It’s ‘crunch time’ for Australian households

From Business Insider.

Australian households are in a vulnerable financial position, especially those who have taken out a mortgage. And in an era of weak incomes growth, soaring energy prices and high levels of indebtedness, with the prospect of higher interest rates on the way, many intend to cut discretionary spending in anticipation of even tighter household budgets.

That’s the finding of the latest AlphaWise survey conducted by Morgan Stanley, which paints an unsettling picture on the outlook for not only Australia’s retail sector, but also the broader economy.

Yes, the weakness in retail sales over the past two months may soon become entrenched. The “crunch time” for Australian households, as Morgan Stanley puts it, has begun.

“In early June, we expressed the view that the Australian consumer faces a domestic cash flow and credit crunch,” the bank wrote in a note released this week.

“Income growth has not recovered, ‘cost of living’ inflation is re-accelerating and ‘macro-prudential’-related tightening of credit conditions is extending from housing into consumer finance.”

In order to test how households may respond to higher interest rates, whether as a result of macroprudential measures to slow investor and interest-only housing credit growth or official moves from the Reserve Bank of Australia (RBA), Morgan Stanley conducted a national survey of 1,836 mortgagors to identify household conditions during late July and early August.

Australia’s 2016 census found that 34.5% of households were currently paying off a mortgage.

Morgan Stanley says the survey was designed to provide insight into the health of the household balance sheet, including their spending intentions as a result of higher mortgage rates.

The news was not good.

“Findings from the AlphaWise survey confirm the stresses in the consumer sector we have been highlighting for some time now,” it says.

“Most households have minimal buffers against a shock to their income, and expect to respond to higher debt servicing costs by drawing down on savings and cutting back on expenditure.

“Other sectors of the economy may be able to offset some of the headline weakness, but the concentrated exposure of the household sector and economy to an extended housing market is posing an increasingly important structural and cyclical risk to consumer spending.”

Of those households surveyed, 54% said they intended to cut back on expenditure in response to higher interest rates, with a further 25% planning to draw down on their savings to cope with higher servicing costs, a pattern that has been seen in Australia’s savings ratio which fell to a post-GFC low in the June quarter.

Somewhat alarmingly, 40% of those surveyed indicated that they did not save at all over the past year, particularly among low-income households.

Source: Morgan Stanley

“Respondents to the survey had extremely small income buffers, with around 40% stating that they did not save over the past year,” Morgan Stanley says.

“This was the case across the income distribution, including 30% of those earning more than $100,000.

“The RBA has referred to such households as living ‘hand-to-mouth’, and they largely attributed the lack of savings to an absence of income growth and a general increase in expenses, with a skew towards necessary rather than discretionary items.”

The bank says that the survey’s findings marry up with its consumer “crunch time” thesis where discretionary spending gets squeezed due to flat wage growth, rising essentials costs and tightening credit conditions.

And, perhaps explaining why consumer sentiment remains at depressed levels, Morgan Stanley says the majority of households expect this trend to continue.

“Only around 13% of respondents expect to be able to save more in the next 12 months,” it says.

“With households increasingly eating into their savings to fund expenditure, any shock to disposable income via further rate rises or lower income would have a disproportionate hit to consumption.”

For those unable or unwilling to draw down further on their savings, the survey found that many planned to cut back discretionary spending levels, especially when it came to holidays and social occasions such as entertainment or eating out.

“The survey suggests Holidays/Vacations and Entertainment/Dining are the categories consumers are most likely to cut back on as interest rates rise,” the bank says.

Providing clout to that view, it also mirrors weakness in the Ai Group’s Performance of Services Index (PSI) for September which revealed that activity levels across Australia’s hospitality sector — measuring accommodation, cafes and restaurants — declined at the fastest pace on record in September.

“Respondents in retail and hospitality are reporting reduced spending by consumers due to a mix of increased household electricity costs, flat income growth, and relatively poor consumer confidence,” the Ai Group said following the release of the PSI report.

Separate data from the Australian Bureau of Statistics (ABS) also found that spending at cafes, restaurants and takeaway food services fell by 1.3% in August, more than twice as fast as the decline in total retail sales over the same period.

Once is an anomaly, twice is a trend.

Throw in a third indicator, suggesting that households intend to cut back spending in these areas, and it’s understandable why many think this could be the start of a prolonged period of consumer weakness.

