Who owns central banks, and how accountable are they? We start a series looking at these important questions.
Hopes And Fears – The Property Imperative Weekly 30th Nov 2019
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents
00:20 Introduction
00:55 US Markets
01:30 Trade Talks
05:15 Japan
05:55 Eurozone
06:20 Germany
07:10 UK
08:25 China
10:40 Australian Section
10:40 Westpac
13:30 Westpac NZ
14:30 Home Sales (HIA)
15:40 Net Government Debt
18:25 RBA on QE and Wages
19:00 Property prices and auctions
20:50 Markets
Auction Results 30 Nov 2019
Domain released their preliminary results for today.
Clearance rates are sliding as we approach the summer break, but still higher than last year. More sold volume than then too.
Canberra listed 69 auctions, reported 47 and sold 30 with 1 withdrawn and 17 passed in. Domain reports a 63% clearance, but we get 43%.
Brisbane listed 88 auctions, reported 25 and sold 16 with 3 withdrawn and 9 passed in. Domain reports a 57% clearance, but we get 18.2%.
Adelaide listed 79, reported 44 and sold 35, with 5 withdrawn and 9 passed in. Domain reports a 71% clearance, but we get 44.3%.
In Sydney we get 59.8% and in Melbourne 54.9%.
A Spanner In The Works!
We discuss the machinery of Government in the light of the cash restriction bill. How come 2,600+ submissions are judged as not relevant?
Committee Members
- Chair Senator Slade Brockman Liberal Party of Australia, WA
- Deputy Chair Senator Alex Gallacher Australian Labor Party, SA
- Member Senator Andrew Bragg Liberal Party of Australia, NSW
- Member Senator Jenny McAllister Australian Labor Party, NSW
- Member Senator Susan McDonald The Nationals, QLD
- Member Senator Rex Patrick Centre Alliance, SA
Deleveraging Despite Low Rates And “Booming” Housing Markets… [Video]
We examine the latest credit data from the RBA and APRA. Who says credit growth is booming?
https://www.rba.gov.au/statistics/frequency/fin-agg/2019/fin-agg-1019.html
https://www.apra.gov.au/monthly-authorised-deposit-taking-institution-statistics
Deleveraging Despite Low Rates And “Booming” Housing Markets….
The end of the working month heralds another set of credit stats from both the RBA and APRA. The RBA reports via their Credit Aggregates, which is all credit stock in the system, while APRA reports on the banks (ADI’s) and also provides some individual lender loan stock data. And which ever way you look at it, credit growth is still anaemic, as the “great deleveraging” continues. And given the weak credit impulse, home prices may also be growing more slowly than many are claiming, though that is another story, for another day.
The RBA said that housing credit growth overall was 0.3% higher in October, compared with 0.2% in September. This translates to an annual rate of 3% to October (3.1% last month), compared with 5% just a year back.
Monthly owner occupied lending rose 0.4% while investor housing lending was flat. Personal credit fell another 0.6% in the month, and business lending was down 0.1%. As a result total credit rose just 0.1%, down from 0.2% last month. Broad money was higher though.
Over a rolling 3 months view, owner occupied credit grew 1.3% while investor credit was down 0.2%, other personal credit was down 1.8% and business credit was up 0.6%.
Looking across the rolling 12 month view, housing credit growth dropped from 3.1% to 3%, with owner occupied lending at 4.8% and investor lending down 0.2%. Business credit was 2.7% higher, and personal credit dropped by 4.7%.
As a result, total credit was just 2.5%, as lower as its been for many years, although broad money rose 4.2%.
APRA’s new data series continues to contain some surprises. Total lending stock by the banks rose to $1.73 trillion, up 0.2% in the month.
The share of investor loans continues to fall, to around 37.2%, and this is explained by investor loan stock falling by 0.21% in the month, compared with a rise of 0.44% for owner occupied loans. The series still looks a bit weird, so we wonder if there are still reporting issues.
