Seven covered the DFA research in a segment on their evening news tonight in Sydney.
Category: Economics and Banking
Mortgage Stressed Household Count In Sydney
Continuing our analysis of mortgage stress (one of the drivers of our estimation of the probability of default), we have estimated the actual number of households in each post code who are experiencing stress currently. To recap, Mortgage stress is a poorly defined term. The RBA tends to equate stress with defaults (which remain at low levels on an international basis). A wider definition is 30% of income going on mortgage repayments (not consistently pre-or-post tax). This stems from the guidelines of affordability some banks used in 1980’s and 1990’s, when economic conditions were different from today. This is a blunt instrument. DFA does not think there is a good indicator of mortgage stress, so we use a series of questions to diagnose mortgage stress focusing on owner occupied households. Through these questions we identify two levels of stress – Mild and Severe.
- Mild = households maintaining repayments, but by reprioritising expenditure, borrowing more on loans or cards, and refinancing
- Severe = households who are behind with their repayments, are trying to sell, are trying to refinance, or who are being foreclosed
We maintain a rolling sample of 26,000 statistically representative households using a custom segment model nationally. Each month we execute omnibus surveys to 2,000 households. Our questions provide a current assessment of mortgage stress. We also model and project likely mortgage stress given the current and expected economic conditions. You can read about the methodology here. The map shows the number of households who are currently in mortgage stress.
This is an interesting view because it shows the absolute estimated number, not the percentage of households. We have not published this view before.
Most striking is the range of master household segments which are represented. An indication that stress is not directly correlated with affluence. We will post data for some of the other regions another time.
The top 100 postcodes at risk of mortgage default
The AFR has done a nice piece on the post code level analysis we completed, and a nice interactive map. Here is the guts of the article, citing DFA.
It’s not just households in Western Sydney and the outer suburbs of Melbourne and Brisbane who are feeling the pressure of paying their monthly mortgage.
A compilation of the top 100 postcodes most at risk of mortgage default by consultancy firm Digital Finance Analytics found a wide geographic spread of suburbs across the country where people could face financial collapse when interest rates start to rise.
The outer suburbs of Canberra, southern Tasmania, Darwin and southern Gippsland in Victoria are some of the regional areas that have been hit by mix of industrial closure, high unemployment and low wages growth, which leaves resident vulnerable to financial collapse.
Digital Finance Analytics principal Martin North said residents of Western Sydney were used to flying close to the wind when it came to household finances.
“There are clearly some western Sydney suburbs and inner-Sydney in the top 200 or 300 postcodes but this is about the probability of default,” Mr North told The Australian Financial Review.
“The probability of default is a complex matrix. It’s not just the lower socio-economic areas [like Western Sydney] because they don’t have big loans and already have more conservative loan criterias.”
Mr North said the postcodes where households are at risk are quite often in regional areas with increasing unemployment – and where they may struggle to find another job.
“The most difficult thing for a mortgage holder is suddenly losing your job because income goes from a certain level to a lower level and it’s quite hard to manage,” he said.
“Events across Australia impacting on employment are probably the best leading indicator of the probability of default.”
Many of those in regional areas are also geographically isolated if they lose their jobs – and don’t have the same employment alternatives that may be on offer for those living in bigger cities such as Sydney, Melbourne and Brisbane.
Two per cent increase poses high risk
In a breakdown of the top 100 postcodes, almost a quarter were in Tasmania (23), followed by Victoria (19), NSW (18), Queensland (16), South Australia (14) and Western Australia (5).
The closure of manufacturing industries in northern Adelaide, the mining downturn in Western Australia, Queensland and in NSW’s Hunter Valley and the public service heartland of Canberra are all mortgage stress hotspots, according to the modelling.
There was also an intergenerational element with most of the households at risk of default including those under 35-years-old who have been lured by record low interest rates.
“My view is these are households that are maxed-up because of the debt they’ve got and with current low interest rates they are just getting by,” Mr North said.
“But if interest rates go up this is where you’ll see the first impact. If interest rates are 2 per cent higher it would create significant pain for households.
“And the risks seem to be higher amongst younger households. I think people have been lured into the market probably sooner than they should have by lower interest rates and rising property values.”
The Canberra postcodes of 2902 (Kambah), 2900 (Tuggeranong, Greenway) and 2903 (Oxley, Wanniassa) top the mortgage stress list, with Tasmanian postcodes in the state’s north and south rounding out the top 10.
