Author: Martin North

Martin North is the Principal of Digital Finance Analytics

CBA Withdraws from Low Doc Lending

CBA has announced that it will remove low documentation features on all new home loans and line of credit applications from 29 September, as the bank continues its ongoing move to ‘simplify’ the bank, via The Adviser.

The Commonwealth Bank of Australia (CBA) has told brokers that it is “simplifying” its product suite to ensure that it is “providing a suitable range of products that align with [its] customers’ needs”.

As such, from Saturday 29 September 2018, the big four bank will remove all low documentation features on new home loans and line of credit applications. Should a customer wish to top up an existing home loan or line of credit with the low doc feature, they must provide full financials for all new applications.

All new loans that have low doc feature, including Home Seeker applications, must reach formal approval by close of business on Friday 28 September 2018.

The bank has said that brokers who request an amendment to an application with a removed product or a low doc feature that has not yet reached formal approval by Saturday 29 September 2018 will need to discuss “another product option” with the customer to suit their needs.

Loans must be funded by close of business Friday 28 December 2018.

There are no changes for existing customers that have low doc loans.

The move marks a major change in the lending landscape, but in practice – CBA has not provided true ‘low doc’ loans for some time, requiring more documentation than most historical low doc loans required.

Indeed, this type of loan product makes up a minimal proportion of the bank’s portfolio.

As well as removing the low doc feature, the bank will also remove several home loan products, including:

One-year Guaranteed Rate
Seven-year Fixed Rate loans
12-month Discounted Variable Rate;
Rate Saver products
Three-year Special Rate Saver; and
No Fee Variable Rate

If a customer wants to top up a One-year Guaranteed Rate, Seven-Year Fixed Rate or a 12-month Discounted Rate Home Loan they must complete a switch to another available product that best suits their needs.

An early repayment adjustment and an administrative fee may apply on the One-year Guaranteed Rate and Seven-year Fixed Rate when completing a switch.

Top-up applications for Rate Saver, Three-Year Special Rate Saver and No Fee Home Loans will still be available.

A CBA spokesperson said: “At the Commonwealth Bank, we constantly review and monitor our suite of home loan products and services to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs.

“From September onwards, we will be streamlining our suite of products to deliver our customers a simplified and competitive range of home loan solutions.”

Highlighting that the bank’s product suite offers “attractive” standard variable rate and fixed rate options, while its extra home loan products offer customers “low interest rates, no monthly fees, and no establishment fees”.

“Whatever our customers’ needs, our network of brokers or home lending specialists can help them find a flexible mortgage and guide them through the entire home buying journey, providing support every step of the way,” they said.

Retail Trade Still Struggles

The ABS says the trend estimate for Australian retail turnover rose 0.3 per cent in May 2018 following a rise (0.3 per cent) in April 2018. Compared to May 2017, the trend estimate rose 2.8 per cent, so still stronger than wages growth (as people raid savings and put more on credit cards).

Across the categories department stores rose 0.5% on the previous month, thanks to sales being brought forward from June, food retailing was up 0.4%, household goods and other retailing were 0.2% and clothing and footwear rose just 0.1%.

Across the states,  the northern territories rose 0.9, ACT 0.6%, Tasmania 0.5%, New South Wales 0.4%, Victoria 0.3%, Queensland and SOuth Australia 0.1% and there was no change in Western Australia.

Online retail turnover contributed 5.6 per cent to total retail turnover in original terms in May 2018, a rise from 5.4 per cent in April 2018. In May 2017 online retail turnover contributed 3.9 per cent to total retail.

Risks to Global Growth Rise as Trade Tensions Escalate

Increased trade tensions have raised the risk that new measures may be taken that would have a much greater impact on global economic growth than those enacted so far, Fitch Ratings says.

The US investigation into auto tariffs, possible additional US tariffs on Chinese imports, and the likely reactions of other countries and blocs, point to a potential serious escalation, albeit with an impact that falls short of across-the-board tariffs imposed on all major trade flows.

The US administration’s continuing focus on reducing bilateral trade deficits and the response by China, the EU, Canada and Mexico to existing measures, have increased tensions. So far the scale of tariffs imposed has been too small to materially affect our forecasts for world growth, as we noted in our most recent “Global Economic Outlook”. The additional tariffs raised are very small relative to the GDP of the affected countries and regions.

