Strong Investment Lending In Latest Finance Data

In the final element of the monthly series, the ABS today released their lending data for July. The total value of owner occupied housing commitments excluding alterations and additions rose 0.3% in trend terms and the seasonally adjusted series was flat. The trend series for the value of total personal finance commitments rose 0.4%. Revolving credit commitments rose 0.8% and fixed lending commitments rose 0.1%. The seasonally adjusted series for the value of total personal finance commitments fell 1.3%.

LendingFinanceJuly2014Revolving credit commitments fell 4.7%, while fixed lending commitments rose 1.5%. The trend series for the value of total commercial finance commitments rose 2.7%. Revolving credit commitments rose 5.1% and fixed lending commitments rose 1.6%. The seasonally adjusted series for the value of total commercial finance commitments rose 3.7% in July 2014, following a rise of 11.8% in June 2014. Fixed lending commitments rose 20.7%, following a rise of 0.8% in the previous month. Revolving credit commitments fell 25.9%, after a rise of 37.7% in the previous month. Looking at the data in more detail, we see the concentration of lending by the banks (and mainly the big four).

PseronalFinanceByLenderWithin the commercial category, lending for housing investment by individuals was a significant element. Here is the absolute dollar amount by states, with a trend line, showing the relative strength in lending for investment purposes in NSW in particular, then VIC. InvestmentLendingByStateJuly2014The investment lending boom is not uniformly spread across the country. Another way to look at the data is on a per capita basis across each state. This chart shows the average amount per capita between January 2011 and July 2014. The movement is NSW in particular since May 2013 highlights both the volume and size of the average loans for investment purposes in NSW, compared with the other states. It is also worth noting the differences between NSW and some of the other states, especially TAS and SA, and we see WA, NT and VIC roughly marching together, behind the rabid pace set by NSW.

InvestmentLendingPCByStateJuly2014

 

 

Apple and the Payments Revolution

Apple’s latest product announcements included some details about their Apple Pay service, which as we highlighted previously is clearly part of an innovation strategy which will potentially have a profound impact on the payments business and consumer behaviour. Whilst initially US based, Apple Pay is something which has potentially broader consequences. To day we outline the main features of Apple Pay, and reflect on the future impact.

Apple Pay will be built into its new iPhone 6, iPhone 6 Plus, and Apple Watch devices to pay for items via Near Field Communications (NFC), which works by transmitting a radio signal between the device and a receiver, when the two are fractions of an inch apart or touching and will also enable online payments as well. Apple’s motivation, as explained by Tim Cook, was to completely change the current old payments technology, and remove the need to own a physical credit card. Apple said it will speed up the check out process, make payments more secure and ultimately replace physical wallets. Volumes and value of mobile payments are set to rise according to market analysts. Here is a summary from the WSJ.

MobilePaymentsWSJSep2014Here are some of the public comments from Apple:

Gone are the days of searching for your wallet. The wasted moments finding the right card. The swiping and waiting. Now payments happen with a single touch. Apple Pay will change how you pay with breakthrough contactless payment technology and unique security features built right into the devices you have with you every day. So you can use your iPhone 6 or Apple Watch to pay in an easy, secure, and private way.

One touch to pay with Touch ID. Now paying in stores happens in one natural motion — there’s no need to open an app or even wake your display thanks to the innovative Near Field Communication antenna in iPhone 6. To pay, just hold your iPhone near the contactless reader with your finger on Touch ID. You don’t even have to look at the screen to know your payment information was successfully sent. A subtle vibration and beep lets you know.

Double-click to pay and go. You can pay with Apple Watch — just double-click the button below the Digital Crown and hold the face of your Apple Watch near the contactless reader. A gentle pulse and beep confirm that your payment information was sent.

Convenient checkout. On iPhone, you can also use Apple Pay to pay with a single touch in apps. Checking out is as easy as selecting “Apple Pay” and placing your finger on Touch ID.

