Economics and Banking – Page 468 – Digital Finance Analytics (DFA) Blog

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.

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.

HousingLendingJuly2104 The 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.

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.

Turning 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.

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

Portfolio 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.

Turning 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.

Finally, 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.

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.

SUPERANNUATION

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.

We 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.

Looking 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.

Looking 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.

Lower 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.

Looking 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!

Capital 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.

So, 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.

Moody’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.

Moody’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.

Interest Only Loans Up To 43.2% In June – APRA

APRA just released their quarterly data on housing exposures of the Authorised Deposit-taking Institutions in Australia for the June 2014 quarter. As at 30 June 2014, the total of residential term loans to households held by all ADIs was $1.23 trillion. This is an increase of $29.7 billion (2.5 per cent) on 31 March 2014 and an increase of $97.2 billion (8.6 per cent) on 30 June 2013. Owner-occupied loans accounted for 66.2 per cent of residential term loans to households. Owner-occupied loans were $811.7 billion, an increase of $16.5 billion (2.1 per cent) on 31 March 2014 and $56.5 billion (7.5 per cent) on 30 June 2013.

ADIs with greater than $1 billion of residential term loans held 98.4 per cent of all residential term loans as at 30 June 2014. These ADIs reported 5.1 million loans totalling $1.21 trillion and an average loan size was approximately $237,000, compared to $230,000 as at 30 June 2013.

There are a number of interesting observations within the data, but the one which stands out is the continued growth in interest only loans. Looking at the new loans written, we see that 43.2% were interest only loans. This is the highest ever, and reflects the growth in investment loans where tax offsets are maximized by keeping the balance as high as possible.

We also see a growth in the number of loans which are approved outside normal criteria. It lifted to more than 3.5% of all loans written in the quarter. At a time when regulators are stressing the importance of good lending practice, this is a surprise, but reflects the fact that larger loans are required by some to chase inflated house prices.

The proportion of new loans originated via brokers was 43%, based on the value of loans written. This is the highest for 5 years.

Low documentation loans continue to make up only a small proportion of all loans written.

Turning to the portfolio data, (the stock of all loans held by ADI’s) we see the continued growth in interest only loans, to 35% of all loans, the continued fall in low document loans,

The average loan balances across the portfolio for loans with offsets, and interest-only mortgages continues to rise, with the average balance for the latter now at $299,000.

Investment loans across all ADI’s now make up 33.8% of all lending in the portfolio.

We see that the number of lending entities fell again to 162, highlighting continued concerns about the competitive tension in the industry.

Latest On Australian Securitisers

The ABS published their data on Australian Securitisers to June 2014 today. At 30 June 2014, total assets of Australian Securitisers were $131.3b, up $2.5b (2.0%) on 31 March 2014. Still below below the pre-GFC peak of more than $250,000 million.

During the June quarter 2014, the rise in total assets was due to an increase in residential mortgage loans (up $3.4b, 3.3%). This was partially offset by decreases in other loans (down $0.4b, 2.5%) and cash and deposits (down $0.3b, 8.0%). Residential and non-residential mortgage assets, which accounted for 82.7% of total assets, were $108.6b at 30 June 2014, an increase of $3.4b (3.2%) during the quarter.

At 30 June 2014, total liabilities of Australian securitisers were $131.3b, up $2.5b (2.0%) on 31 March 2014. The rise in total liabilities was due to increases in loans and placements (up $2.1b, 14.8%) and long term asset-backed securities issued in Australia (up $1.1b, 1.2%). This was partially offset by a decrease in asset backed securities issued overseas (down $0.3b, 2.7%).

At 30 June 2014, asset backed securities issued overseas as a proportion of total liabilities decreased to 9.5%, down 0.4% on the March quarter 2014 percentage of 9.9%. Asset backed securities issued domestically as a proportion of total liabilities decreased to 76.8%, down 0.7% on the March quarter 2014 percentage of 77.5%.

The snapshot shows that the securitised sector is still in the doldrums, and that the bulk of loans are being purchased by local investors, rather than overseas. Growth is below loans system growth for the same period. Note that in this issue revisions have been made to the original series as a result of improved reporting of survey data. These revisions have impacted on the assets and liabilities for March 2014 and December 2013.

NSW First Time Buyer Trends From 2002

As part of our household surveys we have been examining the state of play for NSW first time buyers since 2002. In our research we have identified the year in which they purchased, whether they subsequently refinanced, or moved on, and how many of these households are currently having difficulty in finding a lender to refinance with. To be clear, this is a snapshot, as at August 2014, across multiple cohorts.

The data shows, firstly the monthly volume of loans written for first time buyers, peaking in 2009, and now languishing at a 20 year low. Next we plot, by age of the purchase, what proportion of households have subsequently either refinanced an existing loan, or sold and bought elsewhere. Perhaps it is not surprising that loans which are older, are more likely to be churned. The yellow trend line shows the proportion of households, by year of origination who have tried, but have not so far been able to refinance their loan. We see a significant peak in loans written in the 2009 boom time (when first time buyer incentives were at their peak, both at a federal and state level in a response to the GFC). More recent loans are less likely to be churned, so we see the drop in recent month. This suggests that there are a number of households in the 2009 and 2010 cohort who are in some strife.

We also analysed data on their current levels of mortgage stress, and their loan to income (LTI) ratios. We found that the average LTI grew steadily through the 2007-2012 cohorts, and currently stands at close to 6 times current gross income. We also see a peak in mortgage stress, in those households who took a loan in the 2009-2012 period. The proportion in mortgage stress are lower in the cohorts before and after this period. Once again the data highlights potential issues in specific cohorts, who are highly sensitive to unemployment, falling income or rising rates.

This data also is a warning, that first time buyer incentives can pull households into the market, and lay potential long term problems for them.