NAB expects prices to slow in 2018-19, but not a severe adjustment.

The latest NAB Residential Property Index is out, and it rose 6 points to +20 in Q3, with sentiment (based on current prices and rents) improving in all states except NSW (which edged down). Sentiment rose sharply in Victoria (up 27 to +63) and in Queensland (up 4 to +16). Whilst sentiment rises and confidence lifts among property experts in Q3, NAB expects prices to slow in 2018-19, but not a severe adjustment.

Australian housing market sentiment lifted over the third quarter of 2017, supported mainly by a large increase in the number of property experts reporting positive rental growth in the quarter and continued house price growth in most states.

“The NAB Residential Property Survey shows an improvement in market sentiment across most states last quarter, but we continue to see market conditions that vary across different locations. The momentum is clearly with Victoria, while NSW is experiencing something of a slowdown,” NAB Chief Economist Alan Oster said.

Confidence (based on forward expectations for prices and rents) lifted in all states, led by Victoria, and with WA the big improver. Despite weakening price growth in NSW, higher confidence is being supported by predictions for higher rents.

First home buyers continue emerging as key buyers in both new and established housing markets, accounting for over 36% of all sales in new housing markets and around 29% in established markets.

During Q3, the overall market share of foreign buyers in new property markets fell to a 5-year low of 9.5%, potentially due to lending restrictions on foreign buyers. Low foreign buying activity in new property markets was led by Victoria, where the share of sales to foreign buyers fell to 14.4% (20.8% in Q2).

For the first time, tight credit was identified as the biggest constraint on new developments in all states, while access to credit was the biggest barrier for buyers of established property. Price levels were the biggest concern in both Victoria and NSW. In WA and SA/NT, property experts said that employment security was the biggest barrier to buying an established home.

They also highlighted lower foreign buying activity in new property markets, with VIC saw the share fall to 14.4% (from 20.8% in Q2) and NSW down to 7.8% from 12% in Q2. In contrast, QLD saw a rise to 11.4%, up from 8.6% last quarter.

NAB’s forecasts on residential prices

NAB Group Economics has revised its national house price forecasts, predicting an increase of 3.4% in 2018 (previously 4.3%) and easing to 2.5% in 2019. Unit prices are forecast to rise 0.5% in 2018 (-0.3% previously), with a modest fall expected in 2019.

“More moderate market conditions reflect a combination of factors which vary across markets, including deteriorating affordability, rising supply of apartments, tighter credit conditions and rising interest rates in the second half of 2018” said Mr Oster.

“But still relatively low mortgage rates, a favourable housing supply-demand balance and strong population growth population growth should continue to provide support for prices going forward.”

“By capital city, house price growth is forecast to be moderate outside of Perth – where prices are flattening out – consistent with good business conditions and better employment growth.”

“Melbourne and Hobart are currently experiencing solid growth in prices; Sydney is cooling and we expect Brisbane and Adelaide will cool. Finally, we expect 2018 to mark the beginning of a gradual turnaround for Perth.”
About 300 property professionals participated in the Q3 2017 survey.

Regulator Activity Begins To Bite – AFG

AFG’s latest Mortgage Index results released today shows that major structural change in the Australian lending landscape is continuing. Whilst it is a view from their loan throughput, it underscores the market evolution, and that Victoria is the last bastion of the property sector.

“Today’s results paint a very different picture from this time last year,” said AFG CEO David Bailey.

“Regulator-led tightening of investor lending has led to a further drop in investor volume and they are now sitting at an all time low of 29% of the market.

The shift in lender appetite from investors to upgraders is also evident in average loan size. “The national average home loan is now sitting at an all time high of $491,000,” said Mr Bailey. “This increase can be explained by the fact that people generally spend more for their primary place of residence than they do for an investment property.

The number of people looking to refinance has dropped to 25%, whilst those keen to upgrade their living situation is increasing with upgraders now representing 41% of the market.

“This is also likely to be a reflection of the lack of lending options on the table for investors wanting to refinance, as lenders pull back from the investor market to meet regulator demands,” said Mr Bailey.

The major lenders’ share of the market is also down to a post-GFC low of 64.4% as borrowers continue to explore alternatives outside of the major bank owned brands.

“Looking at loan type, fixed rates are now at 26.3% of all loans which confirms many Australians are anticipating that the next interest rate move will be up” said Mr Bailey.

First home buyers are enjoying their third consecutive quarter in double digits since the beginning of 2014. “National market share for first home buyers has lifted to 13% across the last quarter, helped in part by new stamp duty concessions kicking in on July 1 for this segment of the market in Victoria and New South Wales.”

Victoria continues to set the pace with lodgement volumes in that state up 27% on the first quarter of last year whilst every other state has lost momentum to varying degrees. The strength of the Victorian home market is also evidenced in the average loan size for that state, which is 5% higher than it was at the same time last year.

