The Federal government has today announced that it will be commissioning an independent review of the retirement income system, via InvestorDaily.
This
review was recommended by the Productivity Commission in their report
Superannuation: Assessing Efficiency and Competitiveness and comes 27
years after the establishment of compulsory superannuation.
The
review will look at the three pillars of the existing retirement income
system, being the Age Pension, compulsory superannuation and voluntary
savings.
In doing so, the review will cover the current state of
the system and how it will perform in the future as Australians live
longer and the population ages.
Through its work, the review will
establish a fact base of the current retirement income system that will
improve understanding of its operation and the outcomes it is delivering
for Australians.
The review will be conducted by an independent three person panel.
Mr
Michael Callaghan AM PSM, a former Executive Director of the
International Monetary Fund and a former senior Treasury official will
chair the review, together with fellow panellists Ms Carolyn Kay, who
has more than 30 years’ experience in the finance sector across roles
both in Australia and overseas, including as a member of the Future Fund
Board of Guardians, and Dr Deborah Ralston, who is a Professorial
Fellow in Banking and Finance at Monash University, a member of the
RBA’s Payments System Board and most recently chair of the Alliance for a
Fairer Retirement.
A consultation paper will be released in November 2019 and the final report provided to Government by June 2020.
The
Review will establish a fact base of the current retirement income
system that will improve understanding of its operation and the outcomes
it is delivering for Australians. It aims to identify how the
retirement income system supports Australians in retirement, the role of
each pillar in supporting Australians through
retirement, distributional impacts across the population and over time
and the impact of current policy settings on public finances.
FSC
CEO Sally Loane said the FSC will work closely with the review to ensure
continuing improvements to Australia’s retirement income system,
particularly through the superannuation system.
“Superannuation
consumers receive significant benefits from competition and choice, and
this will be an important focus of the FSC’s approach to the Review,” Ms
Loane said.
“However, this review should not delay important
reforms that the Government has already committed to that will
significantly improve consumer outcomes in superannuation.
“These
include the introduction of a ‘default once’ framework to prevent
unintended multiple accounts, as recommended by both Commissioner
Kenneth Hayne and the recent Productivity Commission review of
superannuation, and legislating an obligation for trustees to consider
the retirement needs of their members.”
The FSC will also suggest
to the review that the government should retain its policy of increasing
the Superannuation Guarantee to 12 per cent. The FSC also suggests that
superannuation laws should be simplified and red tape in the sector
should be removed including barriers to rationalising legacy products.
“The
FSC looks forward to advocating strongly for these positions during the
Review process over the coming year,” Ms Loane said.
AMP welcomed
the review and said a strong retirement system is essential to
supporting the wellbeing of Australians now and into the future.
“This
is a once-in-a-generation opportunity to improve our current retirement
system to make sure it adequately serves everyone’s needs. Now is the
time to have the debate on this issue,” an AMP spokesperson said.
The news from the New York Federal Reserve indicates that the “one-off” spike in repo rates is more structural than many thought – many pundits blamed the timing of tax payments and the like.
But the latest tranches of both the term and overnight operations are now at $60 billion and $100 billion respectively. All up this is now ~$250 billion in funding, and counting. And the target rate is still on the high side, and the offers over subscribed.
If this continues then the Fed’s balance sheet will be growing again, and fast (remember when they were planning to shrink?).
In essence, more of the US economy will be supported by a larger FED, a larger and market distorting Fed to boot.
But the underlying question, still open, is, are these measures signs of a deeper malaise, signalling banks are not trusting some of their counter-parties? Without constant liquidity support will the markets fall over? And in the light of events over the past week plus, do the remarks from the Fed pass muster? We think not. This is significantly more serious than they admit.
The ACCC proposes to impose conditions on the Australian Banking
Association’s (ABA) Banking Code of Practice to ensure the revised Code
will benefit low-income consumers and drought-affected farmers.
The ABA, on behalf of its 23 members including the major banks, has
sought authorisation to amend its Banking Code in line with
recommendations of the Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry (Hayne Royal Commission).