Passbook already stores your boarding passes, tickets, coupons, and more. Now it can store your credit and debit cards, too. To get started, you can add the credit or debit card from your iTunes account to Passbook by simply entering the card security code.

To add a new card on iPhone, use your iSight camera to instantly capture your card information. Or simply type it in manually. The first card you add automatically becomes your default payment card, but you can go to Passbook any time to pay with a different card or select a new default in Settings.Every time you hand over your credit or debit card to pay, your card number and identity are visible. With Apple Pay, instead of using your actual credit and debit card numbers when you add your card, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element, a dedicated chip in iPhone and Apple Watch. These numbers are never stored on Apple servers. And when you make a purchase, the Device Account Number alongside a transaction-specific dynamic security code is used to process your payment. So your actual credit or debit card numbers are never shared with merchants or transmitted with payment.

Protect your accounts. Even if you lose your device. If your iPhone is ever lost or stolen, you can use Find My iPhone to quickly put your device in Lost Mode so nothing is accessible, or you can wipe your iPhone clean completely.

Apple doesn’t save your transaction information. With Apple Pay, your payments are private. Apple doesn’t store the details of your transactions so they can’t be tied back to you. Your most recent purchases are kept in Passbook for your convenience, but that’s as far as it goes.

Keep your cards in your wallet. Since you don’t have to show your credit or debit card, you never reveal your name, card number or security code to the cashier when you pay in store. This additional layer of privacy helps ensure that your information stays where it belongs. With you.

Apple Pay works with most of the major credit and debit cards from the top U.S. banks. Just add your participating cards to Passbook and you’ll continue to get all the rewards, benefits, and security of your cards.

Reading further about the service, clearly security is a big focus because instead of storing your card on the phone, Apple Pay creates a dynamic security code. You can add in a new card just by taking an image of it. Touch ID will be used to confirm transactions (fingerprint reading technology) for added security).

Apple Pay will start in the U.S. with Visa, American Express, and Mastercard. As with any e-wallet, the key is getting business to adopt it. Apple has six banks on board and thus far including Bank of America, Capital One Bank, Chase, Citi and Wells Fargo, with more banks later, including Barclaycard, Navy Federal Credit Union, PNC Bank, USAA and U.S. Bank. In terms of merchants, they have named Bloomingdales, Panera, Sephora, Groupon, Subway, Disney, Target, McDonald’s, Whole Foods, Macy’s, and Walgreens. Apple will also accept payments and they will integrate Apple Pay into the Apple ecosystem.

This is Apple’s first foray into NFC payments, in the USA, payments have evolved more slowly than in other countries. For example in Australia, we can use VISA’s PayWave, and Mastercard’s PayPass, collectively known as PayWave.  Just touch your card and pay for anything to a limit of $100. Beyond that, you will still need to enter your PIN to confirm the payment. There have been a few phantom payments, and there is a risk of fraud if someone gets hold of your card, but it is highly convenient. In the Apple video about Apple Pay, they suggest existing PayWave devices will be able to handle Apple Pay. The current terminal standards (Ingenico and ViVOPay) are based on global standards and if Apple Pay is compliant to these, no updates to existing systems will be needed.

Consider this, already PayWave looks likely to supplement and even replace the current dedicated smartcards on transport systems like the Oyster card in London, where from mid September, PayWave will be implemented. It could be a simple step to using you phone to pay for trips directly.

There is no word on if and when Apple Pay may arrive in Australia, but the writing is on the wall for a significant shakeup, perhaps. For example, will the NSW Transport Opal transport card now be subsumed? But the real insight is the integration of consumer data, merchant data and the rest, as we highlighted in out earlier post the payments revolution around the corner.

