RBA Trading Economic Growth Against Sydney Property

In Glenn Stevens Opening Statement to House of Representatives Standing Committee on Economics today, we get a glimpse of the drivers to lower interest rates. In addition, they are prepared to cut rates even if it leads to more growth in the Sydney property market to drive growth, even if that lever is now less powerful than previously.

Since the hearing in August last year, the economy has continued to grow at a moderate, but below-trend pace. Inflation as measured by the CPI has been affected by movements in energy prices and government policy changes, but even aside from these effects, inflation is low and appears likely to remain so.

The international context is one in which the global economy likewise is growing, but according to most observers at a pace a little below its longer-run average. There are some notable differences in performance by region. The US economy has picked up momentum, growing above trend with a falling unemployment rate. China’s economy met its growth target in 2014. A slightly lower target seems likely to be set for 2015, perhaps something like 7 per cent. But that would still be robust growth for an economy of China’s size. On the other hand, the euro area and Japan have recorded lower growth rates than expected a year ago.

Commodity prices have fallen, in some cases quite sharply. These trends appear to reflect primarily major increases in supply, with some moderation in demand playing a role. That would appear to be the case for iron ore and oil prices (and, prospectively, liquefied natural gas prices, which are typically tied to oil prices). Base metals prices, where few significant supply changes have occurred, have fallen by much less.

So there has been what economists refer to as a ‘positive supply shock’: more of the product is available with lower prices. The effect of this on individual countries will vary, depending on whether they are a producer or a consumer of such raw materials. On the whole for the global economy, however, this is a positive development.

Inflation is quite low in a range of countries, and very low in some. The decline in energy prices is temporarily pushing headline CPI inflation rates even lower.

The very low interest rates in evidence around the world when we last met have fallen further. This has been most pronounced in Europe, where yields on long-term German sovereign debt have fallen to be about the same as those in Japan. German sovereign debt has recently traded at negative yields for terms as long as 5 years. Official deposit rates are negative in the euro area, and the European Central Bank has announced a large-scale asset purchase program – colloquially referred to as ‘quantitative easing’. The euro has depreciated. Some surrounding countries to which funds tend to flow in anticipation of further depreciation – such as Switzerland – have reduced interest rates to significantly below zero and indeed 10-year Swiss government debt has traded at a negative yield. The Swiss National Bank took the decision to remove the cap on the Swiss franc, as it assessed that the size of the intervention likely to be required to hold it was becoming just too large. This move occasioned considerable turbulence in foreign exchange markets.

Meanwhile, the US Federal Reserve, faced with a strengthening US economy and having ended its asset purchase program last year, is expected to begin a gradual process of lifting its policy rate in a few months from now. So the monetary policies of the major jurisdictions look like they will be heading in differing directions. This means there is ample potential for further turbulence in financial markets this year.

The falls in prices for key export commodities are lowering Australia’s terms of trade and hence the purchasing power of our national income. This is a well-understood mechanism and has been the subject of much discussion. It will continue to constrain income growth for households and mining companies, and revenues for both state and federal governments, over the period ahead.

Resource export shipments are increasing strongly, as the capacity put in place by the period of high investment is put to use. At the same time, the high levels of capital spending by the resources sector, which had been a strong driver of domestic demand for several years, peaked during mid 2012 and turned down. All indications are that this downswing will accelerate this year. That has always been our forecast. The recent declines in commodity prices don’t change it, though they do reinforce that this trend is well and truly under way.

The various areas of domestic demand outside mining investment are mixed. Dwelling construction is rising strongly and commencements of new dwellings will reach a new high over the coming 12 months. Consumer spending is responding both to income trends and financial incentives, which are pulling in different directions. Growth in wages, by historical standards, is quite subdued. This and the fall in the terms of trade is working to restrain growth in disposable incomes. Working the other way, the fall in petrol prices, assuming it persists, is adding noticeably to the real incomes of consumers. Increased asset values, which push up gross measures of wealth, and low interest rates are also working to push consumption up relative to income. The net effect of these opposing forces is producing moderate, though not strong, consumption growth.

