Is Record High Consumer Debt a Boon or Bane?

From The St.Louis Fed on The Economy Blog.

Amidst of lot of captivating headlines over the last few months, one may have missed the news that consumer debt has hit an all-time high of 26 percent of disposable income, as seen in the chart below.

In just the past five years, consumer debt (all household debts, excluding mortgages and home equity loans) has grown at about twice the pace of household income. This has largely been driven by strong growth in both auto and student lending.

But what does this say about the economy? Is it a sign of optimism or a cause for concern?

Increasing Debt Levels

Rising household debt levels could mean that:

  • More Americans are optimistic about the U.S. economy.
  • More people are making investments in assets that generally build wealth, like higher education and homes.
  • Consumers have paid off their loans to qualify for new ones.

At the same time, higher debt levels could reveal financial stress as families use debt to finance consumption of necessities. It could portend new waves of delinquencies and, eventually, defaults that displace these kinds of investments. And rising family debts could slow economic growth and, of course, even lead to a recession.

Three Key Themes

This dual nature of household debt is precisely why the Center for Household Financial Stability organized our second Tipping Points research symposium on household debts. We did so this past June in New York, in partnership with the Private Debt Project

We recently released the symposium papers, which were authored by my colleagues William R. Emmons and Lowell R. Ricketts and several leading economists, such as Karen Dynan and Atif Mian. They offer fascinating insights about how, when and the extent to which household debt impacts economic growth.

Looking at all the papers and symposium discussions together, a few key themes emerged.

No. 1: Short-Term vs. Long-Term Debt

Despite an incomplete understanding of the drivers and mechanism of household debt, we learned that increases in household debts can boost consumption and GDP growth in the shorter term (within a year or two) but suppress them beyond that.

Whether and how household debt affects economic growth over the longer term depends on three things:

  • Whether family debts improve labor productivity or boost local demand for goods and services
  • The extent of leverage concurrently in the banking sector, which is much less evident today than a decade ago
  • The stability of the assets, such as housing, being purchased with those debts

No. 2: Magnitude of Risk

Even with record-high levels of consumer debts, most symposium participants did not see household debts posing a systemic risk to the economy at the moment, though trends in student borrowing, auto loans and (perhaps) credit card debts are troubling to those borrowers and in those sectors.

Moreover, rising debt can be a drag on economic growth even if not a systemic risk, and longer-term reliance on debt to sustain consumption remains highly concerning as well.

No. 3: Public Policy

Public policy responses should also be considered. Factors that could further burden indebted families and impede economic growth include:

  • Low productivity growth
  • Higher interest rates
  • New banking and financial sector regulations
  • Rising higher-education costs

Indeed, levels of household debt have often served as a reflection of larger, structural, technological, demographic and policy forces that help or harm consumers. It only makes sense, then, that policy and institutional measures must be considered to ameliorate debt levels and their impact on families and the economy.

After all, what’s good for families is good for the economy, and vice versa.

More Warnings On The Sleeping Risks From Interest Only Loans

The SMH reported today on research from UBS suggesting that around one third of interest only mortgage holders are not aware of the fact that the loan will revert, normally at the end of 5 or sometimes 10 years to principal and interest only borrowing. A roll to a further IO period is not guaranteed.

We discussed a couple of years back, as well in this in October, Citi covered it a few months back, and last week we got Finder.com.au to discuss what borrowers might do; so there should be no surprise to readers of this blog.  This chart shows the estimated value of IO loans which will now fall due outside current lending criteria, based on our research.

This is an extract from the SMH article:

A third of customers with interest-only mortgages may not properly understand the type of loan they have taken out, which could put many in “substantial” stress when the time comes to pay their debt, UBS analysts warn.

Amid a regulatory crackdown on interest-only loans, a new report by analysts led by Jonathan Mott highlights the potential for repayment difficulties with this type of mortgage

Their finding is based on a recent survey conducted by the investment bank, which found only 23.9 per cent of 907 respondents had an interest-only loan, compared with economy-wide figures that show 35.3 per cent of loans are interest-only.