 

Investment Lending Blows Its Stack

The ABS today released their home lending data to July 2014, which held a number of surprises.  The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.6%. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 2.7%. In trend terms, the number of commitments for owner occupied housing finance was flat in July 2014. In trend terms, the number of commitments for the purchase of new dwellings rose 1.3%, the number of commitments for the purchase of established dwellings fell 0.1% and the number of commitments for the construction of dwellings fell 0.1%

AllDwellingsJuly2014The state variations in percentage movements of owner occupied lending are worth a quick look. Owner Occupied lending is slowing faster than many predicted, rising only 0.3%.

AllDwellingsPCChangeStateJuly2014Most Owner Occupied transactions were for the purchase of established dwellings, though the uplift in construction and the purchase of new dwellings can be seen in the data.

EstablishedDwellingsJuly2014 ConstructionDwellingsJuly2014 NewDwellingsJuly2014Refinance accounted for a fair chunk of this, as borrowers look to churn into low rates, which probably at the bottom of the cycle.

RefinanceEstablishedDwellingsJuly2014But the strength of investment housing commitments, which rose 1.2% in the month is pretty amazing.

LendingByCategoryJuly2014Looking in more detail, we see that 40% of loans in the month of July were for investment purposes if we include Owner Occupied refinance in the total OO data.

OOandInvJuly2014However, if you exclude refinance of existing loans, then a staggering 50% (rounded up) were for investment purposes. This is an absolute record, and represents a 4% uplift from last month. We predicted this uplift in our surveys, highlighting the second wind we saw coming through from investors. The attraction of lifting house prices and low interest rates make property investment for many compelling.

OOandInvLessRefinanceJuly2014The story for first time buyers is just as concerning, but in the other direction. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 12.2% in July 2014 from 13.2% in June 2014.
FTBsJuly2014
Again, we need to look at the state data to see whats going on. In NSW, VIC and QLD, the first time buyer percentage of all loans written in the month is rock bottom, in NSW it is sitting at 7%, compared with a peak of 27% in 2011. WA continues to show the most momentum in first time buyers thanks to high migration, then TAS (where there are specific incentives) and SA.

FTBsByStateJuly2014But if you take the average of the slower states and faster states, we see a very stark contrast in the share of first time buyer lending.

FTBsAverageCompByStateJuly2014This data again highlights the risks in the market, younger buyers excluded, masses of investment loans being written which inflate the banks balance sheets, and increases the exposure of households and banks to the heady current prices, which as we have already highlighted are high on any measure you care to look at. There may be a slight feel good factor for investing households, but we wonder about the sustainability of property at these levels.

 

RP Data Weekly Property Trends

RP Data just released their latest weekly trends data. First the data shows a weekly fall overall in capital city house prices, with Sydney and Adelaide the only centres showing an uplift. Sydney prices continue their run ahead of other states.

RPDataData7Sep2014ValueChangesMedian house and unit prices are highest in Sydney, with Perth, Darwin and Canberra ahead of Melbourne. The statistics are calculated across houses and units sold over the most recent four week period.RPDataData7Sep2014Prices‘Time on market’ is simply the average number of days between when a property is first listed for sale and the contract date. The rate of vendor discounting is the average percentage difference between the original listing price and the final selling price.

RPDataData7Sep2014Time

Finally, RP Data monitors more than 100,000 mortgage activity events every month across their industry platforms. Monitoring the activity events across this platform provides a unique and timely lead indicator to housing finance commitments. We continue to see a cooling in mortgage demand in every state other than Victoria.

RPDataData7Sep2014Mortgages

The Current State Of Play In The Property Market

An extract from the latest edition of the DFA report, the Property Imperative, released last week.

The Australian Residential Property market is valued at over $5.2 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia.

ResidentialPricesYOYJune2014
According to the Reserve Bank (RBA), as at July 2014, total ADI housing loans were a record $1.382 trillion , an increase of 8.5% in investor loans and 4.8% in owner occupied loans over the past year. There were more than 5.08 million housing loans outstanding with an average balance of about $237,000 . Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 43.2% of new loans issued were interest-only loans , this is a record.