The individual banks stocks of loans varied, with CBA extending their book (consistent with our industry research, as one of the easier lenders at the moment), along with Macquarie – both of which grew both investor and owner occupied pools. NAB and ANZ dropped investor loans, but extended owner occupied loans. But Suncorp and Westpac dropped BOTH investor and owner occupied loan balances (assuming the reporting is correct – lets see if we get a reversal next month).
Finally, market shares hardly changed, with CBA the largest owner occupied lender and Westpac the largest investor loan provider.
Given the weak credit growth, this puts into sharp contrast the reported rises in home prices. We know transaction volumes remain low, but our industry contacts indicate a stronger pipeline of applications. Despite this the run-off of existing loans is translating to low net growth.
Even then, loan growth is still strong relative to income growth. But actually the most significant element is the fall in business credit, as more sectors come under pressure.
These results appear to be at odds with the RBA’s glass half full view of the economy, and may indicate more weakness in the GDP out-turn next week.
Pressure To Ditch The Cash Ban Rises
We look at the latest media cover of the cash transaction limit, which is being reviewed in the Senate.
Shane Wright in the SMH today.
Our earlier post on the Victorian Branch vote to axe the ban.
The One Australian Economic Question that Matters
Damien Klassen from Nucleus Wealth penned this recently. It is an excellent summary of the critical issue in play – Can rising house prices drive the rest of the economy on their own without a construction boom? Note the disclaimer below.
I’ve written a few times recently about the imbalances in the Australian economy and how messed up the Australian housing cycle is. It looks as if the Australian economy is hanging on to positive growth based on one factor. Without that factor, there is significant economic downside. The one economic question that matters:
Can rising house prices drive the rest of the economy on their own without a construction boom?
There are three main areas to indicate if this is the case. Two have come out with more negative data since I last posted. One is a glass half empty: better current conditions, worse future conditions.
Upside Case
Can rising house prices drive the rest of the economy on their own without a construction boom?
For the optimists, the answer is a resounding yes. House prices have not only stopped falling but have risen over the last few months. Buyer queues are out the door for limited supply which will inevitably mean rising house prices. And Morrison’s 95% lending for first home buyers hasn’t even begun yet. Investors will follow first home buyers, which will lead prices higher and then upgraders will start buying again. Rising property prices will mean consumers will start spending once more, construction will recommence, and a new Australian economic growth cycle will begin.
It would appear that the Federal Government has this belief.
Downside Case
Can rising house prices drive the rest of the economy on their own without a construction boom?
The poorer arguments mounted by pessimists tend to have a moral angle: house prices are too high for children to afford, they will have to come down to a level that an ordinary person on a regular salary can afford. If that occurs, house prices will fall 30-40%. While these arguments are compelling from a social justice perspective, or on a long term basis, the same arguments have been valid for 15 years. Timing is important:
Other weak arguments base the downturn on extrapolating no intervention from governments. We know the current government is hell-bent on intervening in the housing market.
The better argument is that even if construction approvals rebound, employment would fall for at least another year as the construction decisions made over the past two years affect the number of people employed. And construction approvals are not rebounding.
Rising unemployment in Perth led to a 10% house price fall in the 2012-2017 period while Sydney/Melbourne house prices boomed. What is to stop the same fate for Australia as a whole?
Per capita income has gone nowhere for 7 years, so it is hard to see any rescue coming from that front:
If rising unemployment does mean house prices fall further, then there are a range of probable adverse effects. There are some seriously negative economic effects if the effects snowball. And we won’t even get started about the impact on a fragile Australian housing market if an international shock (Brexit, Trade wars, Hong Kong unrest, corporate debt accidents, European recession) hits.
It doesn’t need to be one or the other
You don’t need to buy into the entire negative story to be cautious. If employment holds up, then the positive story has a chance (assuming benign international conditions). But, if unemployment rises, then Australia won’t need a global shock to see house prices resume a downward path.