“Overall, volumes are up on the previous two quarters, however, compared to the same time last year they are flat. This translates into the view that regulator-led changes are being felt everywhere except Victoria,” concluded Mr Bailey.

More Evidence Of The Risks Of Interest Only Loans

Citi has published a 54 page report on the highly topical subject of interest only (IO) loans, and we provided data from our Core Market Model to assist their research.

Even after recent regulatory tightening, they highlight that underwriting standards in Australia are still more generous than some other countries.

They conclude that there are vulnerabilities in the IO sector, both from property investors and owner occupied IO loan holders.

They say that tighter lending criteria and rising house prices has meant investors increasingly face net negative cash flows and investors face a growing household cashflow gap and reducing capital gains expectations.

The large levels of debt outstanding by borrowers aged in their 50’s and 60’s means many investors will need to sell property to discharge their debts.

Owner Occupied IO borrowers are more susceptible to interest rate rises given higher average borrowing levels and higher average loan to
value ratios. Our mapping of OO IO borrowers between 2011 and 2017 highlights the spread of these loans.

They conclude that:

all major lenders face a responsible lending risk – Westpac and CBA have more customers who will need to adjust to the new realities of investing in the residential property market in Australia. Given the widespread use of IO finance and the reduced prospects of discharging debt via means other than liquidation of portfolio holdings, banks must face an increased risk of mis-selling claims in future years. Mining towns serve as a microcosm of this threat.

Branch tellers not rewarded for sales – CBA

Commonwealth Bank has announced further changes to the way   frontline staff are remunerated, increasing the focus on customer service and rewarding branch staff for delivering better customer outcomes, not financial outcomes.

The nation’s largest bank and branch network will move approximately 2000 customer service representatives, also known as tellers, to a new remuneration plan focused on the individual’s contribution to providing superior customer service. Any links to financial measures have been abolished.

Commonwealth Bank Executive General Manager, Angus Sullivan, said: “This change will reward our tellers for continuing to provide superior service to the millions of customers we serve around the country.

“We have been listening to our customers and this is another step to ensure banking is fairer, simpler and more transparent. Customers can be confident that our tellers are not being paid to sell them products.

“The new remuneration plan will support and encourage our teams to have better quality conversations with customers, understand their needs and provide the best possible service.

“This will further strengthen our customer focus and align the way we reward our people with industry standards and community expectations.”

These new measures will be backdated to 1 July 2017, the start of the current CBA performance period, removing all financial measures from individual performance.

In addition, close to 200 Bankwest branch tellers will also move onto a customer-focused remuneration structure from 1 October 2017, the start of the Bankwest performance period.

Commonwealth Bank has already made a number of changes moving away from sales-based incentives and recognition programs, and towards values-based rewards.

Mr Sullivan said this is another example of our commitment to implement all Sedgwick Review recommendations ahead of the 2020 deadline.

“We understand that there is always more to do, and we have been actively participating in the independent review by Mr Sedgwick and the Australian Bankers Association,” Mr Sullivan added.

The spooky mortgage risk signs our bankers are ignoring

From The Conversation.

I’m not normally a fan of parliament hauling private sector executives before them and asking thorny questions. But when the Australian House of Representatives did so this week with the big banks it was both useful and instructive.

And, to be perfectly frank, terrifying.

Let’s start with Westpac CEO Brian Hartzer. First, he confirmed the little-known but startling fact that half of his A$400 billion home loan book consists of interest-only mortgages.

Yep, half. Of A$400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40% interest-only.

Hartzer went on to make the banal statement: “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.”

So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?

Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money. There are top managers like Harzter acting on behalf of shareholders. Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages. And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders. Those folks may well want to make loans to people who can’t pay them back as long as they get a big payday in the short term.

ANZ CEO Shayne Elliot repeated Hartzer’s mantra, saying: “It’s not in our interest to lend money to people who can’t afford to repay.” Recall, this is the man who on ABC’s Four Corners said that home loans weren’t risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting). That is a comment that is either staggeringly stupid or completely disingenuous.

Messers Harzter and Elliot must take us all for suckers. They have made a huge amount of interest-only loans, at historically low interest rates, to buyers in a frothy housing market, who spend a large chunk of their income on interest payments. This certainly looks troubling. It may not be US sub-prime, but it could be ugly. Very ugly.

To put it in context, there appears to be in the neighbourhood of A$1 trillion of interest-only loans on the books of Australian banks. I say “appears to be” because reporting requirements are so lax it’s hard to know for sure, except when CEOs cough up the ball, like this week.

