"Intelligent Insight"
In our latest discussion with Economist John Adams we discuss the latest developments in the “Gold Quest”. Where is Australia’s gold and why won’t the RBA answer John’s questions?
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In the latest in our “from the front line series”, I caught up with Carl, a property investor from Perth, and we discussed the shape of the market there, including falling rental returns and prices.
The stresses and strains are showing…
Note: the video stream is a little compressed]
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The seasonally adjusted Wage Price Index (WPI) rose 0.6 per cent in September quarter 2018 and 2.3 per cent through the year, according to figures released today by the Australian Bureau of Statistics (ABS).
The more reliable trend was 0.5% in the September quarter. Private sector wages grew by 0.55% over the quarter, whereas public sector wages grew by 0.61%.
So Public Sector wages are growing more strongly, whilst the private sector continues to struggle. The weak wages growth will dent the budget projections and household budgets.
ABS Chief Economist Bruce Hockman said seasonally adjusted, private sector wages rose 2.1 per cent and public sector wages grew 2.5 per cent, through the year to September quarter 2018.
“There was a higher rate of wage growth recorded across the majority of industries in comparison to this time last year, reflecting the influence of improved labour market conditions,” Mr Hockman said. “Annual wage growth at the Australia level was 2.3%, the highest growth rate since September quarter 2015.”
In original terms, annual growth to the September quarter 2018 ranged from 1.8 per cent for the Mining and Retail trade industries to 2.8 per cent for the Health care and social assistance industry.
Western Australia recorded the lowest through the year wage growth of 1.8 per cent while Tasmania recorded the highest of 2.6 per cent.
The ABS also released today a feature article that extends previous research looking at the factors underpinning wage growth. The article, Update on the Size and Frequency of Wage Changes, uses job-level micro data and shows that over the last two years the average frequency of wage changes has increased while the average size of wage rises has remained broadly stable.
As expected we are seeing the Government do “unnatural acts” to support the banking sector, in an attempt to alleviate the home price falls and lending freeze ahead of the election next year. The proposed $2 billion funding pool is small beer in the estimated $300 billion SME lending sector.
There is precedent a decade ago when the government’s $15 billion co-investment with the private sector into the residential mortgage-backed securities market during the GFC.
The federal government has announced a new, $2 billion Australian Business Securitisation Fund to help provide additional funding to small business lenders, via The Adviser.
In a joint statement, Treasurer Josh Frydenberg and the Minister for Small and Family Business, Skills and Vocational Education, Michaelia Cash, have announced that the Australian Business Securitisation Fund (ABSF) will “significantly enhance” the ability for small businesses to access funds by providing “significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms”.
The Australian Business Securitisation Fund will be administered by the Australian Office of Financial Management (AOFM), which was previously involved in the Residential Mortgage Backed Securities Market in 2008.
Speaking on Wednesday (14 November), the two ministers said: “Small businesses find it difficult to obtain finance other than on a secured basis – typically, against real estate. Small businesses that have already obtained finance secured against real estate, but wish to continue to grow, also find it difficult to access additional funding.
“Even when small businesses can access finance, funding costs are higher than they need to be.
“To overcome this and ensure that small businesses are able to fulfill their potential and continue to underpin economic growth and employment, the Australian Business Securitisation Fund will invest up to $2 billion in the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms.”
The government has also reiterated that it will “encourage the establishment of an Australian Business Growth Fund to provide longer term equity funding”.
It is now in consultation with the prudential regulator (APRA) and several financial institutions in regard to the establishment of the fund, which could likely emulate overseas counterparts, such as the UK’s Business Growth Fund. This fund has reportedly invested around $2.7 billion in a range of sectors across the economy.
The ministers said: “Many small businesses find it difficult to attract passive equity investment which enables them to grow without taking on additional debt or giving up control of their business.
“A similar fund has not emerged in Australia, in part, as a result of the unfavourable treatment of equity for regulatory capital purposes.”