Mr Mott said he initially suspected the survey sample had an error, but now believed a “more plausible” reason was that interest-only customers did not properly understand their loan.

“We are concerned that it is likely that approximately one third of borrowers who have taken out an interest-only mortgage have little understanding of the product or that their repayments will jump by between 30 and 60 per cent at the end of the interest-only period (depending on the residual term),” he said.

You can read more about the risks from IO loans in our recent Property Imperative Report, free on request.

 

 

RBNZ Consults On Revised Capital Adequacy Changes

The Reserve Bank NZ, has issued a Consultation Paper: Review of the Capital Adequacy Framework for locally incorporated banks: calculation of risk weighted assets.

This is the third consultation document of the review. The first document provided an overview of the review. The second document considered the definition of capital, which is the numerator in the minimum regulatory capital ratio. This document is concerned with the denominator in the minimum capital ratio, which is effectively a measure of exposure to risk.

They highlight further issues with the internal calculation method, as well as recent changes from the Basel Committee.

There is international and New Zealand evidence that minimum capital requirements went down significantly after banks were permitted to use their internal models for parts of the capital calculation. There is also international evidence that internal model outcomes are inconsistent. Different banks often come up with similar rankings of risk but the absolute levels of risk are substantially different even for the same obligors. The evidence is clearest in the case for exposures to governments, banks, and large corporations, but there is also some evidence of problems in other portfolios such as residential mortgages and SME lending.

The Basel Committee had proposed to replace the IRB approach with the standardised approach for bank and large corporate exposures, and with a standardised or semi-standardised approach for all specialised lending to corporates. The finalised framework did not go this far – it continues to allow a more limited form of IRB modelling, the Foundation IRB (F-IRB) approach, for bank and large corporate exposures. The new framework does, as originally proposed, constrain the outputs of internal models and impose an overall floor – based on the risk assessed under the standardised approach – on the average risk weight, to prevent it from straying too far from a common level.

Specifically, there are currently significant differences between the two approaches. Banks with internal models have a significant capital advantage.

They table options for both internal and standard approaches, as below.

 

RBA Warns On Household Risks

The RBA published the minutes of their last meeting, when the cash rate was held, once again.  There is a little more colour in their comments, but nothing has substantially changed in that where the labour market, wage and inflation trends will set their policy direction in 2018. Once again, they mention the medium-term risks associated with high and rising household indebtedness. Significant when wage growth is low, and debt high. No wonder household consumption is moderating.

International Economic Conditions

Members commenced their discussion of the global economy by noting that growth in global industrial production was likely to have increased further in October. The pick-up had been broadly based geographically. Survey measures suggested that conditions in the manufacturing sectors of Australia’s largest trading partners had continued to improve; conditions in the services sectors of the major advanced economies had remained favourable. The strength of industrial production in the high-income economies of east Asia had been associated with very strong growth in exports of electronics, specifically of semiconductors. The strength of demand in electronics-related industries had supported business investment and GDP growth in the region, particularly in South Korea.

GDP growth in the major advanced economies had been above potential, supported by accommodative monetary policies. Members noted that recent growth outcomes for the euro area had been stronger than expected. Growth in business investment had picked up in the major advanced economies over the prior year and further solid growth was anticipated over coming quarters. Consumption growth had remained above average, supported by robust growth in employment.

Conditions in labour markets in a number of major advanced economies had continued to tighten. Employment-to-population ratios had increased and unemployment rates had declined to low levels in Japan, Germany and the United States, among other advanced economies. Members noted that this implied there was limited spare capacity in these economies, based on conventional measures of full employment. However, wage growth had picked up only slightly. While observing that there were typically lags between labour markets tightening and wage pressures emerging, members noted that the wage data might suggest these economies had more spare capacity than implied by conventional measures. More generally, members noted that the nature of work was evolving, driven partly by technological change, and that not everyone was benefiting equally from the recent strength in labour demand. Low wage outcomes had contributed to core inflation in the major advanced economies remaining low, even though producer price inflation had been noticeably higher.