The big lesson of the US mortgage meltdown is that the risks on these mortgages are all correlated. If a few people aren’t paying back an interest-only loan, that is a fair predictor that others won’t pay back their loans either. Yet it seems Australian banks are a decade behind the learning curve.

The Reserve Bank cautions that one-third of borrowers don’t have a month’s repayment buffer. And where are interest rates going to go from here? Up. It is just a question of when. And when that does happen – or when the interest-only period on loans (typically five years) rolls off and principal payments start having to be made – watch out.

We should all remember that the proximate cause of the US mortgage meltdown was borrowers with five-year adjustable-rate mortgages (ARMs) that had huge step-ups in repayments and needed to be refinanced to be serviceable. When the market couldn’t bear that refinancing, defaults went up. Then the collapse of US investment bank Bear Stearns, then Lehman, then Armageddon.

Australia’s large proportion of five-year interest-only loans – turbocharged by an out-of-control negative-gearing regime – looks spookily similar.

It’s one thing for borrowers to do silly things. When it becomes dangerous is when lenders not only facilitate that stupidity, but encourage it. That seems to be what has happened in Australia.

And APRA’s “crackdown” and the Reserve Bank’s warning may be far too little, way too late.

We might stumble though this. I hope we do. But if so, it will be because of dumb luck, not good institutional and regulatory design. And definitely not because of good corporate governance.

Whatever happens, we should learn those lessons.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

First Time Buyers Lead Housing Finance Higher In August

Data from the ABS today on housing finance reconfirms what we already knew, overall lending flows for housing from the ADI’s rose 0.6% in trend terms or 2.1% seasonally adjusted. Within that, lending for owner occupied housing rose 0.9%, or 2.1% seasonally adjusted and investor loans rose 0.2% in trend terms, or a massive 4.3% in seasonally adjusted terms. So lending growth is apparent, and signals more household debt ahead.

First time buyers continue to extend their reach, despite we seeing “Peak Price” for property at the moment. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 17.2% in August 2017 from 16.6% in July 2017. But these numbers may be wobbly, as the ABS warns:

The number of loans to first home buyers increased strongly in August. The ratio of the number of first home buyer loans to the total number of owner occupier loans also increased strongly. The increase has been driven mainly by changes to first home buyer incentives made in July by the New South Wales and Victorian governments. The ABS is working with financial institutions to establish the size of the increase in first home buyer lending in recent months. These numbers may be revised and users should take care when interpreting recent ABS first home buyer statistics. The ABS is continuing to work with APRA and the financial institutions to improve the quality of first home buyer statistics.

The number of investor first time buyers fell a little according to our surveys, but overall there are more active, thanks to the recent owner occupier incentives.

The overall lending flows, in trend terms revealed a rise in all categories, other than lending for new construction to investors, which fell just a little. Also refinanced loans only grew a little and continues to slide as a proportion of all loans. No real surprise as rates are rising now. The mix of loans also continues to pivot away from investment property, down to 44.8% of all loans (ex. refinance). Still a high number though.

Here are the month on month movements by category.

Looking at the original stock data, another $6.5 billion was added to the owner occupied category or 0.6%, while investor loans rose just 0.1% in the month.

The portfolio mix of investment loans drifted lower overall, down to 34.6% or $550 billion, while the total value of owner occupied loans stood at $1.1 trillion.

IMF Downgrades Australia’s Growth Prospects

The latest IMF forecast is still expecting a growth rate of around 3% in 2018, but they revised down 2017 in the latest Global Financal Stability Report.

Our first half result in 2017 was 1.2%, so the second half is circa 1%, hardly stellar, and the sudden rebound to 3% next year, some might say appears courageous.

They also revised up the unemployment rate, remaining at 5.6%, rather than falling to 5.3% as estimated last time.

This plus slow wage growth highlights the issues underlying the economy.

ASIC Stops More Pay Day Lenders

ASIC annouced today enforcable undertaking with Payday lenders Web Moneyline and Good to Go Loans, to cease using a loan product, called OACC2, following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

Both lenders are required to

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

Here are the ASIC releases:

Payday lender Web Moneyline has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Web Moneyline may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking , Web Moneyline is required to:

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘Financially vulnerable consumers can be at particular risk from this sort of activity, and in many cases will have little real understanding of the greater risks of default they are being exposed to. ASIC will take action to protect those consumers from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 21 August 2014 and 26 May 2015 are not required to make any more payments and will shortly receive communication from Web Moneyline confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Web Moneyline (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au.  If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options.

 

Payday lender Good to Go Loans has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Good to Go Loans may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking, Good to Go Loans is required to:

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘ASIC will continue to take action to protect financially vulnerable consumers, many of whom are recipients of welfare payments, from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 18 May 2014 and 20 May 2015 are not required to make any more payments and will shortly receive communication from Good to Go Loans confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Good to Go Loans (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au.  If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on 1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options

Bank of Queensland FY17 Results

Band Of Queensland today announced cash earnings after tax of $378 million for FY17, up 5 per cent on FY16. Statutory net profit after tax increased by 4 per cent to $352 million.

