The Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry will hold an initial public hearing in Melbourne at 10am on Monday 12 February 2018.
An online form for submissions allows an individual or entity to make a submission to the Commission. The Commission will continue to receive submissions over the coming months and will advise when a deadline for submissions is set.
At this hearing the Commissioner and Senior Counsel Assisting will make short opening statements. No witnesses will be called.
The hearing will be held at Level 6, 11 Exhibition Street in Melbourne and will be open to the public although seating will be limited.
The hearing will be streamed live through the Royal Commission’s website and a transcript will be available shortly after the hearing.
Further information about the Royal Commission and Terms of Reference are available on the Royal Commission’s website.
Public Submissions
The Commission is inviting submissions from any individual or entity wishing to tell the Commission about misconduct in the Banking, Superannuation or Financial Services Industry.
The online form for submissions is now available on the Royal Commission website.
The Commission is required to conduct an inquiry. It cannot resolve individual disputes, fix or award compensation, or make orders requiring a party to a dispute to take or not take any action.
The online form has been designed to organise the information provided in a way that will guide the user, and help the Commission, by categorising the information in line with the areas of inquiry set out in the Commission’s
Terms of Reference.
The Commission may contact some individuals or entities that make submissions. The Commission will not be able to contact everyone who makes a submission but will ensure that all submissions are recorded, reviewed and used to inform the Commission’s work.
The latest weekly data from CoreLogic underscores the weakness in the property market. First prices are drifting lower.
The indicator of mortgage activity is also down, suggesting demand is easing as lending rules tighten. But then we always have a decline over the summer break.
The question is, are we seeing a temporary blip, over the holiday season, or something more structural? We think the latter is more likely, but time will tell.
Recent research by AMP has found three quarters of Australians will be starting the year without a defined and specified budget, which will make sticking to our new financial goals tricky.
Whilst around half of households do some rough calculations, one fifth do not track spending at all, and this is true across all age bands and states. Our own surveys suggest that half of all mortgage holders do not budget effectively.
Michael Christofides, Director of Retail Solutions at AMP Bank, said the findings are worrying as budgeting is a critical part to achieving financial security.
“Knowing what you earn, owe and spend gives your greater control over your money and lets you quickly identify areas where you could be saving.
“The problem is that many people mistakenly think they are too busy to budget.
“But perhaps this is because many of us are still using back of the envelope and time-consuming techniques to try and track our finances.”
According to AMP’s research, over a third of Aussies (34 per cent) believe budgeting is too much effort and almost one in five Aussies (19 per cent) say budgeting takes too much time.Even if we do start off the year with good intentions – sitting down and creating an initial budget – over a quarter (27 per cent) of us won’t end up sticking to it.
The research also showed that regularly checking our bank accounts (47 per cent), paper (28 per cent) and excel (20 per cent) were the main ways we keep track of our budgets.
Mr Christofides said, “In this era of smart banking applications, Aussies don’t need to be spending time hunched over an excel spreadsheet – not when an application or smart bank account can do all the work for you with far greater accuracy, giving you far greater control.”
So maybe this year, if we are to meet our financial New Year’s resolutions, we should look to use technology to help us. Not only will it take away the time and effort of budgeting, it will help us to achieve our financial goals and resolutions in 2018.
The major markets of Australia (6.6), New Zealand (8.8) and China (19.4) are severely unaffordable. By international standards houses are big in both Australia and New Zealand but relatively unaffordable.
Using a standard methodology across geographies, the study benchmarks affordability of middle income housing, using an index on average prices and incomes – formally, Median Multiple: Median house price divided by median household income.
Sydney is second worst in terms of affordability after Hong Kong, with Melbourne, Sunshine Coats, Gold Coast, Geelong, Adelaide, Brisbane, Hobart, Perth, Cains and Canberra all near the top of the list. [Click on the graphic to see it larger].
In recent decades, house prices have escalated far above household incomes in many parts of the world. In some metropolitan markets house prices have doubled, tripled or even quadrupled relative to household incomes. Typically, the housing markets rated “severely unaffordable” have more
restrictive land use policy, usually “urban containment.”
