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.
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.
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.
The RBA has left the cash rate on hold once again, and there is no real indication of this changing in the months ahead. We are in a holding pattern for some time to come. They flag concerns about household consumption. We agree.
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. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.
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 this year. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.
The Bank’s central forecast is for growth of the Australian economy to average a bit above 3 per cent in 2018 and 2019. In the first half of 2018, the economy is estimated to have grown at an above-trend rate. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.
Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, but it has depreciated against the US dollar along with most other currencies.
The outlook for the labour market remains positive. The unemployment rate has fallen to 5.3 per cent, the lowest level in almost six years. The vacancy rate is high and there are reports of skills shortages in some areas. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low, although it has picked up a little recently. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.
Inflation is around 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower, at 1¾ per cent.
Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.
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.
Fintech, GetCapital, one of the most interesting SME business lenders here in Australia, recently announced a distribution agreement with aggregator PLAN. So I took the opportunity to discuss the growth of the business with GetCapitals’ COO Frank Sterle in our occasional Fintech Spotlight series.
Frank Sterle COO GetCapital
GetCapital is a specialist lender to the SME sector. It was founded in 2013, and really hit the market in earnest in 2015, offering finance to businesses with an annual turnover of typically between $200k and $2m, though they have written deals for much bigger firms too. Their focus is the Australian and New Zealand Markets. They have lent more than $250 million in loans so far, and this is still growing, with a team now topping 100.
Frank, who by the way previously worked at Deutsche Bank within the Fixed Income, Currencies and Commodities (FICC) division of its Investment Bank, highlighted that they will consider deals across all sectors, and they offer loans for a range of business purposes from vehicle purchase, working capital, equipment finance and import lines of credit, with the proviso that borrowers will need to provide a personal guarantee as a minimum. They operate in the “Prime” to “Near-Prime” credit space.
Around one third of leads come via their direct channel – using an on-line application, one third from strategic partnerships, and one third from a portfolio of aggregators, including AFG, CFG, Fast, Plan, and others. In fact, this is the channel which is expanding fastest and they expect to announce additional aggregator partnerships soon.
Their underwriting processes are interesting, as they have invested big in technology at the back end, for example to be able to capture bank statement data using tools from Proviso and this supports quick assessments of deals by their dedicated Relationship Managers, who will also consider credit history, and serviceability. Although a portion of loans with a low “expected loss” are fully automated, GetCapital still used a final human overlay by an experienced credit officer for larger and more complex underwrites. This also enables a broker to transparently workshop a deal with their Relationship Manger rather than being advised of a black box “computer says ‘no’ response”. They can approve finance in under 24 hours, often much less. They have three price tiers, with the lower value one typical of the sector, averaging around $40,000, but the average is much higher in the stronger credit tiers, with different pricing structures above. Frank was at pains to underscore the prime quality of the loans they write thanks to their specialist capabilities, and that their loss rates are very low, across the country. They claim to be “sharp on price” as well, though the price will depend on how long the business has been trading, their credit score and the assets backing the deal.
They are funded by a couple of institutional investors, including NAB, who provides their wholesale funding, so no crowd funding in sight here!
The experienced team also includes CEO, Jamie Osborn, ex. Managing Director at Macquarie Capital; Chief Commercial Officer Renata Cihelka, ex. ANZ, AMP, Morgan Stanley and CBA; Head of Sales, Cristian Fedrigo, ex. AFG, CBA; Head of Customer Operations, Brad Kinna, ex. ING Direct and Rabobank and Chief Risk Officer, David Hurford, ex. Westpac Institutional Bank.
Looking ahead, Frank believes the SME funding market is set to grow, but in so doing, there will be a bifurcation in the target market, with some focussing on the higher more sophisticated end of the sector, while others will battle it out at the lower end. He thinks they are well positioned for the former, and sees the prospect of further expansion in Australia ahead.