However, further measures mooted by the US would mark a significant escalation. The initiation of a Section 232 investigation into whether auto imports weaken the US economy and impair national security affects US imports of new cars and car parts that were worth USD322 billion last year. The threat of an additional USD200 billion of tariffs on Chinese imports could prompt China to apply tariffs to all imports of goods and services from the US, which were worth USD188 billion in 2017. China could also retaliate with non-tariff barriers.

It remains to be seen whether US announcements are simply negotiating positions that may be modified. But the detailed preparation of, and justification for, such measures and the possibility of instant and strong retaliation by trading partners present growing risks to trade. If tensions rise further, the US hardens its stance and fully withdraws from NAFTA (which is not our base case), this would magnify the impact. The imposition of high tariffs on US auto imports would represent an existential threat to NAFTA.

Table 2 outlines a scenario in which the US imposes auto tariffs at 25% and additional tariffs on China. Trading partners retaliate symmetrically – in line with their recent responses to US steel tariffs – and NAFTA collapses. This scenario coupled with the existing measures would affect close to USD2 trillion of global trade flows.

Our calculations are not behavioural estimates of the impact of tariffs on GDP, which would be highly dependent on the effect on trade volumes. Nevertheless, scaling the measures relative to the size of the economy helps us to compare outcomes with the trade war scenario analysis we carried out in our study “Global Macro Scenario: US Trade Protectionism and Retaliation” last year.

In this scenario, our calculations would imply a shock to US import prices around 35% to 40% of the size of the shock examined in the trade war scenario, in turn suggesting a potential impact on US GDP growth of around 0.5pp. This would be broadly consistent with some other estimates. The US Tax Foundation estimates that if all tariffs announced by the US and other jurisdictions were fully enacted, US GDP would fall by 0.44% in the long run.

Our base case remains that blanket geographical tariffs between major countries are unlikely, and this was reflected in our unchanged forecasts for global growth in June’s “Global Economic Outlook”. But the downside risks to global growth from trade policy have increased.

A major global tariff shock would have adverse supply side impacts, raising costs for importers and disrupting supply-chains, while reducing consumers’ real wages. The global multiplier effect of lower US imports could be significant. US outward FDI (the largest source of FDI globally) would probably fall. Along with weaker confidence and lower investment, a global tariff shock would also hit job creation.

The Household Asset Worm Is Turning

The RBA updated their E2 Household Finances – Selected Ratios to end March, released at the end of June. So they are yet to reflect the latest downturn in home prices and rising debt. But the trajectory is clear and should be ringing alarm bells.

First the ratio of household debt to housing assets and total assets is going up, reflecting mainly falls in property prices.  The rate is accelerating, confirming that while debt is still rising, values are not. Expect more ahead.

The ratios of assets to income are falling, having been rising for year, again reflecting falls in home prices. So while incomes are flat in real terms, asset values are falling faster.

And finally, the killer, the household debt to income ratios continues higher, this despite the greater focus on lending quality, and reduced “mortgage power”. The household debt to income ratio is now at 190.1, the housing debt in income 140.1, and the owner occupied  housing debt to income is 106.7. In fact this is moving up more sharply as lenders have focused on owner occupied lending.

Combined this shows the problems in the household sector. No surprise then that mortgage stress is going higher. We release the June data tomorrow.

Remember that the debt to GDP ratio is highest in Australia compared with other countries.

Another Day, Another Data Breach

Reports of data breaches are an increasingly common occurrence. In recent weeks, Ticketmaster, HealthEngine, PageUp and the Tasmanian Electoral Commission have all reported breaches.

It is easy to tune out to what is happening, particularly if it’s not your fault it happened in the first place.

But there are simple steps you can take to minimise the risk of the problem progressing from “identity compromise” to “identity crime”.

In 2012 former FBI Director Robert Mueller famously said:

I am convinced that there are only two types of companies: those that have been hacked and those that will be. And even they are converging into one category: companies that have been hacked and will be hacked again.

The types of personal information compromised might include names, addresses, dates of birth, credit card numbers, email addresses, usernames and passwords.

In some cases, very sensitive details relating to health and sexuality can be stolen.

What’s the worst that can happen?

In most cases, offenders are looking to gain money. But it’s important to differentiate between identity compromise and identity misuse.

Identity compromise is when your personal details are stolen, but no further action is taken. Identity misuse is more serious. That’s when your personal details are not only breached but are then used to perpetrate fraud, theft or other crimes.