Sydney is again Australia’s least affordable market, with a Median Multiple of 12.9, and ranks second worst overall, trailing Hong Kong. Sydney’s housing affordability has worsened by the equivalent of 6.6 years in pre-tax median household income since 2001. This is a more than doubling of the Median Multiple. In contrast, Sydney’s housing affordability worsen less than one-fourth as much between 1981 and 2001.
At 12.9 Sydney’s Median Multiple is the poorest major housing affordability ever recorded by the Survey outside Hong Kong. Additionally, the UBS Global Real Estate Bubble Index rates Sydney as having the world’s fourth worst housing bubble risk (tied with Vancouver).
Melbourne has a Median Multiple of 9.9 and is the fifth least affordable major housing market internationally. Only Hong Kong, Sydney, Vancouver, and San Jose are less affordable than Melbourne. Melbourne’s Median Multiple has deteriorated from 6.3 in 2001 and under 3.0 in the early 1980s. Just since 2001, median house prices have increased the equivalent of more than three years in pre-tax median household income.
Adelaide has a severely unaffordable 6.6 Median Multiple and is the 16th least affordable of the 92 major markets. Brisbane has a Median Multiple is 6.2 and is ranked 18th least affordable, while Perth, with a Median Multiple of 5.9 is the 21st least affordable major housing market in Australia.
The report argues that:
The key to both housing affordability and an affordable standard of living is a competitive market that produces housing (including the cost of associated land) at production costs, including competitive profit margins.
None of that currently exists in Australia, with land prices sky high, linked to lack of supply (strange given the size of the country!) as well as the financialisation of property and the massive investment sector.
In contrast with well functioning housing markets, virtually all the severely unaffordable major housing markets covered in the Demographia International Housing Affordability Survey have restrictive land use regulation, overwhelmingly urban containment. A typical strategy for limiting or prohibiting new housing on the urban fringe an “urban growth boundary,” (UGB) which leads to (and is intended to lead to) an abrupt gap in land values.
Australia is perhaps the least densely populated major country in the world, but state governments there have contrived to drive land prices in major urban areas to very high levels, with the result that in that country housing in major state capitals has become severely unaffordable.
The latest update on bank reform has revealed the slow and varying progress made by banks in changing broker commissions.
Ian McPhee’s report, commissioned by, but independent of the Australian Bankers Association, asked banks how far they had implemented the Sedgwick Review’s recommendations. Stephen Sedgwick called for an end to volume-based incentives and for banks to ensure remuneration was not directly linked to loan size.
Macquarie Bank, My State Bank, and Bank Australia were amongst the furthest ahead banks, with ‘substantial alignment’ of their broker remuneration to Sedgwick’s recommendation. Only Qudos Bank was fully aligned with the recommendations.
Conversely, Commonwealth Bank’s broker remuneration and governance arrangements were ‘not aligned – planning and/or some implementation progressed’. Work on reforming remuneration had not started at Bank of Queensland, and work reforming governance had not begun at Bank of Sydney.
Of the other majors, ANZ, NAB, and Westpac reported partial implementation of Sedgwick’s reforms.
An imperfect scorecard
McPhee himself notes that “it is not appropriate to draw early conclusions on the status of individual banks’ implementation programs.”
For a start, banks self-reported their own progress with minimal oversight from McPhee. Furthermore, banks’ reporting cycles vary; a bank that reports at the end of the financial year may appear further advanced than a bank that reports at the end of the calendar year, for instance.
According to McPhee “the Sedgwick Review recommendations relating to banks’ arrangements with third parties are least progressed, with a number of banks reporting that they are still in the planning phases. This reflects the time taken to establish the Combined Industry Forum and agree industry-wide responses.”
The Combined Industry Forum set out its changes to remuneration in December.
NAB says that appetite for equity investing among Australian Self-Managed Super Fund (SMSF) investors surged in 2017, with international shares, domestic exchange traded funds, mFunds and partially paid shares the top new investment picks for investors.
The nabtrade data, which looked at the equity trading patterns of SMSFs in the 12 months to 15 December, showed this group of investors had almost tripled their investment in mFunds, and raised their holdings in ETFs and partially paid shares by 55 per cent and 51 per cent respectively.