After a significant credit fueled boom in 2002-2007, momentum slowed after 2007 as a result of the Global Financial Crisis (GFC). The RBA dropped rates directly after the immediate crisis, but then lifted them again to a peak of 4.5% in 2011 in response of a property rebound and the mining sector investment sector boom. In 2013 its benchmark rate was cut to an all-time low of 2.5% which has stimulated further property demand, as the resource sector transitions from an investment to exploit phase. Through 2014, rates have remained at 2.5%, and in the latest RBA minutes, they suggest a continuation for some time at this level .

The Australian Bureau of Statistics says property prices have risen in every capital city in the past year to June 2014. Annually, residential property prices rose in Sydney (+15.6%), Melbourne (+9.3%), Brisbane (+6.8%), Adelaide (+5.6%), Hobart (+4.3%), Perth (+3.6), Darwin (+3.4%), and Canberra (+2.2%) . The Residential Property Price Index (RPPI), a measure including houses and attached dwellings, for the weighted average of the eight capital cities rose 1.8% this quarter, for a total rise of 10.1% over the last year.

RBA Leaves Rate Unchanged Again!

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Monetary policy remains accommodative. Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices continues. The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.

 

 

Housing Lending Up Again In July to $1.382 Trillion

Today is a big data day, with the monthly banking statistics from APRA and the financial aggregates from the RBA for July. Total credit grew by 0.4% in July, with Housing lifting by 0.5%, Personal Credit at 0.2% and Business Lending at 0.3%. In the last year, overall credit rose 5.1%, Housing 6.5%, Personal Credit 0.8% and Business 3.4%.

Looking in more detail at home lending, we see that overall lending was up to $1.382 billion, from $1,375  billion in June. Owner Occupied Lending rose by $3.5 billion and Investor Lending rose by 3.6 billion. This equates to an annual rise of 4.8% for Owner Occupied loans and 8.5% for Investment loans.

HousingLendingJuly2104The proportion of Investment loans from ADI’s rose again to 34.9% of all their housing loans, the largest monthly share ever. From an overall market perspective, a little below 34% of all loans written were for investment purposes.

HousingLendingPCJuly2104 The relative growth in Owner Occupied versus Investment loans is quite stark. Also of note is that growth in both types of loan appears to be slowing recently.

HomeLendiingGrowthByTypeJuly2014Turning to the banking statistics from APRA, total home lending from the banks was $1,273 billion (the gap between this and the RBA numbers of $109 billion is the non-bank sector).  CBA continues to lead the pack on Owner Occupied loans, whilst Westpac leads on Investment loans.

HomeLenidngTrendsJuly2014Looking at the share figures, of the main players, CBA and Westpac have the largest footprints and between them have more than half the market.

HomeLendiingSharesJuly2014Portfolio movements highlights significant Investment Loan grow at Westpac, and both types of loan at CBA. Away from the majors, Macquarie and Member Equity Bank grew faster than the other regional players.

HomeLendiingMovementsJuly2014Turning to deposits, the total with banks rose to $1,736 billion, up 1.2% in the month. Westpac, nab and ANZ lifted the value of deposits more than Westpac in July.

DepositMovementsJuly2014Finally, in the cards portfolios, the overall value fell by $270 million in July to $40.3 billion.  In terms of the portfolio, CBA continues to hold the largest share by value, with Westpac and ANZ following.

CardsJuly2014

 

RBA Reinforces Current Policy Settings

The RBA has made a supplementary submission to the Financial System Inquiry. Of note, they want to limit the extent to which SMSF’s can borrow, especially for property purchase; acknowledges the potential systemic risk from more housing lending, and the potential impact on business lending; and continues to be skeptical about the potential benefits of macroprudential tools. A couple of contextual charts may help – $1.85 billion in superannuation, 30% in SMSF, and the property sector is worth $5.2 trillion, with borrowing of $1.375 trillion, and a greater proportion for investment purposes, with a rise in interest only loans.

