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

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.

June Finance Data – ABS

The ABS published their June lending data today, covering commercial, housing and other lending categories. Owner occupied housing rose 1.8% in seasonally adjusted terms, Personal finance fell 1.8% and commercial lending rose by 12.1% in June after a fall of 5.9% in May.

Looking at housing lending, investment lending remains significant (though in percentage terms it fell slightly this month). This is on a seasonally adjusted basis.

Investment lending accounted for 38% of all housing including refinance, and unsecured.

Looking more narrowly, the proportion of investment loans written remains close to record, at 46.3% of loans, the all time record is 46.8% (May 2014). This is calculated by removing refinance and unsecured lending.

June Housing Finance Up 1% – ABS

The ABS published their housing finance data today to June 2014. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 1.0%. The value of commitments grew faster than the number of transaction, so the average loan size is increasing.

Growth in NSW, WA and TAS was faster than the national average.

We see the momentum spread across the states, with WA and NSW making the largest growth contribution. VIC and QLD grew more slowly.

First time buyers are still at historic lows. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 13.2% in June 2014 from 12.6% in May 2014.

State variations are quite marked. NSW has the lowest proportion of first time buyers, WA the highest. The VIC data shows the impact the removal of some first time buyer incentives in 2013.

Investors loans grew faster than owner occupied loans. This is consistent with the results from our household research.

The splits, after removing refinance of existing loans are 47% investment loans and 53% owner occupied loans.

So, momentum continues, the trends are set, growth in the investment sector, first time buyers excluded, and overall growth stimulated by rising prices. The RBA quarterly statement on monetary policy, issued today, indicates they are comfortable with the current position:

One area where there has been a marked improvement is dwelling investment, which grew strongly in the March quarter and is clearly in an upswing. The increase in dwelling investment is being underpinned by the ongoing strength in the established housing market. Housing price inflation over 2014 to date has not been as rapid as it was over the second half of 2013, but prices continue to rise. Loan approvals are higher than they were a year ago, but have been little changed since late last year. At this level, they are consistent with growth in housing credit stabilising at a rate that is a bit faster than income growth, although the growth of investor credit has continued to outpace that of owner-occupiers. The high rate of housing price inflation has underpinned strong growth in standard measures of household wealth. Along with the very low level of interest rates, this has seen consumption growing a little faster than household income, leading to a gradual decline in the saving rate over the past 18 months or so. Nevertheless, after picking up through 2013, consumption growth looks to have slowed in the first half of this year, with weaker retail sales growth and consumer sentiment falling to below-average levels. It remains to be seen whether this slower growth of consumption is temporary. Indeed, a timely measure of consumer sentiment has rebounded recently to be back above average.

I am less sure, because we are banking on larger loans supporting the growth in house prices, despite record low interest rates, and a significant rise in investment loans. There are risks in this scenario.

RBA Leaves Rates On Hold – 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 for some borrowers have continued to edge lower over recent months. Savers 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 has been slower this year than last year, though prices continue to rise. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.

Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.

Housing Lending Reaches Record $1.375 Trillion in June – RBA

The RBA published their financial aggregates to June 2014, and rounds outs the picture we discussed yesterday. Looking at lending aggregates first, we see investor housing moved up 8.7% in the 12 months to June 2014, whilst owner occupied lending grew over the same period by 5.3%, thus, combined, housing grew 6.4% in the past year. Business lending grew, but was boosted by the provision of bridging loan facilities associated with the re-structure of a domestic corporate entity, and personal credit was up by 3.5% over the last 12 months.

We can show the monthly data, which highlights how housing lending has been moving. The growth in investment lending is clear.

Turning to the value lent, housing lending reached a new record, $1.375 trillion.

Looking at the split between owner occupied and investment lending, the stronger growth on the investment side is again clear,

and is at a new record of 33.73% of all housing loans outstanding.

Looking at how the banks are funding this lending growth, we see overall growth in deposit growth slowing

and overseas funding rising.

The continued growth in investment lending will drive house prices higher, and bloat the bank’s balance sheets, but is not economically sustainable. Ever greater leverage into the housing sector remains a concern. That said, data from our latest household surveys, just in, highlights that investors are getting a second wind, so more growth in likely. Updated survey results will be released next week.

June Bank Lending Data Up Again!

APRA published their monthly banking statistics for June 2014 yesterday. This is a snapshot of the bank’s total books by category. Momentum continues in the housing sector, with owner occupied lending up 0.7% and investment lending up 1.2% in the month, and totalling $1.266 trillion. Looking at the trend since January, we see the majors still sitting in their familiar positions, and we note the momentum at ING and Macquarie also.

Looking in detail at the relative share in June, CBA has more than 27% of owner occupied lending, and Westpac nearly 32% of investment loans.

Looking at the movements, month on month in value terms, we see Westpac grew their investment lending most strongly, CBA grew both owner occupied lending and investment lending, whilst nab focused more on owner occupied lending. Macquarie is writing both owner occupied and investment loans. Bendigo is more focused on owner occupied lending. Members Equity appears to be loosing a little from their owner occupied loans.

