ANZ Hikes Mortgage Rates

The music continues with ANZ announcing it will increase its variable interest home loan rates. This of course is the second of the big four banks to raise mortgages in response to higher funding costs.

Variable interest rates for home and residential investment loans will rise by 16 basis points (Westpac’s was 14 basis points), effective September 27. This means the declared rate for a principal and interest loan will now be 5.36%. That said,  NO rise for ANZ home loan customers in drought-declared regional Australia are planned.

Fred Ohlsson, ANZ Group Executive Australia, says the decision to lift was a difficult one.

“We know the impact rising interest rates have on family budgets,” he says.

“The reality is it is more expensive for us to fund our home loans on wholesale markets and we also needed to balance the needs of all stakeholders.

“There is no change to the effective rates of our home loan customers in drought declared regional Australia benefiting more than 70,000 of our customers.

“We wanted to play our part in keeping cash in regional towns impacted by the drought and we hope this will also assist both families and small businesses in these areas.”

The new rates:

Source: ANZ

 

Getting To Grips With Responsible Lending

Given all the interest in the lending practices across the sector, we have launched a series of DFA video shows on the critical issues surrounding Responsible Lending.

In the series we will look at why responsible lending is so important (for households, industry players and the broader economy), what lessons we did – or should have learnt following the GFC, how changes are likely to play out ahead, and how advice for lending services compares with wealth advice.

Principal at DFA Professor Gill North will lead the shows. The first is an overview of the series and the key themes we will address.

Gill has written widely in this area, and you can access her work via SSRN or though Deakin University

 

 

Regaining trust ‘not the regulator’s job’: APRA

On Wednesday 4 September, APRA chair Wayne Byres addressed the annual Risk Management Association CRO Conference in Sydney and spoke about regaining the community’s trust, via InvestorDaily.

“The broader community has lost confidence that the financial sector understands and acknowledges the privileged position that it holds in society, and the obligations that come with it,” said Mr Byres.

The chairman said that issues brought to light by the royal commission were now front and centre of the public’s consciousness and it was up to the industry to build the trust.

“It is not the regulators’ job to regain that trust for you: the industry needs to earn and sustain the community’s trust through its own actions.

“There are, however, a range of regulatory and supervisory activities that APRA is pursuing that will support and reinforce your own efforts to restore the industry’s standing,” he said.

Mr Byres reiterated his support for APRA to play a role in risk culture and said that APRA was primarily interested in what effects poor risk culture would have on the banks.

“APRA is primarily interested in the potential for a poor risk culture to produce bad outcomes for the bank (and hence depositors),” he said.

The prudential regulator is currently in a process of rescoping their pilot risk culture assessment to make it more useable on a wider basis, said Mr Byres.

“We don’t seek to prescribe the risk culture either. We expect executives and their boards to establish and maintain the risk culture that they consider (and note, we do expect a conscious consideration) to be appropriate to their organisations, given their strategy and risk appetite.”

Mr Byres said an important part of regaining trust was in the commencement of the Banking Executive Accountability Regime (BEAR) – but the work is far from over.

“The BEAR clearly has teeth, and use of the BEAR’s enforcement provisions will demonstrate to the community that there are going to be clear and material consequences for poor prudential outcomes.

“Where I hope the BEAR will have a positive impact is through forcing the industry to hold itself to account much more firmly and quickly than has been the case to date,” he said.

The last area that the APRA chairman flagged concerned remuneration. Mr Byres was keen to stress that APRA is not involved in determining who gets paid what.

Mr Byres said, instead, that APRA had reviewed remuneration policies throughout their entities and found that the frameworks across the board did not consistently meet the objectives of encouraging good behaviours.

“From insufficient challenge to insufficient documentation, it was clear that stronger governance of executive remuneration is needed,” he said.

Concluding his speech, Mr Byres said that if the industry worked together to improve risk culture, accountability and more balanced performance measurements, then the trust in the sector would return.

“As much as we might help, you will have to do the heavy lifting. It will ultimately be the industry’s collective behaviour that determines the extent to which the trust and confidence of the community is regained.”

ASIC prescribes three-year period for credit card responsible lending assessments

Following consultation, ASIC has set a three-year period to be used by banks and credit providers when assessing a new credit card contract or credit limit increase for consumers.

From 1 January 2019, under the revised responsible lending obligations, a credit card contract or credit limit increase must be assessed as unsuitable if it is likely the consumer would be unable to repay the credit limit within this period. The three-year period will apply to all classes of credit card contracts.

