Economics and Banking – Page 418 – Digital Finance Analytics (DFA) Blog

Fed Lifts Rates For The First Time in Years

The Federal Reserve raised the Fed funds rate by 25 basis points to 0.25 percent – 0.5 percent, during its FOMC meeting held on December 16th. While the Fed said is “reasonably confident that inflation will rise, over the medium term, to its 2 percent objective” , Fed Governors were also carefully to point that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”. It was the first hike since June 2006 when Ben Bernanke increased the benchmark rate from 5 to 5.25 percent. From 1971 until 2015, Interest Rate in the United States averaged 5.93 percent, reaching an all time high of 20 percent in March of 1980 and a record low of 0.25 percent in December of 2008.

Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Senate Inquiry Says Credit Card Industry Needs Reform

The Senate Inquiry report of Credit Cards was published today. They have made 11 recommendations, which could have some impact on the sector, but they have rejected regulation of card rates. They suggest a focus on easier switching, better disclosure, affordability assessments and tweaks to minimum payments. They also flag the potential for an alternative longer-term credit product.

Two important points come though. First, card rates have not followed cash rates down.

Second, less affluent households, who revolve consistently and maintain high debt balances cross-subside more affluent households who do not. You can read about our analysis of card economics here.

In addition, many who do borrow on a card do not understand the true rates of interest they are paying.

Here are the recommendations:

Credit card advertising and marketing material should disclose clearly the cost of a credit card for a consumer, including the card’s headline interest rate and ongoing annual fee.
Credit card monthly statements should include prominent reminders about a credit card’s headline interest rate and ongoing annual fee.
The government to work with key stakeholders to develop a system that informs consumers about their own credit card usage and associated costs. Initially, historic usage and cost data could be provided in monthly statements. Over time, it would be desirable to provide customer-specific, online, machine readable records that would allow credit card users to compare credit cards using online comparison engines.
The government should undertake a review into technical and systems innovations that might help facilitate switching in the credit card market, and as part of this review consider the feasibility of account number portability for credit card accounts.
Card providers should be required to provide consumers with the ability to close a credit card through an online process (‘click-and-close’).
The responsible lending obligations, as they apply to credit card lending, be amended so that serviceability is assessed on the basis of the borrower’s ability to pay off their debt over a reasonable period. The government should consult with industry, consumer groups and other interested stakeholders to determine what constitutes a ‘reasonable period’ in this regard.
The government consider introducing a credit card minimum repayment requirement and alternative means of reducing the use of credit cards as long-term debt facilities.
Credit card providers should be required to make reasonable attempts to contact a cardholder when a balance transfer period is about to expire and the outstanding balance has not been repaid. In doing so, the provider should be required to initiate a discussion about the suitability of the customer’s current credit card and, where appropriate, provide advice on alternative products.
The government should consider expanding financial literacy programs such as the Australian Securities and Investments Commission’s MoneySmart Schools Program.
Credit card providers should be required to make reasonable attempts to contact a cardholder in cases where a cardholder has only made the minimum payment for 12 consecutive months on interest bearing balances, and thereby initiate a discussion about product suitability and alternative lending products.
The government consider a Productivity Commission inquiry into the value and competitive neutrality of payments regulations, with a particular focus on interchange fees.

There are some separate comments and recommendations from Nick Xenophon, who suggests consideration should be given, in conjunction with consumer groups and experts, to providing appropriate warnings on credit card statements and credit card advertisements.

Finally, Coalition Senators expressed some concerns about the potential impact of some of the recommendations, as being overbearing.

Securitised Loan Pools Tells Us Something

Guy Debelle Assistant Governor (Financial Markets), spoke at the 28th Australasian Finance and Banking Conference – “Some Effects of the New Liquidity Regime“. During his speech he revealed some significant data drawn from Australian securitised mortgages. With the caveat that securitised loans are somewhat cherry-picked, and may not represent the entire market profile, there are some interesting observations. Of note is the higher level of default in WA, and the proportion of loans above 80% and 90% LVR.