APRA has reportedly suggested that it is “willing to review these arrangements” to assist in facilitating the establishment of the Australian Business Growth Fund.
The government has said that it will host a series of meetings with stakeholders during the next sitting period in Canbera to “fast track” the establishment of the growth fund.
“With more than three million small businesses employing around seven million Australians, enhancing small business access to funding is part of the Coalition Government’s plan for a stronger economy,” the ministers said in a joint release.
Several players in the finance sector have welcomed the announcement, with NAB’s chief customer officer, business and private banking, Anthony Healy, saying that “the country’s largest business bank recognised that for Australia to continue to grow, SME businesses need better and easier access to capital”.
Mr Healy highlighted that NAB had been providing unsecured lending to small businesses through its QuickBiz channel, “helping SMEs borrow against the strength and cash flow of their business rather than physical bricks and mortar”.
He continued: “The Australian Business Growth Fund can help this further by providing a way in which SMEs can receive long term equity capital investments to grow their business, invest in new technology and create more jobs, which is why NAB is supportive of the concept.
“We do believe there is more that can be done to provide SMEs with access to equity capital, and we take confidence from the UK Business Growth Fund having operated successfully for several years.
“We look forward to further discussions with the federal government and other participants about the fund’s potential establishment soon,” said Mr Healy.
Likewise, Spotcap’s managing director, Lachlan Heussler, said: “Mr Frydenberg’s proposal meets a real financial need and is a win-win for both Australian small business owners and for the alternative lending industry in Australia.
“Without sustainable lending and affordable finance options, small and medium-sized businesses will struggle to grow, innovate and create more jobs for our economy.”
Mr Heussler continued: “Australia’s 2.2 million small and medium-sized businesses are the beating heart of our economy but are starved of working capital and under-served by traditional lenders who require security.
“By lowering borrowing costs, the proposed fund is a good step in increasing competition between the dominant, big lenders and online, unsecured lenders, such as Spotcap”.
The Council of Small Business Organisations Australia (COSBOA) likewise welcomed the news, with CEO Peter Strong stating: “We congratulate the hovernment, and the Treasurer Josh Frydenberg, on this decision. It’s a well needed game changer for financing of small businesses.”
Mr Strong said that securing access to affordable capital had become the “number one” challenge for small business owners in Australia, particularly as some banks had “relied solely on past earnings rather than taking future earnings potential into account”.
“As a result, if the business owner doesn’t have a house (or other major asset) to put on the line as security then they are stuck – and Australia misses out on the employment that can be generated by the future growth of these businesses,” he said.
Mr Strong continued: “Small business owners often tell me that the only time they can get a loan is when they no longer need it. Others have told me that they have had to travel overseas to get finance and, using the same business plan as they used in Australia, they get their loan. This was a crazy and damaging situation.”
Mr Strong continued: “It is by no means ‘free money’ but small businesses that are sound and have good growth potential will finally have access to affordable finance.”
Touching on the new growth fund, the COSBOA CEO stated: “Importantly, the Treasurer understands that the announcement would fail if the process of managing the funds is convoluted and complex.
“We, with others, have already been asked to join in designing the system to make sure it is fit for purpose and not made unfit by interference from those who don’t understand our sector. We look forward to working with the Morrison Government, the Treasurer, the Small Business and Family Enterprise Ombudsman and other stakeholders to make these two funds accessible for small business owners and start-ups.”
ANZ has announced that it will implement a swathe of changes to its home and investment lending policy., via The Adviser.
ANZ has informed brokers that it will introduce enhanced home loan verification requirements, effective from 20 November.
Key changes include the following:
PAYG income: Brokers are required to obtain three months’ bank statements showing salary credits in order to verify income (in addition to payslips).
For casual, temporary and contract employees, six months of continuous employment is required, supported by six months of bank statements showing salary credits.
