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Following our October 2017 Mortgage Stress update, here is a map of the count of households in mortgage stress in Greater Brisbane, using our Core Market Model.
Here is a list of the top 10 most stressed post codes in Queensland, by the number of households in stress.
We will post similar maps and lists across the other states shortly.
Following our October 2017 Mortgage Stress update, here is a map of the count of households in mortgage stress in Greater Melbourne, using our Core Market Model.
Here is a list of the top 10 most stressed post codes in the region, by the number of households in stress.
We will post similar maps and lists across the other states shortly.
The Domain preliminary auction results are in, and the national clearance rate is sitting at around 66%, compared with 71% last year, on lower volumes. Melbourne of course is down ahead of the Melbourne Cup.
Brisbane cleared 43% of 125 scheduled auctions, Adelaide 63% of 83 scheduled and Canberra 71% of 100 auctions. So momentum is strongest in Canberra and Melbourne, although more property actually changed hands in Sydney. We expect the weakness in the market to continue in the weeks up to the summer break.
Its crunch time in Australian banking, as property momentum slows, households feel the pinch and mortgage risks rise. Welcome to the Property Imperative Weekly to 4th November 2017.
Watch the video or read the transcript.
We start this week’s review by looking at interest rates. The Bank of England lifted their cash rate by 25 basis points, the first hike since July 2007. The move highlights how shrinking output gaps and tighter labour markets are pushing central banks towards interest rate normalisation. The FED kept US rates on hold at their November meeting, but signalled its intent to lift rates further, and Trump’s nomination for the FED Chair, Jay Powell to replace Yelland will probably not change this. The US economy is certainly outpacing Australia’s at the moment. Rates are indeed on the rise and policy makers are of the view that if there is the need to lift rates, the tightening should be gradual as to not destabilize the economy. The question is though whether this will neutralise the impact, or simply prolong the pain as we adjust to more normal rates. The boom brought about by the banks’ policy of extending credit must necessarily end sooner or later. RBA please note!
Turning to this week’s Australian economic data, Retail turnover was flat in September according to the Australian Bureau of Statistics. More evidence that many households are under financial pressure. In trend terms, there were falls in WA, NT and ACT. NSW had a 0.1% rise compared to last month. On the other hand, Dwelling approvals were stronger than expected, up 1.8 per cent in September 2017, in trend terms, the eighth rise in a row. Approvals for private sector houses rose 0.7 per cent.
The latest credit data from the RBA showed housing lending grew the most, with overall lending for housing up 0.5% in September or 6.6% for the year, which is higher than the 6.4% the previous year. Looking at the adjusted RBA percentage changes we see that over the 12 months’ investor lending is still stronger than owner occupied lending, though both showed a slowing growth trend. They said $59 billion of loans have been switched from investment to owner occupied loans over the period of July 2015 to September 2017, of which $1.4 billion occurred in September 2017. So more noise in the numbers!
Unusually, personal credit rose slightly in the month though down 1.0 % in the past year. Lending to business rose just 0.1% to 4.3% for the year, which is down from 4.8% the previous year. Business investment (or the lack of it), is a real problem. As John Fraser, Secretary to the Treasury said the bottom line is as the mining investment boom ended, Australia has struggled with weak investment in the non-mining sectors, weighing on the labour market, productivity and ultimately economic growth.
And data from APRA showed that the banks are still doubling down on mortgages, in September. Owner occupied loan portfolios grew 0.48% to $1.03 trillion, after last month’s fall thanks to the CBA loan re-classifications. Investment lending grew just a little to $550 billion, and comprise 34.8% of all loans. Overall the loan books grew by 0.3% in the month. We saw some significant variations in portfolio flows, with CBA, Suncorp, Macquarie and Members Equity bank all reducing their investment loan balances, either from reclassification or refinanced away. The majors focussed on owner occupied lending – which explains all the attractor rates for new business. Westpac continues to drive investor loans hard. Comparing the RBA and APRA figures, it does appear the non-banks are lifting their share of business, as the banks are forced to lift their lending standards. But they are still fighting hard to gain market share, which is not surprising seeing it is the only game in town!
