Digital Finance Analytics (DFA) Blog – Page 1052

RBA Highlights Housing Supply Issues And Lending Regulation

The RBA made a statement today to the Inquiry into Affordable Housing. Several points to note:

1. They recognise the high price to income ratio we currently have, but also state that low rates make larger mortgages affordable.

the ratio of housing prices to incomes is at the top of its historical range; but

over time, this has been more than offset by falls in financing costs, so that the typical repayment burden as a share of income is not particularly high. This of course does not rule out affordability problems in particular market segments or for particular types of households.

The recent data from the Economist shows the relative data of prices against average income in different countries.

2. Supply of mortgages is not a constraint

there is no shortage of housing finance in Australia. Housing loan interest rates are currently as low as they have been in a generation, and households are not artificially constrained from borrowing as much as they can reasonably be expected to repay. I have already made the point that perceptions of affordability will differ across different types of households; but, if there is a perceived affordability problem in Australia, it is not due to a lack of finance.

3. There are property supply problems

It is the supply response that determines the extent to which additional demand results in higher prices over time. Our submission highlights that Australia faces a number of longstanding challenges in this area, including regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry. There are also obstacles to affordable housing created by Australia’s unusually low-density urban structure, though this is gradually changing.

4. Lending practice reinforcement and other measures are on the cards

the Bank said in its Financial Stability Review last week that the composition of housing and mortgage market activity is becoming unbalanced. The review also indicated that we are discussing with APRA steps that might be taken to reinforce sound lending practices, particularly for investor finance, though not necessarily limited to that.

I want to emphasise that the banks in Australia are resilient, and mortgage lending in this country has historically been relatively safe. APRA has, however, noted a trend to riskier lending practices, and over the past couple of years has been seeking to temper these through its supervisory activities. There are also broader concerns with the macroeconomic risks associated with excessive speculative activity, since this activity can amplify the property price cycle and increase risks to households.

Our discussions with APRA and other agencies on these matters are ongoing, and there will be more to say about them in due course

Total Housing Lending Hits Another High At $1.39 Trillion – RBA

The monthly Financial Aggregates from the RBA for August are out, and shows yet another growth in housing lending. Total housing credit grew at an annual 6.7%, business credit at 3.2% and personal credit 1.1%. Total housing was $1.39 trillion, and now represents 60.7% of all bank lending, the highest it has ever been. In 1990, housing lending was 23% of all bank lending. The red area chart shows the relative proportion of housing lending, compared with all lending. The difference between the APRA number of $1.28 trillion represents the non-bank sector.

Here is the lending mix data right back to 1990 showing the proportion of the banks books in housing finance, as a total of all lending.

Looking at the mix of housing loans, investment lending makes up 33.9% of all housing lending, it has never been higher. Owner occupied lending was worth $919 billion, and investment lending, $471 billion. These are all seasonally adjusted numbers. The red area chart shows the relative proportion of investment housing lending, compared with all housing lending.

Looking at the relative growth, we see that investment lending grew 0.8% last month, whilst owner occupied loans grew 0.4%, seasonally adjusted.

The 12 month averages, which smooth some of the noise in the data shows strong investment growth, at 9.2%, the strongest for several years, (the all time high was in the credit fueled heights of 2003. when it reach more than 25%). Owner occupied growth was slower at 5.4%, but still the strongest since 2012.

Looking at business lending, we see it falling as a proportion of all lending, to 33%, and worth $760 billion. The red area chart shows the relative proportion of business lending, compared with all lending.

Personal credit (other than housing) fell to 6% of all lending, and worth $142 billion. The red area chart shows the relative proportion of other personal lending, compared with all lending.

Our banks are more and more reliant on housing lending, raising questions about concentration risks, should housing take a negative turn. We encourage the FSI to consider seriously the steps needed to re-balance the equation.

Deja Vu Housing Data For August From APRA

APRA published their monthly banking statistics for August 2014 today. The trend remains set, with investment lending running ahead of owner occupied lending. Further evidence that the RBA should react to the hot market. Total lending was up by $7.4 billion to a total of $1.28 trillion. Owner Occupied loans grew at 0.48% from last month, whilst investment loans grew at 0.78%. 65.4% of loans were for owner occupation, the rest investment. This data excludes the non-bank sector, which will be reported separately.

Looking at the bank specific data, Westpac leads the way on Investment Loans, with CBA continuing to grow its relative share of investment lending. Should the rules of the game change, thanks to RBA intervention, then WBC and CBA (the Sydney based banks) are likely to feel the heat more than the others. Competition amongst the big players is hot, with significant discounts and special offers available to lure prospective borrowers. Lending growth is still well behind property price rises in most centres.

In terms of relative market share, WBC has 32% of all Investment loans, and CBA 26.9%. On the Owner Occupied loans, CBA has 27.2% of the market and WBC 21.4%.

