RBA Holds (As Expected)

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year and inflation remains low almost everywhere. One continuing source of uncertainty, despite recent progress, is the trade and technology dispute between the US and China, which has affected international trade flows and investment. Another source of uncertainty is the coronavirus, which is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be.

Interest rates are very low around the world and a number of central banks eased monetary policy over the second half of last year. There is an expectation of a little further monetary easing in some economies. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is around its lowest level over recent times.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. Following this period of balance-sheet adjustment, consumption growth is expected to pick up gradually. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.

The unemployment rate declined in December to 5.1 per cent. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation remains low and stable. Over 2019, CPI inflation was 1.8 per cent and underlying inflation was a little lower than this. The central scenario is for CPI inflation to be around 2 per cent in the near term and to fluctuate around that rate over the next couple of years. In underlying terms, inflation is expected to increase gradually to 2 per cent over the next couple of years.

There are continuing signs of a pick-up in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.

The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. Lower interest rates have assisted with the process of household balance sheet adjustment. They have also boosted asset prices, which in time should lead to increased spending, including on residential construction. Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual.

With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting. Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments carefully, including in the labour market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Mortgage Stress Pushes Higher In January 2020

The latest results from our household surveys to end the end of January reveals that mortgage stress continues to push higher with 32.8% of households now impacted, representing more than 1.1 million borrowing households. In addition expectations of defaults are up to more than 83,400 over the next 12 months.

These results are of no surprise, given the ongoing pressure on incomes and rising costs, despite somewhat lower mortgage rates for some borrowers. The banks of course are deeply discounting rates for new loans, but many borrowers are unable to access these “cheap” deals and are stranded on more expensive rates.

Whilst some households who are not stressed continue to pay mortgages down ahead of time (which is why many claim all is well in mortgage-land), the hard fact is that one third of households are facing ongoing financial pressures. These households are not reducing their debt, rather in some cases they are turning to additional finance to try and bridge the cash-flow gap. Or they are raiding savings if they have them, and are putting more on credit cards.

We analyse mortgage stress in cash-flow terms. If a household is paying out more each month including the mortgage repayments, compared with income received, they are in stress. This is not defined by a set proportion of income going on the mortgage. They may have assets they could sell, but nevertheless in cash-flow terms they are underwater.

Mortgage stress continues to be visible across most of our household segments, with more than half of young growing families exposed (56%), and this includes a number of recent first time buyers.

Those in the urban fringe, especially on new estates are also exposed (50%) but the largest cohort are in the disadvantaged fringe, where incomes are below average as well. More than 300,000 households in this group are exposed, comprising 47.2% of all household in this segment.

Stress also appears in our more mainstream groups, though at a lower level, and we also see our most affluent segments over-leveraged, with 24% of Exclusive Professionals (the most affluent group) and 10.7% of Young Affluent households impacted. In fact our predicted bank losses are more extreme in these groups, as they have larger mortgages and multiple properties.

Across the states, 36.9% of households in Tasmania are registering as stressed, which equates to 31,700 households exposed, followed by South Australia at 34.1% (99,700) and Western Australia at 33.6% or 152,000 households. In TAS and SA prices have remained elevated relative to income and housing affordability continues to deteriorate. Victoria has more than 305,000 household in stress, or 32.9%, while Queensland has 193,000 (28.1%) and New South Wales 304,000 (27.3%). The highest rate of default (a forward-looking estimate over the next 12 months) is in WA at 4.2%, while the national average is 2.2%.

Across the regions, Regional Queensland, Horsham (VIC), Alice Springs and the Southern Half of Tasmania recorded the highest proportion exposed. But the main urban centres of Melbourne, Sydney, Brisbane and Adelaide had the highest counts. Default rates were highest in Curtin WA at 5% and Brand WA (4%). This is driven by multiple years of poor economic performance across the state and underscores that mortgage stress is a precursor to defaults, which tend to occur significantly later. The majority are still working, though income is under pressure. Given current economic headwinds and settings, we expect defaults to continue to rise.

Finally, across the most stressed post codes, WA 6065, which includes Tapping, Wangara and Wanneroo recorded 50% of households in stress, or 7,360 households, followed by Queensland postcode 4350, the area around Toowoomba with 7,000 households in stress, NSW post code 2560, the area around Campbelltown with 6,900 households in difficulty, or 59% of households, and then Victorian post code 3805, the area around Narre Warren, with 6,200 households in stress, which is equivalent to 53% of households.