Morgan Stanley certainly thinks it is, forecasting that household consumption growth — the largest part of the Australian economy at a smidgen under 60% — will decelerate sharply over the next 18 months.

Source: Morgan Stanley

“We forecast the squeeze on overall disposable income will see discretionary consumption volumes slow to just 0.2% in 2018, dragging overall consumption growth down to 1.1% and well below consensus of 2.5%,” it says.

That growth in overall consumption next year would be only half the level Morgan Stanley is currently forecasting for 2017.

Given that pessimistic outlook, it says that official interest rates will remain unchanged at 1.5% throughout next year, making it somewhat of an outlier compared to current consensus.

“Combined with a broader slowdown in the housing cycle, we see the RBA staying on hold at 1.5% right through 2018, in contrast to the market pricing of a tightening cycle commencing [in the second quarter of next year]”.

And, given the risks, it says that government investment may need to ramp up even further in order to reduce recession risks.

“[Against] this backdrop, we see the gathering momentum behind a public investment program as necessary to mitigate recession risks, rather than sufficient to drive overall growth back to, or above, trend.”

The RBA’s latest forecasts have GDP growing at 3.25% by the end of next year before accelerating to 3.5% by the end of 2019. Both figures are well above the 2.75% level that many deem to be Australia’s trend growth level.

If Morgan Stanley is right about the largest and most important part of the Australian economy, those forecasts will be hard to achieve.

In such a scenario, it’s unlikely that wage or inflationary pressures would build to a sufficient level to justify a rate increase from the RBA. Indeed, it would likely spur on renewed talks of rate cuts, particularly should business and government investment start to weaken.

While there are plenty of good signals being generated by the Australian economy for the RBA to be optimistic about, especially when it comes to the labour market, should the household sector weaken further — and there’s more than a few signs that it is — it’s unlikely that the RBA would respond by making it even tougher for household budgets.

Morgan Stanley says the AlphaWise survey has a margin of error of +/-1.92% at a 90% confidence level.

Households Get Crushed – The Property Imperative Weekly 07 Oct 2017

Mixed economic news this week, which makes the call on the next cash rate move more complex, but even at current levels, more households are getting crunched as wages tall, debt rises and property prices turn.

Welcome to the Property Imperative weekly to 7th October 2017, the latest digest of finance and property news. Watch the video, or read the transcript.

The big shock this week was the horrible retail spending data from the ABS.  Retail turnover in August declined for a second month in a row, down 0.6 per cent, the worst monthly performance in more than four years, which puts economic growth at risk. In seasonally adjusted terms, there were falls in all states and territories but Victoria (-0.8 per cent) and Queensland (-0.8 per cent) led the way.  The full impact of the August slump will be seen when the September quarter GDP figures are released. Last time, the share of economic growth flowing to wage earners fell to 51.3 per cent in trend terms, the lowest since 1964.

Commonwealth Bank economist Gareth Aird said mortgage interest payments are taking up a larger proportion of household income, and were acting as “a handbrake on consumer spending and the retail sector in general”. All too true – as followers of our blog will know, poor wage growth is the problem.

Even the PM highlighted the impact of slow or no wage growth. “While we’re seeing strong growth in employment, we’re yet to see stronger growth in wages so people feel as though they’re not getting ahead,” Mr Turnbull told Neil Mitchell on 3AW radio. But its more than a feeling, it’s an economic reality.

To underscore the pressure on households, we released our mortgage stress data to end September, which confirmed the uptrend by crossing the 900,000 household rubicon for the first time.  Across the nation, more than 905,000 households are now in mortgage stress (last month 860,000) and more than 18,000 of these are in severe stress. This equates to 28.9% of households. A rising number of more affluent households are being impacted as the contagion of mortgage stress continues to spread beyond the traditional mortgage belts. We estimate that more than 49,000 households risk default in the next 12 months, up 3,000 from last month. You can watch our video summary to see which post codes are most impacted.

New research commissioned by mortgage brokers iSelect through Galaxy Research which polled over 1,000 Australian households also found that 25% were experiencing difficulty covering their mortgage repayments and 33% have had their interest rates increased in the past year. Almost 40% of households making their payments have no surplus left over and if interest rates were to rise by 1%, more than 780,000 mortgage holders would struggle to make repayments. This includes 632,000 households which would have to cut back to cover repayments and 150,000 which would be forced into further debt.