SuperJune2014InvestmentLendingSplitValueJune2014SUPERANNUATION

Assets should be managed in the best interests of members. Measures to lower costs and fees, optimise liquidity management and limit leverage should be considered”. The Bank endorses the observation that leverage by superannuation funds may increase vulnerabilities in the financial system and supports the consideration of limiting leverage. The general absence of leverage in superannuation was a key source of resilience in the Australian financial system during the financial crisis. Furthermore, the compulsory and essential character of retirement savings implies that it should remain largely unlevered. While still in its infancy, the use of leverage by superannuation funds to enhance returns appears to have been mainly taken up by self-managed superannuation funds (SMSFs). The Bank has previously commented on the risks that may arise from geared property investment through SMSFs, which may act as an additional source of demand that exacerbates property price cycles. Nonetheless, some limited leverage for liquidity management purposes may be appropriate.

HOUSING MARKET

The Interim Report finds little evidence of a shortage of mortgage finance in Australia, a view that the Bank shares. Even so, the Interim Report raises a number of options in the context of competition in the mortgage market that, if implemented, could result in relatively more finance being directed towards housing. These options should be assessed in terms of the end benefits and risks for consumers and the broader economy. Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses. As noted in the Bank’s initial submission, housing is generally not a particularly risky asset, but because of its size, importance to the real economy and interconnectedness with the financial system it poses systemic risk. With regards to Capital Requirements, the Interim Report highlighted several options for aiding competition through Australia’s capital framework, including changes to mortgage risk weights and providing capital inducements for ADIs that use Lenders’ Mortgage Insurance. Because of the cyclical nature of risk-taking and the large social and economic costs of instability in financial systems, it is crucial that institutions’ capital be allocated according to risk. Hence, changes to the capital framework on competitive grounds should not come at the expense of greater risk, and should not amount to a weakening relative to global regulatory minima.

MACROPRUDENTIAL

The Bank concurs with the Interim Report’s caution regarding unproven macroprudential tools. The Bank and the other CFR agencies view macroprudential policy as being subsumed within the broader financial stability policy framework in Australia. The Interim Report notes the existing framework where APRA, in consultation with the Bank and other CFR agencies, is responsible for administering prudential regulation. Consistent with its existing mandate to promote financial stability, APRA has adapted its prudential intensity in light of developments in systemic risk. For example, following signs of increased risk appetite in the mortgage market, APRA recently surveyed mortgage underwriting standards, released guidance on managing mortgage risk, and asked the major banks to specify how they are monitoring lending standards and the ensuing risks to the economy. Tools like loan-to-valuation ratio and debt-servicing ratio limits on mortgages have only recently begun to be used in developed countries. It is still too early to judge their effectiveness with the available evidence so far mixed; the effects of particular initiatives are not easily disentangled from those of other policy settings, including changes in monetary policy. APRA already has the powers to implement these tools if it was decided they would be beneficial. The Bank is not attracted to arrangements whereby prudential policy setting is spread across multiple agencies or groups of agencies. Australian agencies will continue to closely monitor how these tools perform overseas.

Bank Profits Up To $8.4 Billion In June Quarter – APRA

Yesterday APRA published their quarterly ADI performance statistics to June 2014. So today we look at some of the detail contained in this mammoth release, with a focus on the four major banks, which makes up the bulk of the industry.

APRA reported that the net profit after tax for all ADIs was $8.4 billion for the quarter ending 30 June 2014. This is an increase of $0.1 billion (1.2 per cent) on the quarter ending 31 March 2014 and an increase of $0.2 billion (2.6 per cent) on the quarter ending 30 June 2013. The profit margin for all ADIs was 32.3 per cent for the year ending 30 June 2014, compared to 29.8 per cent for the year ending 30 June 2013. Impaired facilities were $19.9 billion as at 30 June 2014. This is a decrease of $1.8 billion (8.3 per cent) on 31 March 2014 and a decrease of $5.9 billion (22.9 per cent) on 30 June 2013. Whilst there are 161 entities within the data, a quick analysis of net profit shows that the big four have the lions share of profit after tax. So, we will focus our analysis on the majors.