Offenders might withdraw money from your accounts, open up new lines of credit or purchase new services in your name, or port your telecommunication services to another carrier. In worst case scenarios, victims of identity crime might be accused of a crime perpetrated by someone else.

The Australian government estimates that 5% of Australians (approximately 970,000 people) will lose money each year through identity crime, costing at least $2.2 billion annually. And it’s not always reported, so that’s likely a conservative estimate.

While millions of people are exposed to identity compromise, far fewer will actually experience identity misuse.

But identity crime can be a devastating and traumatic event. Victims spend an average of 18 hours repairing the damage and seeking to restore their identity.

It can be very difficult and cumbersome for a person to prove that any actions taken were not of their own doing.

How will I know I’ve been hacked?

Many victims of identity misuse do not realise until they start to receive bills for credit cards or services they don’t recognise, or are denied credit for a loan.

The organisations who hold your data often don’t realise they have been compromised for days, weeks or even months.

And when hacks do happen, organisations don’t always tell you upfront. The introduction of mandatory data breach notification laws in Australia is a positive step toward making potential victims aware of a data compromise, giving them the power to take action to protect themselves.

What can I do to keep safe?

Most data breaches will not reveal your entire identity but rather expose partial details. However, motivated offenders can use these details to obtain further information.

These offenders view your personal information as a commodity that can be bought, sold and traded in for financial reward, so it makes sense to protect it in the same way you would your money.

Here are some precautionary measures you can take to reduce the risks:

  • Always use strong and unique passwords. Many of us reuse passwords across multiple platforms, which means that when one is breached, offenders can access multiple accounts. Consider using a password manager.
  • Set up two-factor authentication where possible on all of your accounts.
  • Think about the information that you share and how it could be pieced together to form a holistic picture of you. For example, don’t use your mother’s maiden name as your personal security question if your entire family tree is available on a genealogy website.

And here’s what to do if you think you have been caught up in a data breach:

  • Change passwords on any account that’s been hacked, and on any other account using the same password.
  • Tell the relevant organisation what has happened. For example, if your credit card details have been compromised, you should contact your bank to cancel the card.
  • Report any financial losses to the Australian Cybercrime Online Reporting Network.
  • Check all your financial accounts and consider getting a copy of your credit report via Equifax, D&B or Experian. You can also put an alert on your name to prevent any future losses.
  • Be alert to any phishing emails. Offenders use creative methods to trick you into handing over personal information that helps them build a fuller profile of you.
  • If your email or social media accounts have been compromised, let your contacts know. They might also be targeted by an offender pretending to be you.
  • You can access personalised support at iDcare, the national support centre for identity crime in Australia and New Zealand.

The vast number of data breaches happening in the world makes it easy to tune them out. But it is important to acknowledge the reality of identity compromise. That’s not to say you need to swear off social media and never fill out an online form. Being aware of the risks and how to best to reduce them is an important step toward protecting yourself.

For further information about identity crime you can consult ACORN, Scamwatch, or the Office of the Australian Information Commissioner.

If you are experiencing any distress as a result of identity crime, please contact Lifeline.

Author: Cassandra Cross Senior Lecturer in Criminology, Queensland University of Technology

RBA Holds The Cash Rate [Again!]

The RBA has released their monthly decision and no surprise, we remain at 1.5%. The tenor of the announcement, to me at least sounded less bullish, and I am sure the economists will the parsing the sentences for clues as to their next move. No hint of the next move being up!

To me it is simple, they would like to lift rates to more normal levels, but cannot thanks to high debt, and downside risks. They are stuck. I believe the next move will be down as the economy weakens (dragged down by the fading property market, rising interest rates internationally, and concerns about China’ economic dynamo). But not yet.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons.

Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar. In Australia, short-term wholesale interest rates have increased over recent months. This is partly due to developments in the United States, but there are other factors at work as well. It remains to be seen the extent to which these factors persist.

The recent data on the Australian economy continue to be consistent with the Bank’s central forecast for GDP growth to average a bit above 3 per cent in 2018 and 2019. GDP grew strongly in the March quarter, with the economy expanding by 3.1 per cent over the year. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

Higher commodity prices have provided a boost to national income recently. Australia’s terms of trade are, however, expected to decline over the next few years, but remain at a relatively high level. The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years.

The outlook for the labour market remains positive. Strong growth in employment has been accompanied by a significant rise in labour force participation. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. A gradual decline in the unemployment rate is expected, after being steady at around 5½ per cent for much of the past year. Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.

Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets. Housing credit growth has declined, with investor demand having slowed noticeably. Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets. Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Credit Card Compare Acquires Singaporean Financial Marketplace Finty

Australia’s largest credit card comparison website, Credit Card Compare
(CCC) announced a seven-figure investment to acquire Singapore’s first rewards-based financial comparison marketplace, Finty.

Credit Card Compare Co-Founder and CEO, David Boyd says that by acquiring Finty, it allows Credit Card Compare to establish its presence in Asia.

“We want to get off the island. Singapore is the natural gateway to the fast-growing ASEAN region where GDP growth outpaces here in Australia. This acquisition is a key plank in our company’s growth strategy,” said David.

“This acquisition allows us to build upon a successful business which dovetails with our own vision for a comparison service that makes financial decisions easier, more rewarding, and, ultimately, more fun.”

Finty Rewards, the innovative cash rewards program unique to Finty in Singapore, pays out cash on a revenue sharing model to customers when they apply for credit cards and personal loans via the Finty website.

Since its launch in April 2017, Finty has made strong inroads into the credit card and personal loan space in Singapore, having developed strong relationships with key banking partners despite operating in the highly competitive financial services comparison space.

“This deal is the culmination of months of work. The Finty team has built a great business in a short time, overcoming challenges and building their brand along the way. They are an extremely dynamic, hard-working, and smart team. We are delighted to be working with them as we expand into Asia.”

“We are excited to work with new banks and brands, and to continue building on our existing relationships with international partners including American Express, HSBC, and Citi.”

Co-Founder and Managing Director of Finty, Kwok Zhong Li, said that by partnering with Credit Card Compare, the Finty brand will be better positioned to thrive in Singapore. Together with Credit Card Compare, we now have more resources, manpower and expertise to thrive in Singapore while making a strong entrance into other countries,” Zhong Li said.

“Finty makes financial decisions simple, enjoyable, and rewarding. It’s the first financial marketplace in Singapore to offer cash rewards based on a revenue sharing model.”

Credit Card Compare is currently the largest comparison site in Australia dedicated to credit cards, where more than two million consumers have used its marketplace in the last 12 months to compare and apply for a credit card.

“At Credit Card Compare, our mission is to connect Australians with credit cards that will improve their financial lives. Comparing cards can be a daunting task, however we have developed a platform that easy to use with the best offers in the market.

Credit Card Compare is Australia’s largest comparison site designed exclusively to help Australian consumers compare, research, and apply for credit cards. We help millions of Australians confidently select the most suitable credit card for their lifestyle and financial needs. Founded in 2008 by brothers David and Andrew Boyd, Credit Card Compare remains independently co-owned by the two original founders to this day. It features data, calculators, tools and reports on 200+ cards from Australia’s largest banks and credit unions, and maintains a prime online ranking and share of voice in one of Australia’s most competitive online fields: comparison sites.

Finty  is Singapore’s first rewards-based financial comparison marketplace that makes financial decisions simple, enjoyable and rewarding. Finty offers cash rewards based on revenue sharing and the online platform uses a proprietary predictive model to determine the value of cash rewards for customers when they apply for a range of credit cards and personal loans from major bank partners.

You Can Now Support DFA On Patreon

We have just launched a DFA page on Patreon.

As you know, if you’re after intelligent insight which is independent and data driven on Australian Finance and Property, DFA is the place to come, because whether you own property, are thinking of buying, are a saver, or just a user of financial services, you will find our content immediately relevant. Information is power, data is the lifeblood of insight and we offer objective analysis and balanced insights.

We have been able to release new content most days via our social media channels, including videos on YouTube, podcasts and via this blog, but this is taking significant time and effort, to the point where it is crowding out our other business ventures. So to keep the content coming, and to develop the channel further, (we have some great plans) we need your help.

Using Patreon you can elect to subscribe via various tiers on a monthly basis to either help fund our ongoing production costs or to get access to additional content including behind the scenes and additional interviews, plus polls on future content. In particular, this will help to cover the costs of the interviews we produce.

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Dwelling Approvals Fall in May

The number of dwellings approved in Australia fell by 1.5 per cent in May 2018 in trend terms, according to data released by the Australian Bureau of Statistics (ABS) today.  At is all about a fall in unit approvals, with a notable decline in Melbourne.  Expect more falls ahead, a further signs of trouble in the housing sector.