In China, GDP growth had been stronger than expected over the first three quarters of 2017, but more recently growth looked to have eased. This was particularly true of residential construction activity in cities where the authorities had implemented policies to address buoyant housing market conditions. The output of some sectors producing inputs for the construction sector, such as glass and steel products, had fallen in preceding months. Production shutdowns designed to deal with environmental concerns had also affected crude steel production. In combination, these factors had led to some levelling off of Chinese bulk commodity imports, including from Australia. Despite this, spot prices for iron ore had increased over the previous month and Chinese producer price inflation had remained elevated, partly reflecting stronger commodity prices. Although consumer price inflation in China had edged higher, it remained below the authorities’ objective of 3 per cent in 2017.

Domestic Economic Conditions

Members commenced their discussion of the domestic economy by noting that the wage price index continued to suggest that wage growth had been stable at a low rate. The outcome for the September quarter had been slightly lower than expected, despite the 3.3 per cent increase in award and minimum wages in the quarter, as previously determined by the Fair Work Commission. (The award system directly covers around one-quarter of the workforce.) Wage growth in the health and education sectors remained above the national average and a number of sectors had seen an increase in year-ended wage growth compared with a year prior. This had occurred at the same time as spare capacity appeared to have declined and more firms had been reporting difficulty finding suitable labour. The forecast was still for wage growth to increase gradually over the next year or so.

Labour market conditions had remained positive and had been stronger than expected over the previous year. Employment had increased a little in October and growth over the previous year had been well above average. Full-time employment had risen sharply and was growing at around its fastest pace in a decade. The participation rate was notably higher than a year earlier, particularly for women and older workers, who had been staying in the labour force for longer. The unemployment rate had edged lower to be 5.4 per cent in October, which was its lowest level since 2013, and unemployment rates had been on a downward trend in most states. Forward-looking indicators of labour demand suggested employment growth would be somewhat above average over the next few quarters.

Members noted that the September quarter national accounts would be released the day after the meeting and that recent data suggested GDP growth over the year to the September quarter was likely to have picked up to around the economy’s potential growth rate.

Information on components of household consumption indicated that growth in aggregate household consumption had moderated in the September quarter; growth in retail sales volumes and motor vehicle sales to households had been subdued. The growth in the value of retail sales in October was consistent with reports from the Bank’s liaison suggesting that moderate growth in consumption had continued into the December quarter.

Dwelling investment was expected to have fallen marginally in the September quarter. Dwelling investment had fallen over the preceding year in Queensland and Western Australia, but had remained at a high level in New South Wales and Victoria. Residential building approvals had picked up in preceding months, but remained below the levels of a few years earlier. Together with data on the pipeline of work yet to be done, this suggested that dwelling investment would remain at a high level for the following year or so, but that it was not likely to add materially to GDP growth.

Conditions had eased in the established housing market, most noticeably in Sydney, where housing prices had declined in prior months and auction clearance rates had fallen. Housing price growth had also eased in Melbourne, but remained relatively strong, supported by high population growth. Housing prices in Perth and Brisbane had been little changed in preceding months.

Members observed that business conditions in the non-mining sector had been above average for most industries over the preceding year or so and that non-mining profits had been increasing. Non-mining business investment looked to have risen further in the September quarter and the prospects for continued growth were positive: investment intentions had been revised higher, particularly for the business services sector; survey measures of capacity utilisation had remained well above average; and private non-residential building approvals had remained strong. Mining investment looked to have been little changed in the September quarter, although declines were still anticipated over the next few quarters.

Growth in public investment had picked up over the preceding few years, driven by infrastructure investment. Further growth was expected over the following couple of years, based on projections in state and federal budgets. Members considered macroeconomic modelling of a scenario under which public investment was higher than forecast for the following three years. The demand effects of this scenario included the direct contribution to GDP growth of higher public investment, as well as the multiplier effects through higher profits earned by private sector firms and the higher incomes earned by workers on these projects. Members noted the possibility of ‘crowding out’ of other forms of demand, but did not consider this a major risk given that the economy was currently operating with a degree of spare capacity and inflation was low. Indeed, a sustained pick-up in spending on public infrastructure could even ‘crowd in’ additional investment by the private sector firms undertaking those projects on the public sector’s behalf. Members also noted that the higher level of infrastructure investment could boost productivity in the economy.