The proposed amendments aim to improve basic bank accounts and low or
no-fee accounts by prohibiting informal overdrafts unless requested by
the customer, and dishonour fees. The ABA is also proposing that certain
types of basic bank accounts have no minimum deposits, free direct
debit facilities, access to a debit card at no extra cost and free
unlimited domestic transactions.
In addition, the ABA’s changes would prevent default interest being charged on agricultural loans in drought-affected areas.
After considering the ABA’s proposal, the ACCC believes that additional conditions are required to strengthen these changes.
“The proposed changes to the Code should result in public benefits,
by giving customers on low incomes better access to affordable banking,
and to address a source of significant harm to farmers experiencing
drought,” ACCC Deputy Chair Delia Rickard said.
“While the ACCC strongly supports these objectives, we are proposing
to place extra conditions on ABA members to ensure the changes
effectively address the Royal Commission’s recommendations, and in turn
actually deliver these public benefits.”
For example, under the ABA’s proposal, basic bank accounts could
still be overdrawn without the customer’s agreement in some
circumstances, and banks could continue to charge interest, in some
cases at rates approaching 20 per cent, on overdrawn amounts.
“This could lead to low income customers getting into debt from
overdrafts they did not agree to, which is exactly the kind of problem
the Hayne Royal Commission sought to address,” Ms Rickard said.
The proposed conditions of authorisation would not allow interest to
be charged in these cases, or would require any such interest charges to
be repaid to the customer.
The ACCC also shares consumer groups’ concerns that the ABA’s
proposed changes would not require banks to proactively identify
existing customers who would be eligible for the accounts, or even to
continue to offer a basic bank account at all.
To address this, the ACCC’s proposed conditions would require banks
to proactively identify eligible customers, including through data
analysis; inform these customers of their eligibility, and for the ABA
to report to the ACCC on measures taken to offer them fee-free bank
accounts, and report how many customers have taken them up.
The ACCC will also require members of the ABA who currently offer a
basic banking product to continue to do so for the period of
authorisation.
Feedback is invited on these issues and the proposed conditions by 14
October 2019. The ACCC’s final determination is due in November 2019.
The draft determination and more information about the application for authorisation is available at The Australian Banking Association.
A mortgage brokerage has welcomed and affirmed the sentiment yesterday expressed by Treasurer Josh Frydenberg that “hard-working families” are being negatively impacted by stricter responsible lending rules, via Australian Broker.
Aussie Home Loans
CEO James Symond said, “We are concerned about customers being knocked
back on home loan applications due to stringent interpretations of rules
by APRA and ASIC.”
According to Symond, there is cause for concern over the low property
listings and the downturn in construction activity, despite
historically low interest rates, the likelihood they will continue to
fall and auction clearance rates picking up.
Speaking at The Australian Financial Review’s Property Summit in Sydney yesterday, Frydenberg welcomed the increase in housing prices
and linked the stabilisation in the housing sector to the easing of
lending regulations — measures, he emphasised, that “at the time
achieved their desired objectives” through mitigating risks associated
with investor loans, interest-only lending and serviceability.
Speaking of responsible lending, Frydenberg said, “While these
obligations were first legislated back in 2009, the shadow of the Royal
Commission and recent litigation has given rise to uncertainty as to how
they ought to be implemented in practice.”
“Common sense dictates that a sensible balance needs to be struck
because an unduly restrictive application of these obligations can do as
much harm as an overly lax one.
“Should responsible lending laws be applied too stringently, they
will also negatively impact consumer behaviour with consumers more
likely to remain with their current provider than go through the red
tape burden associated with looking for alternatives.
A recent study commissioned by Aussie revealed an overwhelming lack
of consumer confidence both in the housing market and in their prospects
of securing a home loan.
Just one-third of Australians are more confident about buying a home
than they were five years ago, despite record low interest rates and
lower property prices.
The study also found 70% described the home loan process negatively,
calling it ‘stressful’, ‘a waiting game,’ ‘overwhelming,’ ‘confusing,’
‘difficult,’ ‘painstaking’ and ‘rigid.’
Further, about 29% of Australians are waiting to buy property despite
promising market conditions as the home loan process has been described
as hard to navigate and riddled with red tape.