Meanwhile, at this point non-mining business investment spending is still very subdued. While several key fundamentals are in place for stronger performance, clear signs of a near-term strengthening remain unconvincing at this stage. This is a weaker outcome than we had expected six months ago. Public sector final spending – about one-fifth of aggregate demand – is fairly subdued, and the intent of governments, as you know, is to restrain their own spending over the period ahead. The lower exchange rate is likely to help export volumes outside the resources sector, and of late better trends have been observed in some services export categories including tourism and education.

Overall, growth in non-mining economic activity has picked up, but is still a little below average. Our expectation had been that a further pick-up would occur in 2015. When we reviewed our forecasts in late January, we didn’t feel that growth in the recent past had been materially different from what we had estimated a few months ago. But when we tried to look ahead, we concluded that there were fewer signs of a further pick-up in non-mining activity than we had hoped to see by now. As a result, the revised forecasts we took to the February Board meeting embodied a longer period of below-trend growth, and a higher peak in the rate of unemployment, than earlier forecasts. They also suggested that inflation was likely to remain pretty low over the forecast horizon. The inflation outlook was revised slightly lower, in part reflecting the effect of declining oil prices as well as the weaker outlook for economic activity.

At its meeting in February the Board considered that this revised assessment – that is, sub-trend growth for longer, a higher peak in the unemployment rate, slightly lower inflation – warranted consideration of some further adjustment to monetary policy, after a fairly long period during which the cash rate had remained steady. These were incremental changes to the outlook but all in a consistent direction.

Another factor in our consideration was dwelling prices, which have continued to increase. Price rises in Sydney are very strong, and they are pretty solid in Melbourne. On the other hand they are much more mixed elsewhere. Excluding Sydney, the rise for Australia as a whole over the past year was about 5 per cent. That is a healthy pace but not alarming, and some cities have seen price falls. Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds.

I note that, on the regulatory front, APRA has announced its supervisory approach to managing the potential risks posed by the rise in lending to investors in housing. This involves more intense scrutiny of investor loan portfolios growing at over 10 per cent per year, with the possibility, ultimately, of additional capital being required if APRA deems it necessary. APRA has also reiterated its expectations for other elements of lending standards such as interest rate buffers and floors. And ASIC has begun a review of interest-only lending in the context of consumer protection legislation. The Bank welcomes these steps and will keep working with other regulators in these areas.

The Board is also very conscious of the possibility that monetary policy’s power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past. A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy. Today, such a channel may be less effective. Nonetheless we do not think that monetary policy has reached the point where it has no ability at all to give additional support to demand. Our judgement is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support.

The forecasts published last week in the Statement on Monetary Policy assume a lower path for interest rates and a lower exchange rate than both earlier forecasts and the ones the Board responded to at the February meeting. These are assumptions rather than forecasts or commitments to a course of action.

It is worth noting that, despite concerns at various times about whether the exchange rate would adjust appropriately to our changing circumstances, it has been doing so over the period since we last met with the Committee. Against the US dollar it has fallen by around 17 per cent since our last hearing. The US dollar itself has been rising against all currencies, of course, so much of this movement is an American story rather than an Australian one. Against a basket of relevant currencies the Australian dollar has fallen by less, but the decline is still about 11 per cent since August. Further adjustment is probably going to occur.

One other development since our last meeting with the Committee was the final report of the Financial System Inquiry. This was quite a wide-ranging report and there is now a further period of consultation. I simply note that the Inquiry did not find major problems in the financial system, but did make recommendations about capital, to enhance the resilience of the banking system, and about loss-absorbency more broadly in the context of resolution. These will be mostly in the province of APRA to consider. The Inquiry also made some observations about payments matters, generally supporting the steps the Payments System Board has taken since its inception in 1998, and pointing to some areas where further steps may be appropriate. The Payments System Board will be considering these matters at its meeting next week.