Financial Markets

Members noted that conditions in financial markets generally had been little changed over the previous month, with volatility having remained at a low level throughout 2017. Financial conditions generally remained very accommodative, despite the gradual withdrawal of monetary stimulus in some economies over 2017. However, there had been a noticeable tightening in financial market conditions in China over the year, including in response to regulatory measures.

Market pricing suggested that market participants expected the US Federal Open Market Committee (FOMC) to increase the federal funds rate at its December meeting, consistent with the median of FOMC members’ projections. However, market pricing continued to suggest a more modest increase in the federal funds rate over 2018 than implied by the median FOMC projection. Members noted that previously announced changes to the composition of the FOMC had not affected market analysts’ expectations regarding the stance of US monetary policy. Regulations – particularly on smaller financial institutions – were under review, although members noted that core reforms relevant to capital, liquidity, stress testing and resolution planning were likely to be preserved.

Members observed that the yield on long-term US government bonds had been little changed over preceding months, whereas the yield on shorter-term US government bonds had increased. This in part reflected expectations for an increase in the federal funds rate and the US Treasury shifting its issuance towards securities at shorter maturities. Long-term government bond yields in other major financial markets had also generally remained little changed at low levels.

Members noted that while yields on Australian 10-year government bonds had been little changed, their spread to US Treasury bond yields had declined to a low level over preceding months.

Financing conditions remained favourable for corporations across major markets. Although spreads of high-yield corporate bonds to government bonds had increased a little in November, they remained at very low levels. Also, equity valuations remained high, having risen over 2017, although there had been small declines in some markets over November.

There had been little change in most major exchange rates over November. The US dollar had appreciated a little since early September on a trade-weighted basis, reflecting increased prospects for both future increases in the federal funds rate and US fiscal stimulus. Members noted that while the Australian dollar had depreciated by around 5 per cent in trade-weighted terms over this period, it had moved within a relatively narrow range over the previous two and a half years and was a little higher than the level of early 2016.

In China, a broad range of policy actions had contributed to a tightening in financial market conditions since late 2016 and a reduction in leverage within the financial system. Recent regulatory announcements had been directed towards managing risks in the shadow banking sector. Members noted that Chinese equity valuations had risen strongly over 2017, but had fallen somewhat in November after the authorities had signalled their concern that some stocks were overvalued.

In Australia, housing credit growth had eased a little over the second half of 2017, as growth in lending to owner-occupiers had slowed somewhat and growth in lending to investors had stabilised at a lower level than in the first half of the year. The easing in housing credit growth had been accounted for by the major banks, which had been more affected by the need to restrain interest-only lending to comply with the supervisory measures announced earlier in the year. Growth in housing lending by non-authorised deposit-taking institutions (non-ADIs) had picked up, although these institutions’ share of overall housing lending remained small. Members noted that these lenders charged higher interest rates on average than ADIs, which is likely to reflect both the borrower risk profile and higher funding costs of non-ADIs.

Issuance of residential mortgage-backed securities, which are an important source of funding for non-ADIs, had been strong in 2017 and pricing of these securities had declined a little. Major banks’ funding costs had declined a little over 2017 and long-term debt funding had grown relatively strongly in the second half of the year.

Members observed that the Australian equity market (on an accumulation basis) had risen in line with global markets over the previous couple of years and that volatility had remained low over the prior year. Australian share prices had been little changed over the preceding month, although banks’ share prices had declined, partly in response to lower-than-expected profit increases.

Financial market prices continued to imply that the cash rate was expected to remain unchanged over the following year or so.