When presented with an asset class that has limited upside in positive scenarios and significant downside in adverse scenarios, I usually opt to avoid the asset class and look for returns elsewhere.
Update 1: Australian Credit growth:
The Royal Commission into banking reversed the credit boom and was enough to see house prices down around 10%. This came even while most other factors affecting house prices were still positive.
Will the Morrison government manage to get the already over-levered Australian households to take on even more debt? If I am too bearish, particularly in the short term, this is where you will see the effects. So far there are none:
On the regulatory front, the Westpac v ASIC responsible lending court case win for Westpac has the potential to lead to easy lending conditions. ASIC is taking the case to the Federal court, so we are in limbo for some time.
Update 2: Unemployment
There is not enough space here to go into the detailed links between house prices and unemployment. Indicatively, during the 2012 to 2017 housing boom years, the Perth market faced mostly the same factors as Sydney/Melbourne except for (a) slightly weaker population growth and (b) rising unemployment. And Perth property prices fell more than 10% while the rest of Australia boomed.
We are expecting considerable job losses in the construction sector.
Having said that, construction jobs have been resilient so far. Forward indicators (job ads and approvals) continue to point to sizeable job losses.
Source: ABS, Seek, UBS
Add to this scenario, job losses from state government austerity as budgets have been struck by falling transaction numbers in the housing market:
Finally, any global shock (trade wars, recessions, debt crises) is likely to be transmitted to the housing market through higher unemployment.
Update 3: Foreign Buyers
Foreign demand was substantial for both the boom and the bust:
China cracking down on its capital account and deteriorating relations between Australia and China suggests foreign investment will remain low.
The question is whether Hong Kong unrest translates to increased demand for Australian property.
The Answer
So, the answer to the one question
Can rising house prices drive the rest of the economy on their own without a construction boom?
will be found in whether increases in unemployment remain contained.
I’m skeptical. But if I’m wrong, the charts above will be where we will see the signs.
Recent data suggest my skepticism is warranted.
Disclaimer
This blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.
ASIC and APRA issue updated MoU
The Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) have committed to strengthen engagement, deepen cooperation and improve information sharing.
The agencies today published an updated Memorandum of Understanding (MoU).
The updated MoU follows on from the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry[1]. APRA and ASIC are also working closely with Government on the legislative changes required to implement these recommendations.
ASIC Chair James Shipton said the updated MoU builds on the open and collaborative relationship across all levels of the agencies.
‘ASIC and APRA will continue to proactively engage and respond to issues efficiently to deliver positive outcomes for consumers and investors.
‘The MoU facilitates more timely supervision, investigations and enforcement action and deeper cooperation on policy matters and internal capabilities.’
APRA Chair Wayne Byres said enhanced cooperation reinforced the twin peaks model of regulation that has operated in Australia for more than 20 years.
‘ASIC and APRA share an interest in protecting the financial wellbeing of the Australian community and achieving a fair, sound and resilient financial system,’ Mr Byres said.
‘Strengthening engagement is a key priority of the ASIC Commissioners and APRA Members. We will continue to work closely together to enhance regulatory outcomes and achieve our respective mandates.’
This MoU, which will be reviewed on a regular basis, is only one aspect of how ASIC and APRA are establishing closer cooperation. Led by ASIC Commissioners and APRA Members, the agencies are regularly meeting under a revised engagement structure and working together on areas of common interest, including data, thematic reviews, governance and accountability. Both agencies are committed to detecting prudential and conduct issues early and working to revolve them efficiently and effectively.
The updated MoU is available on the ASIC website here.
Broker Best Interests Duty Bill Released
The final best interests duty bill for mortgage brokers has been tabled in Parliament, outlining the role brokers need to take when helping a borrower from 1 July 2020. From The Adviser.
The amended Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 has been tabled in Parliament today (28 November).