Preference shares were equally popular with SMSF investors, with holdings up 34 per cent. Traditional equity holdings were also solid, up 13.5 per cent, while SMSFs retreated from investing in floating rate notes and options over the same period.
NAB Director of SMSF and Customer Behaviour, Gemma Dale, said SMSF investors were overall very active in equity markets in 2017, with total portfolios up more than 15 per cent on the previous year.
“The analysis shows that investors are getting comfortable with the more exotic equity instruments in the market and are prepared to spread risk. Low levels of volatility and the strong performance of domestic and international markets gave investors’ confidence to look for new opportunities,’’ Ms Dale said.
“As with previous years, financials and materials were the most heavily traded sectors, accounting for 36 per cent and 17 per cent of the turnover in 2017. NAB, Commonwealth Bank and Telstra were the most traded stocks in 2017.
“Telecommunication services, healthcare and consumer discretionary stocks were also popular among investors.”
The data also showed SMSF investors are also getting more confident in international equity investing and prepared to take bets on new and innovative sectors such as robotics and aerospace using ETFs.
“International trading surged nearly 100 per cent over the previous year, with US equities and US ETF’s the most traded equity instruments on international markets throughout the year,’’ Ms Dale said.
‘’Like retail investors, SMSF investors are turning to offshore markets to diversify their portfolios and to access high growth sectors in the US.’’
Most popular equity investments by SMSF Investors in 2017 Top Ten Domestic Equity instruments in 2017
NATIONAL AUSTRALIA BANK. Ordinary Fully Paid
COMMONWEALTH BANK OF AUSTRALIA. Ordinary Fully Paid
WESTPAC BANKING CORPORATION. Ordinary Fully Paid
AUSTRALIA AND NEW ZEALAND BANKING GROUP. Ordinary Fully Paid
TELSTRA CORPORATION. Ordinary Fully Paid
BHP BILLITON. Ordinary Fully Paid
WESFARMERS. Ordinary Fully Paid
CSL. Ordinary Fully Paid
WOOLWORTHS GROUP. Ordinary Fully Paid
WOODSIDE PETROLEUM. Ordinary Fully Paid
Source: nabtrade
Top Ten International Equity instruments in 2017
AMAZON COM ORD Common Stock
APPLE ORD Common Stock
FACEBOOK CL A ORD Common Stock
ALIBABA GROUP HOLDING ADR REP 1 ORD Depositary Receipt
ENPHASE ENERGY ORD Common Stock
TENCENT ORD Common Stock
TESLA ORD Common Stock
NVIDIA ORD Common Stock
MICROSOFT ORD Common Stock
BANK OF AMERICA ORD Common Stock
Source: nabtrade
Calls to reduce the current regulatory restrictions, for example on investor and interest only loans, will probably fall on deaf ears. Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent. This from the excellent James Mitchell via The Adviser.
A leading mortgage professional has criticised the prudential regulator for not providing a clear time frame for its macro-prudential measures or explaining what it is ultimately looking to achieve.
Speaking to The Adviser on a recent Elite Broker podcast, Intuitive Finance managing director Andrew Mirams said that he can’t see the complexities in the mortgage market easing up “anytime soon”.
Australian banks are still required to limit their investor mortgage growth to 10 per cent, while interest-only loans can only account for 30 per cent of new lending.
“Late last year, [APRA chairman] Wayne Byres came out and said these are all temporary measures,” Mr Mirams said. “But he’s never articulated to anyone about how temporary or what measures might change in the future or what their actual outcome.
“I think a lot of the things they’ve done, they’ve got right. An investor getting a 97 per cent interest-only loan just didn’t make sense. You’re just putting people at risk should the markets move, and we all know markets move at different times.
“But they haven’t articulated what they were trying to achieve, what sort of timeline and what outcomes they are hoping to get. I think that would help all of us manage client expectations. Because all of us will have lots of clients that are getting frustrated with being told ‘no’. And you can’t really give them an outcome of what or when they might be able to move again.”
In October last year, Mr Byres spoke at the Customer Owned Banking Convention in Brisbane, where he indicated that the regulator would like to start scaling back its intervention, provided that banks can continue to lend responsibly.