My sense is that GetCapital is indeed well positioned to disrupt core prime lending to SME’s in Australia, and as such are becoming a force to be reckoned with. Highly relevant given the feedback from our latest SME surveys which shows again that the incumbent lenders are forcing SME’s to jump though ever higher hoops to get a loan.
Further evidence of the digital disruption of finance ahead!
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.
GetCapital, specialist lender to small and medium sized businesses (SMEs), has announced its appointment to the lending panel of aggregator PLAN Australia from 20 August.
PLAN is one of Australia’s largest mortgage aggregation groups, with over 1,650 members and a total loan book value close to $70 billion. The aggregator’s commercial and asset finance volumes reached $990 million in the six months to March 2018.
The partnership will see GetCapital’s multi-product offering of business loans, equipment finance and trade finance become available on PLAN’s extensive broker network across Australia.
“We welcome the opportunity to work with PLAN as part of our commitment to support the growth of Australian SMEs,” said GetCapital CEO Jamie Osborn. “We look forward to delivering real value to PLAN’s experienced brokers, their customers and their businesses”.
PLAN has one of the largest partnership manager (PMs) workforces in Australia, with PMs across all states providing personalised support and business advice. They work with established financial planners, accountants and property business owners to find a sustainable way of delivering both end-to-end advice and lending services.
“We are delighted to partner with GetCapital and have them join our panel”, said Anja Pannek, CEO of PLAN Australia. “This will further strengthen our commercial and asset finance options for our brokers and their customers.”
Technology-enabled whilst still taking a traditional relationship management approach to servicing brokers, GetCapital’s range of finance solutions feature flexibility and convenience over traditional lenders, including approvals in under 24 hours.
These benefits complement PLAN’s broker support offering through technology, professional and business development, based on its four C’s: customer first, compliance focused, commercially oriented, and committed to the industry.
About GetCapital
Founded in 2013, GetCapital is a specialist provider of finance to SMEs. GetCapital offers fair and transparent financing facilities to mainstream businesses including business loans, trade finance facilities, equipment finance as well as property secured loans.
In 2017, GetCapital was named one of Australia’s fastest growing companies in Deloitte’s Technology Fast50.
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:
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.
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.
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.
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 monthly RBA credit aggregates for July are out today. Total credit for housing rose 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%.
Interestingly the RBA’s seasonally adjusted numbers lifted credit growth from the non-adjusted set, but we are skeptical of these adjustments, given the current abnormal conditions in the market (especially taking into account the APRA data today).
That said, the trends tell the story, with the noisy monthly chart
less easy to read than the annual charts. Owner occupied housing is growing at 7.6%, investment housing at 1.5% and overall housing at 5.5%.
We still see some growth in the non-bank sector, and this month the RBA reported NO switching between investment and owner occupied loans.
So overall, the credit tightening continues to bite and investors are at the sharp end. No reason to think this will change, as it is driven by more responsible lending practices.
Now Westpac has broken the dam, others are following, as expected. More will follow, especially late on a Friday afternoon…
Both regional banks, Suncorp and Adelaide Banks said that “challenging” market conditions have forced them to hike rates on variable rate mortgages across both owner-occupied and investor mortgage products by as much as 40 basis points.
Suncorp says rates on all variable rate home and small business loans will rise by 17 basis points and 10 basis points respectively, from September 14.
Adelaide Bank says rates for eight products across its range of principal and interest and interest-only owner-occupied and investor products will apply from September 7. Specifically, principal and interest-owner occupied and investment variable loans will be increasing by 12 basis points, interest-only owner occupied and residential investment loans will rise by 35 basis points and 40 basis and interest-only investment loans settled before January 1 will be increased by 12 basis points.
Lets be clear about what is happening here. Funding costs are indeed rising, as we show from the latest BBSW.
In addition some of the smaller lenders are lifting some deposit rates to try and source funding.
But the real story is the 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.