Members concluded their review of developments in financial markets with a detailed discussion of Australian businesses’ access to finance. They noted that external finance had become available on increasingly favourable terms for large businesses over recent years, with foreign banks having added to competition for large business lending. Nevertheless, business borrowing had grown only moderately, reflecting subdued mergers and acquisitions activity, with investment having been funded largely from internal sources of funds. In contrast, many small businesses continued to find it challenging to obtain finance, particularly in their start-up or expansion phases. Members noted that this was likely to reflect the riskier nature of such lending, but also the less competitive market for small business lending. Participants on the Bank’s Small Business Finance Advisory Panel, convened annually, had confirmed the challenges of accessing bank lending. Members observed that equity funding was often more appropriate for the risk profile of start-up businesses, but that there are relatively few avenues for such financing in Australia compared with some other markets. Members were encouraged by the potential for innovations to improve access to finance for small businesses and the willingness of regulators to facilitate these developments, including in the areas of comprehensive credit reporting, open banking and alternative funding platforms.

Considerations for Monetary Policy

In considering the stance of monetary policy, members noted that conditions in the global economy had improved over 2017 and that the outlook had also been upgraded. This improvement had been supported by expansionary financial conditions, notwithstanding some withdrawal of monetary stimulus in a number of economies. In the major advanced economies, labour market conditions had continued to tighten, but wage growth and core inflation had remained low. Members recognised that this combination of strength in economic activity and low inflation was a central issue in the global economy. It was possible that this combination could continue for a while yet, but it was also possible that inflation could pick up by more than expected as spare capacity diminished.

Although the global growth outlook had improved, commodity prices and Australia’s terms of trade were expected to decline in the period ahead, but to remain at relatively high levels. The Australian dollar had continued to fluctuate within its range of the preceding two and a half years. An appreciating exchange rate would be expected to result in a slower pick-up in domestic economic activity and inflation than currently forecast.

Members noted that the low level of interest rates had been supporting the Australian economy. Recent data suggested that GDP growth had been around its trend rate over the year to the September quarter. Output growth was still expected to pick up gradually over the forecast period. Business conditions were positive and capacity utilisation had remained high. The outlook for non-mining business investment had improved further and the pick-up in public infrastructure investment was also supporting overall growth. However, growth in consumption was expected to have slowed in the September quarter and the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.

Growth in employment, particularly full-time employment, had increased and the unemployment rate had fallen to a four-year low. Although wage growth had been a little lower than expected in the September quarter, it appeared to have stabilised at a low rate. Leading indicators of labour demand had been broadly consistent with continuing strength in the labour market. In these circumstances, spare capacity in the labour market was expected to be absorbed gradually and wage growth was expected to pick up over time.

Housing market conditions had generally eased, especially in Sydney. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, the Australian Prudential Regulation Authority had introduced a number of supervisory measures earlier in the year and credit standards had been tightened to lower the risk profile of borrowers. Growth in household credit had slowed somewhat, but members agreed that household balance sheets still warranted careful monitoring.

Over the prior year or so, the unemployment rate had fallen and inflation had moved closer to target. Members noted that this had occurred at the same time as risks in household balance sheets had lessened. Recent data had increased confidence that there would be further progress on these fronts over the following year. How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

The Decision

The Board decided to leave the cash rate unchanged at 1.5 per cent.

NAB refunds $1.7 million for overcharging interest on home loans

ASIC says National Australia Bank Limited (NAB) has refunded $1.7 million to 966 home loan customers after it failed to properly set up mortgage offset accounts.

Following customer complaints, NAB conducted an internal review which found that between April 2010 and August 2017 it had not linked some offset accounts to broker originated loans. This resulted in those customers overpaying interest on their home loan.

NAB has refunded affected customers so that they are only charged interest that would have been payable had the mortgage offset account been properly linked from the commencement of the home loan.

‘Consumers should be confident that when they sign up for a home loan they are receiving all of the benefits that are being promoted,’ Acting ASIC Chair Peter Kell said.

‘Where there are errors there should be timely and appropriate action to ensure that consumers are not any worse off as a result of the mistake.’

NAB reported the issue to ASIC. NAB has also engaged PwC to review the remediation approach and to ensure NAB’s compliance systems will prevent a similar error from occurring in future.