Why Market-Based Liquidity Is Important

According to the Bank of England, in a speech to regional business contacts on Wednesday, Dame Clara, External Member of the Financial Policy Committee, discussed the challenges of encouraging and promoting greater use of market-based finance at a time when the banking system is undergoing structural changes, which may be impacting on the liquidity of markets through which such finance is provided.

Dame Clara pointed out that the financial crisis highlighted the cost of overwhelming reliance on the banking system.

“So it seems sensible to secure the benefits that capital markets and market-based finance can clearly offer our companies; namely, funding alternatives and risk-management options against a more diverse group of counterparties. Indeed, pushing savings from a conservative bank deposit to real investment is critical to ensuring that risk-taking can produce future economic growth and prosperity.”

Dame Clara noted that whilst it is important to recognise that market-based finance can also present systemic risk – such as the financing mechanisms outside the banking system that helped to propagate risk from US sub-prime mortgages – a more balanced financial system should emerge in the long-term. This should make both the real economy and banking system more resilient to economic shocks, as well as help central banks step back from “last resort” measures and allow private markets to operate more widely and efficiently.

Dame Clara highlighted the important role of investment banks in helping this balance to be achieved. Firstly, by facilitating equity and bond issuance, and secondly by ensuring liquidity in the secondary market for those assets.

However, while recent reforms in the regulation of investment banks – including enhanced capital and liquidity standards – have made the core of the system much safer, Dame Clara is concerned that reduced activity by investment banks in capital markets could be making some markets more fragile. And this is not always adequately reflected in liquidity risk premia.

“The post-crisis package of prudential measures included multiple adjustments to capital requirements from levels that were far too low. This has greatly increased the resilience of the core banking system. However, it has also altered the economic model for capital markets intermediation, and will have acted as an additional disincentive to such activities, especially those related to low-margin market-making,”

“But despite these changes, some measures of liquidity risk premia appear compressed; the compensation that investors require for bearing liquidity risk in some corporate bond markets has actually fallen to below its long-term average. Fragile liquidity conditions in these markets render them vulnerable to sharp correction,” Dame Clara said, citing the wobble in high-yield markets in the summer of 2014 and the volatility in the US Treasury market in October last year as examples.

The financial system is on a path to a new market structure, with established investment banks acting more like brokers, and their clients – institutional investors, pension funds and hedge funds – increasingly being seen as the true providers of market liquidity.

In Dame Clara’s view intermediaries have a vital role to play – especially in markets for securities that are less amenable to exchange trading, like corporate bonds or bespoke derivatives.

“In order to ensure that capital markets can contribute to the stability and prosperity of the economy, without recourse to last resort liquidity provision, it is imperative that more thought is given to how we promote resilient capital markets during what could be a bumpy transition at a time of heightened geopolitical risk,” Dame Clara concluded.

“As the post crisis reform agenda beds down, it will be important to take stock of the cumulative impact and interaction of all the recent reforms. The goal is to achieve the right calibration for a financial system that is able to work towards a sound and strong economic future.”

Housing Finance Leaps Higher

Data from the ABS today shows a further lift in home lending in December, driven hardest by the investment sector, but with owner occupation lending also in play. The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 1.0%. Investment housing commitments rose 1.2% and owner occupied housing commitments rose 0.9%. Investment lending comprised more than 50.6% of new loans, excluding refinance, another record. Refinancing remains strong in the current low rate environment. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 4.7%. However, DFA is now using the trend series in our modelling, as we think the SA series are suspect (according to the ABS, trend series reduces the impact of the irregular component of the seasonally adjusted series and is derived by applying a 13-term Henderson-weighted moving average to all but the last six months of the respective seasonally adjusted series, whilst the last six months are estimated by applying surrogates of the Henderson moving average to the seasonally adjusted series.)

HousingFinanceTrendDec2014In trend terms, the number of commitments for owner occupied housing finance rose 0.5% in December 2014. In trend terms, the number of commitments for the purchase of established dwellings rose 0.6%, while the number of commitments for the purchase of new dwellings fell 1.1% and the number of commitments for the construction of dwellings was flat.

