvals show that the number of dwellings approved rose 0.2 per cent in November 2014, in trend terms, and has risen for six months.

Dwelling approvals increased in November in Tasmania (3.8 per cent), the Australian Capital Territory (3.2 per cent), the Northern Territory (2.9 per cent), Victoria (2.8 per cent) and Western Australia (0.9 per cent) but decreased in Queensland (2.4 per cent), New South Wales (1.4 per cent) and South Australia (1.1 per cent) in trend terms.

In trend terms, approvals for private sector houses fell 0.3 per cent in November. Private sector house approvals fell in South Australia (0.7 per cent), Western Australia (0.7 per cent) and New South Wales (0.5 per cent) but rose in Victoria (0.2 per cent) and Queensland (0.2 per cent).

The value of total building approved fell 0.7 per cent in November, in trend terms, and has fallen for 12 months. The value of residential building fell 0.5 per cent while non-residential building fell 1.0 per cent in trend terms.

Bank of England Releases GFC Court Minutes

The Bank of England today published, in a special release, the minutes of Court and related meetings from the crisis period of 2007-09, in appropriately redacted form.  This follows the Bank’s 11 December 2014 announcement of a series of proposals to enhance the transparency and accountability of the Bank. As part of this announcement, the Governor committed to publishing the 2007-2009 Court minutes, as requested by the Treasury Committee.

In the period covered by these minutes the Bank was operating within the statutory framework established in 1998. Court was much larger than the present Court, a number of members had standing conflicts of interest, and there was no provision for a non-executive chairman (to compensate for that, the Governor established the practice of having all Court business discussed first in the non-executive directors’ committee). At the time, the Bank had no powers to take actions to manage macro-prudential risks.  It was not responsible for banking supervision and there was no bank resolution authority.  The roles, in a crisis, of the Bank, the Treasury and the FSA were ill-defined. These deficiencies were rapidly identified during the period covered by the minutes, and were addressed both by the 2009 Banking Act and subsequently by the 2012 Financial Services Act, which radically changed both the role of the Bank and the structure of its governance.

Governor, Mark Carney said:

“The financial crisis was a turning point in the Bank’s history. The minutes provide further insight into the Bank’s actions during this exceptional period – the policies implemented to mitigate the crisis, the lessons that were learned, and how the Bank changed as a result.

The Bank is committed to increased openness and transparency and these minutes, in combination with the other recent reviews, provide a complete record of the Bank’s activities during the crisis.”

UK PRA Published its New “PRA Regulatory Digest”

Continuing their efforts to strengthen the effectiveness of their effective communications, the UK regulatory authorities have created a monthly digest of relevant releases and news. They say that

“this digest is for people working in the UK financial services industry and highlights key regulatory news and publications delivered for the month. Readers are encouraged to continue to visit the Bank of England website throughout the month, subscribe to alerts and visit the calendar for upcoming news and publications.”

We think the Australian Regulatory authorities should learn from this, as at the movement we have separate and disconnected release streams from RBA, APRA and ASIC. The UK effort shows the power of bringing material together into a more digestible form.

We think this should be coordinated by the Council of Financial Regulators (CFR). This body is the conductor of the regulatory orchestra, and has only had an independent website since 2013.  It is the coordinating body for Australia’s main financial regulatory agencies. We discussed the role of CFR recently.

Latest Banking Statistics

Last week saw the release of the November data from both the RBA and APRA. Looking at the overall summary data first, total credit grew by 5.9% in the year to November 2014. Housing lending grew at 7.1%, business lending at 4.6%, and personal credit by 1.1%.

LendingNoiv2014Looking at home lending, in seasonally adjusted terms, total loans on book rose to $1.42 trillion, with owner occupied loans at $932 billion, and investment loans at $483 billion, which equals 34.2%, a record.

HomeLendingNov2014From the APRA data, loans by ADI’s were $1.31 trillion, with 34.82% investment loans, which grew at 0.84% in the month. Looking at relative shares, CBA continues to hold the largest owner occupied portfolio, whilst WBC holds the largest investment portfolio.

HomeLendingSharesNov2014Looking at relative movement, WBC increased their investment portfolio the most in dollar terms. CBA lifted their owner occupied portfolio the most.

HomeLendingPortfolioMovementsNov2014Turning to deposits, they rose 0.39% in the month, to 1.78 trillion.

DepositSharesNov2014There was little change in relative market share, though we noted a small drop at nab, which relates to their cutting deposit rates from their previous market leading position.

DepositChangesPortfolioNov2014Finally, looking at the cards portfolios, the value of the market portfolio rose by $627 billion, to $41,052 billion. There were only minor portfolio movements between the main players.

CardsShareNov2014

UK’s Financial System Not “Entirely Safe”

The UK’s financial system is not “entirely safe” according to former Bank of England governor Lord Mervyn King, speaking on BBC Radio 4’s Today programme. He questioned the banking system’s ability to withstand another crisis and argued the core problems that led to the meltdown have not yet been dealt with.