ASIC has prescribed a three-year period to strike an appropriate balance between:

  • preventing consumers from being in unsuitable credit card contracts, and
  • ensuring that consumers continue to have reasonable access to credit through credit card contracts.

In July 2018 ASIC released Consultation Paper 303 Credit cards: Responsible lending assessments (CP 303), which outlined the proposal to prescribe a period of three years for responsible lending assessments. The consultation paper suggested this period would apply to all classes of credit card contracts.

Today ASIC published a feedback report (REP 590) which outlines the submissions received and ASIC’s responses. ASIC Credit (Unsuitability-Credit Cards) Instrument 2018/753 has also been created.

In REP 590 ASIC provides further guidance on the assumptions that should be made when assessing whether a consumer can repay the credit limit within three years. This includes guidance on:

  • fees on credit card accounts
  • interest rates charged on credit card contracts held with other credit providers, and
  • the effect of the reform on responsible lending assessments for other credit products.

The new legal requirement commences on 1 January 2019. Credit providers are expected to have systems in place to ensure that that they can meet the new obligations.

The revised obligations will apply to licensees that provide credit assistance and licensees that are credit providers for both new credit card contracts and credit limit increases under existing credit card contracts.  ASIC will monitor the prescribed period and our guidance to ensure that it is achieving the goals of the reform.

Background

In March 2018 the Government implemented reforms in response to the Senate Economics References Committee report relating to credit card interest rates. As part of the reforms, responsible lending obligations were amended to require that a credit card contract or credit limit increase must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within a period prescribed by ASIC.

The purpose of this reform is to make sure that consumers can afford to repay their credit card debts within a reasonable period. Consumers will still retain the flexibility to make low minimum repayments on credit cards.

In July 2018 ASIC released Report 580 Credit card lending in Australia (REP 580), which contained our findings that more than one in six consumers are struggling with credit card debt, and that lenders could do more to take proactive steps to address persistent debt, low repayments or poorly suited products. We also found that in the 12 months to June 2017, $621 million could have been saved if consumers who regularly incur interest charges had used a lower rate card.

In REP 580 ASIC flagged that it would publicly report on the credit providers who do and don’t respond to the findings and this will occur later in 2018.

ASIC received 15 submissions in response to CP 303. ASIC thanks the people, businesses and associations that took the time to provide comments on our proposal.

CBA says breaking the law was an ‘honest mistake’

CBA has rejected claims it broke the law, pointing to an obscure loophole in the Criminal Code and stating that it was “genuinely of the belief” that it was doing the right thing.

Great legal minds are trying to find ways to explain the banks conduct and avoid the worst potential consequences! This from InvestorDaily:

Earlier this month, Colonial First State (CFS) executive general manager Linda Elkins faced the royal commission, where she was questioned about CBA’s handling of the MySuper transition.

From 1 January 2014, employers could only make default contributions to a registrable superannuation entity (RSE) offering a MySuper product.

Counsel assisting Michael Hodge established in his questions to Ms Elkins that CBA had breached the law 15,000 times by receiving default contributions into high-fee-paying accounts after 1 January 2014.

RSEs were also given a deadline of 1 July 2017 to transfer existing accrued default accounts (ADAs) to an approved MySuper product.

Mr Hodge noted that the contravention of s.29WA of the SIS Act is a strict liability offence, a point that was highlighted by CBA in its latest submission to the Hayne inquiry.

“However, it should be noted that in determining whether or not an offence has actually occurred, consideration would need to be given to the defence of mistake of fact available in section 6.1 of the Criminal Code in respect of strict liability offences,” the bank said.

“This is particularly the case here where CFSIL was genuinely of the belief that the members for whom the s.29WA breach occurred were in fact ‘choice’ members who fell outside the requirements of s.29WA and that it was only after engagement with APRA that it understood that the regulator was of a different view.”

In June 2014,  the board of CFS was told by management that APRA had requested it accelerate the transition for 60,000 ADA members, the royal commission heard.

Moving the 60,000 into lower-fee MySuper products would have the effect of turning off grandfathered commissions for advisers, the royal commission heard.

CFS, like other retail super providers, was eager to have ADA clients make an “investment decision” so that they would be considered a ‘choice’ member and therefore ineligible for transfer to a MySuper product.

In Mr Hodge’s submission to the commission following the fifth round of hearings, he stated that it is open to the commission to find that additional breaches occurred.