NAB has commenced contacting and refunding affected customers.

Background

An offset account is a savings or transaction account that is linked to a home loan account. Any money in the offset account reduces the amount of interest payable on the linked home loan. For example, if the outstanding balance on the home loan is $300,000 and there are savings of $50,000 in the offset account, then interest is only payable on the difference ($250,000).

In this case, NAB failed to link some offset accounts to home loan accounts, which meant that money held in those offset accounts did not reduce the interest payable on the home loan accounts. As a result, consumers paid more in interest than was required.

NAB also conducted a broader investigation which found that the issue only applies to broker originated loans.

NAB will also remediate customers who had an offset account during the relevant period but had repaid their home loan before 2017.

NAB said:

In February 2017, NAB commenced a review into how it processes offset account requests for customers who apply for a home loan through a Broker, looking back to 2010.

This review found that some customers may not have had their offset account correctly linked to their home loan, and that these customers may have consequently paid additional interest.

We sincerely apologise to our customers for this, which was due to administration errors.

All of the customers identified through this review with an open account have been contacted and received refunds. They represent 0.73% of the total number of offset accounts established through our Broker channel since 2010 (approximately 178,000).

NAB advised ASIC about this matter earlier this year, and, over the past 12 months, has implemented a number of measures to improve offset origination processes, and enhanced the ability for customers to review their offset arrangements themselves.

Seven charts on the 2017 budget update

From The Conversation.

Here’s how the budget is looking at the mid-year mark, in seven charts.

The A$5.8 billion drop in the 2017-18 underlying cash deficit compared with the original May budget is due more to higher revenue than lower spending. Receipts are higher by A$3.6 billion and payments are lower by A$2.1 billion.

The higher receipts reflect the stronger economy, which implies higher company tax (up A$3.2 billion) and superannuation fund taxes (up A$2.1 billion).

Receipts would have been even higher if not for stubbornly weak wages growth which, despite stronger employment growth, has tended to dampen individuals’ income tax receipts. These are in fact down by A$0.5 billion.

The estimates of GST and other taxes on goods and services remain unchanged since the budget.

The lower payments of A$2.1 billion are driven by several changes having opposite effects. Some of these are:

  • A$1.2 billion (over four years) lower welfare payments to new migrants due to longer waiting times;
  • A$1 billion (over four years) lower payments to family daycare services due to more stringent compliance checking; and
  • A$1.5 billion (over four years) lower disability support payments due to lower than expected recipient numbers.

There is not much change in the net debt projections relative to those in the 2017-18 budget. Net debt is A$11.2 billion lower at A$343.8 billion in 2017-18 (around 19% of GDP). Debt stabilises in 2018-19 and starts to steadily decline thereafter to about 8% of GDP in the next ten years.

The lower deficits as a share of GDP are obviously reducing debt, but one factor tending to increase debt is student higher education loans. These are projected to increase by 32% from A$44.4 billion to A$58.8 billion over just the next four years.

The economic outlook continues to be a puzzle. National output of goods and services, real GDP, is expected to grow slightly slower in 2017-18 than the budget forecast – 2.5% compared with 2.75%.

However this is an improvement on the 2% achieved in 2016-17. And it is expected to increase further to 3% in 2018-19.

The economy is being driven by strong global growth and strong domestic business investment. Australia’s major trading partners are forecast to grow (meaning real GDP growth) at a weighted average of 4.25% in each of the next three years.

Wages and household consumption are the puzzle – they are not growing as fast as expected from the stronger than expected employment growth (up 0.25% on the budget to 1.75%) and lower than expected unemployment rate (down 0.25% on the budget to 5.5%).

Household consumption growth is down 0.5% on the 2017-18 Budget forecast to 2.25%. This has in fact become a global phenomenon due to higher costs and job insecurity from the forces of globalisation and automation.

Commodity prices are notoriously volatile and hard to predict, yet they are critical to the budget forecasts because they impact the revenue of resource companies which feeds into company taxes and other taxes.