To enhance the information available to us, since the middle of 2015, mandatory reporting requirements came into effect for asset-backed securities to be repo eligible with the Reserve Bank and also to be eligible collateral for the CLF.

The required information includes key transactional level data, detailed tranche information, and the relationships between trusts and service providers including who is providing various facilities such as a fixed to floating swap. At the loan level, required data for RMBS include: 62 loan fields such as loan balances, interest rates, arrears measures; 18 borrower fields such as borrower income, employment type, whether they are an investor or owner-occupier, whether they are a first home-buyer; and 13 collateral fields (that is, detail on the collateral underpinning the mortgage) including postcode and property valuation.

These requirements include data that are commonly used by ratings agencies and RMBS investors, but the data go beyond that to also include some useful information that has not been commonly compiled before, such as offset balances and borrower income at origination. This allows us, along with other investors in asset-backed securities, to undertake a richer analysis of such securities and more accurately assess their risk and pricing than may have been possible before. In our case, it allows us to undertake our own risk assessment and not be dependent on rating agencies.

In addition to these data fields, issuers are also required to provide a working cash flow waterfall model of the security which can provide useful information about structural aspects of ABS in some cases only previously obtainable through a detailed reading of legal documentation. This innovation has been very useful in standardising information across securities, allowing us to verify structural features of deals and provide more granular haircuts and pricing than was the case previously.

These reporting requirements are standardised for all repo-eligible asset-backed securities, meaning that the same information is required for all securities. As a result, going forward, it will be easier to compare securities. We see this as being of great benefit to the industry as a whole, as does the industry itself, as evidenced by the support of the Australian Securitisation Forum (ASF) through the whole process of introducing these new standards.

The repo-eligibility requirements also direct issuers to make the information available to investors and other permitted users, not just to the Reserve Bank. By and large, the information provided to these groups is the same as that provided to the Reserve Bank; however, there have been some fields where the information provided posed a potential risk to privacy. Hence issuers may redact some particular fields and provide aggregated de-individualised data about these fields instead.

Since the middle of this year, we have received into our securitisation system around 1 600 submissions, covering around $400 billion in assets, including around two million individual housing loans. The information is updated on a monthly frequency so we are gaining not only a much richer view of the ABS market at any point in time, but also a rich time series. With this very large panel data set we can examine how the market, and the underlying collateral, evolves through time.

With the caveat that the data reporting is still in its infancy, it’s already apparent that there are many potential benefits of the data. Let me illustrate some of the summary information that we can glean from the first few months of reporting. As noted earlier, these data cover around 2 million housing loans of the total of the approximately 6 million such loans on issue currently.

Graph 4 shows the loan to value ratio (LVR) at origination and currently. The largest share of loans had an LVR at origination of between 70 and 80 per cent. While that is still the case in terms of the current LVR, the share is noticeably lower. Similarly, there are almost no loans with an LVR greater than 90 per cent, even though around nearly 10 per cent had an LVR greater than 90 at origination. That said, it should be borne in mind that securitised loans tend to be more seasoned than non-securitised loans and are therefore amortising more quickly. The seasoning (time since loan origination) of the securitised loans is shown in Graph 5. It shows that 95 per cent of the value of loans is more than one year old, and nearly 75 per cent is more than three years old.

Graph 4

Graph 5

One issue which is of some interest currently is the extent of the repayment buffer that has been built up by borrowers. This is shown in Graph 6 which shows that two-thirds of borrowing is covered by a repayment buffer of at least one month’s worth of required mortgage payments, and for half of this, that buffer is more than one year. As the time series on this loan feature accumulates it has the potential to be useful information for monetary policy as well as financial stability considerations. Graph 7 shows the level of documentation for loans securitised by different types of lender. It shows that the major banks have a minimal share of low doc loans in their pools, whereas for the non-bank issuers the share is considerably larger.