Corelogic’s October property price trends showed that Sydney’s deflating house prices have dragged the property market down across the entire country, the most conclusive sign yet that the boom is over. October is traditionally a bumper month for property sales but average house prices across Australia’s capital cities posted no growth at all. Sydney house prices fell by 0.5 per cent, bringing quarterly losses to 0.6 per cent. Prices in Canberra and Darwin also fell (by 0.1 per cent and 1.6 per cent respectively), while Adelaide and Perth each posted zero growth. Of the capital cities, only Melbourne, Brisbane and Hobart saw property prices increase, at 0.5 per cent, 0.2 per cent and 0.9 per cent respectively. The Australian Property boom is “Officially Over”, despite stronger auction clearance results this past week, which underscored the gap between the momentum in Sydney and Melbourne. Total listings and clearance rates were significantly higher down south.
The HIA reported a further decline in New Home Sales. The results are contained in the latest edition of the HIA New Home Sales Report. During September 2017, new detached house sales fell by 4.5 with a reduction of 16.7 per cent on the multi-unit side of the market.
Lender Mortgage Insurer, Genworth a bellwether for the broader mortgage industry, reported their Q3 performance. While the volume of new business written was down 9.8% on 3Q16, the gross written premium was only down 3.9%. Underlying NPAT was down 14.5% to $40.5 million. The total portfolio of delinquencies rose 4.4% to 7,146, and the loss rate overall was 3 basis points. The regional variations are stark, the performance in Queensland and Western Australia remains challenging and delinquencies are elevated they said. WA was 0.88%, up 19 basis points and QLD was 0.72% up 5 basis points. According to the Australian Financial Security Authority, insolvencies are also rising in WA and QLD, which is mirroring the rise in mortgage delinquency.
We released our October 2017 Mortgage Stress and Default Analysis. Across Australia, more than 910,000 households are estimated to be now in mortgage stress up 5,000 from last month. This equates to 29.2% of households. More than 21,000 of these are in severe stress, up by 3,000. We see continued default pressure building in Western Australia, as well as among more affluent household, beyond the traditional mortgage belts across the country. We estimate that more than 52,000 households risk 30-day default in the next 12 months, up 3,000 from last month. We expect bank portfolio losses to be around 2.8 basis points ahead, though with WA losses rising to 4.9 basis points.
Risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. As continued pressure from low wage growth and rising costs bites, those with larger mortgages are having more difficulty balancing the family budget. These stressed households are less likely to spend at the shops, which will act as a further drag anchor on future growth, one reason why retail spending is muted.
The post code with the highest count of stressed households, and up from fourth place last month is NSW post code 2170, the area around Liverpool, Warwick Farm and Chipping Norton, which is around 27 kilometers west of Sydney. There are 6,380 households in mortgage stress here. The average home price is $803,000 compared with $385,000 in 2010. There are around 27,000 families in the area, with an average age of 34. The average income is $5,950. 36% have a mortgage and the average repayment is about $2,000 each month.
Mortgage stress is still strongly associated with fast growing suburbs, where households have bought property relatively recently, often on the urban fringe. The ranges of incomes and property prices vary, but strikingly it is not necessarily those on the lowest incomes who are most stretched. The leverage effect of larger mortgages has a significant impact.
The latest Household Debt Trends from the ABS also showed first, more households are in debt today, compared with 2005-6, and second more households have debts at more than three times their income. Those on lower incomes have borrowed harder, with 50% in the bottom income range borrowing, compared with 44.6% in 2003-4.
Many banks are cutting their mortgage rates to try to attract new borrowers, desperate to write business in a slowing market, because mortgage lending remains the only growth engine in town. We saw announcements from ANZ, and Virgin Money, the Bank of Queensland-owned lender who cut rates by up to 21 basis points and also lifted the maximum LVR to 80%. On the other hand, mirroring other lenders, Westpac is the latest to bring in a number of responsible lending changes affecting how brokers enter in requirements and objectives (R&O) questions for clients. In a note to brokers the bank said: “This will ensure that the correct R&O are captured accurately for all applications submitted and resubmitted and there is a central location that incorporates all the R&O information that has been discussed between yourself and the client with documented evidence of any loan changes,”.
More evidence of the impact of regulation on the mortgage sector came when Bengido and Adelaide Bank’s CEO provided a brief trading update as part of the FY17 AGM. There are some interesting comments on the FY18 outlook. First they have been forced to “slam on the breaks” on mortgage lending to ensure they comply with APRA’s limits on interest only loans and investor loans. As a result, their balance sheet will not grow as fast as previously expected. On the other hand, this should help them maintain their net interest margins, their previous results had shown a steady improvement and strong exit margin. They are forecasting 2.34%.
