Digital Finance Analytics (DFA) Blog – Page 1057

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.

Building Approvals Fall In June – ABS

The ABS published their data today on Building Approvals to June 2014. The number of dwellings approved fell 1.1 per cent in June 2014, in trend terms, and has fallen for six months. The seasonally adjusted estimate for total dwellings approved fell 5.0% in June following a rise of 10.3% in the previous month. The seasonally adjusted estimate for private sector houses fell 2.2% in June following a rise of 1.4% in the previous month. The seasonally adjusted estimate for private sector dwellings excluding houses fell 10.5% in June following a rise of 26.7% in the previous month. Clearly the data is volatile month by month, so the trend series tells is more about what is happening. Overall, in seasonally adjusted terms, numbers are down, compared with the peak in January 2014.

Dwelling approvals decreased in trend terms in the Australian Capital Territory (15.2 per cent), New South Wales (1.8 per cent), Victoria (0.8 per cent), South Australia (0.7 per cent), Western Australia (0.7 per cent) and Queensland (0.4 per cent) but increased in the Northern Territory (9.2 per cent) and Tasmania (2.7 per cent). In trend terms, approvals for private sector houses fell 0.4 per cent in June. Private sector house approvals fell in trend terms in South Australia (3.7 per cent), New South Wales (0.6 per cent), Western Australia (0.4 per cent) and Victoria (0.2 per cent), but rose in Queensland (0.3 per cent).

The value of total building approved fell 2.6 per cent in June, in trend terms, and has fallen for seven months. The value of residential building fell 0.5 per cent, while non-residential building fell 7.1 per cent in trend terms. The seasonally adjusted estimate of the value of total building approved rose 3.7% in June and has risen for two months. The value of residential building fell 3.7% following a rise of 14.7%. The value of non-residential building rose 17.9% and has risen for two months.

Continued signs that low interest rates are not translating to strong growth in construction. We still are not building enough properties to meet demand, so expect house prices to continue to rise in some areas at least.

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!

CPI 3% Through Year To June 2014 – ABS

The ABS published the Consumer Price Index for the quarter to June 2014 today. The CPI rose 3.0% through the year to the June quarter 2014, following a rise of 2.9% through the year to the March quarter 2014. The Consumer Price Index (CPI) rose 0.5% in the June quarter 2014, following a rise of 0.6% in the March quarter 2014.

The most significant price rises this quarter were for medical and hospital services (+4.6%), new dwelling purchase by owner-occupiers (+1.6%) and tobacco (+3.1%). These rises were partially offset by falls in domestic holiday travel and accommodation (-3.8%), automotive fuel (-2.7%) and telecommunication equipment and services (-1.6%).

This is at the top end of the RBA target, and highlights the fact they continue to have to balance, inflation, interest rates and other factors. They are still caught in the middle. Inflation is being assisted by the higher dollar exchange rate.

Government To Review Retirement Income Rules

The Treasury today announced a review seeking feedback on the types of products which would be appropriate for people approaching or in retirement with a focus on ensuring they do not out live their savings.

The Government’s superannuation election commitments include reviewing:

the regulatory barriers restricting the availability of relevant and appropriate income stream products in the Australian market; and

the minimum payment amounts for account-based pensions, to assess their appropriateness in light of current financial market conditions.

Given their interactions, this discussion paper Review of retirement income stream regulation forms the basis for consultation on both reviews.

In addition, on 14 December 2013, the Government announced it would not proceed with the previous government’s unlegislated measure to facilitate the provision of deferred lifetime annuities and that it would instead consider the proposal as part of the review of the regulatory arrangements for retirement income streams. This paper also provides a basis for consultation on extending concessional tax treatment to deferred lifetime annuities.

The Government welcomes views on this discussion paper, and written submissions will be accepted until 5 September 2014.

We believe there is opportunity to create new products and services, provided they are fairly priced and transparent. In our review of the demand for annuity products in Australia, we found that many were concerned about these issues, and of course the UK just moved from a mandatory annuity structure to allowing retirees complete freedom to save and spend as they please. They had a major mess previously. DFA believes that households should not be forced to take a particular solution, but products correctly structured and priced would be of significant help. We know from our household surveys that many are not saving sufficient to support their expected life in retirement. Indeed many had no clear expectation of how long they might live, and what they might need to have invested.