Turning to First Time Buyers, on the revised new method of calculation and in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 14.5% in December 2014 from 14.6% in November 2014. The fall in First Time Buyer activity remains a feature in the current climate.

FirstTimeBuyersDec2014-DecThe state by state data reflects the revised First Time Buyer data, with NSW up by one third from 8% to 11% following the ABS revisions, compared with a national uplift of one quarter. We still see WA leading the way, though falling from the June 2014 peak. The other states are now more closely aligned. Given the size of the adjustment, we hypothise that at least one of the majors was not correctly recording first time buyer data.

FirstTimeBuyers-StatesDec2014

CBA Results Suggests Momentum Slowing?

The Commonwealth Bank of Australia announced its results for the half year ended 31 December 2014 today. The Group’s statutory net profit after tax (NPAT) for the half year ended 31 December 2014 was $4,535 million, which represents an 8 per cent increase on the prior comparative period. Cash (NPAT) was $4,623 million, an increase of 8 per cent on the prior comparative period. Cash Return on Equity was 18.6 per cent. The Board declared an interim dividend of $1.98 per share – an increase of 8 per cent on 2014 interim dividend.

Revenue was up 5 per cent in subdued market conditions. The cost to income ratio improved 70 basis points to 42.2 per cent as productivity initiatives continue. Return on Equity on a cash basis was 18.6 per cent. They maintain a strong capital position – Basel III Common Equity Tier 1 (CET1) (Internationally Comparable) of 13.3 per cent.

The banks said that while some of the Group’s customers are facing challenges, this is not translating into a deterioration of credit quality. The Group is maintaining a strong balance sheet with high levels of capital and provisioning. Liquidity was $151 billion as at 31 December 2014.

Customer deposits were up $32 billion to $458 billion and represents 63 per cent of funding. During the period the Group took advantage of improving conditions in wholesale markets, issuing $18 billion of long term debt in multiple currencies.

Looking at the segmentals, the bank reported that:

  • Net interest income and other banking income both grew 6 per cent, with average interest earning assets up $49 billion to $739 billion and retail and business average interest bearing deposits up $27 billion to $432 billion;
  • Net interest margin (NIM) declined 2 basis points (to 2.12 per cent) on the prior half, reflecting competitive asset pricing, partially offset by lower wholesale funding costs;
  • Strong growth in net interest income and other banking income and a disciplined approach to expenses contributed to Retail Banking Services cash earnings growth of 12 per cent;
  • Wealth Management’s average Funds Under Administration grew by 11 per cent with 85 per cent of funds outperforming their respective three year benchmarks;
  • Cash earnings in New Zealand (excluding the impact of lower losses associated with the New Zealand earnings hedge) grew 15 per cent and in Bankwest grew 8 per cent respectively;
  • The Group’s cost to income ratio improved by 70 basis points, in large part due to the on-going productivity focus, which delivered savings of $312 million over the past twelve months;
  • The annualised ratio of loan impairment expense (LIE) to average gross loans and acceptances improved 2 basis points and 3 basis points (to 14 basis points) compared with the prior comparative period and the prior half respectively;
  • Investment in long term growth continued, with $595 million invested in a set of initiatives, including $167 million for risk and compliance related projects, with the balance invested against on-going strategic priorities;
  • Provisioning remained conservative, with total provisions of $3.9 billion, and the ratio of provisions to credit risk weighted assets at 1.25 per cent. Collective provisions included a management overlay of almost $800 million and an unchanged economic overlay;
  • CET1 (Internationally Comparable basis) was 13.3 per cent. CET 1 (APRA basis) increased 70 basis points (on the prior twelve months) to 9.2 per cent;

The Group remained one of a limited number of global banks in the ‘AA’ ratings category.