Iron ore prices are assumed to remain flat at US$55 per tonne over the forecast period, as in the budget. This forecast is almost certain to be wrong because iron ore prices never stay flat for long – the problem is that we can’t say in which direction it will be wrong.

The same applies to thermal coal prices which are assumed to be flat at US$85 per tonne which is again consistent with the budget forecast.

Australian taxpayers continue to bear most of the burden of budget repair. The government can claim with some justification that their efforts to reduce payments further have been thwarted by the Senate.

Excluding the effect of Senate decisions, new spending has been more than offset by reductions in other spending. The gap between the revenue and payment is reducing at the rate of about 0.6 percent per year.

As a share of GDP payments are expected to be 25.2% in 2017-18, falling to 24.9% of GDP by 2020-21 which is slightly above the 30-year historical average of 24.8% of GDP.

Wage growth has been revised down from an already low 2.5% in the budget to 2.25% in MYEFO. With the Consumer Price Index forecast to grow at 2%, wages are barely keeping pace with inflation – growing in real purchasing power by only 0.25%.

This provides a meagre compensation for labour productivity growth which is implied to be about 1% in MYEFO. Wage growth is expected to pick up by 0.5% next year to 2.75%.

This is important because it underpins government revenue growth, yet it’s brave to expect the deep forces that are keeping wages down in Australia and around the world to turn around and exactly match the 0.5% growth in real GDP expected to occur next year.

New measures since the budget have increased the deficit on both the revenue and expenditure sides of the budget. On the revenue side, for example, higher education changes reduced revenue by A$76 million and the GST by A$70 million.

On the expenses side, needs-based funding for schools has cost an additional A$118 million and improving access to the Pharmaceutical Benefits Scheme costs A$330 million. The roll-out of the NDIS in Western Australia adds another cost at A$109 million, and Disability Care Australia at A$362 million.

Author: Ross Guest , Professor of Economics and National Senior Teaching Fellow, Griffith University

Blackstone taps Australia’s shadow-lending market with La Trobe stake

From Reuters.

Blackstone Group has snapped up an 80-percent stake in property financing company La Trobe Financial for an undisclosed amount, in a move that will help the New York-based investment giant expand in Australia’s lucrative mortgage-lending market.

This deal comes as Australia’s push to control a bubble in its red-hot housing market, by reining in bank lending, forces some property developers in the country to look outside the regular banking system to secure financing.

The Blackstone-La Trobe partnership aims to focus on the A$1.7 trillion Australian mortgage loan market and service small to medium enterprises “who are finding it increasingly difficult to obtain credit from the traditional bank sources”, the companies said in a joint statement on Monday.

La Trobe will use the tie-up to attract retail investors for its A$2 billion Credit Fund and its A$4.6 billion mortgage loan portfolios, according to the statement.

Chief Executive Greg O‘Neil will continue to head the Melbourne-based company while Blackstone will appoint two directors to La Trobe’s board.

While Blackstone has been a prolific investor in Australian commercial real estate with about A$9 billion ($6.9 billion) in property purchases in the last seven years, the deal with La Trobe marks the private equity giant’s entry into small-business mortgage lending in the country, according to a spokeswoman.

The broader shadow banking market accounts for about 7 percent of Australia’s total financial assets, according to the country’s central bank.

These lenders are funding some developers at more than double the interest rate for the same type of loans that the country’s big banks were providing just a few months earlier, before regulatory pressure forced them to limit exposure to new projects.

Chief executive Greg O’Neill will retain 20% ownership and continue in his role while the existing management and executive team will also remain unchanged.

O’Neill said the opportunity for La Trobe to partner with Blackstone was the perfect fit for staff, customers and the business.

“The specialist credit space is experiencing a defining period of change and growth around the world right now and it is critical that we continue to build on our strong capital position, expand our networks and draw on global best practice,” he said.

“We look forward to working closely with them over the coming years to expand and substantially grow our retail and institutional investment programs and our specialist lending offerings.”