Graph 6

Graph 7

Finally, in terms of credit risks, Graph 8 shows arrears rates by states and shows that the current distribution of arrears are consistent with the variation in economic conditions across the states, though at the same time all arrears rates are relatively low.

Graph 8

Of course, credit risk is not so much about the averages but the distributions. Having the loan level data enables an insight into the characteristics of the loans in the various tails of the distribution that warrant closer attention. It will also allow an assessment of the correlations between the various drivers of risk that may lead to credit deterioration.

In sum, there is very rich potential in these data for many purposes for the RBA and other market participants. From our point of view, the data provide us with a great deal of insight into the contingent risk that might at some point reside on our balance sheet. But clearly, the data are also very useful for financial stability and monetary policy considerations too.

DFA Household Finance Security Index Lifts – For Some

The latest edition of the DFA Household Finance Confidence Index (FCI) is released today, using data from our household surveys up to the end of November 2015. The index moved up a little, from 90.73 to 91.46, but still below the neutral setting of 100. So overall households remain cautious about their financial state in the run up to Christmas.

The results are derived from our household surveys, averaged across Australia. We have 26,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. We discuss the findings in the video below.

To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

One of the more interesting aspects of the research highlights that households who are property investors continue to have their overall confidence eroded, driven by the higher costs of finance and doubts about the prospect of future capital growth. This echoes the fall-off in investment lending we have been tracking in recent weeks. The downturn in investor confidence is most marked in NSW. On the other hand, owner occupied property owners have become relatively more confident, thanks to continued low interest rates. Those households who are property inactive (renting, or seeking to buy) remain the least confident sector.

Looking at the elements which drive the index, we find that 35.5% of households say their costs have increased in the past year, up by 0.6% from last month, whilst 5% say their costs have fallen. 59% say there has been no net change, thanks to lower mortgage interest costs over the year, helping to offset other rising costs. Low inflation levels are helping.

Income growth remains under pressure, with 5% saying their income has rising in the part year (after inflation), and 37% saying their real incomes have fallen, whilst 57% said there was no change. Many have not received any rise in pay over the past year, and are relying on more overtime to lift take-home wages. One respondent said ” we are simply running harder, just to stand still”.

Looking at debt levels, 61% said they had more debt than last year, 23% said there was no change, and just 15% said their debt was lower (up by 1.6% last month). Mortgages continue to be the main burden, and some households (those generally more affluent) are continuing to reduce their credit card and loan debt. We did also note a continued rise in small loans, from households under financial stress.

Many households have little money in the bank for a rainy day, but of those who are saving, 14% said they were more comfortable with their savings than a year ago which is down 1.5%, and linked directly to continued low rates of return available on many bank deposit accounts. Around 30% were less comfortable, because they had to dip into their savings to pay the bills, and in the run up to Christmas, down a little from last month. Several commented on recent stock market falls, and the risks to their investments running into 2016.

Job security was quite varied, depending on region and industry. Those employment in (lower paid) service industry jobs – for example in healthcare in NSW, were the most confident, whilst those in mining, agribusiness and construction, especially in WA and SA were more concerned. 17% felt more secure than a year ago, 62% felt about the same, and 20% felt less secure. Younger households felt less secure than more mature households.

Finally, 60% of households said their net worth was higher than a year ago, down a little from last month, thanks to recent stock market adjustments, and property coming off in several locations. 15% said their net worth was lower (a rise of 1.6% compared with last month), and 23% said there was no change.

We think it quite likely we will see continued improvement in coming months, although if house prices start to tumble, or interest rates were to rise, this would have an immediate negative impact. We would also observe that households remain cautious, and whilst we expect something of a spending boom over Christmas, it looks like it will be tempered by limited increases in personal credit, and lack of available savings.

