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.
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.
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.
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.
Broadcast on Thursday 28th November 2019, Nucleus Wealth’s Head of Investment Damien Klassen, Head of Operations Tim Fuller, and founder of Digital Finance Analytics, Martin North discuss “Australia’s Housing Market Dilemma.”
According to an article in InvestorDaily, RBA Governor Philip Lowe has poured water on the prospects of quantitative easing (QE), saying Australia “shouldn’t forget about fiscal policy” to prevent a recession.
“QE is not on the agenda at this time,” Governor Lowe told at the annual dinner of the Australian Business Economists.
Interest
rates will have to hit 0.25 per cent before the RBA considers QE –
something that economists are predicting by mid-2020. But Governor Lowe
doesn’t think QE will be necessary, saying that the Australian economy
is in a good position and that the RBA will achieve its goals.
“At
the moment, though, we are expecting progress towards our goals over
the next couple of years and the cash rate is still above the level at
which we would consider buying government securities.”
However,
Governor Lowe hinted again that he would prefer the use of fiscal policy
rather than monetary policy to ward off a recession, citing a report
from the Committee on the Global Financial System (CGFS), which he
recently chaired.
“The
report also notes that there may be better solutions than monetary
policy to solving the problems of the day,” Governor Lowe said.
“It
reminds us that when there are problems on the supply-side of the
economy, the use of structural and fiscal policies will sometimes be the
better approach. We need to remember that monetary policy cannot drive
longer term growth, but that there are other arms of public policy than
can sustainably promote both investment and growth.”
Governor Lowe
also said that the willingness of central banks to provide liquidity
could reduce the incentive for financial institutions to hold their own
adequate buffers and create an “inaction bias” from prudential
regulators or fiscal authorities.
“If this were the case, it could lead to an over-reliance on monetary policy,” he said.
The
sentiments about quantitative easing have been echoed by fund managers.
Sarah Shaw, chief investment officer at 4D infrastructure and Chris
Bedingfield, principal at Quay Global Investors have urged the
government to instead allocate investment in infrastructure to create
jobs and boost productivity.
Ms Shaw noted the need to replace
roads, bridges and other structures with better planned
“forward-thinking” infrastructure is high.
“If you think about the
need for infrastructure spend that I’m talking about, if you put a
number on it, it’s maxed at $4 trillion by 2040 of infrastructure
capacity that’s needed,” she said.
“If you think about that and
you’re in an interest rate environment as low as it is today, if you’re
not borrowing to invest in a much-needed infrastructure, then there’s
something wrong.”
She added she looks for companies that are
locking in fixed term bet to invest for future cash flows, because “now
is the time to do it” with the current low cash rate.
“Why shouldn’t countries be doing that?” Ms Shaw queried.
“I’ll
give you an example: China during the GFC, biggest form of quantitative
easing – 35,000 kilometres of high-speed rail. That’s the sort of
quantitative easing that we should be looking at here in Australia.”
VanEck has predicted there will be more rate cuts in 2020.
As discussed with John Adams in our recent post, we did not come away with the same conclusion, and Westpac, for example is forecasting QE will hit during 2020.