Roy Morgan Research mortgage stress data also confirmed the rising pressure, with a rise, to 17.3%, despite a decline in loan rates.  Those they identified as ‘Extremely at Risk’ also increased from 12.4% to 12.8%. They define stress on a different basis to the DFA cash-flow method, but the trend is still clear.

We also found, in joint research with HashChing a massive discrepancy in home loan interest rates across NSW, with vast differences in rates even within the same suburbs. The data shows that in some cases, neighbours are paying up to $87,027 more for new owner occupied loans (105 basis point disparity), and $201,704 more for refinanced owner occupied loans (235 basis point disparity). The calculation is based on an average home loan of $500,000 over 25 years. Those borrowers paying higher rates are essentially adding an extra three years of mortgage repayments compared to those on a lower rate.

More bad news from banking analysts at UBS who said a third of borrowers with interest-only (IO) loans “do not know or understand that they have taken out an IO mortgage”. According to the results, 23.9 per cent (by value) of respondents stated that they were on an IO mortgage, well below APRA’s figure of 35.3 per cent. UBS said “While we initially suspected that this was a sample error… We believe a more plausible explanation is that around one-third of IO customers do not know or understand that they have taken out an IO mortgage. We are concerned that it is likely that approximately one-third of borrowers who have taken out an IO mortgage have little understanding of the product or that their repayments will jump by between 30-60 per cent at the end of the IO period”.

Whilst FBAA executive director Peter White said that the conclusion was “the biggest load of nonsense on the planet” and that there was no analytical data to support what they’re saying; DFA analysis shows that over the next few years a considerable number of interest only loans (IO) due 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.  We conservatively estimate $7 billion will fall due this year, $9 billion in 2018 and rise to $20 billion in 2020. So the value of the loans is significant and if UBS is right, may be understated.

The IMF released their Global Financial Stability Report, and Australia got a mention for all the wrong reasons. With household debt now 100% of GDP, we are at the top end of the risk curve.  Whilst increased household debt gives an economy a boost in the short term, the IMF has found it creates greater risk 3-5 years later, lifting the potential for a financial crisis, as household struggle to repay.  Given the ultra-high debt levels in Australia, this is an important observation, and we are entering the danger zone now.

Data from the RBA showed that overall household debt rose again with the household debt ratio now at a new record of 193.7.  They left the cash rate unchanged for the 14th consecutive month. But the real problem is that with the current economic settings, mortgage debt is growing at more than three-time income and cpi. There can be no excuse for this, and the settings need to be changed, now.

Even the property news was mixed. ABS data showed overall Building approvals were up 0.4% in August but had fallen 1.2% (on revised figures) in July. This was driven by apartment approvals, which were up 4.8%, while approvals for houses fell 0.6%. Year-on-year the news is still bleak. Approvals are down 15.5% on that basis – the 12th consecutive month they have fallen. The HIA home sales for August lifted but whilst the increase in sales offset larger declines in sales in recent months, it was not sufficient to reverse the decline in sales that is evident since early 2016. The auction volumes were down last week, thanks to the Grand Finals and Long Weekend. But clearance rates in Melbourne remained firm.  And CoreLogic’s September home price series showed slippage in Sydney, down 0.1% in the month, although the national average was up just 0.2%, with Hobart and Melbourne leading the way.

The bottom line is this. We are certainly at a tipping point, and more evidence is amassing on the risks to households, to the housing sector and to the the broader economic outlook. Worryingly, we think there are strong echoes of the pre-GFC conditions which existed in the USA. High debt, extended home prices, suspect mortgage underwriting standards, and the risk of rates rising. There is now a very limited window for regulators to get their act together, and head off the potential crash at the pass. The problem is, intervention also risks creating the crisis they are trying to prevent, so regulators are in a bind, and politicians would prefer to kick the can down the road. The signs are there for those who what to see them, but many prefer to look away.

And that’s the Property Imperative Weekly to 7th October 2017. If you found this useful, do leave a comment below, subscribe to receive future updates and check back next week.

Auction Results 07 Oct 2017

The preliminary results from Domain for today continue to show falling volumes and clearance highest in Melbourne, even after a rebound from the long weekend last week.  The numbers are below those from a year ago.