ANZ Launches Australia’s first Home Loan Centre

ANZ today continued its expansion in NSW opening Australia’s first dedicated Home Loan Centre. Located at Westfield in Parramatta, the centre will provide customers with a specialist service to improve the process of obtaining a home loan.

ANZ Managing Director Retail Distribution Australia Catriona Noble said: “We understand that buying a house is usually the single biggest investment people make and we want to remove some of the stress associated with organising a home loan.

“By creating a dedicated space for home loans, customers will have access to a team of specialists in an environment not usually associated with a bank. We’ve designed this to look and feel like a typical home and we’re confident this will resonate strongly with our customers.

“Our two Home Loan Centres in New Zealand have been incredibly successful helping thousands of New Zealanders into a new home since late 2014. We expect our centre in Western Sydney to be equally well received,” Ms Noble said.

BIS Capital Proposals Revised Again, LVR’s and Investment Loans Significantly Impacted

The second consultative document on Revisions to the Standardised Approach for credit risk has been released for discussion.

There are a number of significant changes to residential property risk calculations . These guidelines will eventually become part of “Basel III/IV”, and will apply to banks not using their internal assessments (which are also being reviewed separately).

First, risk will be assessed by loan to value ratios, with higher LVR’s having higher risk weights. Second, investment property will have a separate a higher set of LVR related risk-weights. Third, debt servicing ratios will not directly be used for risk weights, but will still figure in the underwriting assessments.

There are also tweaks to loans to SME’s.

These proposals differ in several ways from an initial set of proposals published by the Committee in December 2014. That earlier proposal set out an approach that removed all references to external credit ratings and assigned risk weights based on a limited number of alternative risk drivers. Respondents to the first consultative document expressed concerns, suggesting that the complete removal of references to ratings was unnecessary and undesirable. The Committee has decided to reintroduce the use of ratings, in a non-mechanistic manner, for exposures to banks and corporates. The revised proposal also includes alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.

The proposed risk weighting of real estate loans has also been modified, with the loan-to-value ratio as the main risk driver. The Committee has decided not to use a debt service coverage ratio as a risk driver given the challenges of defining and calibrating a global measure that can be consistently applied across jurisdictions. The Committee instead proposes requiring the assessment of a borrower’s ability to pay as a key underwriting criterion. It also proposes to categorise all exposures related to real estate, including specialised lending exposures, under the same asset class, and apply higher risk weights to real estate exposures where repayment is materially dependent on the cash flows generated by the property securing the exposure.

This consultative document also includes proposals for exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items.The credit risk standardised approach treatment for sovereigns, central banks and public sector entities are not within the scope of these proposals. The Committee is considering these exposures as part of a broader and holistic review of sovereign-related risks.

Comments on the proposals should be made by Friday 11 March 2016.

Looking in more detail at the property-related proposals, the following risk weights will be applied to loans against real property:

which are finished properties
covered by a legal mortgage
with a valid claim over the property in case of default
where the borrower has proven ability to repay – including defined DSR’s
with a prudent valuation (and in a falling market, a revised valuation), to derive a valid LVR
all documentation held

If all criteria a met the following risk weights are proposed.

For residential real estate exposures to individuals with an LTV ratio higher than 100% the risk weight applied will be 75%. For residential real estate exposures to SMEs with an LTV ratio higher than 100% the risk weight applied will be 85%. If criteria are not met, then 150% will apply.

Turning to investment property, where cash flow from the property is the primary source of income to service the loan

Commercial property will have different ratios, based on counter party risk weight.

But again, those properties serviced by cash flow have higher weightings.

Development projects will be rated at 150%.

Bearing in mind that residential property today has a standard weight of 35%, it is clear that more capital will be required for high LVR and investment loans. As a result, if these proposals were to be adopted, then borrowers can expect to pay more for investment loans, and higher LVR loans.

It will also increase the burden of compliance on banks, and this will likely increase underwriting costs. Finally, whilst ongoing data on DSR will not be required, there is still a need to market-to-market in a falling market to ensure the LVR’s are up to date. This means, that if property valuations fall significantly, higher risk weights will start to apply, the further they fall, the larger the risk weights.

