Economics and Banking – Page 469 – Digital Finance Analytics (DFA) Blog

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.”

If The Worm Turns, What Happens To Household Mortgage Stress?

The wind appears to be changing. First the new head of APRA warned at a CEDA event they were watching the mortgage lending of the banks closely, “The Australian banking system clearly has a concentration of risk in housing. If anything was to go wrong in the housing market it would have very severe impact on the viability and health of the banking system, so it’s naturally something we watch very carefully.” Meantime in London, Treasury Secretary Martin Parkinson spoke to Chatham House where he mused on the low interest rate strategies being adopted by many countries, the limits of monetary policy and the potential for macroprudential measures. Locally, whilst fixed rate mortgages are being offered at record lows below 5%, the consensus appears to be shifting towards a lift in rates in Australia, partly as a result of rising inflation, although timing is not certain. So, what is the potential impact of a rate rise on Australian mortgage holders, bearing in mind that the average loan to income is stretched? How far would rates rise? Where would the pain be felt most?

To answer these questions, we have examined interest rate trends, and incorporated a rising rate scenario into our mortgage stress models. First, let’s look at rate trends. This is a plot of the RBA target rate since 1990. If we take a linear average, we see that currently we are well below the “neutral” range. An RBA rate of 4-4.5% would on this basis be a neutral rate. This is the first assumption I have made in my stress modelling.

Then we have to estimate the spread above the target rate the variable rate mortgage will be coming in at. We still have most households on a floating rate, although 15% are locking in fixed at the moment. This plot shows the target cash rate, against the spread between a CMT deposit account and a standard variable mortgage. Lets assume an average uplift of 300 basis points. That would put the mortgage rate at about 7%.

Now, we will assume rates will be lifted to this level in the next 12-15 months. We will also assume that income rises at the level it has in the past 2 years, and that unemployment stays at 6% (to isolate the effect of the rate movement). We then calculate for the 26,000 households in our survey the impact on their income/expenditure if their mortgages do rise. The impact is of course immediate, unless households are on a fixed loan. This is incorporated in the modelling. Now, we calculate the proportion of households which will be in mortgage stress in 18 months time (see the definitions we use here). Lets take Sydney as an example. This geo-mapping shows where the main movements are in terms of increases in mortgage stress. The blue postcodes are worst hit. Many of these households are in the western suburbs, and are typically younger, and on lower incomes. Many are first time buyers.

Mortgage stress does not mean an immediate crisis, but households hunker down short term, and it is a warning of trouble ahead because many households who get into difficulty are ultimately forced to sell. My read on this modelling is that if rates rise, the impact on the property market could be quite profound. This in turn does indeed lay potential bear traps for the banks, because of their high leverage into property. There is a strong case to lift the currently relatively low capital rules for the big four, to provide a buttress against rising rates, and to avoid financial stability issues. The recent FSI interim report touched on this. If rates do indeed start to rise, we will need to be alert to the issues. Actually, the regulators should have been acting sooner, as the genie is now out of the bottle. We will publish data on this scenario for other states another day.

Savers Quest For Yield

The CPI data which came out from the RBA yesterday registered 3%. This was very bad news for households with savings in deposit accounts at the banks, because ever more are finding that returns after tax are well below CPI. This is part of a worrying trend for many, and is prompting them to seek out alternative and possibly higher risk saving vehicles. Today we examine this issue in the light of latest data from our household surveys.

First, here are some benchmark savings rates mapped to the CPI and RBA benchmark rate. Many savings rates are now below the CPI, even before we consider the tax implications, as of course income from deposits is taxable. More and more households will see their savings eroded in real terms. It may not be as bad as in the UK, where thanks to even lower base rates, central bank intervention and other factors, deposit rates are around 1% and inflation above 3%, but its getting all too familiar.

The RBA has observed in its monthly updates that investors are seeking higher risk, higher return alternatives to bank deposits. Our surveys illustrate this nicely. We have been asking savings households about their intentions each month. Now, up to 80% of households with savings of more than $250k are actively seeking alternatives. It is lower for smaller balances, because typically these need to be readily available in case of emergencies. But even here, 35% are reconsidering their options.

We also split the analysis between those saving within SMSF and those outside, as SMSF have advantaged tax treatment we expected these savers to be less concerned, but not so. We found that more of those saving via a SMSF were more actively seeking alternatives than those saving in their own names. This is a clue to why SMSF’s are investing direct in property.

For households looking beyond bank deposits, it is worth highlighting they are moving away from secure savings options, because of course the government guarantee on deposits remains at $250,000 per customer per institution without charge. So if households start looking for other options, they might consider shares (though the market is close to its highs), property (will prices rise further?) or other wealth management products, where fees are not well disclosed, advisors may not give best advice, and returns are uncertain. There are certainly no simple alternatives. That in turn allows the banks to let their deposit rates slip, source funding cheaper from overseas wholesale markets, and by maintaining loan deposit rates, bolster their profits. We are mandated to save, yet the fact is, its hard to find solutions which provide returns above inflation at reasonable risk. Caveat Emptor!