In response, CBA has stated that “there is no evidence before the commission to suggest that the failure to pay contributions of a subset of FirstChoice Personal members into a MySuper product was anything other than a genuine misunderstanding about the scope of s.29WA and its impact on particular cohorts of members, which CFSIL came to learn APRA did not agree with.”

“CFSIL believed that these members of FirstChoice Personal were choice members, to whom s.29WA did not apply.

“That honest mistake does not excuse CFSIL’s breach of the SIS Act provisions and s.912A(1)(c) of the Corporations Act as it has properly conceded, but it does tell against a finding of a failure to do all things necessary to provide services efficiently, honestly and fairly.”

Westpac admits to breaching responsible lending obligations

ASIC says Westpac has admitted breaching its responsible lending obligations when providing home loans and agreed to submit to a $35 million civil penalty to resolve Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act). A three-week trial for this matter was due to commence in the Federal Court yesterday.

The parties have jointly approached the Federal Court seeking orders that Westpac contravened the responsible lending provisions of the National Credit Act because its automated decision system:

  • did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and
  • for home loans to owner occupiers with an interest-only period, failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan. For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.

The litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system. For approximately 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure. For approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period. Of these approximately 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.

If approved by the Federal Court, this will represent the largest civil penalty awarded under the National Credit Act.

Westpac admitted contraventions of the National Credit Act and the parties filed a Statement of Agreed Facts and joint submissions as to the appropriate penalty. Westpac will also pay ASIC’s litigation and investigation costs.

The National Credit Act provides consumer protections to ensure that credit providers make reasonable inquiries about a borrower’s financial situation, verify the information that they obtain and assess whether a loan contract will be unsuitable for the borrowers.

The responsible lending laws are designed to ensure that lenders have regard to all relevant information about the consumer before approving a loan to minimise the risk of adverse outcomes for the consumer over the course of the loan. Lenders must have in place the right processes to ensure that they comply with these important obligations.

ASIC Chair James Shipton said, ’This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated. Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy.

‘This outcome, and ASIC’s actions in relation to responsible lending, reinforce that all lenders must obtain information from individual borrowers about their financial situation to ensure that they can properly assess the ability of the customer to repay the loan. Lenders must then verify the information to ensure that it is true, and then assess whether the loan is unsuitable for the borrower. Taken together, these responsible lending obligations are a cornerstone protection for both borrowers and lenders,’ he said.

‘This outcome is a warning to all lenders that they must comply with the responsible lending obligations. If they do not, ASIC will take action to enforce the law.’

Background

ASIC published its review of interest-only loans in August 2015 (refer: 15-220MR), as part of a broader review by the Council of Financial Regulators into home-lending standards. The review included 11 lenders, including the big four banks, and found that lenders were often failing to consider whether an interest-only loan would meet a consumer’s needs, particularly in the medium to long-term (refer: 15-220MR). ASIC was particularly concerned with Westpac’s home loan assessment process, and with Westpac providing very lengthy interest-only periods (up to 15 years) for owner occupiers.

As part of the outcomes of ASIC’s work, ASIC required lenders and brokers to raise standards to ensure they were complying with responsible lending obligations. The 11 firms in our review, including Westpac, all committed to implementing stronger standards.

ASIC has provided guidance on responsible lending in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). ASIC is updating its guidance this year and will be engaging in a full public consultation as part of this process.

ASIC has also been engaging with the Government in relation to comprehensive credit reporting and a proposed open banking regime. These initiatives will assist in improving responsible lending standards by making high-quality information about consumers’ financial situation available to lenders when assessing the suitability of a loan.

RBA Warns On Housing Loan Performance

The RBA has released their Corporal Plan for 2018/2019. In the section on Financial Stability they call out specific risks in the home lending market, relating to credit quality.

During 2018/19 to 2021/22, the main risks to financial stability will most likely continue to relate to credit quality. Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue, requiring ongoing monitoring by both banks and regulators.

They also highlight the role of the Council of Financial Regulators (CFR), and the issues raised by the Productivity Commission and Royal Commission:

The Reserve Bank works with other regulatory bodies in Australia to foster financial stability. The Governor chairs the Council of Financial Regulators (CFR) – comprising the Reserve Bank, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury – whose role is to contribute to the efficiency and effectiveness of regulation and the stability of the financial system. The Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management, in conjunction with the other members of the CFR.