La Trobe Financial manages investment mandates in excess of A$13 billion, including a retail Credit Fund of almost $2 billion and over $1 billion of public RMBS bonds issued.

AFG Highlights The Number Of Mortgage Broker Related Investigations

AFG has today called on the banking Royal Commission to recognise the significant inquiries that have already been conducted into the mortgage broking sector and the important role mortgage brokers play in the Australian lending market, as the government outlines the inclusion of mortgage brokers in the scope of the banking Royal Commission.

“The mortgage broking channel accounts for more than 53% of the Australian lending market so it is unsurprising that we are in the mix, however 2017 has also been marked by significant regulatory scrutiny of our industry,” said AFG CEO David Bailey.

“The ASIC Review of mortgage broker remuneration and the ongoing Productivity Commission inquiry into competition in the financial system have both looked at the structure of the mortgage broking sector.

“We are confident Justice Hayne will recognise the unprecedented data collection process conducted by ASIC in their Review of mortgage broker remuneration has thoroughly examined our industry.

“The ASIC report recognised the important role that mortgage brokers can play in promoting good consumer outcomes and strong competition in the home loan market and we are confident any other examination of our sector would find the same,” said Mr Bailey.

The Combined Industry Forum (CIF), made up of representatives from across the mortgage industry, has submitted a report to government that outlines a package of reforms to address the proposals made in the ASIC review.

“The Productivity Commission is also undertaking a significant examination of the competitive landscape and mortgage brokers are a key lynchpin in providing that competition.

“The Royal Commission, and the industry as a whole, needs to focus on how competition can be further improved and this should include the impact the government guarantee has on competition.

“Ultimately, the findings of this inquiry should assist the government to promote a competitive and stable financial industry that contributes to Australia’s productivity,” said Mr Bailey.

“The mortgage broking sector provides vital competition to deliver on that aim.

“AFG has 45 lenders on its panel with more than 37% of borrowings going to lenders other than the four major banks, and we remain committed to ensuring choice and competition remains for Australian consumers.

“This competitive tension ensures consumers continue to have choice and most importantly benefit in terms of home loan price and service because of the service brokers deliver on a daily basis across the Australian lending market,” he concluded.

Auction Volumes Decrease Across The Combined Capital Cities

From CoreLogic.

The final week of auction reporting for 2017 returned a preliminary auction clearance rate of 64.2 per cent across the combined capital cities, increasing on last week when the final auction clearance rate fell below 60 per cent for the first time this year, when only 59.5 per cent of auctions cleared. The number of homes taken to auction fell this week, after the surge in activity recorded over the 4 weeks prior when volumes remained consistently above the 3,000 level. There were a total of 2,865 auctions held this week, down on last week when 3,371 auctions where held across the capitals and only slightly higher than volumes from the same week one year ago (2,735).

Melbourne and Sydney both saw an increase in preliminary clearance rates this week, with 67.3 per cent and 60.8 per cent of auctions clearing which was up on the previous week when both cities recorded their lowest clearance rates of the year. The smaller auction markets returned varied results this week, with Adelaide recording the highest preliminary auction clearance rate of 70.1 per cent, while only 43.3 per cent of auctions sold in Perth.

2017-12-18--auctionresultscapitalcities

Virgin cuts investment rates

Virgin Money has announced multiple rate reductions on its new fixed rate investment products.
This reflects easing on funding rates (now future expectations of higher rates have eased) and competitive pressure for share of lending.  Expect more banks to follow. Existing borrowers are still paying the higher amount of course.
The changes, which come into effect tomorrow (19 December), will decrease rates on the 1-5 year fixed rate interest only investment products and the 4 year fixed rate principal and interest product.

Changes are as follows:

Term Current rate (p.a.) New rate (p.a.) Change
Investment – Fixed interest only
1 year 4.49% 4.39% -0.10%
2 year 4.39% 4.14% -0.25%
3 year 4.39% 4.29% -0.10%
4 year 4.59% 4.29% -0.30%
5 year 4.69% 4.59% -0.10%
Investment – Fixed principal and interest
4 year 4.44% 4.29% -0.15%