“Dwelling approvals have weakened in May, driven by a 2.6 per cent fall in private dwellings excluding houses,” said Justin Lokhorst, Director of Construction Statistics at the ABS.

Among the states and territories, dwelling approvals in May fell in Queensland (4.2 per cent), Victoria (2.7 per cent), Tasmania (2.0 per cent) and Western Australia (0.8 per cent) in trend terms.

 

Dwelling approvals rose in trend terms in South Australia (4.3 per cent), Northern Territory (2.8 per cent) and Australian Capital Territory (1.5 per cent), and were flat in New South Wales.

In trend terms, approvals for private sector houses fell 0.5 per cent in May. Private sector house approvals fell in Queensland (1.7 per cent), Western Australia (0.6 per cent), South Australia (0.4 per cent) and New South Wales (0.2 per cent). Private sector house approvals were flat in Victoria.

In seasonally adjusted terms, total dwellings fell by 3.2 per cent in May, driven by a 8.6 per cent decrease in private sector houses. Private sector dwellings excluding houses rose 4.3 per cent in seasonally adjusted terms.

The value of total building approved fell 0.7 per cent in May, in trend terms, and has fallen for seven months. The value of residential building fell 0.8 per cent, while non-residential building fell 0.4 per cent.

The HIA said:

“The market is cooling for a number of reasons including a slowdown in inward migration since July 2017, constraints on investor finance imposed by state and federal governments and falling house prices.

“A slowing in Australia’s population growth since June 2017 coincides with changes to visa requirements announced early last year. Since then Australia has experienced almost a year of slowing population growth.

“Finance has become increasingly difficult to access for home purchasers. Restrictions on lending to investors and rising borrowing costs have seen credit growth squeezed. Falling house prices in metropolitan areas have also contributed to banks tightening their lending conditions which have further constrained the availability of finance.

Chinese ‘Minsky moment’ looming: Spectrum

The warning signs are ‘flashing amber’ on a credit crisis in China as the authorities stamp down on excessive lending, says Spectrum Asset Management; via InvestorDaily.

Credit-focused Spectrum Asset Management has issued a note titled Our double Minsky risk that focuses on the likelihood of a credit crisis playing out in China and Australia.

Spectrum principal Damien Wood said both countries have seen a build-up of private debt to record levels: from the business sector in China, and from households (via residential mortgages) in Australia.

Both countries are vulnerable to what is known as a ‘Minksy moment’, a term coined by US economist Paul McCulley in relation to the Russian debt crisis of 1998 and inspired by US economist Hyman Minsky.

The warning sign of a Minsky moment, said Mr Wood, is when the availability of credit starts to shrink.

In China, the government’s “well intended” efforts to cut down on excessive corporate leverage are causing the warning lights to ‘flash amber’ on a Minsky moment, he said.

“In October 2017, China’s central bank governor warned specifically of a Minsky moment for China. In the reported statement, he noted high corporate leverage and rising household debt,” Mr Wood said.

“One key step was to reduce lending from yield chasing ‘shadow’ banks. The concerns were that these key providers of speculative lending were an unsustainable source of finance that promoted poor allocation and management of capital.”

Shadow banking is falling in China, and the net impact is that overall lending growth is slowing, Mr Wood said.

Chinese authorities are looking to “smooth the transition of China Inc’s loan book” by cutting reserve requirements, reducing taxes, and directing banks and lenders to help financial SMEs.

But if these measures do not work, China could look to socialise credit losses.

“Notwithstanding the steps taken, a key fall-out from the reduction in credit availability can be seen in the Chinese corporate bond market. Bond default rates are accelerating and credit spreads on corporate bonds have jumped,” Mr Wood said.

If defaults on Chinese corporate bonds continue (see graph above) a “stampede for the exit could begin”, Mr Wood said. “And then we are one step closer to a Minsky moment.”

Australia is facing the prospect of its own Minsky moment when it comes to household debt (which is sitting at 120 per cent), where Spectrum rates the warning light flashing ‘green to amber’.

“The problem is, even if household debt does not cause excessive problems locally, a rapid deleveraging in China would likely hit local financial markets,” said Mr Wood.

“A large debt reduction in China will risk lower than expected demand for our goods from our major export market,” he said.

“Conversely, we doubt a domestically-driven downturn locally would raise an eyebrow in China’s financial markets.”