Looking at home loans, average balances increased by $24 billion or 6% on the prior comparative period to $404 billion. The growth in home loan balances was largely driven by growth in Retail Banking Services and Bankwest. There was a drop of margin of seven basis points related to home lending, reflecting intense competition and discounting in the market.

In their outlook, they highlight the importance of job creation.

The Australian economy has many of the foundations necessary to make a successful transition from its dependence on resource investment. Population growth, a vibrant construction sector, some signs of increased business investment, greater trade access supported by a lower Australian dollar and a strong banking sector are all contributing to an economy that remains the envy of most developed markets. However, the volatility of the global economy continues to undermine confidence, particularly the impact of lower commodity prices on national revenue. Weak confidence is a significant economic threat. Businesses need the certainty to invest to create jobs, and households need a greater feeling of security. That requires implementation of a coherent long term plan that clearly addresses target government debt levels and timeframes, infrastructure priorities, foreign investment, business competitiveness policies and, above all, job creation.

Overall then, whilst profit was in line with expectations, revenue growth may be slowing, and margins are under some  pressure thanks to what the bank called “competitive asset pricing” aka the battle for home loan market share.

 

Rate Cut Unlikely To Cut Defaults – Fitch

Fitch Ratings says that the Reserve Bank of Australia’s move on 3 February 2015 to cut its official interest rate to 2.25% down from 2.50%, which led to mortgage rates in Australia falling to their lowest point in 50 years, is unlikely to improve the performance of domestic residential mortgage loans.

Australian variable interest rates have tracked well below historical levels for a long time, and there is little room for further improvement in mortgage performance in terms of loan defaults and delinquencies. Fitch data shows that the current delinquency rate of loans that are more than 30 days past due (a measure of borrowers who have missed one or more payments) on residential mortgages is now just 1.08%, the lowest recorded since December 2007.

Financial distress is one of the key factors that borrowers cite when they default on mortgages. However, interest rates are already at low levels, while household finances have improved following lower petrol prices, both of which mean that now is one of the least likely times for borrowers who remain employed, to be unable to pay. Fitch is of the view that a 25bps cut in rates will have no impact on mortgage performance.

Any defaults in the current environment will be due to other key factors such as sickness, business bankruptcy and divorce, which are unaffected by interest rates. Fitch remains vigilant for over-commitment of borrowers and poor underwriting in the mortgage market, although there is little evidence of such practices now.

Fitch currently rates 139 Australian residential mortgage backed securities (RMBS) transactions and five covered bond programmes which include over 1.4 million individual housing loans as collateral. These loans represent approximately 18% of the Australian housing loan market and so provide a good proxy for the market as a whole.

 

RBA Lowers Growth Forecast

The RBA published their statement on monetary policy today.  They point to a lower than expected growth and inflation forecast, but higher rates of unemployment. GDP is now projected at 2.25 per cent to June, and a quarter percent lower by the end of the year than their last projection.  They are expecting unemployment to remain higher for longer, and above 6 per cent during 2017. Inflation is forecast at a headline level of just 1.25 per cent, thanks to lower oil prices, although the bank’s favoured core inflation measure still sits within its 2-3 per cent target.

Looking at the economic drivers, the banks said that the 9 per cent fall in exchange rates had yet to flow through into higher prices, and the fall in oil prices are estimated to have increased real household disposable income by 0.25 per cent over the last half of 2014, and will lift spending power by an additional 0.5 per cent over the first three months of this year.

“While growth in non-mining activity has picked up a little over the past two years, all components except dwelling investment look to have grown at a below average pace over the past year,” the RBA said.

The ABS capital expenditure survey suggests that there will be only very modest growth in non-mining investment in 2015.

The most significant comment for me related to the behaviour of households who have experienced significant lifts in wealth thanks to rising house prices, yet may not be turning this into higher rates of consumption.

“However, another possibility is that ongoing buoyant conditions in housing markets will have less of an effect on consumption than previously. In particular, in recent years fewer households appear to have been utilising the increase in the value of their dwelling to increase their leverage or trade up”.