Queensland’s mining belt of Mackay (postcode 4721), Brisbane’s outer suburbs (4131), and the outer-suburbs of Melbourne (Essendon, Tullamarine) as well as Hunter Valley’s 2343 scrape into the top 50.
The top 100 postcodes are rounded out by more mining towns (Fitzroy and Blackwater in Queensland), the suburban battlers in south-east Queensland’s Logan (4128), NSW’s Macquarie Fields (2564) and The Ponds (2769).
The typical assumptions about mortgage stress is where more than 30 per cent of household income is spent on home repayments.
But Mr North said this was too simplistic. He also overlays industry employment data as well as information from credit rating agencies about actual defaults.
The National Australia Bank has red-flagged 40 postcodes across the country where business and personal loans are at a higher risk of default, especially when mixed with the stressful combination of rising interest rates and higher unemployment.
In its 40 hotspots, NAB is conducting a more stringent assessment of loan applications, including increasing the amount of equity that borrowers require.
Reserve Bank of Australia assistant governor Christopher Kent last week said the central bank predicted unemployment would remain high until 2017.
RBA Minutes Quite Bullish
The notes from the RBA meeting of 4th August were released today. They seem quite bullish on future economic prospects. Does this mean a rise in the cash rate sooner?
Global economic conditions were expected to continue to be supported by the lower level of oil prices and accommodative global financial conditions. Global industrial production growth had eased further this year, particularly in the Asian region, and this had contributed to lower commodity prices. Growth of Australia’s major trading partners was expected to be around its long-run average over the next two years. Members observed that the downside risks to the outlook for Chinese growth identified over the past year had receded somewhat, although the Government’s policy response to the recent volatility in Chinese equity markets had clouded the medium-term economic outlook. Uncertainties arising from the expected start of monetary policy tightening in the United States had moved into sharper focus.
Domestically, economic activity had generally been more positive over recent months. Very low interest rates were continuing to support strong growth in dwelling investment and consumption, and the further depreciation of the Australian dollar was expected to impart stimulus to the economy through stronger net exports. Although surveys of business investment intentions and non-residential building approvals suggested that non-mining business investment would remain subdued for some time, members noted that non-mining business profits had increased, business conditions were clearly above average and businesses had been hiring more labour, partly encouraged by very low wage growth. As a result, employment had risen as a share of the working age population and the unemployment rate had been relatively stable, in contrast to earlier expectations of a further increase. The recent data on inflation were largely as expected.
Members noted that output growth was expected to pick up gradually from its below-average pace over the past year to exceed 3 per cent in 2017. The forecast for the unemployment rate had been revised lower since the previous forecasts had been presented. The further depreciation of the Australian dollar had resulted in a slight upward revision to the forecast for inflation. Nonetheless, inflation was expected to remain consistent with the target over the forecast period given that domestic cost pressures were likely to remain well contained.
Credit was growing moderately overall, with growth in lending to the housing market broadly steady over recent months. House prices continued to rise strongly in Sydney and Melbourne, but trends had been more varied in a number of other cities. Members observed that recent responses by banks to the suite of measures implemented by APRA in respect of lending to investors in housing, including a tightening in lending conditions, would be expected to reduce the risks relating to the housing market, although it was too early to gauge their full effects.
Members noted that an accommodative monetary policy setting remained appropriate given the forecasts, while observing that the Australian economy had been adjusting to the shift in activity in the resources sector from the investment to the production phase. This shift had been accompanied by significant declines in key commodity prices and was being assisted by the depreciation of the exchange rate over recent months.
In light of these considerations, the Board judged that it was appropriate to leave the cash rate unchanged. New information about economic and financial conditions would continue to inform the Board’s assessment of the outlook and determine whether the current stance of policy remained appropriate to foster sustainable growth and inflation consistent with target.
Loan Probability Of Default By Post Code
DFA’s coverage in the SMH today relating to the probability of default by post code has stimulated significant interest. As part of our household surveys, we capture data on mortgage stress, and when we overlay industry employment data and loan portfolio default data, we can derive a relative risk of default score for each household segment, in each post code. This data covers mortgages only (not business credit or credit cards, which have their own modelling).
Given that income growth is static or falling, house prices and mortgage debt is high, and costs of living rising, (as highlighted in our Household Finance Confidence index released yesterday), pressure on mortgage holders is likely to increase, especially if interest rates were to rise, which we have argued will happen sometime (and perhaps sooner rather than later given the recent RBA commentary on jobs and capacity). In addition, the internal risk models the major banks use, will include a granular lens of risk of default.