There was a one-off $16m uplift thanks to asset sales, but the stronger results were really thanks to lower bad and doubtful debts.  Otherwise, pretty much as expected. The question is, can the NIM improvement be maintained in the ultra-competitive market, despite a small lift in past 90 day mortgage defaults?

Return on equity was 10.4%, just slightly better than FY16, but this included the $16m profit from asset disposals.

Net interest margin fell to 1.87%, but was better in 2H.

Loan growth was significantly lower in FY17, although better in 2H.

The BOQ Board has maintained a fully franked final dividend of 38 cents per ordinary share and announced a fully franked special dividend of 8 cents per ordinary share.

Second half cash earnings after tax increased 16 per cent on the first half result, supported by a $16 million profit on the disposal of a vendor finance entity. On an adjusted basis (excluding the vendor finance entity disposal), FY17 cash earnings after tax increased 1 per cent to $362 million and second half cash earnings after tax in creased 7 per cent on the prior half to $187 million.

Lending growth improved in both the housing and commercial loan portfolios.

The Virgin Money Reward Me home loan portfolio has grown ahead of expectations.

Broker settlements increased to 28%, and interest only loans was 40% in 2H16, and 39% in 1H17, but trending down, they say! 8% of loans are higher than 90% on a portfolio basis, and 19% in the 81-90% band.

These include Virgin Money home loans.

BOQ’s niche businesses continue to grow. BOQ Specialist, BOQ Finance and other commercial lending target segments have all delivered good results.

During the year, capability has been built in the niche segment of corporate healthcare, leveraging industry expertise and contacts through BOQ Specialist. Loan balances in the niche business banking segments of agribusiness, corporate healthcare & retirement living and hospitality & tourism have grown by $309 million to $1.5 billion.

BOQ Finance also made another strong contribution. The Cashflow Finance acquisition made during the year added another dimension to the business’ suite of finance products.

BOQ’s asset quality remains sound with further improvement across a range of metrics. This is the outcome of a deliberate approach to improve risk management over the past five years. Impaired assets as a percentage of gross loans were down to 44 basis points, while loan impairment expense was just 11 basis points of gross loans during the year.

However, there was a small rise in 90 days past due mortgage arrears.

BOQ has delivered on its 1 per cent underlying expense growth target with underlying expenses of $510 million. This target was achieved while still investing in the business. BOQ is continuing to invest in digitising processes, which will have the dual benefit of improving customer experiences and improving business efficiency.

BOQ’s strong capital position further improved. The CET1 ratio was up 10 basis points over the half to 9.39 per cent.

This position will be further strengthened by 20 to 25 basis points following business and regulatory changes expected to occur in the first half of FY2018. In response to these changes and BOQ’s position, the Board has determined that returning some of this excess capital to shareholders is the most appropriate course of action at this time.

A special dividend of 8 cents per ordinary share has been announced by the Board, along with suspension of the dividend reinvestment plan for the final and special dividends on ordinary shares. This will be reinstated on 24 November 2017.

No maths formula for rate repricing: Westpac

From Australian Broker.

There is no document or formula that exists behind Westpac’s decision to raise interest-only loan rates in light of lending speed limits imposed by the Australian Prudential Regulation Authority (APRA).

Instead, the bank has said differentiating rates between interest-only and principal and interest loans have been made as a “judgment”.

These claims came to light when Westpac’s CEO Brian Hartzner and chief financial officer Peter King faced the House of Representatives Standing Committee on Economics in its review of Australia’s four major banks in Canberra yesterday (11 October).

The bank made estimates around what the size of the gap between IO and P&I rates would be, Hartzner said. While forecasts were made around these changes, it was difficult to see exactly what would happen as it was impossible to accurately guess how many customers would switch mortgage types.

“It’s not a mathematical formula, it’s a judgment,” he said.

While there was no physical documentation that exists around different price points, Hartzner admitted the bank would have modelled around profitability and rate changes.

“Obviously we consider commercial issues in the things we do.”

When committee chair David Coleman questioned whether regulation was being used to boost bank profits, Hartzner outright denied this.

“I would reject the idea that compliance is a profit centre.”

Westpac spends $300m to $400m per year on compliance – fees which the bank was not going to recuperate, he said.

Profit was not a primary driver for these changes, he said, stressing that the main push was to manage Westpac’s balance sheet.

At the moment, around 50% of Westpac’s existing loan book consists of IO loans.

Hartzner’s message to borrowers was simple.

“Switch to a principal and interest loan. It’s cheaper.”