Overtime, bonus and commission income: Brokers are required to make inquiries of customers as to whether any of their income is comprised of overtime, bonus or commission, and record the overtime/bonus/commission amounts in the Statement of Position, adding that brokers should also include an explanation of the income in their submission/diary note.
In line with current ANZ policy, any income from bonus, commission or overtime needs to be removed from the income calculation and shaded in accordance with credit policy (currently 80 per cent), before being added back to the customer income, using the ANZ Toolkit.
However, the bank noted that if the overtime/commission/bonus amount cannot be identified from the customer’s payslips, or the customer has chosen to provide six months’ salary credits rather than salary credits and payslips, further payslips may be required in order to verify the amount of income that is derived from bonus, overtime or commission payments.
Casual, temporary or contract employment: Where a customer is in casual, temporary or contract employment, the customer will need to provide evidence of six months of continuous employment via salary credits through either ANZ transaction history or OFI bank statements.
In order to satisfy the continuous employment requirement, customers cannot have a gap greater than a total of 28 days (either continuous or cumulative), which ANZ said is measured by the pay period start/end dates on payslips or the number of salary credits available on ANZ transaction history/ OFI bank statements.
Additional checks by ANZ for irregular income: An additional check will be performed by ANZ to confirm if a customer’s income is irregular. If the assessor cannot satisfy themselves of the reasons for irregular income via the documents provided, the Statement of Position and any relevant diary notes, then they will contact the broker for further information.
OFI home loan: Three months of statements are required (even if the home loan liability is not being refinanced) to confirm monthly repayment amount and that the account conduct is satisfactory.
Where the loan account is less than three months old, a copy of the Letter of Offer (LOO) or the loan transaction history (showing balance AND at least one repayment) is considered acceptable provided the above conditions are also met.
Rental expenses: Three months of bank statements showing rental payments made by the customer will be required, or a lease agreement to verify the ongoing rental expense.
Additional commentary regarding customer’s financial situation
Brokers are required to make adequate inquiries with customers about their financial situation and provide additional commentary to explain any material differences between verification documents (for example, bank statements) and customer-stated income or expense figures in the Statement of Position, as well as any potential indicators of financial hardship.
ANZ stated that indicators of financial hardship may include adverse account conduct (e.g. overdrawn, excess, late payments, arrears), regular overdrawing of an account due to gambling transactions, and payday lender transactions.
Brokers have also been asked to include any additional commentary/explanation in a diary note, which the bank said will form part of ANZ’s assessment.
Changes to Broker Interview Guide: Also effective on 20 November, ANZ has also announced that it will change questions in its Broker Interview Guide in relation to inquiries into a customer’s future financial circumstances, which will apply to all home and investment loan applications.
Key changes include: More detailed information required from customers who have stipulated a significant change to their future financial circumstances including the requirement for supporting documentation in some instances.
More detailed information required from customers who are approaching retirement including the requirement for supporting documentation in some instances.
The use of HEM may well be back in play, following the latest from the Westpac ASIC case. Given that at some banks HEM is still being used for around half of applications, and the Royal Commission commented specifically in the use of HEM, perhaps the law needs to be changed.
The core of the argument is whether the loans were unsuitable, and that it seems would depend of the ultimate progress of the loan subsequently. In other words, it cannot be proved to be unsuitable until it falls over. ASIC would need to prove the loan was unsuitable!
Actually we think the law says lenders have to verify expenses, and in other cases, for example in pay day lending specific inquiries are required as part of the assessment.
But its a clear as mud at the moment! When is unsuitable lending to be demonstrated. This will have a significant impact on any potential class actions. Expect bank share prices to rise!
A federal court has rejected a $35million fine for Westpac after it admitted breaking responsible lending laws, via MPA.
Last year the Australian Securities and Investments Commission (ASIC) began proceedings against Westpac in relation to its use of the Household Expenditure Measure (HEM) when assessing home loans.