Finally, it continues the divergence between the relative risks of investment and owner occupied loans, the former demanding more capital, thus increasing the differential pricing of investment loans.

The Committee notes that the SA is a global minimum standard and that it is not possible to take into account all national characteristics in a simple approach. As such, national supervisors should require a more conservative treatment if they consider it necessary to reflect jurisdictional specificities. Furthermore, the SA is a methodology for calculating minimum risk-based capital requirements and should in no way be seen as a substitute for prudent risk management by banks.

Now, some will argue that in Australia, this will not impact the market much, as the major banks use their own internal models, however, as these are under review (with the intent of closing the gap somewhat with the standard methods used by the smaller players) expect the standard models to inform potential changes in the IRB set. Also, it is not clear yet whether banks who use lenders mortgage insurance for loans above 80% will be protected from the higher capital bands, though we suspect they may not. Non-bank lenders may well benefit as they are not caught by the rules, although capital market pricing may well change, and impact them at a second order level. We will be interested to see how local regulators handle the situation where an investment loan is partly serviced by income from rentals, and partly from direct income, which rules should apply – how will “materially dependent” be interpreted?

ACCC takes action against Woolworths for alleged unconscionable conduct

The Australian Competition and Consumer Commission has instituted proceedings in the Federal Court against Woolworths Limited, alleging it engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers, in contravention of the Australian Consumer Law.

The ACCC alleges that in December 2014, Woolworths developed a strategy, approved by senior management, to urgently reduce Woolworths’ expected significant half year gross profit shortfall by 31 December 2014.

It is alleged that one of the ways Woolworths sought to reduce its expected profit shortfall was to design a scheme, referred to as “Mind the Gap”. It is alleged that under the scheme, Woolworths systematically sought to obtain payments from a group of 821 “Tier B” suppliers to its supermarket business.

The ACCC alleges that, in accordance with the Mind the Gap scheme, Woolworths’ category managers and buyers contacted a large number of the Tier B suppliers and asked for Mind the Gap payments from those suppliers for amounts which included payments that ranged from $4,291 to $1.4 million, to “support” Woolworths. Not agreeing to a payment would be seen as not “supporting” Woolworths.

The ACCC also alleges that these requests were made in circumstances where Woolworths was in a substantially stronger bargaining position than the suppliers, did not have a pre-existing contractual entitlement to seek the payments, and either knew it did not have or was indifferent to whether it had a legitimate basis for requesting a Mind the Gap payment from every targeted Tier B supplier.

The ACCC alleges that Woolworths sought approximately $60.2 million in Mind the Gap payments from the Tier B suppliers, expecting that while many suppliers would refuse to make a payment, some suppliers would agree. It is alleged that Woolworths ultimately captured approximately $18.1 million from these suppliers.

“The ACCC alleges that Woolworths’ conduct in requesting the Mind the Gap payments was unconscionable in all the circumstances,” ACCC Chairman Rod Sims said.

“A common concern raised by suppliers relates to arbitrary claims for payments outside of trading terms by major supermarket retailers. It is difficult for suppliers to plan and budget for the operation of their businesses if they are subject to such ad hoc requests.”

“The alleged conduct by Woolworths came to the ACCC’s attention around the time when there was considerable publicity about the impending resolution of the ACCC’s Federal Court proceedings against Coles Supermarkets for engaging in unconscionable conduct against its suppliers,” Mr Sims said.

“Of course, the allegations against Woolworths are separate and distinct from the Coles case.”

The ACCC is seeking injunctions, including an order requiring the full refund of the amounts paid by suppliers under the Mind the Gap scheme, a pecuniary penalty, a declaration, and costs.

These proceedings follow broader investigations by the ACCC into allegations that supermarket suppliers were being treated inappropriately by the major supermarket chains.