“We would ideally like to start to step back from the degree of intervention we are exercising today,” Mr Byres said.
“Quantitative benchmarks, such as that on investor lending growth, have served a useful purpose but were always intended as temporary measures. That remains our intent, but for those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and — crucially — will be sustained.”
Macro-prudential measures are a relatively new instrument but have becoming increasingly popular across the globe. In addition to Australia, lending curbs are also being used in the UK, New Zealand and Hong Kong.
Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent.
AMP Capital chief economist Shane Oliver believes that APRA’s measures, or at least some of them, will become permanent.
“I suspect that, as time goes by, they will likely become a permanent feature because of the control over risky behaviour that they allow over and above that achieved by varying interest rates and because the regulatory framework necessary to administer them will become more entrenched,” Mr Oliver said.
Mr Oliver believes that APRA’s mortgage curbs may be seen as increasingly attractive from a social policy perspective, in that they can “tilt lending away from non-first home owner-occupiers”.
There are other reasons why APRA’s measures are likely to remain.
“Poor affordability and high household debt levels, neither of which are likely to go away quickly,” Mr Oliver said.
The ATO published the latest data on Self-managed superannuation funds to 2016. The number and balance of funds continues to grow and contributions are growing faster than to retail or industry funds. More property is held and under limited recourse borrowing arrangement.
In 2015–16, estimated average return on assets for SMSFs was positive (2.9%), a decrease from the estimated returns in 2014–15 (6.0%). This was the same as the investment performance for APRA funds of more than four members (2.9%) and remains consistent with the trend for APRA funds over the five years to 2016.
We also see a rise in property investment within SMSFs, with 7% of SMSFs reported $25.4 billion assets held under limited recourse borrowing arrangement (LRBAs), which is slightly higher than in 2015 (6%). The majority of these funds held LRBA investments in residential real property and non-residential real property.
The estimated average total expense ratio of SMSFs in 2016 was 1.21% and the average total expenses value was $13,700. This would be lower than the typical costs in a retail fund.
SMSF’s make up 30% of all superannuation assets which in total are worth $2.3 billion. There were 597,000 SMSFs holding $697 billion in assets, with more than 1.1 million SMSF members as at 30 June 2017. Over the five years to 30 June 2017, growth in the number of SMSFs averaged almost 5% annually.
At 30 June 2016 the average SMSF member balance was $599,000 and the median balance was $362,000, an increase of 26% and 32% respectively over the five years to 2016.
The average member balances for female and male members were $511,000 and $641,000 respectively. The female average member balance increased by 30% over the five-year period, while the male average member balance increased by 22% over the same period.
Over the five years to 2016, the proportion of members with balances of $200,000 or less decreased from 42% to 32% of all members.
In 2016, the majority of members had balances of between $200,001 and $1 million.
53% of SMSFs have been established for more than 10 years, and 16% have been established for three years or less.
For the 2015–16 income year, the average assets of SMSFs were just over $1.1 million, a growth of 25% over five years and 3% from 2015. Total contributions to SMSFs increased by 21% over the five years to 2016. This is significantly higher than the growth of total contributions to all superannuation funds (16%) over the same period. The majority of SMSFs continued to be solely in the accumulation phase (53%) with the remaining 47% making pension payments to some of or all members.
At 30 June 2017, 57% of all SMSFs had a corporate trustee rather than individual trustees.
Of newly registered SMSFs in 2015 to 2017, on average 81% were established with a corporate trustee.
At 30 June 2017 there were 1.1 million SMSF members, of whom 53% were male and 47% female.
The trend continued for members of new SMSFs to be from younger age groups. The median age of SMSF members of newly established funds in 2016 was 47 years, compared to 59 years for all SMSF members as at 30 June 2017.
SMSFs directly invested 80% of their assets, mainly in cash and term deposits and Australian-listed shares (a total of 54%).
In the five years to 2016, cash and term deposits decreased (by 7%) to 25% of total SMSF assets.