ASIC argued the bank failed to conduct proper assessments to ascertain whether borrowers could afford to repay their loans.
The $35m penalty was a negotiated settlement between the two parties after it admitted to using the HEM to assess borrowers’ living costs.
ASIC alleged the bank approved around 50,000 home loans based on a HEM benchmark, even though expenses were presumably higher.
Among the explanations of the reasons behind the decision to refuse the penalty, Justice Nye Perram said the court had been asked to determine whether Westpac was in contravention of Section 128 of the National Consumer Credit Protection Act 2009.
Justice Perram said this section merely prohibits the making of a credit contract where an assessment has not been carried out. Regardless of the bank using the HEM benchmark, an assessment was in fact carried out.
Justice Perram also said that although both parties had agreed on the sum, “the theoretical maximum penalty is therefore either $1.1 million or $1.7 million per contravention” depending on the dates of contravention.
Justice Perram said because the parties could not agree on what contravened the section, it was difficult to “judge the appropriateness” of the $35m figure.
The results from the DFA household surveys to the end of October 2018 are out today. The index measures households overall comfort level with their finances across a number of key dimensions. Recent home price trends, lower returns on deposits and share market gyrations have combined to take the index lower, despite strong employment trends. The wealth effect is now working in reverse, with a potential impact on future consumption.
The index returned a result of 88.1, down from 88.4 last month. This continues the decline since late 2016, and is now approaching the lowest ratings from 2015.
The convergence across the states continue as home price falls in NSW and VIC take a toll, with the southern state showing a significant slide. WA and QLD appear to be tracking quite closely.
Across the age bands, younger households are under the most pressure (thanks to large mortgages, or renting) while those aged 50-60 years remain the most confident, thanks to lower net borrowing, and more savings and investments. For those aged 40-50 recent falls in property prices swamp any benefit from stock market performance.
Those holding property for owner occupation remain the most positive, despite falls in paper values of their homes, but property investors are now registering significant concerns, thanks to flat or falling net income from rentals, falling capital values and concerns about the future of negative gearing and capital gains tax relief. More property investors signalled an intention to seek to sell property, as the switch from interest only to principal and interest loans continues. More than 41% of mortgage applications were rejected, compared with 5% last year, as more rigorous underwriting standards bare down. In fact those renting are in many cases more confident than property investors, significant turn around. The great property investor decade in passing.
Turning to the moving parts within the index, there was a small fall in those feeling more insecure about their job prospects, down 0.71% to 26.99%. There was a rise of 1.53% in those feeling more secure to 12.68%, and as a result those saying there was no change dropped a little, down 1.91% to 57.14%. We continue to see the spread of more precarious employment, including gig economy jobs, zero hours contracts, and growth in low paid ancillary healthcare jobs. We also saw a significant fall in employment in the finance, construction and real estate sectors, as the property sector eases.
Savings have been hit by recent stock market ructions, plus lower deposit rates on call accounts. As a result, there was a 3.38% rise in those less comfortable with their savings, to 43.39%. 49.28% said there was no change.
On debt, 45.47% of households were more concerned about their debt holdings, up 3.48%, thanks to some higher interest rates, rejected loan applications, and falling property values eating into equity, so reducing loan to value ratios. That said, those seeing no change stood at 51.87%, so more than half of households do not see any significant change.
Looking at household cash flow, income growth remains anemic in real terms. Just 3.69% said they had real income growth in the past year, up 1.32%, partly thanks to recent wage awards. However, 53.71% said their incomes had fallen over the same period, up 4.01%, and 41.33% said there was no change. Those in the public sector (especially in Canberra) appear to be fairing the best.
On the costs side of the equation, recent oil price falls have yet to translate into the results, so households said that overwhelmingly their costs of living has risen in the past year – at 83.66%. 4.88% said their costs had fallen, up 1.50% and 11.33% said there was no change. We see find households discussing power bills, fuel, health care costs and child care expenses, but they also highlighted recent rises in some food staples and council charges.