The Reserve Bank will continue working with the other CFR agencies to support financial stability. In the period ahead this will be informed by the Financial Sector Assessment Program review of Australia being conducted by the International Monetary Fund during 2018. The Bank and other CFR agencies
will also carefully consider the implications for the resilience of the financial sector arising from findings and recommendations of the final report of the Productivity Commission’s review of competition in the financial system, as well as the outcomes of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Bank will also continue working with APRA and with other regulators to monitor and, where necessary, respond to risks that may emerge from economic and financial shocks emanating from Australia or abroad.

 

APRA tells Hayne the ‘threat’ of litigation is sufficient

The prudential regulator has defended its powers after the royal commission questioned its preference for working “behind closed doors” and failure to take legal action against rogue funds,via InvestorDaily.

The fifth round of the royal commission saw APRA deputy chair Helen Rowell grilled by counsel assisting Michael Hodge QC. Ms Rowell disagreed with Hodge’s suggestion that APRA works “behind closed doors” but admitted the that no corporate trustee has been required to give an enforceable undertaking in relation to superannuation in the last 10 years.

“The fact that no litigation was commenced does not mean that further remediation and proceedings are foreclosed,” APRA said in its submission. “APRA actively considered taking proceedings in the IOOF case.

“APRA accepts that there are legitimate questions as to whether a decision to litigate may achieve a result with wider deterrence effect as indicated in counsel assisting’s submissions. This issue will be the subject of further submissions by APRA on the policy and general questions posed by the commission following round 5.

“In APRA’s view, having the power to take litigation or other action is important to achieve the necessary changes and responses from entities without necessarily having to take that action in all cases. That is, the ‘threat’ of potential action facilitates the achievement of appropriate outcomes, which is APRA’s focus.”

APRA said the matter will be taken up further in its submissions on policy and general questions.

‘Fees for no service’

During her testimony on 17 August, Ms Rowell was asked whether APRA had received any suggestion from ASIC that ASIC will commence public enforcement action in relation to ‘fees for no service’.

“I don’t know the answer to that question,” Ms Rowell said.

In its submission, APRA agreed that charging fees for no service or charging fees to deceased members was “unacceptable”.

“However, what the most appropriate response is will depend on the context of the particular event,” APRA said.

“Where for example an RSE licensee itself identifies an instance of inappropriately charged fees, reports it promptly to APRA and engages with the relevant regulator (whether that be ASIC or APRA) in developing a remediation plan, APRA’s focus will properly be on whether the remediation plan is sufficient and whether the RSE licensee has systems in place designed to prevent future breaches.

“On the other hand, where RSE licensees do not promptly acknowledge and remedy issues, APRA can rely on the possible breaches of s 52 or s 62 to press the RSE licensee to take appropriate remedial and preventative action.”

APRA said the issue of ‘fees for no service’ impacts on the regulatory spheres of both ASIC and APRA.

“The ultimate causes of action for the misconduct identified may be different as between ASIC and APRA, but they will have the same factual substratum. APRA and ASIC share information and coordinate their activities in relation to the issue of fees for no service. APRA does not agree that it is incumbent on it to act earlier or separately from ASIC in such matters, when ASIC action may be achieving the common regulatory objective of appropriate remediation to affected members and/or where there may be other actions in train.”

Poles Apart – The Property Imperative Weekly 01 Sept 2018

Welcome to the Property Imperative Weekly to 1st September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.    Locally the bad news keeps coming, while US markets remain on the boil.

And by the way, if you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.

Listen to the podcast, read the transcript, or watch the video show.

NineNews published an article this week, claiming that Sydney and Melbourne dwelling values “may soon rise again” because of a decline in dwelling construction, citing a report saying that the rate of construction is expected to slow down, with the number of new homes built set to fall by up to 50,000 each year.  So they said, that would mean 20,000 fewer homes built across the country each year than the 195,000 needed to meet future demand.

Indeed, the ABS reported this week that building approvals in July were 5.6 per cent lower than in the same month last year.  Total seasonally adjusted dwelling approvals in July fell in New South Wales (-5.2 per cent), Victoria (-4.6 per cent), Queensland (-6.0 per cent), South Australia (-26.5 per cent) and Western Australia (-14.7 per cent). Seasonally adjusted approvals increased in Tasmania by 13.6 per cent. In trend terms, total dwelling approvals in July increased by 4.5 per cent in the Northern Territory and in the Australian Capital Territory (12.2 per cent).

The data shows its high rise apartments which are slowing the fastest (in response to slowing demand from investors) but it is worth noting that the volume of approvals for new detached houses have been tracking around their strongest levels in 15 years. The HIA said that weaker conditions in a number of states have typically been overshadowed by strong activity in Victoria. With Victorian home approvals now showing signs of weakness they expect the national trend – of declining building approvals – will continue throughout 2018.