This cuts to the heart of the problem. Their core strategy was to allow housing to expand, to lift wealth, to encourage spending, to drive growth, until the business sector kicks in. However, there is mounting evidence that households are not convinced, and are unwilling or unable to spend. Retail is still below trend, and as interest rates of savings fall, households become more conservative. It could be that their core thesis is flawed.  Indeed, they had previously acknowledged

“we shouldn’t expect consumption to grow consistently and significantly faster than incomes like it did in the 1990s and early 2000s, given that the debt load is already substantial”.

In our recently published household finance confidence index we noted a consistent fall. No surprise then households are not performing as expected.

Bank of England maintains Bank Rate at 0.5%

The Bank of England’s Monetary Policy Committee at its meeting today voted to maintain Bank Rate at 0.5%. The Committee also voted to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

The Committee’s latest inflation and output projections will appear in the Inflation Report to be published at 10.30 a.m. on Thursday 12 February.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009.  A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009.  The previous change in the size of that programme was an increase of £50 billion to a total of £375 billion on 5 July 2012.

The Bank will continue to offer to purchase high-quality private sector assets on behalf of the Treasury, financed by the issue of Treasury bills, in line with the arrangements announced on 29 January 2009 and 29 November 2011.

NAB 2015 First Quarter Trading Update

NAB released its trading update today. Overall cash profit was a little below expectations, and loss provisions were up. Looking in more detail, revenue rose approximately 4%, but after excluding gains on the UK Commercial Real Estate (CRE) loan portfolio sale and SGA asset sales, on a like for like basis, increased approximately 2% thanks to higher markets income and growth in lending balances over the quarter. Group net interest margin (NIM) was flat, but after excluding Markets and Treasury, was slightly lower. Expenses increased approximately 4% after excluding specified items in the September 2014 Half Year. The main drivers include timing of enterprise bargain agreement-related salary increases, normalisation of performance based incentives and investment in the core franchise. The charge for Bad and Doubtful Debts for the quarter rose 30% to $227 million, but was stable excluding releases from the Group Economic Cycle Adjustment (ECA) and UK CRE overlay in the September 2014 Half Year.

The Australian business appears to be settling now, with business banking losses easing despite intense competition. Mortgage lending is still strong. No further comments were made on the UK exit strategy.  The Group’s Basel III Common Equity Tier 1 (CET1) ratio was 8.74% as at 31 December 2014, an increase of 11 basis points from 30 September 2014. As previously announced, the Group will target a CET1 ratio of 8.75% – 9.25% from 1 January 2016, based on current regulatory requirements.

First Time Loans Now 25% Higher – ABS

The ABS published revised First Time Buyer data to try and iron out some data issues. As a result in November 2014 an extra 1,566 loans (25.8%) were found. This means First Time Buyer Loans were 14.6% of new loans in November, as opposed to 11.6% reported previously. Still a low number, compared with the peak of 30.6% in April 2009.

FTB-Nov-2014-RevisedThis does not count First Time Buyers going direct to the investment sector, which we have highlighted before. The ABS explanation follows.

The First Home Owner Grant (FHOG), introduced on 1 July 2000, is a national scheme funded and administered by the states and territories http://www.firsthome.gov.au. Under the scheme, a one-off grant is payable to eligible first home owners. Until October 2012, all first home buyers were eligible for the grant regardless of whether they bought a new or an established home.

Gradually, States and Territories restricted grants to new homes only so that first home buyers who were buying established homes were no longer eligible for the grant. APRA reporting instructions state that a First Home Buyer is a borrower entering the home ownership market for the first time as an owner-occupier. The instructions do not make any distinction between first home buyers who are eligible for a First Home Owner Grant and those who are not. Nonetheless, some lenders’ reporting systems only record first home buyers if they are eligible for a grant which may cause under-reporting of first home buyers.

This under-reporting has progressively impacted on first home buyer statistics from October 2012 as individual States and Territories have changed the eligibility of their First Home Owner Grants, generally to cover only the purchase of newly constructed homes.