Looking at portfolio movements, in the past month, WBC has been lending the most, note also Macquarie is active as it continues its strategy to grow its retail business.

Another way to look at this growth pattern is by month on month percentage movements. Relatively, Macquarie is the most aggressive, followed by AMP bank.

Turning to the other data in the statistics, on the deposit side, balances grew by 0.75%, to $1.749 trillion. This is a slowing from the previous 1.02%, perhaps reflecting falls in average deposit rates relative to other investments.

In terms of monthly movements, nab has been the most aggressive amongst the larger banks, together with HSBC from the smaller players. Relatively speaking, Suncorp, Rabobank and Bendigo went backwards.

Looking at relative shares, CBA has 24.2%, WBC 21.0% and nab 17.6%. This chart highlights the concentration in the big four, with a combined 78.4% of all deposits. With deposits backed by the government guarantee, these might be viewed as government back funds, and this helps to prop up the credit ratings of the major players. The Australian Government has guaranteed deposits up to $250,000 in Authorised Deposit-taking Institutions at the moment. There is a case to review this, and we wonder if the FSI report, due soon will mention it.

Finally, Cards. The balances on cards are at $40 billion, just $130m up from last month.

CBA has 27.9% of the market, Westpac 22.9% and ANZ, 19.6%. The big four have combined 84%, and with Citigroup’s 10%, the five have close to 95%.

So, in summary, deja vu. Hot investment lending, industry concentration, and large deposit balances guaranteed.

Household Incomes And Property Segmentation

In the current discussions about macroprudential, stimulated by the RBA comments last week and likely to be stoked further as the RBA appears before the Senate Banking Committee on Thursday, many are claiming that household balance sheets and incomes are supporting the growth in house prices, and so no intervention is needed. The chair of the Banking Committee Sam Dastyari is “concerned about the unanticipated consequences of the Reserve Banks’s view-change on the sustainability of the housing boom and whether it needed to interfere with bank lending”.

The debate has shifted to first time buyers, and not wishing to put further barriers in the way of the small number able to enter the market at prices which are already too high. They may be missing the point. First, the increase in household wealth is directly linked to the rise in house prices (a weird piece of feedback here, as prices rise, households are more wealthy, so can accommodate higher prices – spot the chicken and egg problem?). In addition, wealth is growing thanks to stock market movements (though down recently) driven partly by the US and European low rates and printing money strategies. This will reverse as rates are moved to more normal levels later. Superannuation, the third element is of course savings for retirement, so cannot be touched normally (there are exceptions, and no, first time buyers should not be allowed to use their super to get into the property market). More first time buyer incentives won’t help.

But, we have been looking at household incomes, after inflation, at a segment level. We segment based on property ownership, and you can read about the DFA segments here. On average, across all households, income growth is falling behind inflation. This is the ABS data from June 2014. In the past few months, real income is going backwards, before we consider rising costs of living.

However, at a segment level, the situation is even more interesting, and diverse. Those wanting to buy, but unable to enter the market are seeing their incomes falling sharply, inflation adjusted, making the prospect of buying a house more unlikely. We are seeing the number of households in this group rising steadily, see our Property Imperative Report.

First time buyers, those who have, or are purchasing for the first time, are also seeing income falling in real terms, more sharply than the average. This is why we are predicting a higher proportion of first time buyers will get into mortgage stress, especially if interest rates are increased. This is one reason why loan to income ratios for this group are high.

Then looking at holders, their incomes are moving closer to the average. Holders have no plans to change their property, many have mortgages.

Refinancers, are hoping to lock in lower rates, though we note the forward rates are now higher than they were, which may suggest the lowest deals are evaporating. One of the prime motivations for switching in this segment is to reduce outgoings, not surprising when we see incomes falling faster than the average in real terms.

Now, looking at Up Traders, we find their incomes are rising more quickly than the average. Up Traders have been active recently. They have the capacity to service larger loans. They will be purchasing primarily for owner occupation.

Down Traders have incomes rising more quickly, thanks to investment income, and there still about one million households looking to sell and move into a smaller property, releasing capital in the process. They are also active property investors, directing some of their released capital in this direction, either direct, or via super funds.

Investors also have incomes which are rising faster than the average, so no surprise they are active in the market, seeking yields higher than deposits, and taking advantage of negative gearing. We continue to see a small but growing number of investors using super funds for the transaction.

So, the segmental analysis highlights how complex the market is, and that there are no easy fixes. Any rise in interest rates would hit first time buyers very hard. Demand from investors (the foreign investment discussions is only a sideshow in my view) will be sustained, with the current policy settings. Raising interest rates will not help much on this front, because interest will be set against income. So macroprudential controls on investment loans makes more sense.