The key features of the new law are:
- mortgage brokers must act in the best interests of consumers in relation to credit assistance in relation to credit contracts;
- where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts;
- mortgage brokers and mortgage intermediaries must not accept conflicted remuneration;
- employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries; and
- the circumstances in which these bans on conflicted remuneration apply are to be set out in the regulations.
Notably, the duty to act in the best interests of the consumer in relation to credit assistance is a principle-based standard of conduct that applies across a range of activities that licensees and representatives engage in.
As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract.
The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. Instead, it is the responsibility of mortgage brokers to ensure that their conduct meets the standard of “acting in the best interests of consumers” in the relevant circumstances.
However, the new duty will mean that there could be circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with. For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s “best interests”, the accompanying documentation reads.
The penalty for breaking this duty for both credit representatives and licensees is 5,000 penalty units.
Examples of the duty in action – white label called in question
In the explanatory materials, there are examples of steps that may need to be taken for this new duty. These include:
- prior to recommending any home loan product or other credit contract to a consumer based on consideration of that consumer’s particular circumstances, the mortgage broker may need to consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
- any recommendations made would be expected to be based on consumer benefits, rather than benefits that may be realised by the broker; that is, a broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer;
- in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.
Interestingly, the new duty also outlines that “a broker would not suggest, from their aggregator’s panel of lenders, a white label home loan that has the same features as a branded product from the same lender, but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product”.
The explanatory materials go on to outline that during a periodic review, a broker “would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests”.
“For example, it may be a breach of the duty if the broker suggested the consumer remain in their current home loan when they could refinance to a cheaper product as the broker did not want to incur the consequent liability to the lender when their commission payments were clawed back,” it reads.
Helping consumers understand their decision implications
The materials also outline that there may be situations where the consumer does not properly understand the implications of different choices and so the broker may have to assist them to understand why a particular loan is or is not in their best interests, which could inform the brokers’ actions.
An example given is if a consumer asks the broker if they should take out an interest-only home loan on a property they are looking to buy. The home loan will have a higher interest rate than a principal and interest home loan. The broker helps the consumer to understand the difference in cost of the two home loans, and other differences in the way in which they operate, including that the consumer will only build equity if the property’s value increases or they make additional repayments, and the implications of moving to higher repayments at the end of the interest-only period.
Another example is if a consumer asks the broker if they should take out a home loan with an offset account as they have heard this can save them money, even though the interest rate is slightly higher. The broker helps the consumer to understand what is in their best interests, based on the difference between the higher interest rate and the savings that consumer could reasonably expect through utilisation of the offset account.
Comments from Frydenberg
At the second reading this afternoon (28 November), Treasurer Josh Frydenberg said: “[T]he bill introduces a best interests duty for mortgage brokers that will ensure that consumers’ interests are prioritised when a mortgage broker provides credit assistance, as regulated by the National Consumer Credit Protection Act 2009. In practice this will mean that, in accordance with Commissioner Hayne’s recommendations, a duty will apply in relation to the provision of consumer credit assistance and not business lending.
“The government is also reforming mortgage broker remuneration, and the bill provides for a regulation making power to this end. The regulations will require the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount; ban campaign and volume based commissions and payments; and cap soft dollar benefits.
“Further, the period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited.
“After careful consideration, the government decided to delay consideration of aspects of Commissioner Hayne’s recommendations for mortgage brokers—namely moving to a borrower-pays remuneration structure. We will be doing a review with the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC). That will be carried out in three years time.
“Implementation of these reforms, as recommended by the royal commission, is a critical component of restoring trust and confidence in Australia’s financial system and is part of the Morrison government’s plan for a stronger economy.”
The government will also introduce the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Bill 2019. The Bill implements a further four additional commitments the Government announced at the time of responding to the Royal Commission and will ensure that ASIC can effectively enforce existing laws.
“The government is taking action on all 76 recommendations contained in the Final Report of the Royal Commission and, in a number of important areas, is going further. Restoring trust in Australia’s financial system is part of our plan for a stronger economy,” Mr Frydenberg said.