In 2016, 7% of SMSFs reported $25.4 billion assets held under Limited recourse borrowing arrangement (LRBAs), which is slightly higher than in 2015 (6%). The majority of these funds held LRBA investments in residential real property and non-residential real property. In terms of value, real property assets held under LRBAs collectively made up 93% or $23.7 billion of all SMSF LRBA asset holdings in 2016.
The estimated average total expense ratio of SMSFs in 2016 was 1.21% and the average total expenses value was $13,700.
The average ‘investment expense’ and ‘administration and operating expense’ ratios were consistent at 0.65% and 0.56% respectively.
Lenders are facing a dilemma, do they chase mortgage lending growth, and embed more risks into their portfolios, or accept the consequences of lower growth and returns as household debt explodes and we join the 200% Club!
Welcome to the Property Imperative weekly to 20 January 2018. We offer two versions of the update, the first a free form summary edition in response to requests from members of our community:
Alternatively, you can watch our more detailed version, with lots of numbers and charts, which some may find overwhelming, but was the original intent of the DFA Blog – getting behind the numbers.
Tell us which you prefer. You can watch the video, or read the transcript.
In our latest digest of finance and property news, we start with news from the ABS who revised housing debt upward, to include mortgage borrowing within Superannuation, so total Household Liabilities have been increased by approximately 3% to $2,466bn. The change, which required the accurate measurement of property investment by self-managed superannuation funds, brought the figure up from 194 per cent so we are now at 200% of income. A record which no-one should be proud of. It also again highlights the risks in the system. Australian households are in the 200% club.
The final set of data from the ABS – Lending Finance to November 2017 which also highlights again the changes underway in the property sector. Within the housing series, owner occupied lending for construction fell 0.88% compared with the previous month, down $17m; lending for the purchase of new dwellings rose 0.25%, up $3m; and loans for purchase of existing dwellings rose 0.11%, up $12m.
Refinance of existing owner occupied dwellings rose 0.28%, up $16m.
Looking at investors, borrowing for new investment construction rose 5%, up $65m; while purchase of existing property by investors fell $74m for individuals, down 0.75%; and for other investors, down $21m or 2.28%.
Overall there was a fall of $16m across all categories.
We see a fall in investment lending overall, but it is still 36% of new lending flows, so hardly a startling decline. Those calling for weakening of credit lending rules to support home price growth would do well to reflect that 36% is a big number – double that identified as risky by the Bank of England, who became twitchy at 16%!
Looking then across all lending categories, personal fixed credit (personal loans rose $70m, up 1.74%; while revolving credit (credit cards) fell $4m down 0.18%. Fixed commercial lending, other than for property investment rose $231m or 1.12%; while lending for investment purposes fell 0.25% or $30m. The share of fixed business lending for housing investment fell to 36.7% of business lending flows, compared with 41% in 2015. Revolving business credit rose $6m up 0.06%.
A highlight was the rise in first time buyer owner occupied loans, up by around 1,030 on the prior month, as buyers reacted to the incentives available, and attractor rates. This equates to 18% of all transactions. Non-first time buyers fell 0.5%. The average first time buyer loan rose again to $327,000, up 1% from last month. We do not think the data gives any support for the notion that regulators should loosen the lending rules, as some are suggesting. That said the “incentives” for first time buyers are having an effect – in essence, persuading people to buy in at the top, even as prices slide. I think people should be really careful, as the increased incentives are there to try and keep the balloon in the air for longer.
So, what can we conclude? Investment lending momentum is on the turn, though there is still lots of action in the funding of new property construction for investment – mostly in the high rise blocks around our major centres. But in fact momentum appears to be slowing in Brisbane, Sydney and Melbourne. This does not bode well for the construction sector in 2018, as we posit a fall in residential development, only partly offset by a rise in commercial and engineering construction (much of which is state and federal funded). What I’m noticing is that those in the construction sector – from small builders to sub-contractors – have significantly lower confidence levels than they did six months ago, based on our surveys.
Whilst lending to first time buyers is up, there are risks attached to this, as we will discuss later.
The good news is lending to business, other than for housing investment is rising a little, but businesses are still looking to hold costs down, and borrow carefully. This means economic growth will be slow, and potential wages growth will remain contained.