Most of these areas are fast-growing highly developed suburbs, often on the fringes of our major centres, with many relatively newly built properties on small lots, and often with little local infrastructure. As a result, a significant proportion of income goes on transport costs, and so despite many households having above average incomes, their larges mortgages and high expenses are putting them under continued severe pressure.

Finally, a couple of comments for those in stress, bearing in mind many we survey seem unaware of their plight, because they do not maintain a cash flow. So step one is to draw up a cash flow of money in and money out – ASIC’s Money Smart web site has some excellent tools. Next prioritise spending, and focus on repaying high interest debt (like credit card debt). Third, be cautious of refinancing and restructuring as while this may provide a short term path to relief, unless households in difficulty change their behaviour, it will not be a long-term fix. And finally, do not count on income growth ahead, as given the current economic conditions across the country, we expect wages to remain lower for longer.

And this is a warning too to those contemplating the new first owner incentives. Be conservative in your cash flow estimates, do not count on automatic income acceleration. This would be a path to mortgage stress sooner rather than later.

We plan to publish some stress geo-mapping in a later post.

CBA launches venture building entity X15

Commonwealth Bank has today launched X15 Ventures, an Australian technology venture building entity, designed to deliver new digital solutions to benefit Australian consumers and businesses.

X15 will leverage CBA’s franchise strength, security standards and balance sheet to build stand-alone digital businesses which benefit from and create value for CBA’s core business. CBA customers will benefit from a broader range of solutions which complement the bank’s core product proposition.

The bank will partner with Microsoft and KPMG High Growth Ventures to deliver X15 Ventures. Microsoft will bring its platform and engineering capability to the initiative, while KPMG will provide advisory services.

CBA Chief Executive Officer Matt Comyn said: “We remain focused on bringing together brilliant service with the best technology to deliver exceptional customer outcomes in the core of our business. X15 will enable us to innovate more quickly, and continue to offer the best digital experience for our customers.”

X15 will be a wholly-owned subsidiary of CBA, with funding provided from CBA’s $1 billion annual technology investment envelope, its own delivery model, and a dedicated management team. X15 will be headed by Toby Norton-Smith who has been appointed Managing Director of X15 Ventures.

Mr Norton-Smith said: “X15 allows us to open the door and partner more easily with entrepreneurs than ever before. Under its umbrella, we will create an environment for new businesses to flourish, we’ll empower Australia’s innovators and bring new solutions to market designed to empower customers as never before.

“X15 businesses will be nurtured and developed as start-ups but will have the scale and reach of CBA behind them to achieve rapid growth. We are pleased today to be unveiling our first two new ventures, Home-In, a digital home buying concierge, and Vonto, a business insights aggregation tool. We intend to launch at least 25 ventures over the next five years.”

Microsoft Australia Managing Director Steven Worrall said: “Commonwealth Bank has always excelled in terms of its technology vision and we have partnered with the bank for more than 20 years. Today’s announcement takes that innovation and transformation effort to the next level with the launch of X15 Ventures. I believe that the next wave of major technology breakthroughs will come from partnerships such as this, bringing together our deep technical capabilities and absolute clarity about the business challenges that need to be addressed.”

Amanda Price Head of High Growth Ventures KPMG said: “A performance mindset can be the difference between success and failure for start-ups. We look forward to working with CBA and X15 Ventures to build the ecosystem of support these new ventures need. From founder programs designed to unlock sustained high performance, to business and strategy solutions for high-growth ventures, there will be a wealth of smart tools at their disposal to help them overcome the challenge of scaling at speed.”

Further information:

More information on X15 Ventures, please visit: www.x15ventures.com.au.

Home-in, which is live for select customers today, is a virtual home buying concierge that will simplify the complex process of buying a home. Smart app technology helps buyers navigate the purchase process more easily from end-to-end, leverage a platform of accredited service providers like conveyancers and utility companies, access tailored checklists and a dedicated home buying assistant who will respond to queries with the touch of a button. More information is available at www.home-in.com.au.

Vonto, launched today, is a free app available to all small business owners, not matter who you bank with. It draws data from Xero, Google Analytics, Shopify and other online business tools and presents the data and analytics in one location, allowing users to obtain a quick, holistic and rich view of their business for ease and increased control. For more information on Vonto, please visit: www.vonto.com.au.

Higher superannuation means lower wages: Grattan

Workers overwhelmingly pay for increases in compulsory superannuation contributions through lower wages, a new Grattan Institute paper finds.

No free lunch: higher super means lower wages uses administrative data on 80,000 federal workplace agreements made between 1991 and 2018 to show that about 80 per cent of the cost of increases in super is passed to workers through lower wage rises within the life of an enterprise agreement, typically 2-to-3 years. And the longer-term impact is likely to be even higher.