So finally, we can look at net worth (assets minus debts). Around 30% of households reported no change compared with a year ago, but 30.6% reported a net fall, up 5.27% and directly associated with the fall in property values and share values. 37.92% said their net worth was higher, down 1.89% from last month. So the fall in values is now hitting home, and as a result more households are experiencing a negative wealth effect.
This may well be deadly to household consumption (the engine of growth from the RBA’s perspective). This all goes to show that tracking employment growth as a leading indicator of the economy is not telling the whole story.
Slow wages growth, falling home prices and rising costs are combining to drag wealth and household confidence lower, and there is no end in sight. Another reason why we think the RBA will not be lifting the cash rate any time soon.
By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.
We will update the index next month.
The corporate regulator has told the Hayne royal commission that it is at a loss over how to successfully prevent misconduct in financial services, via InvestorDaily.
The Australian Securities and Investments Commission has expressed in its submission that work had to be done to stop misconduct in the industry but there was not enough evidence as to how.
“There is unfortunately currently a dearth of knowledge and research as to what effectively deters misconduct across the range of corporate sectors and, in particular, the financial sector itself,” it reads.
ASIC recognised that it had a duty to force significant cultural change in the industry and said it would begin onsite supervision in major financial institutions.
However, ASIC rejected the interim reports idea that it did not go to court or issue civil penalties.
The Hayne Interim Report made claims that ASIC rarely went to court, seldom brought civil penalty proceedings and allowed entity’s to pay infringement notices with no admission.
ASIC said it was willing to change its enforcement practices but said it regularly undertook litigation against the financial sector.
“ASIC has litigated matters (through civil and criminal proceedings) twice as much as it has accepted enforceable undertakings,” ASIC’s report read.
ASIC also rejected the emphasis the interim report placed on its track record in the past decade against the major banks.
The interim report noted how ASIC had only issued commenced 10 civil proceedings against the major banks but 45 infringement notices to the major banks and accepted 13 enforceable undertakings.
ASIC said that the figures expressed in the report do not support the proposition that ASIC presently avoids compulsory enforcement action, nor do they reflect the full variety of enforcement tools made available to ASIC.
ASIC provided no comment on the interim reports findings that the commission had never brought proceedings against a licensee who failed to report a data breach.
“As at April 2018, ASIC had never brought, or sought to have the Commonwealth Director of Public Prosecutions (CDPP) bring, proceedings against a licensee for failing to comply with the 10 day time limit for breach reporting under Section 912D of the Corporations Act 2001 (Cth) (the Corporations Act), 21 despite affirming that it believed that entities frequently fail to comply with the section,” the report read.
The commission also provided no comment to the reports findings that it had never commenced proceedings against an entity for fees for no service.
“At 30 May 2018, ASIC had never commenced, or sought to have CDPP commence, proceedings under Section 12DI of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). This prohibits accepting payment for financial services when the payee does not intend to, or there are reasonable grounds to believe it cannot, supply the service,” it read.
In our latest video show I caught up with Joseph Wilks who was on the front line of the UK property market in 2008 and beyond.
He describes what happened (and the parallels with Australia) and also explores some of the dynamics of the New Zealand property market which seems to have some of the same hallmarks.
Domain has released their preliminary auction results for today. The final results from last week came in at 38% nationally, and the early results from today also look weak. Significantly lower than this time last year, and they are likely to settle lower again.
Their graph cuts off at 40% so lower than that do not show.
Brisbane listed 111, reported 54 and sold 22 with 7 withdrawn, giving a Domain clearance rate of 36%.
Adelaide listed 72, reported 32 and sold 21 with 6 withdrawn, giving a Domain clearance rate of 55%.
Canberra listed 89, reported 72 and sold 32 with 7 withdrawn giving a Domain clearance of 41%.