The HIA also reported on new home sales for July, saying that consistent with the trend for much of 2018, July saw sales fall by 3.1 per cent compared to the previous month. Sales in 2018 thus far are 6.1 per cent lower than in the corresponding time in 2017. The noticeable new trend is that new home sales in Victoria are weakening. Victoria has experienced exceptionally strong conditions, which have been sustained over a number of years, obscuring weaker conditions in a number of other states. With Victorian new home sales now showing signs of weakness we expect the national trend – of declining sales – will continue throughout 2018.

The Sydney market has also been cooling throughout the year particularly in the new growth areas. The high volume of new apartments in metropolitan cities are competing for first home buyers and resulting in a slowdown in new detached home sales. Other regions in New South Wales, such as the Hunter, around the ACT and South and North Coasts, are continuing to see strong growth. They say the market for new home sales across the country 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. They expect that it will continue to slow over the next two years due to the adverse factors now starting to take effect the market.

Specifically, they say that 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. An increase in interest rates charged by banks, which had been anticipated, will accelerate the slowdown in sales and ultimately new home building activity.

The latest data from the RBA and APRA confirm the fall in credit, with the monthly RBA credit aggregates for July showing total credit for housing up 0.2% in the month, to $1.77 trillion, with owner occupied credit up 0.5% to $1.18 trillion and investment lending down 0.1% to $593 billion. Investment housing credit fell to 33.4% of the portfolio, and business credit was 32.5%. APRA’s data showed that investor loan balances at Westpac, CBA and ANZ all falling, while NAB grew just a tad. Macquarie, HSBC. Bendigo Bank and Bank of Queensland grew their books, highlighting a shift towards some of the smaller lenders. Suncorp balances fell a little too. You can watch our separate video “Rates Up, Lending Down”, for more on this.

And of course we saw more out of cycle rates hikes from Westpac, who lifted variable rates for owner occupies and investors holding loans with them by 14 basis points – see out video “Westpac Blinks” for more on this – where we discuss the margin compression the experienced, thanks to rising international funding rates (see the BBSW) and the switch from interest only to principal and interest loans.  Then on Friday, Suncorp and Adelaide Bank, both of whom had already lifted a couple of months back, lifted again.  As I said yesterday, what is happening here is that funding costs are indeed rising. But the real story is that they are also running deep discounted rates to attract new borrowers, (especially low risk, low LVR loans) and are funding these by repricing the back book. This is partly a story of mortgage prisoners, and partly a desperate quest for any mortgage book growth they are capture. Without it, bank profits are cactus.  Once again customer loyalty is being penalised, not rewarded.  Those who can shop around may save, but those who cannot (thanks to tighter lending standards, or time, or both) will be forced to pay more

Damien Boey at Credit Suisse, writing before Suncorp And Adelaide Bank moved again said Westpac was the latest of the banks to hike variable rates across new and existing customers, following similar moves from BOQ, BEN, MQG and SUN over the past few months. Not only are out of cycle rate hikes broadening out across the system – we think that they will continue to broaden out across the majors, and become a recurring theme. This is because:

  1. Money market rates are a significant driver of the marginal cost of funds. Arguably, the banks that have hiked out of cycle to date have been more exposed to money markets than the banks that have not. Therefore, money market stress has had a bigger impact of their profitability, putting more pressure on them to hike rates. However, if there are question marks about why certain systemically important banks are facing liquidity or credit problems, then funding costs must inevitably rise for everyone, even if we are only talking about small, but fat tail risks. Also, RBA research suggests that as rates approach the zero bound, the relative cost of no/low fixed rate deposits increases to the point that perversely, margin pressures can emerge.
  2. Interbank spreads should be negligible unless … If a central bank targets a cash rate like the RBA does, it must be willing to provide any and all reserves that the banking system needs. In other words, it must be the lender of last resort. And if it is possible to obtain reserves from the RBA in almost any situation, there should be no need to borrow them from other banks. In turn, the spread of bank bill swap rates (BBSW) to overnight indexed swap rates (OIS, the risk free rate), should be negligible. Unless of course, there is counterparty credit risk over and above liquidity risk. Interestingly, the RBA has gone out of its way recently to remind the market that it is indeed the lender of last resort. But the BBSW-OIS spread remains elevated at European crisis highs, around 45bps.
  3. Wide interbank spreads are hard to explain using conventional factors. For as long as there is a pricing premium mystery, there is no visible end to the cycle of out of cycle rate hikes. Interestingly, in its August Statement on Monetary Policy the RBA provided some alternative explanations for wide interbank spreads, after witnessing the USD liquidity narrative break down in recent months. But even Bank officials do not find these explanations convincing. Therefore, the mystery remains unresolved.
  4. The marginal funding cost drives the change in the average funding cost. Therefore, we do not need to forecast further increases in the BBSW-OIS spread to have conviction that banks will continue hiking rates out of cycle. We only need to know that the BBSW-OIS spread will persist at wide levels. Again, for as long as there is uncertainty about why the spread is so wide to begin with, it is hard to argue with conviction that spreads ought to narrow and normalize.