“This is why it is so important for the regulators to act to restore Australians’ confidence in the housing market and their ability to buy property,” said Symond.
So, just worth remembering the high levels of mortgage stress in the system currently – at ultra low rates, based on our analysis to end August 2019.
As we discussed yesterday, there is only one game in town, more mortgage growth, but that game is deeply flawed….
According to the ABS Australian National Accounts, in seasonally adjusted terms, Australia became a net lender to overseas this quarter. This is the first time since June quarter 1975 that Australia has been a net lender as opposed to a net borrower. The ratio of net lending to overseas to GDP was 1.1% this quarter.
Graph 1. National net lending (net borrowing), relative to GDP, seasonally adjusted
At a sector level, net borrowing by general government declined to its
lowest level since September 2008, driven by sustained increases in
saving. Non-financial corporations’ net borrowing has also continued to
decline in line with slowing investment in non-residential buildings and
structures. Households recorded a small increase in net borrowing this
quarter, however the level remains lower than it was a year ago, driven
by weaker investment in dwellings.
Graph 2. Net lending (net borrowing), by sector, seasonally adjusted
National capital investment continues to fall
Household investment as a proportion of GDP has now declined for four
consecutive quarters. This decline continues to be driven by weakness in
dwelling investment in line with soft housing market conditions.
Capital investment by non-financial corporations as a proportion of GDP
was broadly unchanged this quarter. Machinery and equipment rose
strongly on the back of continued investment in autonomous machinery by
large mining companies. However, this was offset by softness in
non-residential building investment with the completion of projects
outstripping commencements this quarter. New engineering construction
was also weak, continuing to be impacted by liquified natural gas
projects transitioning from construction into the production phase.
General government investment as a proportion of GDP fell slightly to
3.6% this quarter. from 3.8% in March 2019. Despite the fall this
quarter, the ratio has been trending up since mid-2015, reflecting
increased public infrastructure investment by state and local general
governments to support population growth and growing demand for public
services.
Graph 3. Gross fixed capital formation, by sector, relative to GDP, seasonally adjusted
Martin North is the Principal of Digital Finance Analytics, a boutique research, analysis and consulting firm. This former consultant of Booz Allen & Fujitsu Australia pedigree is well known for his level-headed approach to financial markets & the economy.
His Walk The World channel on YouTube is a must for astute economy watchers in Australia. While his commentary is highly regarded across mainstream media such as the AFR, Sydney Morning Herald, the ABC, 9News and many more.
The recent RBA Bulletin included an article “Bank Balance Sheet Constraints and Money Market Divergence“, which in summary shows that money market trades have generally not been profitable for the four major banks since the financial crisis.
This is partly because debt funding costs have fallen by less than money market returns. In addition, equity funding, which is more expensive than debt, has increased. Consequently, the incentive for banks to arbitrage between money market interest rates has fallen.
They show that residential mortgages are always significantly more profitable than money market trades over the sample period (Graph 4). This suggests that there has been a substantial opportunity cost associated with diverting equity funding away from mortgages and towards lower-margin activities such as money market trading. This is consistent with the balance sheets of the major banks being weighted towards mortgages and away from trading investments.
According to the latest property exposure statistics from the Australian
Prudential Regulation Authority (APRA), the ADI’s sector exposure to
residential mortgages increased by 3.6 per cent when comparing the June
quarter 2019 to the previous corresponding period.
Thus banks tend to prefer more profitable lines of business, such as lending for residential housing, over the narrow margins implied by money market arbitrage. In other words, bank profitability is strongly connected with mortgage growth.
We know that APRA has reduced the rules on minimum lending standards for mortgages in July, and since then, banks have dropped their minimum rate requirements, opening the taps for more loans. As Australian Broker reported recently:
Westpac will decrease its floor rate from 5.75% to 5.35%, effective 30 September.
The same change will go into effect at its subsidiaries: St. George, BankSA and Bank of Melbourne.
After
the initial round of floor reductions across lenders of all sizes,
Westpac matched CBA with the higher floor rate of the big four banks at
5.75%, while ANZ and NAB each amended theirs to 5.50%.