Fitch Ratings says Australian banks’ profit growth is likely to slow in 2018 as global monetary tightening pushes up funding costs, loan-impairment charges rise, and tighter regulation has an impact on business volumes and compliance costs from the 15 or so inquiries or reviews across the sector (according to UBS). They say Australian banks are more reliant on offshore wholesale funding than global peers, as the superannuation scheme here has created a lack of domestic customer deposits. Global monetary tightening could therefore push up banks’ funding costs. Indeed, The 10-Year US Bond yield is moving higher, and whilst the US Mortgage rates were only moderately higher today, the move was enough to officially bring them to the highest levels since the (Northern) Spring of 2017.
The main risks to banks’ performance stem from high property prices and household debt. Australian banks are more highly exposed to residential mortgages than international peers, while households could be sensitive to an eventual increase in interest rates or a rise in unemployment, given that their debt is nearly 200% of disposable income. Indeed, Tribeca Investment Partners said this week that local equities may be hurt by troughs in the domestic property market. “A heavily indebted household sector that is experiencing flat to negative real income growth, as well as dealing with higher energy and healthcare costs, and which has drawn down its savings rate, is unlikely to fill the gap in growth”
In local economic news, the latest ABS data on employment to December 2017, shows the trend unemployment rate decreased slightly to 5.4 per cent in December 2017, after the November 2017 figure was revised up to 5.5 per cent. The trend unemployment rate was 0.3 percentage points lower than a year ago, and is at its lowest point since January 2013.
The seasonally adjusted number of persons employed increased by 35,000 in December 2017. The seasonally adjusted unemployment rate increased by 0.1 percentage points to 5.5 per cent and the labour force participation rate increased to 65.7 per cent. The number of hours worked fell. By state, trend employment rose in NT, WA and SA. Over the past year, all states and territories recorded a decrease in their trend unemployment rates, except the Northern Territory (which increased 1.6 percentage points). The states and territories with the strongest annual growth in trend employment were Queensland and the ACT (both 4.6 per cent), followed by New South Wales (3.5 per cent).
The ABA released new research – The Edelman Intelligence research conducted late last year which tracks community trust and confidence in banks. Whilst progress may be being made, the research shows Australian banks are behind the global benchmark in terms of trust. Based on the Annual Edelman Trust Barometer study released in January 2017, Australia remains 4 points behind the global average.
The Australian Financial Review featured some of our recent research on the problem of refinancing interest only loans (IO). Many IO loan holders simply assume they can roll their loan on the same terms when it comes up for periodic review. Many will get a nasty surprise thanks to now tighter lending standards, and higher interest rates. Others may not even realise they have an IO loan!
Thousands of home owners face a looming financial crunch as $60 billion of interest-only loans written at the height of the property boom reset at higher rates and terms, over the next four years.
Monthly repayments on a typical $1 million mortgage could increase by more than 50 per cent as borrowers start repaying the principal on their loans, stretching budgets and increasing the risk of financial distress.
DFA analysis shows that over the next few years a considerable number of interest only loans (IO) which come up for review, will fail current underwriting standards. So households will be forced to switch to more expensive P&I loans, assuming they find a lender, or even sell. The same drama played out in the UK a couple of years ago when they brought in tighter restrictions on IO loans. The value of loans is significant. And may be understated.
We also featured research on the Bank of Mum and Dad, now a “Top 10” Lender in Australia. Our analysis shows that the number and value of loans made to First Time Buyers by the “Bank of Mum and Dad” has increased, to a total estimated at more than $20 billion, which places it among the top 10 mortgage lenders in Australia. Savings for a deposit is very difficult, at a time when many lenders are requiring a larger deposit as loan to value rules are tightened. The rise of the important of the Bank of Mum and Dad is a response to rising home prices, against flat incomes, and the equity growth which those already in the market have enjoyed. This enables an inter-generational cash switch, which those fortunate First Time Buyers with wealthy parents can enjoy. In turn, this enables them also to gain from the more generous First Home Owner Grants which are also available. Those who do not have wealthy parents are at a significant disadvantage. Whilst help comes in a number of ways, from a loan to a gift, or ongoing help with mortgage repayments or other expenses, where a cash injection is involved, the average is around $88,000. It does vary across the states. But overall, around 55% of First Time Buyers are getting assistance from parents, with around 23,000 in the last quarter.