Even after some banks have hiked rates out of cycle, we still think that in aggregate there are more than 50bps of variable rate mortgage hikes in the pipeline based on already known developments in the money market. But the RBA only has 1.5% worth of rate cut ammunition left in its bag of tricks.

This means that the RBA has lost some autonomy over the monetary transmission mechanism, because effective borrowing rates can rise independently of the cash rate. In particular, Australian-US yield differentials are likely to further invert, undermining the carry trade appeal of the AUD/USD. The Fed still seems quite determined to hike rates. But the RBA is unlikely to be matching the Fed’s hawkishness given the slowdown in train, and given what the banks are doing to rates and credit supply.

So we are in for a period of more out of cycle rate rises, as well as tighter lending standards. No surprise, then that refinance rejections are rocketing, as we reported this week, and mortgage prisoners are getting locked in.  The ABC story even got picked up by ZeroHedge in the US.

So back to that NineNews report, they missed completely the real reason why home prices are falling, it’s all about credit availability.  Lending standards are tighter now – borrowing power is reduced, and so new loans are only available on tighter terms. If you want to understand the link between credit and home prices, which is still not widely understood, I recommend you watch my recent conversation with Steve Keen, who explains the mechanisms involved, and the policy failures behind them. See “Are Icebergs Fluffy? … A Conversation with Steve Keen”. This show has already become one of the most popular in the site, and it is really worth a watch.

The upshot though is home prices are likely to continue to fall. CoreLogic’s dwelling price index showed another fall in August, recording a 0.38% decrease in values at the 5-city level. This is the 11th consecutive monthly decline in home values, down a cumulative 3.4% over that period at the 5-city level: Quarterly values also fell another 1.3% In the year to August, with home values down by 3.09% at the 5-city level, driven by Sydney (-5.64%). Significantly, Perth’s housing bust continues to roll on, with dwelling values now down 13% since peaking in June 2014 after falling another 0.6% in August: the cumulative loss in values at 13% is greater than the 11.5% peak-to-trough falls experienced between 2009-09, and the duration of the downturn has hit 50 months – more than twice as long as prior downturns. Plus, rents there have similarly fallen, with median asking rents down 29% for both houses and units since June 2013.

My theory is, where Perth has gone, other centres are likely to follow as the great property reset rolls on. Melbourne and Victoria is deteriorating significantly, and remember there net rental yields are some of the lowest across the country. No, prices are not likely to recover anytime soon.

And if you want further evidence, auction clearance rates remain in the doldrums.  It is interesting to see now the main stream media is beginning to talk about this, and I have been busy this week with interviews on Radio Melbourne, 2GB and elsewhere. Remember this is only the end of the beginning. I continue to believe 2019 will be a really bad year, what with more rate hikes, interest only loan switches, and decaying sentiment. As one industry insider told me this week, “some of my property investor clients have decided to try and sell before the falls bite”. It may be too late.

And to add to the mix, ABC’s Michael Janda wrote an excellent piece this week on the advantage some large banks have with regard to how APRA assesses their capital base.  The big four banks between them hold around 80 per cent of all Australian home loans. There are many factors that have led to this extreme market dominance: economies of scale, better credit ratings and an implicit Federal Government guarantee — all of which are linked. But the major banks — plus Macquarie and, recently, ING — also enjoy a regulatory benefit that is little known outside the financial sector, but provides a substantial competitive advantage. “The average capital risk weights of the standard banks is around 39 per cent, the major banks average around 25 per cent, and the actual cost [difference] of that equates to around 15 basis points in margins, so it’s not insignificant at all,” the chief executive of second-tier lender ME Bank, Jamie McPhee, told The Business. Those 15 basis points, or 0.15 percentage points, either have to be added onto the interest rate of mortgages that ME Bank and other smaller lenders offer or they take a hit to their profit margins.