NAB reported their FY17 results and cash earnings were up 2.5% to $6,642 million, which was below expectations. NAB now has its main footprint in Australia, (and New Zealand). Of the $565 billion in loans, 84% of gross loans are in Australia, and 13% in New Zealand. 58% of the business is mortgages, and 10.9% of gross loans, or $62bn are commercial real estate loans, mainly in Australia. So you can see how reliant NAB is on the property sector. NIM improved a bit, although the long term trend is down. Wealth performance was soft, and expenses were higher than expected, but lending, both mortgages and to businesses, supported the results. They made a provision for potential risks in the retail and the mortgage portfolio, with a BDD charge of 15 basis points but new at risk assets were down significantly this last half. The key risk, or opportunity, depending on your point of view, is the property sector. Currently portfolio losses are low at 2 basis points but WA past 90-day mortgages were up. If property prices start to fall away seriously, new mortgage flows taper down, or households get into more difficulty (especially if rates rise), NAB will find it hard to sustain its current levels of business performance. Ahead, they flagged considerable investment in driving digital, and major cost savings later into FY20 with a net reduction of 4,000 staff.
It is worth saying that back in the year 2000, NAB’s net interest margin was 2.88% compared with 1.85% today, which is lower than ANZ’s 1.99% recently reported. This should be compared with US banks who are achieving 3.21% on average according to Moody’s. It shows that considerable reform of banks in Australia are required. The biggest expense by far is the people they employ. The future of banking is digital! As the mortgage lending tide recedes, the underlying business models of Australian banks are firmly exposed. They have to find a different economic model for their business. Just pulling back to Australia and New Zealand and flogging more mortgages will not solve their problem.
And that’s the Property Imperative Weekly to the 4th November 2017. If you found this useful, as always, do leave a comment below, subscribe to receive future updates, and check back next week for our latest weekly digest
Following our October 2017 Mortgage Stress update, here is a map of the count of households in mortgage stress in Greater Sydney, using our Core Market Model.
Here is a list of the top 10 most stressed post codes in the region, by the number of households in stress.
We will post similar maps and lists across the other states shortly.
Sydney’s deflating house prices have dragged the property market down across the entire country, in the most conclusive sign yet that the boom is over, figures from CoreLogic have revealed.
For the month of October – traditionally a bumper month for property sales – average house prices across Australia’s capital cities posted no growth at all.
Sydney house prices fell by 0.5 per cent, bringing quarterly losses to 0.6 per cent.
Prices in Canberra and Darwin also fell (by 0.1 per cent and 1.6 per cent respectively), while Adelaide and Perth each posted zero growth.
Of the capital cities, only Melbourne, Brisbane and Hobart saw property prices increase, at 0.5 per cent, 0.2 per cent and 0.9 per cent respectively.
Perth’s flat growth was also an improvement on a long period of falling prices.
The poor results will be a disappointment to sellers who assumed a spring sale would optimise the value of their property.
CoreLogic’s head of research Tim Lawless put the low growth down, primarily, to tighter restrictions on lending.
“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” he said.
He added that more expensive rates on interest-only loans were acting as a disincentive for property investors, particularly those that offered low rental yield.
Commenting on the NSW capital’s poor results, Mr Lawless said: “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”
However, despite the recent depreciation, house prices in Sydney are still 7.7 per cent higher than they were a year ago.
Turning to Melbourne, Mr Lawless put the city’s continued growth down to “record-breaking migration rate”, which he said was creating “unprecedented housing demand”.
Units v Houses
In most capital cities, houses continued to see higher capital growth than units, due to overdevelopment of the latter. A notable exception to this was Sydney.
Over the year, unit values in Sydney grew by 7.9 per cent, compared to 7.7 per cent for houses.
“While Sydney is seeing a large number of new units added to the market, it seems that high levels of investment activity and strained affordability is helping to drive a better performance across this sector,” Mr Lawless.
The report found that rental yields, while they had grown 2.8 per cent over the year, were still extremely low when compared to house prices – which have on average risen 6.6 per cent over the year.
Sydney and Darwin were exceptions to this.
“If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be a slow process,” Mr Lawless said.
Chinese money dries up
While CoreLogic put the flat growth down to tougher mortgage lending restrictions, a report by Credit Suisse offered a different explanation.
According to the ABC, the report found Chinese capital flows into Australia had fallen in recent months, and this was having a pronounced effect on the domestic property market.
“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” ABC quoted Credit Suisse as saying.