One option would be to differentially increase the capital buffers the banks hold for investment loans, making their pricing less aggressive, and the banks more willing to lend to suitable owner occupiers and businesses, which is what we need. Trimming demand for investment properties may help to control prices.

The bottom line though is that many years of poor policy are coming home to roost, on both the supply and demand side. A number of settings need to be changed, as discussed before.

My Recent Thoughts On House Prices

I did an interview for the ABC, on the RBA Financial Stability Review. Here is the transcript, courtesy of the ABC. The link to the interview, and my longer interview can be found at the ABC site.

By way of context, a quick reminder of current house price trends from the Economist:

CHRIS UHLMANN: The Reserve Bank (RBA) has given its strongest warning yet that a dangerous property price bubble in Sydney and Melbourne could destabilise the economy.

It’s now ramping up talks with other regulators to introduce lending controls to head off the risk of a damaging correction in prices.

With more I’m joined by our business editor, Peter Ryan.

And Peter, these warning have been around for the past year. Is the Reserve Bank starting on the back foot?

PETER RYAN: Well, this was certainly very strong language from the RBA yesterday that investment in Australian property is now becoming “unbalanced” and that the speculation increases the potential for current stellar prices to fall.

Now the RBA is now worried about the broader impact of any correction or a hard landing and how that would hurt not just the speculators but average Australians whose biggest single investment is usually the family home.

The property analyst Martin North says unless the RBA intervenes with tighter controls, there could be a correction in the range of 20 to 25 per cent and that some borrowers could find themselves overwhelmed in debt – in other words facing negative equity.

MARTIN NORTH: Property prices have been high for a long period of time so this is not just a little bubble. This is a long term systemic issue.

So what’s been happening is it’s been sucking a lot of money from people’s pockets out to pay the mortgage, right? Secondly, people have been committing to buy at the top of the market and so if prices were to move down, a lot of people who’ve bought relatively recently would be out of the money and that’s very significant.

A lot of those are investors – and investors will change their tune quite quickly, you know, particularly if capital growth is no longer in the sector. So yeah, this is a very unstable situation.

Also, the banks have a huge exposure to property, probably one of the highest exposures in the world and that means that whatever happens to the property market is going to impact not only individuals but also the banks as well.

PETER RYAN: If there was a correction and those property speculators decided to sell while they could and the market was flooded with properties, what impact would that have on the general market?

MARTIN NORTH: We will probably see a downward swing and that downward swing would gain quite a lot of momentum. I wouldn’t be surprised to see prices slipping by 20 to 25 per cent. It will probably self-correct a little bit beyond that but it’s that, it’s that sort of slide down and then up which is the problem.

PETER RYAN: And that of course is a huge problem for borrowers who bought at the top of the market, borrowed too much and are now over their heads in debt.

MARTIN NORTH: The real issue there of course is all the people will find that they’re in negative equity at a point. In other words, they can’t then sell. So we could find the situation where people are trying to sell, are being forced to sell. That will tend to drive prices further down, probably languish for quite some time because we have to correct back to long term averages between income and property prices in my view.

So this is more like I think the early signs of some of the things that happened in the US prior to the GFC.

CHRIS UHLMANN: Property analyst Martin North.

So Peter, can we expect to see action on lending controls from the Reserve Bank?

PETER RYAN: Well, the RBA governor Glenn Stevens is speaking in Melbourne later today and as always his comments will be scrutinised on perhaps when and how the RBA might intervene to prevent any property bubble bursting.

CHRIS UHLMANN: Business editor Peter Ryan, thank you.

Macroprudential Tools could prove useful – RBA

In a speech in Melbourne, the RBA governor, Glenn Stevens said macroprudential tools could prove useful in helping to control the exuberant housing market. That said, he was still skeptical about their effectiveness.

He made the point that whilst monetary policy can’t solve every problem (i.e. interest rates alone) and there may be a need to take other steps if “at the margins they are helpful,”he didn’t consider macroprudential tools a simple solution to the problem, referred to in yesterdays Stability Review of strong investment lending. A reminder of the latest data, which we discussed recently.

He reiterated his concerns about the risks of investment loans, and highlighted the potential risks later, echoing yesterdays report.

No mention of macroprudential as a fad this time, which I guess is a step in the right direction. The IMF and OECD seem more convinced of the effectiveness of macroprudential. DFA’s view is we need them, and soon, alongside changes to negative gearing, and increased capital buffers.

It is interesting to note that U.S. regulators have announced that large banks will be required to hold more liquid capital to ensure they do not get into difficulty in a downturn. According to Reuters the eight biggest U.S. banks must boost capital levels by a total of $68 billion under these new rules. These rules are stricter than those under Basel III, and the banks have complained they will be put at a competitive disadvantage. They will need to hold tier one assets of 5%.