For regional banks on the “standardised” system, the safest high-deposit, fully documented housing loans are considered just 35 per cent at risk, meaning they only have to hold $35,000 in capital on $1 million home loan. However, the major banks, plus Macquarie and ING, are allowed to set their own risk weights, using internal financial modelling under the internal ratings-based (IRB) approach. Until the Financial System Inquiry (FSI) there was no floor on how low these could be — a couple of the major banks were averaging less than 15 per cent on mortgages, meaning they held less than $15,000 in capital to protect against losses on $1 million home loan. Smaller banks have ‘disadvantage baked in’. However, on recommendations from that inquiry, the bank regulator APRA introduced a floor of 25 per cent on the average mortgage risk weight for these banks. That still leaves a significant difference between the amount of capital the big banks hold and what the smaller banks have to put aside.

APRA continues to argue that these more sophisticated banks deserve benefit from their investment in more advanced management systems, and yet APRAs recent reviews suggest significant issues. Here is a recent discussion between Senator Whish-Wilson and APRA Chair Wayne Byers discussing in a Senate committee hearing in May the outcomes from their targeted reviews of major bank lending practices in 2017, but only released publicly through the royal commission process earlier this year.

This casts doubt on whether the big four actually live up to the theory of having better risk assessment and management than the smaller banks. Is APRA still captured we ask, and should the playing field be levelled. We continue to think so.

So now to the markets. Locally, Bendigo and Adelaide Bank fell 0.26% on Friday to 11.59, Suncorp rose 0.06% to 15.49, Westpac fell 0.38% to 28.54, well down from a year ago, despite the mortgage rate hike, and CBA fell 1.26% to 71.24. More are getting negative on the banks, given recent events.  The ASX 200 fell 0.51% to 6,319, just off its highs, as the financial sector fell away.  The Aussie continues to fall against the US dollar, down a significant 0.96% to 71.93, and we continue to expect more weakness ahead.

Sentiment is rather different in the US markets, with the 10-year rate still elevated, and the gap to the 3 month Libor very narrow, as we discussed before a potential harbinger of a recession later. But the US stock markets remain in positive territory.  The Dow Jones Industrial Average fell 0.09% to 25,964, still below its peak in February. The S&P 500 passed a new record in the week, and ended on Friday at 2,901.  The VIX was down again, falling 4.95% to 12.87, indicating the market is risk off at the moment.  The US Dollar Index Futures was up 0.43% to 95.05.

That said, the burst of optimism about trade in the market during the week, didn’t last until the closing bell on Friday. The U.S. announced a bilateral deal with Mexico on Monday. But tension built throughout the week as the U.S. announced there was a Friday deadline to bring Canada into a newly-revamped NAFTA. The U.S. and Canada missed that deadline, but announced that talks would resume next Wednesday, leaving the market facing more wait-and-see trading days. There was also drama during Friday’s discussions after the Toronto Star reported that Trump told Bloomberg off the record he had no plans to give any concessions at all to Canada. The president appeared to later confirm that stance in a tweet, saying Canada now knows where he stands.

Trade worries spread beyond North America, though. Trump told Bloomberg he was prepared to withdraw from the WTO if necessary. And he plans to move ahead with tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes next week. China’s foreign ministry said Friday that the U.S. putting pressure on Beijing would not work.

The Yuan rose a little against the US Dollar, but remains way down on a year ago.

Meantime retail earnings dominated the calendar this week, leading to strong stock movements in the low-volume environment. The S&P Retail index ended up slightly for the week.

Among big movers, Abercrombie & Fitch stock plummeted on second-quarter revenue and same-store sales missed estimates. Best Buy stock tumbled despite better-than-expected second quarter revenue and earnings as online sales slowed and the company warned that it is “expecting a non-GAAP operating income rate decline in the third quarter.” And Tiffany & Co spiked on second-quarter results and strong outlook, but then tumbled in later sessions.

In tech, Tesla shares started the week with a quick drop and finished it lower as it scrapped plans to go private. CEO Elon Musk wrote in a blog late last week that he would not move forward with a plan to take the company private, noting that after speaking with retail and institutional shareholders that “the sentiment, in a nutshell, was ‘please don’t do this.’”

Musk had surprised the market out of the blue, tweeting he was thinking of taking the company private at $420 per share and had funding secured. The SEC was interested in whether the tweet was designed in a way to punish short sellers, according to reports.

The NASDAQ rose 0.26% to 8,109.5 in record territory driven by the booming sector.