“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.
“This fall foreshadows weakness in NSW housing demand in the year ahead.”
This, Credit Suisse argued, could see the Reserve Bank forced to cut interest rates even further. Currently the cash rate sits at a record low of 1.5 per cent.
Australian house price growth stalled in October, according to data from CoreLogic, thanks largely to a 0.5% decline in Sydney, the nation’s largest and priciest property market.
Prices in Australia’s largest city fell in the two months, leaving the decline since July at 0.6%, the largest over a comparable period since May 2016.
As a result of the weakness in Sydney, prices nationally have grown by just 0.3% since July in weighted terms, seeing the increase on a year earlier slow to 6.6%.
On the recent evidence, a Sydney-led national housing market slowdown is now underway.
Tim Lawless, Head of Research at CoreLogic, called it a “significant turn of events”, acknowledging that if historical patterns are repeated, there’s likely to be further declines to come.
He’s not alone on that front.
To George Tharenou, economist at UBS, the weakness in CoreLogic’s Home Value Index signals that Australia’s housing boom is now “officially over”.
“Australia’s world record housing boom is ‘officially’ over after a large ‘upswing’ of 6556% price growth in 55 years,” he says.
“After dwelling price growth was resilient at a booming 10% [plus annual] pace earlier this year, there is now a persistent and sharp slowdown unfolding.
“Indeed, the weakness in auction clearing rates, and the near flat growth in prices in the last 5 months, suggest the cooling may be happening a bit more quickly than even we expected.”
If the chart below from UBS is anything to go by, the decline in auction clearance rates in recent months points to the likelihood that annual price nationally will continue to decelerate into early 2018.
Source: UBS
“Price growth now seems likely to end 2017 around 5% year-on-year, below our expectation for 7%,” Tharenou says.
Like Lawless at CoreLogic, he says the Sydney-led slowdown is a lagged response to macroprudential tightening from Australia’s banking regulator, APRA, something that has led to out-of-cycle mortgage rate hikes as a result of tougher lending standards.
“This slowdown in house prices has coincided with a sharp slowing of investor housing credit growth to a 5.5% annualised pace in the last three months to September,” Tharenou says.
“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth ahead via a fading household wealth effect.”
Source: UBS
Given his expectation that weaker house price growth will soften household consumption, the largest part of the Australian economy, Tharenou says it will prevent the Reserve Bank of Australia from lifting interest rates until the second half of next year.
Should house price growth weaken further in the months ahead, it must surely cloud the outlook for residential construction, another crucial part of the Australian economy and the third-largest employer in the country.
With new home sales and building approvals both rolling over from the record levels reported last year, a bout of price weakness may exacerbate that slowdown, creating negative second-round effects across the broader economy given the sheer size of the residential construction sector.
Preliminary clearance rates hold firm as volumes across the combined capital cities reach their highest level year-to-date and Melbourne records its busiest auction week on record.
This week, the combined capital cities saw the number of auctions held reach a new year-to-date high, with a total of 3,690 held, surpassing the previous 2017 high recorded over the week prior to Easter when 3,517 auctions were held. The higher volumes returned a preliminary auction clearance rate of 67.8 per cent, rising from a final clearance rate of 64.7 per cent last week, when fewer auctions were held (2,519). This week’s surge in volumes can be attributed to activity across Australia’s largest auction market in Melbourne, where volumes across the city reached their highest on record this week, with 1,983 held recording a preliminary auction clearance rate of 71.7 per cent. Sydney also saw a substantially higher volume of auctions this week with 1,196 homes taken to auction, recording a clearance rate of 64.1 per cent. Sydney’s clearance rate has been consistently below 65 per cent since the first week of October. Activity across the remaining auction markets was varied with Brisbane recording the lowest preliminary clearance rate (47.1 per cent). Historically auction volumes have peaked around late November / early December; if this trend holds true this year, we could see new records being set for auction volumes as the Spring season concludes.
We have the preliminary results from Domain, which underscores the gap between the momentum in Sydney and Melbourne. Total listings and clearance rates were significantly higher down south.
In addition, while Brisbane achieved 39% on 135 scheduled auctions, Adelaide, reached 69% of 96 scheduled (at a clearance rate HIGHER than Sydney!) and Canberra cleared 82% of 100 scheduled, the highest in the country. This chimes with our surveys, which shows significant numbers of property investor switching away from Sydney and towards both Canberra and Adelaide, where property is more reasonable, and where tenants are paying, on a net rental basis, higher rates.