There was also research this week LF Economics which showed that some major lenders are willing to accept a 20% “Deposit” for a mortgage from the equity in an existing property, and in so doing, avoided the need for expensive Lenders Mortgage Insurance.
Both arrangements are essentially cross leveraging property from existing equity, and is risky behaviour in a potentially falling market. More evidence of the lengths banks are willing to go to, to keep their mortgage books growing. We think these portfolio risks are not adequately understood.
So, we conclude that banks are caught between trying to grow their books, in a fading market, by offering cheap rates to target new borrowers, and accept equity from existing properties, thus piling on the risk; while dealing with rising overseas funding, and in a flat income environment, facing heightened risks from borrowers as they join the 200% club.
That’s the Property Imperative Weekly to 20 January 2018. If you found this useful, do leave a comment, subscribe to receive future updates and check back for our latest posts. Many thanks for watching.
The final set of data from the ABS – Lending Finance to November 2017 highlights again the changes underway in the property sector. They also contain some revisions from last month. As normal we will focus on the trend series, which smooths some of the monthly changes.
Within the housing series, owner occupied lending for construction fell 0.88% compared with the previous month, down $17m; lending for the purchase of new dwellings rose 0.25%, up $3m; and loans for purchase of existing dwellings rose 0.11%, up $12m.
Refinance of existing owner occupied dwellings rose 0.28%, up $16m.
Looking at investors, borrowing for new investment construction rose 5%, up $65m; while purchase of existing property by investors fell $74m for individuals, down 0.75%; and for other investors, down $21m or 2.28%.
Overall there was a fall of $16m across all categories.
We see a fall in investment lending overall, but it is still 36% of new lending flows, so hardly a startling decline. Those calling for weakening of credit lending rules to support home price growth would do well to reflect that 36% is a big number – double that identified as risky by the Bank of England, who became twitchy at 16%!
Looking then across all lending categories, personal fixed credit (personal loans rose $70m, up 1.74%; while revolving credit (credit cards) fell $4m down 0.18%. Fixed commercial lending, other than for property investment rose $231m or 1.12%; while lending for investment purposes fell 0.25% or $30m. The share of fixed business lending for housing investment fell to 36.7% of business lending flows, compared with 41% in 2015. Revolving business credit rose $6m up 0.06%.
So, what can we conclude? Investment lending momentum is on the turn, though there is still lots of action in the funding of new property construction for investment – mostly in the high rise blocks around our major centres. But in fact momentum appears to be slowing in Brisbane, Sydney and Melbourne. This does not bode well for the construction sector in 2018, as we posit a fall in residential development, only partly offset by a rise in commercial and engineering construction (much of which is state and federal funded).
The good news is lending to business, other than for housing investment is rising a little, but businesses are still looking to hold costs down, and borrow carefully. This means economic growth will be slow, and potential wages growth will remain contained.
Finally, here is the ABS reporting the data. Note the significant swings between the trend and seasonal adjusted series. You can pick your number, and weave a story to suit, as people are doing.
The total value of owner occupied housing commitments excluding alterations and additions rose 0.1% in trend terms, and the seasonally adjusted series rose 2.7%.
The trend series for the value of total personal finance commitments rose 1.0%. Fixed lending commitments rose 1.7%, while revolving credit commitments fell 0.2%.
The seasonally adjusted series for the value of total personal finance commitments rose 1.1%. Revolving credit commitments rose 2.8% and fixed lending commitments rose 0.1%.
The trend series for the value of total commercial finance commitments rose 0.5%. Fixed lending commitments rose 0.6% and revolving credit commitments rose 0.1%.
The seasonally adjusted series for the value of total commercial finance commitments rose 14.7%. Fixed lending commitments rose 22.0%, while revolving credit commitments fell 8.1%.
The trend series for the value of total lease finance commitments fell 1.2% in November 2017 and the seasonally adjusted series fell 8.0%, after a rise of 4.1% in October 2017.