States and Territories restricted grants to new homes from different dates – New South Wales and Queensland from October 2012; Victoria from July 2013; the Australian Capital Territory from September 2013; South Australia and Tasmania from July 2014. Loans to first home buyers were therefore underestimated in these States from the dates specified due to some lenders under-reporting. Other lenders have reported correctly throughout. Originally, the drop in loans to first home buyers from October 2012 had been attributed to the change in grant eligibility reducing the affordability for first home buyers and economic conditions, such as rising house prices and the increase in investment loans for housing. However, subsequent analysis and follow-up with lenders has confirmed that the drop was due, at least in part, to under-reporting by some lenders.

CHANGES TO THE ESTIMATION METHOD

The ABS estimates that the number of loans to first home buyers which are currently being reported are approximately 80% of the total number of loans to first home buyers. Total reported monthly home loan commitments are not affected by this under-reporting.

For lenders who are under-reporting loans to first home buyers, the ABS has developed a model to adjust the proportion of first home buyers to total loans for each period of incorrect reporting. The model uses the following components:

      a) proportion of first home buyers to total loans for those lenders reporting correctly this period;
      b) the proportion of first home buyers to total loans for those lenders reporting incorrectly in the previous period;
      c) the proportion of first home buyers to total loans for those lenders reporting correctly in the previous period; and
    d) coefficients which determine the relative contribution of the above components to the incorrectly reported proportion.

The coefficients (d) of this model were estimated using data from January 2002 to the month prior to the First Home Owner Grant policy being changed (for example, in NSW the data were from January 2002 to September 2012). All the affected states were analysed separately. When more lenders are able to report correctly, the coefficients and estimates will be updated accordingly.

Application of the adjusted proportion:

The following table is an excerpt from the Housing Finance form (ARF392.0) and will be used to demonstrate the application of the adjusted proportion.

Chart: New commitments for home loans

There are no known issues in reporting the total number and value of Fixed rate home loans (9t and 9vt), Secured revolving credit home loans (10t and 10vt) and Other home loans (11t and 11vt). The estimated proportion of first home buyers is applied to the totals for Question 9, Question 10 and Question 11 (9t, 9vt; 10t, 10vt; and 11t, 11vt) respectively to determine the number of first home buyers of the particular loan type. The values for non-first home buyers (i.e. All other loans) are then derived by subtracting the values for first home buyers from the respective totals.

Each lender reports the data by State and Territory, and the proportion for each period is applied to the relevant lenders at the state level. The adjustment is made at the lowest level collected, and is applied to the affected lenders and affected States only. The data are then aggregated to the published States and the national level.

Revisions have been made to the previously published data for the Number, Percentage (%) of all dwellings financed, and Average loan size of First Home Buyers and Non-first home buyers at the national level (columns B to G of Table 560909a). Relevant States’ previously published data have also been revised (Table 560909b) back to when the First Home Owner Grant was first restricted in that State or Territory.

RBA Cuts Rate to 2.25%

The RBA has cut the cash rate by 25 basis points to 2.25 per cent, effective 4 February 2015.

Growth in the global economy continued at a moderate pace in 2014. China’s growth was in line with policymakers’ objectives. The US economy continued to strengthen, but the euro area and Japanese economies were both weaker than expected. Forecasts for global growth in 2015 envisage continued moderate growth.

Commodity prices have continued to decline, in some cases sharply. The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns reaching new all-time lows over recent months. Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low.

In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year. The fall in energy prices can be expected to offer significant support to consumer spending, but at the same time the decline in the terms of trade is reducing income growth. Overall, the Bank’s assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected. The economy is likely to be operating with a degree of spare capacity for some time yet.

The CPI recorded the lowest increase for several years in 2014. This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon. Measures of underlying inflation also declined a little, to around 2¼ per cent over the year. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit growth picked up to moderate rates in 2014, with stronger growth in lending to investors in housing assets. Dwelling prices have continued to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market.

The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. At today’s meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.