‘This trade-off between more superannuation in retirement but lower living standards while working isn’t worth it for most Australians,’ says the lead author, Grattan’s Household Finances Program Director, Brendan Coates.

‘This new empirical analysis reinforces that the planned increase in compulsory super, from 9.5 per cent now to 12 per cent July 2025, should be abandoned. Most Australians are already saving enough for their retirement.’

The paper directly measures the super-wages trade-off for nearly a third of Australian workers – those on federal enterprise agreements. But it shows that other workers are also likely to bear the cost of higher compulsory super in the form of lower wages growth.

Despite the claims of some in the superannuation industry, it is unlikely that future super increases will be different from past increases.

It’s true that wages growth has slowed in recent years, but nominal wages are still growing by more than 2 per cent a year, so employers have plenty of scope to slow the pace of wages growth if compulsory super contributions are increased.

And none of the plausible explanations for lower wages growth – whether slower growth in productivity, technological change, globalisation, an under-performing economy, or weaker bargaining power among workers – helps explain why employers would foot any more of the bill for higher compulsory super this time around.

If employers aren’t willing to offer large pay rises today, it’s hard to imagine why they would pay for higher super. In fact, if workers’ bargaining power has fallen, employers are even less likely to pay for higher compulsory super than in the past.

Grattan’s 2018 report, Money in retirement: more than enough, found that the conventional wisdom that Australians don’t save enough for retirement is wrong.

Now this working paper finds that the conventional wisdom that higher super means lower wages is right.

‘Together, these findings demand a rethink of Australia’s retirement incomes system,’ Mr Coates says.

The 11th Hour Regulatory Impact Economic Bombshell

The Cash Restrictions Bill just keeps giving as Economist John Adams and Analyst Martin North reveal a dirty secret.

With a few days before the Senate Economics Legislation Committee delivers their report following the recent hearings, what does this say about the political processes which drives our legislative machine? No wonder the proposed Bill is a mess..

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

Black Swans Squared – The Property Imperative Weekly 1st February 2020

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

  • Contents:
  • 00:20 Introduction
  • 00:40 US Markets
  • 02:00 Coronavirus
  • 06:00 Federal Reserve
  • 10:08 China
  • 13:40 Japan
  • 14:20 UK
  • 15:30 Brexit
  • 16:20 Euro Zone
  • 17:20 Germany
  • 17:45 Deutsche Bank
  • 20:15 Australian Segment
  • 20:15 Growth outlook and the virus
  • 23:30 Economics
  • 24:30 Home Prices
  • 25:50 Confidence
  • 28:00 Markets

Credit Growth Stirs, Perhaps…

Its the last day of January, so the RBA has released their credit aggregates to the end of December 2019 and APRA released their latest modified Monthly Authorised Deposit-taking Institution Statistics.

Looking at the RBA data first, over the past month housing credit stock (the net of new loans, repaid loans and existing loans) rose by 0.3%, driven by owner occupied housing up 0.5%, while investment loans slide just a little, but rounded to zero. Personal credit slid another 0.5% while business credit rose 0.2% compared with the previous month. These monthly series are always noisy, and they are also seasonally adjusted by the RBA, so there is plenty of latitude when interpreting them.

But overall, total credit grew by 0.2% over the month, while the broad measure of money rose just 0.1%.

The three month derived series helps to spotlight the key movements over the past few years. Credit growth for owner occupation rose 1.4%, and it has been rising a little since the May election, and the loosening of lending standards by APRA, and lower rates later. Its low point was a quarterly rise of 1% a few months ago. Investment lending continues to shrink, at 0.1%, but the rate of decline has eased from September, again thanks to loser lending standards. However this also reflects a net loan repayment scheme that many households, in the current tricky environment are on. Personal lending is still shrinking, falling at 1.6%, though the rate of slowing is reversing from a low of minus 1.8%. Business credit is o.4%, but has been falling since October where it stood at 1.8%, reflecting a serious downturn in business confidence and demand for credit. For businesses, the economic backdrop has been a challenging one. The global economy is sluggish and household spending is soft. In this environment business investment in the real economy has lost momentum across the non-mining sectors – weighing on credit demand. Rolling total credit for 3 months is 0.6%, up from a low of 0.5% a couple of months back.

Turning to the annualised data series, housing credit is at 3.1% up from 3.03% last month. Annual owner occupied housing is up 5% from a low of 4.7% in August, while investor loans are down 0.3%, which is the largest fall we have ever seen. Personal credit is 5.1% lower, and that is another record low, while business credit grew by 2.5% on an annual basis, which is the lowest its been for years.

