Martin North – Page 1050 – Digital Finance Analytics (DFA) Blog

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.

The Current State Of Play In The Property Market

An extract from the latest edition of the DFA report, the Property Imperative, released last week.

The Australian Residential Property market is valued at over $5.2 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia.

According to the Reserve Bank (RBA), as at July 2014, total ADI housing loans were a record $1.382 trillion , an increase of 8.5% in investor loans and 4.8% in owner occupied loans over the past year. There were more than 5.08 million housing loans outstanding with an average balance of about $237,000 . Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 43.2% of new loans issued were interest-only loans , this is a record.

After a significant credit fueled boom in 2002-2007, momentum slowed after 2007 as a result of the Global Financial Crisis (GFC). The RBA dropped rates directly after the immediate crisis, but then lifted them again to a peak of 4.5% in 2011 in response of a property rebound and the mining sector investment sector boom. In 2013 its benchmark rate was cut to an all-time low of 2.5% which has stimulated further property demand, as the resource sector transitions from an investment to exploit phase. Through 2014, rates have remained at 2.5%, and in the latest RBA minutes, they suggest a continuation for some time at this level .

The Australian Bureau of Statistics says property prices have risen in every capital city in the past year to June 2014. Annually, residential property prices rose in Sydney (+15.6%), Melbourne (+9.3%), Brisbane (+6.8%), Adelaide (+5.6%), Hobart (+4.3%), Perth (+3.6), Darwin (+3.4%), and Canberra (+2.2%) . The Residential Property Price Index (RPPI), a measure including houses and attached dwellings, for the weighted average of the eight capital cities rose 1.8% this quarter, for a total rise of 10.1% over the last year.

More Evidence That House Prices Are Too High

The Economist has just published its latest interactive house price comparison tool. It enables comparisons to be made across multiple countries, comparing absolute prices, real prices, rental ratios and prices against income. It is a powerful tool and highlights some interesting facts. One nice thing is you can select the range of dates also. Here are a few examples. First the trend in prices for selected countries. It shows Australia near the top of the list.

The trend since 2000 shows Australia clearly out in front amongst the countries I selected.

Turning to price relative to income, we see Australia again featuring near the top

Looking at the trends since 2000, we see how rentals are tracking. High, but not as high a house price movements suggesting perhaps linkages to interest rates and income growth?

But the most stunning chart in my view shows the change in values since 1975. We lead the way in Australia, leaving New Zealand, Canada and the UK in our wake. Also its worth noting the Japan story, no upward growth since 1975, that’s a different world.

Finally, in real terms, after correcting for inflation, Australia is way, way out in front looking at the long run from 1975. The trend since 2000 is not quite so stark.

We like the tool, and recommend it if you want further proof that Australian property on an international basis looks expensive, on nearly any measure you care to select. But there is a broader question to reflect on. What is driving sky high property prices in a number of countries, including New Zealand, Canada and UK? Could the ultra low interest rates and quantitative easing in Europe and US simply be the root cause, inflating stock prices and property prices? The mega-economic experiment we are in the midst of is a path never before trod. So the outcome is not certain.

Latest DFA/JP Morgan Mortgage Industry Report Launched Today

The latest report, volume 20 of the Mortgage Industry Report series was released today. As well as over viewing current industry trends, this time we focus on some of the mortgage pricing issues in the light of the FSI interim report, capital and funding.

JPM authored their report using DFA research data as detailed in the Property Imperative which is available on request from DFA. Because of compliance issues the final JPM version of the report is only available direct from them.

Go here for more details of our research programmes, and for media requests, go here.

RBA Leaves Rate Unchanged Again!

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Monetary policy remains accommodative. Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices continues. The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.

Housing Lending Up Again In July to $1.382 Trillion

Today is a big data day, with the monthly banking statistics from APRA and the financial aggregates from the RBA for July. Total credit grew by 0.4% in July, with Housing lifting by 0.5%, Personal Credit at 0.2% and Business Lending at 0.3%. In the last year, overall credit rose 5.1%, Housing 6.5%, Personal Credit 0.8% and Business 3.4%.

Looking in more detail at home lending, we see that overall lending was up to $1.382 billion, from $1,375 billion in June. Owner Occupied Lending rose by $3.5 billion and Investor Lending rose by 3.6 billion. This equates to an annual rise of 4.8% for Owner Occupied loans and 8.5% for Investment loans.

HousingLendingJuly2104 The proportion of Investment loans from ADI’s rose again to 34.9% of all their housing loans, the largest monthly share ever. From an overall market perspective, a little below 34% of all loans written were for investment purposes.

The relative growth in Owner Occupied versus Investment loans is quite stark. Also of note is that growth in both types of loan appears to be slowing recently.

Turning to the banking statistics from APRA, total home lending from the banks was $1,273 billion (the gap between this and the RBA numbers of $109 billion is the non-bank sector). CBA continues to lead the pack on Owner Occupied loans, whilst Westpac leads on Investment loans.

Looking at the share figures, of the main players, CBA and Westpac have the largest footprints and between them have more than half the market.

Portfolio movements highlights significant Investment Loan grow at Westpac, and both types of loan at CBA. Away from the majors, Macquarie and Member Equity Bank grew faster than the other regional players.

Turning to deposits, the total with banks rose to $1,736 billion, up 1.2% in the month. Westpac, nab and ANZ lifted the value of deposits more than Westpac in July.

Finally, in the cards portfolios, the overall value fell by $270 million in July to $40.3 billion. In terms of the portfolio, CBA continues to hold the largest share by value, with Westpac and ANZ following.