Smaller lenders followed suit, the majority also updating their rates to either the 5.50% or 5.75% figure.
While some went even lower, ME Bank amending its rate down to 5.25% and Macquarie to 5.30%, Westpac has taken a step away from the other majors with its newest update.
With July marking the strongest demand for new mortgages in five years and further RBA
rate cuts expected in the near future, the floor reduction seems well
timed to capitalise on the strong market activity forecasted to
continue into the coming
Now of course there are still tighter guidelines on income and cost analysis for mortgage applications than a couple of years ago, but have no doubt standards are lowering again, and mortgage lending momentum appears to be on the turn, judging by the most recent data.
And the RBA stock data showed a small rise in to total value of owner occupied loans outstanding, though investor loans are still sliding on a 3 month seasonally adjusted rolling basis.
We expect a further rise in the results to be released at the end of September, to end August 2019
In addition, as reported in the AFR, they are being encouraged to lend.
Scott Morrison says Australia’s banks must not shy away
from lending after the Hayne commission as he pushes back against what
he calls an “instinctiveness” in society towards responsible lending
standards that are too onerous.
Speaking to the Australian American Association in New York, the
Prime Minister said that while it was important to implement the
findings of the royal commission, as well as other reforms such as the
Banking Executive Accountability Regime, “we need our banks to keep
lending”.
“We can’t be scared of our own shadows in our economy, the animal
spirits in our economy and the role of the banking and financial system
in extending credit.
And lenders are responding with a tranche of mortgage rate cuts to attract new borrowers or new refinances (rather than passing cheaper funding costs through to existing borrowers).
For example, the Commonwealth Bank of Australia changed its New Wealth Package fixed rates for owner-occupied and investment home loans, for both new and existing customers switching to a fixed rate home/investment home loan as of Tuesday, 24 September.
The largest rate drop is for
owner-occupiers with interest-only home loans on a five-year fixed rate,
who will see rates drop by 90 basis points to 3.99 per cent, as will
investors with an interest-only home loans on a four-year fixed rate.
Owner-occupiers with IO mortgages on
one-year and four-year fixed rates will see rates drop by 65 basis
points (to 3.89 and 3.99 per cent, respectively), while those with a
three-year fixed rate will see their new rate start from 3.79 per cent
(10 basis points lower than previous).
Other sizeable rate drops include
investors with a four-year fixed rate on P&I repayments, who will
see their interest rates fall by 75 basis points to 3.64 per cent.
Investors with P&I repayments on other fixed rate terms will see rates drop from between 5 and 50 basis points.
Owner-occupiers with a P&I home
loan that is on a one-year fixed rate term will see a range change of 60
basis points, dropping the new rate to 3.29 per cent. Those with a
four-year fixed rate will also see their rates drop by the same amount,
bringing the new rate to 3.49 per cent.
And ME Bank announced reductions of up to 49 basis points across its variable home loan products for investors.
The rate reduction announcement comes a week following ME bank’s 2019 financial year results, which saw its home loan portfolio grow by 7.3 per cent, from $24.5 billion to $26.3 billion (or 2.5 times system growth).
The bank has cut rates for investors on both principal and interest (P&I) and interest-only (IO) loans with a loan-to-value ratio of less than, or equal to, 80 per cent.
The changes have been applied to the
“flexible home loan member package” for investors, as well as the “basic
home loan” investor product, with all changes effective as of Tuesday,
24 September 2019.
The largest rate reduction (49 basis
points) was applied to the bank’s basic home loan product, for investors
making principal and interest repayments.
For investors on the bank’s basic home loan product, the new rates are as follows:
P&I repayments, any loan amount – 49 basis point reduction to 3.68 per cent p.a. (3.70 per cent comparison rate)
IO repayments, any loan amount – 45 basis point reduction to 3.89 per cent p.a. (3.79 per cent comparison rate)
Investors currently on the flexible home loan package (which requires an annual fee of $395) will see the following changes:
P&I
repayments on a loan amount above $700,000 – 14 basis point reduction to
3.63 per cent p.a. (4.06 per cent comparison rate)
IO
repayments on a loan amount between $400,000-$700,000 – 23 basis point
reduction to 3.89 per cent p.a. (4.19 per cent comparison rate)
So to Philip Lowe’s recent speech “An Economic Update” where he said that…
…the global economy is that while it is still growing reasonably well, the risks are increasingly tilted to the downside. The main source of these downside risks are geopolitical developments in many parts of the world. These developments are creating considerable uncertainty and this uncertainty is causing businesses to reconsider their spending plans. This is making the international environment more challenging for us.