As a result, total credit grew 2.4%, which is the lowest level of growth since 2010, following the global financial crisis. Credit growth has progressively eased after peaking at 6.7% during the 2015/16 financial year. Key to the slowdown was the housing downturn as the cycle matured and lending conditions tightened. On the other hand, broad money is growing at 4.3%, and is significantly higher than last year, which we attribute to the positive terms of trade (thanks to iron ore prices and commodity volumes and RBA open market operations).

So while sentiment bounced after the May Federal election, which removed uncertainty around tax policy for the sector, as the RBA has lowered rates since June by a total of 75bps, with further cuts likely and APRA easing mortgage serviceability assessments; growth is anemaic, and of course sentiment is now in the gutter, thanks to the bushfires, coronavirus, and lack of income growth. While many analysts are predicting a bounce in credit in 2020, and a sentiment turnaround, pressure on global commodity prices and weak international tourism, as well as the drought are likely to take their toll.

We are also seeing more applications for mortgages being received, but also higher rejection rates, so we will see if this will really lead to stronger credit. And given such weak credit, we still question the veracity of the CoreLogic price series, which seems to exist in a different world. Our data supports much weaker average home price growth.

Turning to the APRA Bank series, the total value of mortgages lent (in original terms) grew by 0.34%, which is stronger than the market (0.3%), suggesting that the banks may be clawing back some business from the non-bank lenders, who have been quite active over the past couple of years. Within that owner occupied loans rose by 0.53% in the month, while investment loans grew 0.3%. The rate of growth remains slow.

The total stock of loans did rise, up around $5 billion dollars to $1.09 trillion for owner occupied loans, and up only slightly to $644 billion, giving total exposures of $1.74 trillion, a record. The mix of investment loans fell to a low of 36.9%.

Finally we can examine the portfolio movements by individual lender, which reveals that, according to the data submitted by lenders (which may include some adjustments) CBA grew their portfolio the strongest, up more than $2.2 billion, including both owner occupied and investor loans, followed by Macquarie which continues to drive investor lending very hard, while NAB, Westpac and ANZ grew their owner occupied loans, while dropping their investor lending balances. Bendigo Bank, AMP and HSBC were also active in growing their investor loans. Neo-lender Volt Bank made an appearance in our selected list, while Suncorp dropped the value of both their owner occupied and investor loans. This highlights that lenders are steering quite different paths in their underwriting and marketing strategies. Time will tell whether the new loans being written are more risky.

And in closing, its interesting to note APRA’s release today saying that

The Australian Prudential Regulation Authority (APRA) will expand its quarterly property data publication to include new and more detailed statistics on residential mortgage lending.

In a letter to authorised deposit-taking institutions (ADIs) today, APRA confirmed the next edition of its Quarterly Authorised Deposit-taking Institution Property Exposures (QPEX) publication would include additional aggregate data on residential property exposures and new housing loan approvals.

The decision is part of APRA’s to move towards greater transparency, and will enable more in-depth market analysis by industry analysts, media and other interested parties.

The updated QPEX publication will also feature: 

•             reporting of additional sector-level statistics for the ‘Mutual ADI’ category; and

•             clarified definitions for reported items, specifically for unreported loan-to-value ratios.

APRA Executive Director of Cross-Industry Insights and Data Division, Sean Carmody said: “APRA’s updated Corporate Plan commits us to increasing transparency of both our own operations and the industries we regulate. One of the key ways we can do that is by releasing more of the data we collect.

“With the ADI sector heavily reliant on commercial and residential property lending, enhancing QPEX will translate to greater transparency and sharper insights into one of the most crucial contributors to the economy.”

Consultation is continuing separately on a proposal for quarterly publication data sources to become non-confidential. This would mean that more of the underlying data may be disclosed to the public on a dis-aggregated basis. While this consultation remains open, APRA will continue to publish industry and peer group aggregate data, and mask data in QPEX where an individual entity’s confidential information could be revealed.

The next QPEX will be published on 10 March 2020 for the December 2019 reference period.

The letter to industry and non-confidential submissions can be found at: https://www.apra.gov.au/authorised-deposit-taking-institution-publications-refresh

We believe that the dis-aggregated data should indeed be released – because sunlight remains the best disinfectant to quote Supreme Court Justice Louis Brandeis. Compared with the disclosures in other markets, Australia is so behind the times, on the pretext of confidentially. So we endorse the need for more granular data to help separate the lending sheep from the lending goats.