So, some borrowers in the higher risk areas may find it more difficult to get a mortgage, without having to jump through some extra screening hoops, and may be required to stump up a larger deposit, or cop a higher rate.
In the CBA results last week we saw some leading indicators of potential higher risks from the lender with the biggest owner occupied portfolio. So no surprise, the banks are aware of potential relative risks, especially if credit decisions are automated. In fact some of the smaller lenders appear to have greater flexibility.
Here is the national map of relative default probability. It shows the relative ranking, with the higher probability ranked 1, and clustered into meaningful groups.
Mortgage price hikes tipped to continue
A leading market analyst says rising house prices will force the banks to continue raising capital and keep passing on higher home loan rates.
Following last week’s $5 billion capital raising by CBA, Digital Finance Analytics principal Martin North says there is no doubt in his mind that capital will continue to be required.
“We will see more capital raisings,” Mr North told Mortgage Business.
“That means the prices of mortgages will continue to rise irrespective of what happens to interest rates.
“We are in a circle where bigger house prices allow bigger loans to be made, which allows the banks to make more loans and require more capital, like a black hole sucking everything in.”
Earlier this month, ANZ raised $3 billion to meet its CET1 capital ratio requirements. NAB announced a $5.5 billion capital raising in May and Westpac raised $2 billion the same month through its dividend reinvestment plan.
Speaking with Mortgage Business last week, HSBC chief economist Paul Bloxham said more capital raisings are likely as Australia’s banking sector seeks to meet the new, tougher requirements set out by the authorities.
Interest rate hikes on investor home loans came into effect last week with three of the four major banks charging higher rates. NAB raised its interest-only loans by 29 basis points while CBA and ANZ both added 0.27 per cent to their investor loans.
The repricing has been viewed as a response to APRA’s crackdown on credit growth in the investor segment and the need for increased capital.
However, analysts are sceptical whether higher home loan rates actually will cool investor demand.
“Given the momentum in the housing market, it is not clear that the lift in lending rates to investors that has occurred so far will have a significant impact on investor interest in the market,” Mr Bloxham said.
“Further increases in lending rates or a genuine change in direction by the central bank may be required to take the exuberance out of the Sydney and Melbourne housing markets.”
Mr North notes that interest rates are still extremely low and demand for home loans remains “extremely strong”.
“The only thing that will dampen demand is a one or two per cent rise in the official cash rate. Or some other external shock,” he said.
DFA Household Finance Confidence Index For July 2015 Shows Investors Have It
We released the latest DFA Household Finance Confidence today, incorporating results from our household surveys to end July. The overall index recovered a little from its all time low last month, rising to 91. This is still below a neutral setting. The index has been below water since April 2014.
This month we pulled out data from the 26,000 survey responses, segmented by our master property categories. We found that households who are property inactive (those renting, living with parents or friends, or homeless) consistently registered a lower score, at 87 this month, and we see a falling rating since we started this analysis in 2012. On the other hand, those households with investment property consistently rated higher, because of the wealth effects of rising property values, and because their incomes were more stable. Owner occupied households fell between the two extremes, though we noted a kick-up this month, thanks to the prospect of potentially cheaper loans ahead. We also see a subtle fall in the confidence of property investors, who are reacting to recent hikes in interest rates for investment properties. Could this be the first sign of an investment sector slow-down?
Now turning to the All Australia aggregate data, we see that costs of living continue to worry households, with 38% of households saying their costs were rising, up 3% on last month, and a similar fall in those who said there was no change to their costs. Households identified costs relating to council rates, food, fuel and overseas purchases as the main reasons for the rise. Those families burdened with child care costs and health related expenditure also suffered significant increases.
Turning to income, 4% more households this month said their income was falling in real terms, and 40% of households fall into this category. As well as wages being static or falling, households also saw falls in the interest paid on bank deposits. Only 4% said their incomes had risen, these tended to be households receiving dividend income from stocks. Just over 55% of households said their incomes had not changes (though as highlighted above, their costs had), so many are feeling the pinch.
Next, looking at job security, those households who felt more secure in their jobs fell by nearly 1%, to 16% of households. More than 62% of households felt no difference in their level of job security. There were significant state and industry variations however, with those in WA and SA the most concerned, and registering a fall in security, whilst NSW and VIC both registered higher rates of job security.