AllandMajorsNetProfitJune2014We note that for the majors loans and deposits continue to grow, and they are overall quite well aligned, though deposit growth is slowing slightly more recently.

MajorsGrowthDepositsandLoansIncomeJune2014Looking at income sources for the majors, overall net interest income continues to rise, but the impact of lower rates, and discounting in the home loan market shows that gross interest income from the home loans has fallen from its peak in 2011. Bank margins are rising thanks to a change in funding, and lower international capital market rates.

MajorsInterestIncomeJune2014Looking at fee income, we see fees holding their own in value, but as a percentage of all income, fees are falling, standing at 20% of total income in the most recent quarter.

MajorsFeeIncomeJune2014Lower interest rates have had an impact on the mix of deposits, with more money going into call deposits than term deposits. With rates so low, term deposits, and certificates of deposits are less attractive.

MajorsDepositMixJune2014Looking at asset quality, the value of specific provisions have fallen again, as impaired facilities and past due payments have reduced. In fact the bulk of the profit growth can be traced to a reduction in the level of provisions!

MajorsAssetQualityJune2014Capital ratios stand at 12%, the highest they have been, although these are relatively modest compared with some other countries. We commented on the capital ratio question recently.

MajorsHomeCapitalJune2014So, overall, the banks remain strong, but the big four which dominate the banking scene in Australia are relying largely on the release of provisions and improved margins to maintain profit growth and profit margins.

Australian non-conforming loans are higher quality than pre-2008 US and UK equivalents – Moody’s

Interesting release from Moody’s today on securitisation of non-conforming loans in Australia. Non-conforming loans are defined those who fall outside normal credit approval criteria, for example because of a negative credit history, or because borrowers provided limited verification of their financial situation, or required an abnormally large loan, and as a result they do not meet the standard underwriting criteria of prime lenders and lenders mortgage insurance providers.

In the analysis today of the APRA data we highlighted a rise in non-standard approvals.

OutsideServicabilityJune2014Moody’s calculate that some 7% of all Retail Mortgage Backed Ssecurities (RBMS) were backed by non-conforming loans but says the underwriting standards and overall quality of borrowers in Australian non-conforming residential mortgage backed securities (RMBS) portfolios after the global financial crisis in 2008-09 are better than in comparable transactions in the Australian market before the financial crisis, and better than in subprime transactions in the US and UK written pre-2008.   Moody’s report says that currently, all Australian mortgage portfolios, including non-conforming RMBS are performing strongly, supported by the country’s low interest rate environment, stable economy and continued house price appreciation.

As we highlighted recently, overall securitisation is well below pre-GFC levels.

SecuritisersLiabilities-June2014Moody’s says:

In contrast to the US subprime, US Alt-A, and UK non-conforming RMBS issued pre-2008, Australian non-conforming RMBS did not experience a significant rise in delinquencies and defaults after the financial crisis, because Australia did not suffer the severe economic stress and house price declines that affected the US and UK markets from 2007 onwards. Moody’s report says that while there are many common elements between Australian non-prime loans, and pre-2008 UK and US mortgages granted to borrowers who did not meet the traditional prime lending criteria, current market practices and legislation in Australia have put strict constraints on lenders, such that the average quality of borrowers in Australia is better than in typical pre-2008 UK non-conforming, US subprime or US Alt-A portfolios.

According to Moody’s report, Australia’s non-conforming RMBS market re-emerged in 2013, after stalling as a result of the global financial crisis. Over the last 18 months, 10 new transactions totaling AUD3.0 billion have been issued, including USD200 million in USD denominated issuance from Australian originators.

Moreover, while competition has been strong among non-conforming lenders in Australia post-2008, there has been no evidence of a loosening of underwriting standards to gain customers. Instead, lenders have focused on price to attract borrowers.