So the question is, will Sydney continue to stall, as prices continue to slide, and will the same falling trends begin to spread to the more buoyant states?
We are on a knife edge…!
Another big week of finance and property news, so we pick over the bones and try to make sense of what’s going on. And we ask were the Regulators asleep at the wheel?
Welcome to the Property Imperative weekly to 28th October 2017. Watch the video or read the transcript.
We start this week’s review with a look at the latest economic data. The latest GDP read from the US, at 3.1% annualised, in Q2 and 3.0% in Q3, provides more support to the view the FED will lift their benchmark rate again before the end of the year. This is likely to have a flow on effect by rising rates in the international capital markets, which will mean higher bank funding costs here, as well as putting downward pressure on the toppy stock market. To confirm this view, we saw the benchmark 10-year Treasury Bond Yield in the USA rose to its highest rate in several months.
In Australia, the ABS said the CPI was 0.6 per cent in the September quarter 2017 following a rise of 0.2 per cent in June. The most significant price rises were electricity (+8.9%), tobacco (+4.1%), international holiday travel and accommodation (+4.1%) and new dwelling purchase by owner-occupiers (+0.8%). These rises were partially offset by falls in vegetables (-10.9%), automotive fuel (-2.3%) and telecommunication equipment and services (-1.5%). The CPI rose 1.8 per cent through the year to September quarter 2017 having increased to 1.9 per cent in the June quarter 2017, below the RBA’s 2-3% target band.
The RBA’s Guy Debelle spoke about some of the uncertainties in taking the economic temperature in Australia. He homed in on the CPI data from the ABS, making the point that our belated quarterly CPI reports are out of kilter with the monthly data now provided in many other western countries. In addition, the ABS will be revising their expenditure weightings in the CPI series, which means that CPI may currently be over stated by perhaps a quarter of a percent. These revisions are made every 5 or 6 years, although there are plans afoot to make them more frequently. The ABS is under tremendous funding pressure, and there are risks their critical data series may be compromised.
The National Accounts data from the ABS for the year 2016-17 really brought home how much of the growth in the economy was thanks to household consumption, as opposed on business or government investment. This helps to explain why the RBA was willing to let household debt escalate to their current astronomical levels, why rates are so low, and why the property sector is so important. In summary, overall growth was 2%, the lowest since 2008-9; wages rose 2.1%, the weakest since 1991-2; growth in household expenditure as measured in current price terms was 3.0%, the lowest on record; the household saving ratio was at its lowest point (4.6%) in nine years and yet household consumption was the strongest growth driver at 1.22 percentage points.
This was because households borrowed an additional $990 billion over the 10 year period from 2006-07, mainly in mortgages. The value of land and dwellings owned by households increased by $2.9 trillion over the same period and increased by $621 billion through 2016-17 and despite slow wage growth, household gross disposable income plus other changes in real net wealth increased $456.6 billion, or 32.6%, in 2016-17, largely due to a $306.5 billion appreciation in the value of land held by households.
But of course, such high debt and high property prices are now creating fault lines in the property market and household finances.
We are seeing more risks in the property investment sector. Traditionally, in the Australian context, loans to property investors have tended to perform better than loans to owner occupiers. This is because investors receive rental income streams to help pay for the mortgage costs, they are willing to carry the costs of the property against future capital gains, and many will be able to offset costs against tax, especially when negatively geared. In addition, occupancy rates in most states have been stellar.
But things are changing, as the costs of borrowing for investment purposes have risen (thanks to the banks’ out of cycle rises), while rental returns are flat, or falling and the costs of managing the property are rising. In addition, the supply of investment property is rising, and occupancy rates are declining in a number of key markets. As a result, more investors are seeing net rental yields – after mortgage payments and other costs drifting into negative territory, especially in VIC and NSW. Our Core Market Model, and recent data from ANZ suggests defaults from the property investment sector are now running at similar levels to owner occupied borrowers, and are set to rise further.