Looking at household debt (which is very high at the moment), 13% of households were more comfortable at their levels of debt, whilst 26% were less comfortable, and 60% were as comfortable as last time. Low interest rates are allowing households to manage high debt, but of course they are highly leveraged, and would be impacted if interest rates were to rise. Most households expect rates to remain low for the next couple of years.
Turning to savings, 14% of households were more comfortable with the savings they had, little changed from last month, whilst 54% were as comfortable as last month. Households commented on the difficulty of finding a good home for their savings, in the current low interest rate environment, and were concerned that adjusted returns were worth next to nothing. We also noted an increase in those households unable to get access to $2,000 within a week in an emergency. Around 15% of households are in this category, and the majority are those who are property inactive.
Finally, we look at net worth. Those households in the eastern states with property are feeling better off thanks to continued rises in property prices. Those with investment properties were feeling particularly smug. However, those in WA, NT and QLD were more more concerned about the trajectory of house prices, and saw their net worth falling – 62% of households saw their net worth rise, up 2%, whilst 14% saw it fall.
So overall, slowing wage growth and rising costs of living are counterpointed by rises in property prices, and low interest rates. However, bearing in mind that rates are unusually low and house price growth unusually high (for some), we do not see the fundamentals in place for a significant boost to household financial confidence any time soon. Therefore we expect households to spend conservatively, continue to save, and seek higher investment returns from higher risk asset classes.
IMF’s Latest On Greece
Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), says Greece debt is unsustainable, further fiscal reforms are needed and confidence in the banking sector needs to be improved.
“The policy package specified in the Memorandum of Understanding (MoU) recently agreed between the Greek authorities and European institutions, with input from Fund staff, is a very important step forward. It not only reverses much of the policy backtracking that caused the previous program to run seriously off track, but puts in place wide-ranging policies to restore fiscal sustainability, financial sector stability, and a return to sustainable growth. I particularly welcome the authorities’ efforts to overcome the serious loss of confidence in recent months through strong upfront actions. Most of these actions have been fully specified in the MoU, and key measures including in the fiscal structural areas will be implemented as prior actions for the disbursement of the first European Stability Mechanism (ESM) tranche.
“In two areas that are of critical importance for Greece’s ability to return to a sustainable fiscal and growth path—the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail. This is understandable, and I am encouraged in this regard by the government’s commitment to work with its European partners and the Fund on completing these essential reforms in the coming months. With the detailed specification of these outstanding reforms, the recently agreed MoU will entail a very decisive and credible effort on the part of the Greek authorities to restore robust and sustainable economic growth.
“However, I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical for medium and long-term debt sustainability that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far.
“In conclusion, I believe that the actions to be taken by the authorities by the time of the first review, in conjunction with the policies specified in the MoU, once they have been supplemented by the above-mentioned fiscal structural and financial sector reforms, as well as by significant debt relief, will provide the basis for a credible and comprehensive program to restore medium-term sustainability. We look forward to working closely with Greece and its European partners in the coming months to put in place all the elements needed for me to recommend to the Fund’s Executive Board to consider further financial support for Greece.”
APRA releases updated guidelines on section 66 of Banking Act
The Australian Prudential Regulation Authority (APRA) has today released updated guidelines in relation to section 66 of the Banking Act 1959. Section 66 deals with the use of restricted terms in relation to banking services.
Under section 66 and 66A of the Banking Act the use of a number of terms is restricted to those institutions that are authorised by APRA to carry on banking business. These terms include the use of ‘bank’, ‘banker’, ‘banking’, ‘building society’, ‘credit union’, ‘credit society’, ‘authorised deposit-taking institution’ and ‘ADI’.
These terms are restricted for use only by authorised deposit-taking institutions (ADIs) regulated by APRA to ensure potential customers are not misled into believing that non-APRA-regulated institutions have the same level of capital adequacy, depositor-priority and other prudential protections that apply to ADIs.
The updated guidelines provide additional information for institutions not regulated by APRA, including information on activities that are likely to be considered ‘financial’; information that should be included in an application to use restricted terms; and the likely timeframes for APRA to consider an application. The updated guidelines issued today also clarify and confirm APRA’s existing policy and practice which restrict the use of the terms ‘banker’ and ‘banking’ by ADIs that are not banks.
The Guidelines – Implementation of section 66 of the Banking Act 1959, have been updated by APRA following a consultation on draft revised guidelines issued in April 2013.
The guidelines can be found on the APRA website at: www.apra.gov.au/adi/Pages/adi-authorisation-guidelines.aspx.