No Change in UK Bank Capital Plans Following Stress Tests

Fitch Rating. says that after its latest stress tests, the Bank of England’s (BoE) assessment is that the UK banking sector is adequately capitalised and the results will not force any capital planning revisions. Further sector-wide capital step-ups are unlikely in future.

Capital ratios are likely to remain stable, held up by the BoE’s increased use of countercyclical buffers. These will be built up as lending growth accelerates and will be released when the cycle turns. The BoE’s intention is that banks’ capital planning should become more efficient and flexible. The BoE’s Financial Policy Committee indicated that it considers a Tier 1 capital adequacy ratio of 11% to be appropriate for the sector. Fitch expect banks to set their internal buffers relative to this level and plan their capital needs relative to the level of sensitivity to stress test inputs.

Results from yesterday’s stress test show that, under the baseline scenario, the seven participating banks are improving their capital positions. But the Royal Bank of Scotland Group (RBS; BBB+/Stable) and Standard Chartered (A+/Negative) did not meet the BoE’s capital requirements under the stress scenario. Both banks have taken, or are taking steps this year to address capitalisation.

The regulator will use future stress test results to assess individual banks’ capital requirements. Fitch expects the tests to become more sophisticated and more qualitative in nature. This is already the case in the US where the Federal Reserve’s annual Comprehensive Capital Analysis and Review plays an important role in how the country’s leading banks assess their capital planning exercises.

In the UK, annual cyclical tests will be run to capture risks from financial cycles, with the severity of scenarios increasing as risks build up. This should produce more rounded stressed results. Latent risks not captured by the annual cyclical scenario will be introduced every other year when the BoE will run a biannual stress test. Fitch thinks the banks should, over time, be able to anticipate broad movements in the annual cyclical scenario, making it easier for them to set internal buffers above minimum regulatory requirements, based on their expected sensitivity to the regulatory stress test.

The 2015 stress test hurdles – a 4.5% common equity tier 1 (CET1) ratio and a 3% leverage ratio – were not particularly onerous. All participating banks met these. But hurdle rates will evolve and banks will need to meet their Pillar 1 minimum CET1 ratios under stressed scenarios, plus any additional requirements set by the regulators under Pillar 2A and buffers for systemically important banks.

ACCC authorises system to facilitate credit reporting

The Australian Competition and Consumer Commission has granted authorisation for five years to the Australian Retail Credit Association Ltd (ARCA) in relation to principles for exchanging comprehensive consumer credit data between signatory credit reporting bodies and lenders.

ARCA represents lenders and credit reporting bodies in Australia and has developed the principles in a process involving its members and industry since July 2013. This follows reforms to the Privacy Act which expand the type of consumer credit information that can now be shared.

The ACCC received a large number of submissions from industry in response to the application and its draft determination, with general support for the principles.

“Access to more consumer credit information will allow lenders to make better credit decisions, with resulting benefits for consumers in the form of greater financial inclusion for consumers and assisting to reduce consumer over-indebtedness,” ACCC Deputy Chair Delia Rickard said.

“This will lead to increased competition between credit reporting bodies and between lenders, and assist lenders to comply with their responsible lending obligations at less cost.”

The ACCC has considered a concern raised that some provisions are unduly prescriptive and will impose costs on smaller credit providers who wish to have an agreement with more than one credit reporting body. Also consumer advocacy bodies want to include provisions about recording repayments under financial hardship arrangements.

“The ACCC accepts that there are some potential public detriments arising from the costs imposed by the provisions. However, these costs appear to be relatively small and offset by the cost savings and other benefits of these provisions,” Ms Rickard said.

“Each credit provider will make a commercial decision whether or not to provide data and consume data from multiple credit reporting bodies.”

“ARCA is working to resolve the issues around reporting of financial hardship arrangements, and will need to involve industry and relevant regulators. The ACCC will be keen to see this matter resolved in assessing any application for re-authorisation.”