“I don’t think we’re yet at the point where we can be confident that the banking system would be entirely safe. I don’t think we’ve really yet got to the heart of what went wrong.”

The warning comes despite banks and other financial institutions being forced to hold more capital to prevent the risk of failure in the event of another downturn.

King, went on to say that imbalances between global economies have not yet been resolved. He added keeping base rate at the low of 0.5 per cent cannot go on .

“The idea that we can go on indefinitely with very low interest rates doesn’t make much sense.” However raising interest rates now “would probably lead to another downturn”.

He was at the helm of the Bank of England during the GFC.

His comments mirror some of the concerns highlighted in the recent Murray report.

Household Savings Intentions in 2015

We have updated our savings intentions data, using results from our latest household surveys. Today we outline the main findings from the research. Using the DFA property segmentation, we can compare the relative value of savings across the segments, and compare this distribution with last year. In addition, we expect savings rates to be cut further next year.

RelativeSavings2014We see that Down-Traders hold the largest relative share of savings, up from 32% last year to 38% this year. All other segments are at the same relative values as last year, or at lower levels. This highlights that people looking to sell and move to smaller properties are hold the most significant savings.

In this analysis, savings includes balances in current accounts, call and term deposit accounts, and other liquid savings vehicles, but excludes property, shares are superannuation.

Looking at savings intentions, we see that Down-Traders are expecting to save more next year (55%), and only 5% are expecting to be savings smaller amounts. Investors, Portfolio Investors and Refinancers are more likely to be saving less next year. Want to Buys and First Time Buyers are also quite likely to do the same next year.

SavingsIntentions2015We can also look at the relative distribution of saving and investment vehicles by type. For some, the main vehicle is statutory superannuation, whereas for some other groups, bank deposits and cash management accounts are more significant. We also highlight the importance of pre-paying the mortgage for some segments.

SavingsByType2014At this point, we introduce our master household segments, and show the relative savings distribution across these segments. By far the largest balances are held by the Exclusive segment, followed by Self-Funded Retirees. The chart shows the relative distribution, with the yellow box showing the 50% distribution bounding.

SavingsBalancesDistWe also see some trends by looking across segments over time. Exclusive and Stables household segments are seeing balances increasing, whereas Seniors and Self-Funded Retirees are seeing balances falling. In our analysis we saw that these older groups are especially feeling the impact of lower savings rates.

SavingsChangeYOY2014Another way to look at the savings scene, is to examine the motivations for savings. The chart below shows the relative distribution by age bands. Significantly, many households in the 20-30 and 30-40 age ranges are not saving at all. Older households are more likely to be saving for growth, whereas the oldest households are most likely to be saving for income.

Savings-Motivations-201465% of younger households are most likely saving for a specific event (e.g. holiday, car, wedding) or for a rainy day. We see that saving for property purchase peaks in the 30-40 years age group.

We believe that households will continue to be cautious in 2015, and that will savings rates continuing to fall, we will see many saving more, not less. The RBA remains keen to encourage households to spend more, but the research shows that saving remains important for those with the largest balances, and many are stress by costs of living rising, savings rates falling, and therefore are expecting to save less.

This is the last post for 2014. Thanks to all those who follow, read and comment on the DFA Blog. We will be back early in 2015, with fresh insight and updated surveys. Meantime happy holidays.

The Capital Conundrum II

A series of separate but connected events will see capital requirements of banks continue to steadily increase from 2015 onwards.  You can read about the capital issues in the earlier post. This is consistent with the outcomes from the G20. The international environment is driving capital requirements higher (on the back of the northern hemisphere government bailouts post the GFC). Locally the regulators are also making moves, and the recommendations from the Murray Financial Systems Inquiry (FSI) are also in play. Overall, some of the most significant elements are:

  1. Globally Significantly Banks (GSIBs) likely to need to hold more capital, and this will likely flow down to other banks also.
  2. Latest BIS recommendations on floors and ratios
  3. APRA changing the liquidity coverage ratio
  4. FIS on capital ratios
  5. FIS on advanced IRB banks

There are other steps in the works also. The net effect is that capital requirements will be lifting in 2015, irrespective of the FSI (and the capital changes recommended do not need parliamentary approvals).

Here is DFA’s view of how these outcomes will translate in the Australian context

  1. Banks need to raise $20-40 bn over next couple of years, – that is doable – and they will access the now functioning global markets. It will be ratings positive.
  2. Smaller banks will be helped by the FSI changes to advanced IRB, if they translate, but will still be at a funding disadvantage
  3. Deposit rates will be cut, they have been falling already despite RBA rate being static, this has not received enough commentary, there are millions of households reliant on income from deposits
  4. Mortgage rates will lift a little, and discounting will be even more selective – Murray’s estimates on the costs are about right.
  5. Lending rates for small business will rise further
  6. Competition won’t be that impacted, and the four big banks will remain super profitable
  7. We will still have four banks too big to fail, and the tax payer would have to bail them out in the event of a failure (highly unlikely but not impossible given the slowing economic environment here, and uncertainly overseas). The implicit government guarantee is the real issue.