Financial Stability Board (FSB) peer review of China
The Financial Stability Board (FSB) published today its peer review of China. The review concludes that the authorities have made good progress in addressing the FSAP recommendations on both topics, but that there is additional work to be done. A unifying theme behind the findings and recommendations is the need for closer coordination and information sharing between the authorities to handle a dynamic financial system. The report published today describes the findings and conclusions of the peer review of China. The draft report was prepared by a team of experts drawn from FSB member institutions and led by Jon Cunliffe, Deputy Governor of the Bank of England.
The peer review examined two topics relevant for financial stability and important for China: the macroprudential management framework and non-bank credit intermediation. The review focused on the steps taken by the authorities to implement reforms in these areas, including by following up on relevant recommendations in the 2011 Financial Sector Assessment Program (FSAP) report by the International Monetary Fund (IMF) and the World Bank.
The peer review concludes that the authorities have made good progress in addressing the FSAP recommendations on both topics, but that there is additional work to be done. A unifying theme behind the peer review findings and recommendations (see below) is the need for closer coordination and information sharing between the authorities to handle a dynamic financial system. Enhancing inter-agency coordination and developing an integrated risk assessment framework will promote a common understanding of objectives and risks, which will in turn facilitate joint policy actions and public communication.
In particular, the peer review found that the People’s Bank of China and financial sector regulatory agencies (China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission) have made important strides in developing a macroprudential management framework. Notable achievements include the elaboration of monitoring frameworks and toolkits by each agency to assess systemic risk in the sectors under their respective mandates; data improvements and ongoing work to develop a shared statistical platform; and enhanced inter-agency coordination through the Financial Crisis Response Group directly under the State Council and the Financial Regulatory Coordination Joint Ministerial Committee (JMC). Importantly, the authorities have a broad range of tools that can be used for macroprudential purposes, and have deployed them frequently in response to economic and financial system developments.
Building on what has been done to date, and as is being grappled with in many jurisdictions, additional work is needed to flesh out and operationalise a comprehensive and coordinated macroprudential policy framework. The peer review recommends:
- Clarifying the mandate and roles of different inter-agency bodies in assessing systemic risks and designing macroprudential policies, and strengthening the supporting infrastructure accordingly.
- Further developing an integrated systemic risk assessment framework that incorporates the views of different agencies and takes into account cross-sectoral policy interactions and implications for the overall stance of macroprudential policy.
- Developing an inter-agency protocol specifically for financial stability monitoring/assessment and related information sharing, based on the respective role of each authority in the macroprudential policy framework.
- Publishing the outcome of key inter-agency meetings and deliberations periodically as a means of communicating the authorities’ macroprudential outlook and policy stance.
Non-bank credit intermediation has accounted for an increasing proportion of funding to the Chinese economy – around 20% of new financing flows over the period 2012-14 – although the most recent figures indicate that its growth has moderated. The peer review found that the authorities have improved their monitoring of non-bank credit intermediation in recent years and have taken steps to contain identified risks. Specific examples include the augmentation of data collection, enhanced cooperation between the authorities via the JMC, and policy actions to mitigate identified risks related to the interbank market, the trust sector and banks’ wealth management products.
Notwithstanding these accomplishments, challenges remain in assessing and mitigating emerging risks in this sector – both in terms of data collection and, more importantly, in terms of undertaking coordinated and comprehensive risk assessments to inform the use of policy tools. This is not unique to China, as many other jurisdictions are in the process of improving their monitoring and developing policy tools to ensure that non-bank activities develop into a transparent, resilient and sustainable source of market-based financing. The peer review recommends that the authorities:
- Continue to enhance efforts to collect and disclose comprehensive and granular data relating to non-bank credit intermediation (e.g. on various forms of wealth and asset management products), and routinely share them for risk monitoring purposes.
- Enhance their ability to assess systemic risks stemming from non-bank credit intermediation by extending the analytical framework to focus on the liquidity, maturity transformation, credit and reputational risks for banks stemming from these products, the impact of second-round effects, and the use of crisis simulation exercises.
- Develop a more activity-based regulatory approach in order to discourage regulatory arbitrage and ensure a level playing field in non-bank credit intermediation.
- Continue to promote a more diversified and resilient financial system by increasing reliance on market-based pricing mechanisms via the removal of implicit guarantees, and by further developing capital markets and an institutional investor base as an alternative pillar to bank financing.