Data out this week illustrated two contrasting segments of the U.S. economy, one stronger and one weaker. Economic indicators on the consumer side remained very strong. The Conference Board’s index of consumer confidence increased to 133.4 this month, compared to a reading of 126.7 forecast by economists. That was its highest level since October 2000. The University of Michigan’s August consumer confidence index was revised up to 96.2 from its preliminary measure of 95.3. And consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month, matching June’s reading and analyst forecasts.

But the National Association of Realtors said its pending home sales index, which measures signed contracts for homes where transactions have not yet closed, fell 0.7% to a reading of 106.2 after rising by a revised 1.0% in the previous month. Economists had forecast pending home sales rising 0.3% last month. So more questions on the housing sector ahead.

Oil closed out the month higher as traders balanced expectations of crude supply losses with the potential of trade wars denting global demand. China, the world’s largest commodity importer, has seen economic growth dwindle since the trade war with the U.S. kicked off, and a further escalation could dent growth, forcing Beijing to rein in crude imports. Oil prices ended the month nearly 2% higher on bets on renewed global supply shortage as U.S. sanctions on Iran’s crude exports are expected to reduce crude from market, underpinning higher crude prices. Both WTI and Brent crude are expected gain on a potential slump in Iranian exports, although gains in WTI prices will be limited as the refinery maintenance season is set to get underway. Oil prices were helped earlier in the week by an EIA report showing crude oil stockpiles fell much more than expected.

Gold moved a little higher this week, ending up 0.16% on Friday to 1,206, Bitcoin lifted 1.23% to 7,029

So, we can see a significant divergence between the local market here, dragged down by negative sentiment on banks and housing (and the increasing realisation of more issues ahead) and the US where stocks are at the highs despite the building risks from higher corporate debt and the yield curve inversion.

The two markets are poles apart.

CIF to propose ‘customer first duty’ for brokers

The Combined Industry Forum has agreed “in principle” to extend its good consumer outcomes requirement to incorporate a “conflicts priority rule” as a “customer first duty”, via The Adviser.

In its interim report, released on Monday (27 August), the Combined Industry Forum (CIF) stated that throughout 2018, it has been considering ways to build upon its good customer outcomes reforms published in its response to the Australian Securities and Investments Commission’s (ASIC) review into mortgage broker remuneration.

In its review, ASIC noted that a broker would satisfy the requirement if the “customer has obtained a loan which is appropriate [in terms of size and structure], is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

However, the CIF has proposed that the provision could be extended to include a “conflicts priority rule”.

“The ‘conflict priority rule’ could be formulated as a requirement for the customer’s interests to be placed above the providers, or those of their organisation, based on the information reasonably known to the provider, at the time of providing the service,” the CIF noted.

“The effect of this approach would be a requirement to place the customer’s interests first. The combination of the good customer outcome definition and a customer first duty allows both an easy to follow principle – put the customer’s interests first – and structure to follow for brokers when assessing loan suitability.”

The CIF added that further governance metrics could be built for “monitoring and oversight”.

However, the CIF acknowledged that the development and application of the customer first duty is “multifaceted and complex”, noting that “there may be unknown impacts”.

“These include the potential for limiting access to credit, and a disproportionate impact on smaller and regional lenders if lender panels require rationalisation,” the CIF continued.

The CIF noted that it had “not yet settled on a final position”, but claimed that the reform should be underpinned by the following principles:

  • placing the customer first, and having ‘good’ consumer outcomes at the centre of its approach
  • fit-for-purpose for the mortgage broking industry, considering the nature of services provided, the form of conflicts of interests inherent to the industry, the current evidence of risks to customer outcomes, and considering the current regulatory framework
  • promoting competition, and ensuring that no part of the value chain is unfairly disadvantaged
  • all parts of the value chain will have a role to play to support the implementation and monitoring the customer duty
  • providing transparency for all participants, and
  • promoting simple, achievable solutions. Finally, the CIF is aware that there is merit in moving a customer first principle from an implicit expectation, to an explicit statement that a customer and mortgage advice provider can easily understand.

The CIF concluded that it is “aware that there is merit in moving a customer first principle from an implicit expectation, to an explicit statement that a customer and mortgage advice provider can easily understand”.

The report also outlined CIF’s progress in implementing other reforms proposed in its response to ASIC, which include the standardisation of commission payments, the removal of bonus commissions, the removal of “soft dollar payments”, and the drafting of the “Mortgage Broking Industry Code”.