Authorisation provides statutory protection from court action for conduct that might otherwise raise concerns under the competition provisions of the Competition and Consumer Act 2010. Broadly, the ACCC may grant an authorisation when it is satisfied that the public benefit from the conduct outweighs any public detriment.

More information about the application for authorisation is available at Australian Retail Credit Association Ltd Authorisation A91482

IMF Updates Global and National Housing Outlook, Australian Property Overvalued

In the latest release, the IMF have provided data to October 2015, and also some specific analysis of the Australian housing market. We think they are overoptimistic about the local scene, and we explain why.

But first, according to the IMF, globally, house prices continue a slow recovery. The Global House Price Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.

As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.

Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play.

For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.

House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.

Turning to the Australia specific analysis, Adil Mohommad, Dan Nyberg, and Alex Pitt (all at the IMF) argue that house prices are moderately stronger than consistent with current economic fundamentals, but less than a comparison to historical or international averages would suggest. Here is just a summary of their arguments, the full report is available.

Argument: House prices have risen faster in Australia than in most other countries, suggesting, ceteris paribus, overvaluation.

Counter argument 1: House prices are in line on an absolute basis – Price-to-income ratios have risen in Australia and now near historic highs. However, international comparisons suggest that Australia is broadly in line with comparator countries, although significant data comparability issues make inference difficult.
Counter argument 2: The equilibrium level of house prices has also risen sharply – Lower nominal and real interest rates and financial liberalization are key contributors to the strong increases in house prices over the past two decades. The various house price modeling approaches indicate that house prices are moderately stronger (in the range of 4-19 percent) than economic fundamentals would suggest.
Counter argument 3: High prices reflect low supply – Housing supply does indeed seem to have grown significantly slower than demand, reducing (but not eliminating) concerns about overvaluation.
Counter argument 4: It is just a Sydney problem, not a national one – The two most populous cities, Sydney and Melbourne, have seen strong house price increases, including in the investor segment. A sharp downturn in the housing market in these cities could be expected to have real sector spillovers, pointing to the need for targeted measures—including investor lending—to reduce risks from a housing downturn.
Counter argument 5: There are no signs of weakening lending standards or speculation – While lending standards overall seem not to have loosened, the growing share of investor and interest-only loans in the highly-buoyant Sydney market, is a pocket of concern.
Counter argument 6: Even if they are overvalued, it doesn’t matter as banks can withstand a big fall – While bank capital levels are likely sufficient to keep them solvent in the event of a major fall in house prices, they are not enough to prevent banks making an already extremely difficult macroeconomic situation worse.

Let us think about each in turn.

First, the financialisation of society is not just an Australian thing (though we have some of the highest household debts in the world), so just because we are following a global trend, does not make it ok.
Second, we agree, in the main centres, house prices are about 20% over fundamentals, and in some pockets up to 30%, so yes this is a problem, especially at a time of flat income growth.
Third, supply has been increasing, but this has stoked investment housing speculation, and is not equally strong in all areas and price brackets. We still have a massive under-supply of affordable housing, just ask prospective first time buyers – and many are having to reach for the skies just to buy something, so we thing prices are still hiked because of supply problems.
Fourth, Sydney and Melbourne markets do indeed seem to be on the turn (and record low interest rates remember), so there is risk.
Fifth, underwriting standards had declined, refer to recent APRA. ASIC and RBA comments. Guidelines on assessment of income, and baseline interest rate assumptions have been tightened. Speculation is also rife, especially in the investment sector (refer our surveys).
Sixth, banks are being forced to raise capital because there is risk in the system, and the APRA stress tests showed that whilst individual banks are strong, they had not taken into account the fact that in a downturn, all banks would be trying to access capital markets at the same time and so may not be successful.

Thus, DFA concludes the IMF initial statement is correct, and despite their detailed analysis, their counterarguments are not convincing. We do have a problem.