In fact, the ANZ full year result, which superficially looked strong – up 18% on the prior comparable period – contained a number of negative trends, as they focus more on the retail business in Australia and New Zealand. Yes, they have a strong balance sheet, as capital is released from their assets sales, and provisions were down; but the underlying net interest margin fell, down 8 basis points on last year to 1.99%, with a fall of 2 basis points in 2H, despite the mortgage book repricing and loan switching. In addition, 90-Day mortgage defaults overall remained similar to last year, but with a spike in WA and a fall in VIC/TAS. Investment loan delinquencies are rising, whereas they have traditionally been lower than OO loans. They have recently tightened underwriting standards, but of course loans already on their books have looser standards. They warn “household debt and savings have both increased, however the ability for households to withstand economic shocks has diminished a little”. “In 2018 we expect the revenue growth environment for banking will continue to be constrained as a result of intense competition and the effect of regulation including a full year of impact of the Australian bank tax.”
Our own analysis of default probability, from our Core Market Model, now includes 90-day default risk modelling. We measure mortgage stress on a cash flow basis – the October data will be out next week – and we also overlay economic data at a post code level to estimate the 30-day risk of default (PD30). But now we have added in 90-day default estimates (PD90) and the potential value which might be written off, measured in basis points against the mortgage portfolio. We also calibrated these measures against lender portfolios. Granular analysis can provide a rich understanding of the real risks in the portfolio. Risks though are not where you may expect them! If we look at the results by state, WA leads the way with the highest measurement, then followed by VIC, SA and QLD. The ACT is the least risky area. In WA, we estimate the 30-day probability of default in the next 12 months will be 2.5%, 90-day default will be 0.75% and the risk of loss will be around 4 basis points. This is about twice the current national portfolio loss, which is sitting circa 2 basis points.
Banks are cracking down on loans to borrowers buying into Brisbane’s over-supplied apartment market, with a number of risky postcodes identified, which require bigger deposits. The four major banks – Westpac, Suncorp, Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB) – are restricting lending for certain Brisbane postcodes, where apartment buyers will now be required to have a deposit of up to 20% to qualify for a home loan. Suncorp has blacklisted nearly 40 postcodes in the Queensland capital, including Inner Brisbane, Teneriffe, Fortitude Valley, Bowen Hills, and Herston. The banks are refusing to loan more than 80% of the cost of a unit due to “[weaknesses] in the investment market” as well as the current oversupply in inner-city apartments. Prices for apartments in Inner-Brisbane have dropped to their lowest level in three years.
QBE’s Housing Outlook, published this week, suggests home price growth will slow further in the years ahead. We continue to see appetite from property investors easing, as property price growth stalls or in some states reverse. Banks on the other hand are chasing new business with deep discounts on new loans. For example, Teachers Mutual cut their rate for new loans by 30 basis point, to 3.84%. Westpac, St George, BankSA and Bank of Melbourne all introduced promotional discount rates, with rates down by up to 20 basis points. Bank West also offered discounts to both new owner occupied and investor borrowers. So, the war chests created by the back book repricing earlier in the year – especially investor and interest loans are being used to target new business. As a result, we expect to see a hike in refinancing, especially in the lower LVR owner-occupied sector, as borrowers seek to reduce their monthly outgoings.
We also showed that more households seeking a mortgage are generating multiple applications, sometimes direct to a bank, and sometimes via mortgage brokers, as they seek to find the best deals. More applications are made via online systems, which make the process easier, but the net result of all this is that mortgage conversation rates have fallen from around 80% to 50%, creating more noise, and costs in the system. We think this is a direct results of the banks’ so called omni-channel approach to distribution, which will turn out to be quite costly.
Following the concerns expressed recently by RBA and ASIC on the risks to household finances, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income. Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?
The Treasury added their voice this week, when John Fraser, Secretary to the Treasury, gave an update on household finances and housing as part of his opening statement to the October 2017 Senate Estimates. He expressed the view that debt is born by those with the greater capacity to repay but this belies the leverage effect of larger loans in a rising interest rate environment. He said that “while banks’ progress against these measures has been positive, regulators will need to think carefully about whether future efforts to maintain financial stability should lean against cyclical excesses or address structural risks within the financial system”.
So, we have the full Monty, with all four members of the shadowy “Council of Financial Regulators” expressing concerns about household debt and home price risks. A completed change of tune from the declarations of 2015 when everything was said to be just dandy!
Now those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all-time low. We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.
All members of the “Council of Financial Regulators” which is chaired by the RBA are culpable. This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey! The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability. But too little has been done, too late. And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth. Even now, lending for housing is growing three time faster than incomes or cpi. Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. It’s time to review the regulatory structure and remember that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government! That could prove to be a costly mistake.
And that’s the Property Imperative Weekly to 28th October 2017. If you found this useful, do leave a comment below, subscribe to receive future updates and check back next week for the next installment.