Turning to Credit Card Loans, balances rose 0.2% in the month (after a fall last month), at $40.6 billion. CBA still leads the pack, and we continue to see ANZ and Citi shrinking their portfolios. Macquarie, as we highlighted previously picked up an additional portfolio last month.

Finally, if we look at deposits, balances grew at 0.64% in the month, to $1.72 trillion. Not much change in the relative positioning of the banks.

However, it is worth noting that nab balances fell in the month, ANZ rose a little, whereas CBA and Westpac had stronger $5billion plus uplifts.

Finally, loans grew faster than deposits in the month, and the gap in funding is drawn from the financial markets, where spreads have dropped significantly, more than 65 basis points in some cases from 12 months ago. This is why we are seeing deposit rates falling, as we highlighted recently and savers are looking for yield elsewhere.

Later we will look at the RBA data, which includes the non-bank sector to round out the monthly analysis.

Why Enticing First Time Buyers With Super Is A Bad Idea

We know that first time buyers are sitting on the sidelines, as shown in our recent surveys. The biggest barrier is price. Many are desperate to enter the market and would jump at any additional incentive.

No surprise then to see proposals popping up from time to time to try and assist first time buyers. Often they are tactical and shorted sighted. The latest is from Nick Xenaphon, the Independent Senator for South Australia “Home affordability: a Super idea“.

Independent Senator for South Australia, Nick Xenophon, will introduce legislative changes in the Spring session of parliament to allow first home buyers to access their superannuation savings to pay a house deposit. Such a scheme successfully operates in Canada, called Home Buyers’ Plan, leading to improved housing affordability. At a Senate Economics References Committee hearing in Adelaide today, the Inquiry heard from HomeStart Finance (an arm of the South Australian Government) outlining the Canadian scheme. In Canada up to $25,000 can be accessed for a first home, and it’s made a dramatic difference for housing affordability there. However, Senator Xenophon will be moving for changes to Superannuation Act 1976 to allow the release to superannuation funds for a first home, with similar safeguards to the Canadian scheme. In Canada the amount has to be paid back into the super fund within 15 years. “With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” Nick said. “As HomeStart Finance said today, there’s something strange about being able to access your super fund if you are about to default on your housing loan, but you can’t access it to put a deposit on a home in the first place.” Housing affordability in Australia has fallen for the past three decades, as house prices outstrip income growth. An annual affordability survey by Demographia this year found Australia had the second-worst housing affordability in the world, behind Hong Kong. All 39 Australian housing markets surveyed were “seriously” or “severely” unaffordable, defined as having average house prices more than four times average income. Senator Xenophon gave credit to his state colleague, John Darley MLC, who has been a long-time advocate for releasing super funds for home buyers.

At least he recognises we have a serious problem in the housing sector. Here is the recent data on the percentage of first time buyers transacting, its pretty much as low as its ever been. However, we do not think his suggestion has merit. In fact it would be a disaster. His proposal would be, in effect an additional first time over grant, by another name, and we have already shown the first time buyer incentives merely lift prices in the short term, and do nothing to assist long term. You can read our earlier analysis “First Time Buyer Incentives are Bad News” here.

Two additional points, Canada’s housing market is overheating, as shown in our recent comparisons, based on the recent data from the IMF, which we reported here. So their policy settings are not correct.

In addition, there is additional risk, especially when prices are higher than they should be, that households will be exposed when rates rise. First time buyers are already highly exposed. It they also have their hard earned super locked into housing, this is an additional and concerning exposure. The interim FSI report highlighted concerns about super flowing into property. It is a risk too far.

If the politicians want to address the housing issue (and that means recognising there is a problem, which needs attention – RBA please note), then there are alternatives they should consider. Tackle negative gearing, work with the states on land supply, and bring in macroprudential controls on lending. Read my suggestions in detail in the submission I made to the Senate Inquiry into Affordable Housing. My policy suggestions were:

Australia should develop a strategic housing plan which guides ongoing development, be it in current centres, or expansion into new towns. Current tactical plans are not sufficient. The plan should specifically address the supply of affordable housing.
Strategies should be devised to increase land supply. State governments should reduce the current high levels of access fees for new development and revise planning criteria and processes. This has the potential to create considerable economic growth.
Overseas investors should not be able to access first-time buyer incentive schemes, and the Foreign Investment Review board rules should be strengthened to reduce the impact of foreign investors on the local market.
The RBA should have a direct multi-segmented housing affordability metric within its measurement framework. Affordability should be targeted at trend average, not rates experienced since the debt explosion of the 2000 onwards.
Macro-prudential policies should be employment to control the growth in lending. In line with the recommendations from the Bank of International Settlement debt to income servicing ratios should be employed as the policy tool of choice.
Negative gearing should be tapered away and removed for new transactions.
Joint equity schemes like the UK’s Help to Buy Scheme should be considered as a tactical step to assist some of the “Want-to-Buys.”