On the Australian economy, he said after having been through a soft patch, a gentle turning point has been reached. While we are not expecting a return to strong economic growth in the near term, we are expecting growth to pick up. Against this backdrop, the main source of domestic uncertainty continues to be the strength of household spending.
He went on to say over the past year, there has been no growth at all in consumption per person, which is an unusual outcome at a time when employment is growing strongly (Graph 9). An important part of the explanation here is that household disposable income has been increasing only slowly for an extended period, reflecting both subdued wage increases and strong growth in taxes paid.
The persistence of slow growth in household income has led many people to reassess how fast their
incomes will increase in the future. As they have done this, they have also reassessed their spending,
particularly on discretionary items, which has been quite weak over recent times (Graph 10). Not
surprisingly, spending on household essentials has been much less affected.
Another part of the explanation for weak growth in household spending is the adjustment in the housing
market. As housing prices have fallen, there has been a marked decline in housing turnover, with the
turnover rate having declined to the lowest level in more than 20 years (Graph 11). With fewer
of us moving homes, spending on new furniture and household appliances has been quite soft. So too has
expenditure on moving costs and real estate fees. More broadly, the correction in the housing market has
also affected the economy through its impact on residential construction activity.
Thus, we can join the dots, if banks lend more and stoke the housing market, this may reverse the weak consumer spending and drive the economy harder. This is of course why the Government and regulators are doing all they can to pull prices higher (though volumes remain very low, and the number of new listings have hardly moved).
And according to the ABC, more building firms are failing.
Statistics, provided by ASIC, show 169 NSW-based construction companies went into administration, receivership or a court-ordered shutdown in the June quarter — the highest number since the September quarter in 2015.
Over the whole 2018-19 financial year, 556 construction companies went under — 101 more than the previous financial year.
Yet, despite all this in a Q&A the Governor was asked if he was concerned about the recent developments in the housing market. Lowe said the RBA was not worried about the recent lift in dwelling prices and he does not expect credit growth to materially lift due to lower interest rates – meaning that the recent acceleration in the housing market will not be an impediment to a near term rate cut.
In fact the only point of resistance against looser lending and more credit is ASIC’s appeal against the recent ruling relating to HEM (Household Expenditure Measures) that found knowing a customer’s current living expenses was immaterial to deciding whether they could afford repayments on a loan.
In the most famous line of his judgment, Justice Perram found that
“Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum [of how much one can spend without going into “substantial hardship”] is. But it is that conceptual minimum which drives the question of whether I can afford to make the repayments on the loan.”
ASIC commissioner Sean Hughes said the regulator felt compelled to
appeal after Justice Perram ruled that a lender “may do what it wants in
the assessment process”.
“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower,” he said in a statement.
“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.
“For those reasons, ASIC will appeal to the Full Court of the Federal Court.”
If ASIC loses then the final drag on future credit growth will be blown away.
I have to say, I find this whole narrative very unconvincing. Remember home prices relative to income remain very stretched, the debt burden has never been higher, and yet people are being encouraged to borrow big, and help resurrect the housing market (and the economy), at any cost.
If rates are cut again, the flow of credit will rise (thanks to the APRA changes and heightened competition among lenders). And of course the main driver of this is that banks need lending growth to drive future profitability. But my own modelling suggests that as we approach the zero bounds, profitability will actually be squeezed some more. That said, we can see why it is that Mortgage Growth is The Only Game In Town. From Polys, to Regulators, to Lenders, they all want it. Household though will bear the consequences.
Economist John Adams and Analyst Martin North discuss the latest on the Bill to outlaw certain cash transactions. Much more to come on this, as the latest draft bill has reshaped the purpose of the legislation.