Brisbane cleared 53% of 11 scheduled auctions, Adelaide 66% of 80 scheduled and 65% of those scheduled in Canberra.

 

Even the PM is warning of low wage growth

From The New Daily.

Prime Minister Malcolm Turnbull has blamed low wage growth for the worst monthly drop in consumer spending since 2010.

Retail turnover in August declined for a second month in a row, according to official data released on Thursday, with the -0.6 per cent drop in trade the worst monthly performance in more than four years – putting economic growth at risk.

“While we’re seeing strong growth in employment, we’re yet to see stronger growth in wages so people feel as though they’re not getting ahead,” Mr Turnbull told Neil Mitchell on 3AW radio on Friday.

“That’s why economic growth is so important.”

The Prime Minister said wages would naturally rise as unemployment falls. “It’s supply and demand. Phil Lowe, the Governor of the Reserve Bank, was making this point just the other day,” he said.

Mr Turnbull also blamed higher energy bills, while some economists pointed the finger of blame at rising household debt and cooling house prices.

August retail trade slumped the most at ‘Newspaper and book retailing’, down -2.3 per cent; ‘Cafes, restaurants and catering services’, down -1.8 per cent; and at ‘Electrical and electronic goods retailing’, down -1.6 per cent.

Nowhere in Australia escaped, with retail sales falling in every state and territory, with New South Wales, Victoria and the ACT tied for worst performance at -0.8 per cent.

retail turnover
It was the worst month-on-month result, in seasonally adjusted terms, in four years. Source: ABS

The link between low wage growth, low spending and low economic growth has been a growing area of concern in recent months.

Commonwealth Bank CEO Ian Narev said in a speech on Friday that wage growth was the “No.1 metric” that policymakers should be concerned about.

The reason experts are so concerned is that any drop in consumer spending from cash-poor workers could have big consequences for economic growth, as household consumption currently accounts for roughly 57 per cent of Australia’s economic growth.

The full impact of the August slump will be seen when the September quarter GDP figures are released. In the GDP figures for the June quarter, the share of economic growth flowing to wage earners fell to 51.3 per cent in trend terms, the lowest since 1964, while the profit share soared to 27.3 per cent, the highest since 2012.

Dr Richard Holden, an economist at the University of New South Wales, has previously warned The New Daily that a drop in consumer spending “goes round in a vicious cycle”.

“If you have more of a drop on consumer spending, you’re going to see a contraction on the business side. It flows straight into business investment and business expansion, and that has a multiplier effect,” Dr Holden said at the time.

Commonwealth Bank economist Gareth Aird has described the August retail report as a “shocker”.

“It’s not surprising to see such weak retail trade outcomes given household income growth is so soft. But two consecutive monthly falls look at odds with the recent strength in the labour market.”

Mr Aird also said mortgage interest payments are taking up a larger proportion of household income, acting as “a handbrake on consumer spending and the retail sector in general”.

The expected arrival of online giant Amazon, and the growth of online retail in general, is also putting pressure on retailers, he said.

Australian Retailers Association executive director Russell Zimmerman blamed increased energy costs, higher tax burdens and an inflexible wage system for the concerning result and called for government action to lift confidence.

JP Morgan economist Ben Jarman said further weakness in household consumption would put at risk the Reserve Bank’s forecasts for a return to economic growth of 3 per cent, from the current annual rate of 1.8 per cent.

“The consumption data challenge the RBA’s assertion that growth will move back above potential,” he said.

Labor leader Bill Shorten told a media conference on Friday that the misuse of labour hire contracts were a major contributing factor to Australia’s low wage growth.

ASIC bans director of unlicensed payday lender

ASIC says it has banned Mr Robert Legat from engaging in credit activities for a period of three years following the penalty decision of the Federal Court on 10 March 2017.

The Court had previously found that payday lenders Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF Companies) breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.

The FAF Companies used a business model which used the sale and purchase of diamonds to provide loans to consumers (the diamond model). The Federal Court found that the diamond model was designed to conceal the true nature of the transaction, which was the provision of credit. As such the FAF companies should have held an Australian credit licence under the National Credit Act.

ASIC found that Mr Legat created and caused the FAF companies to implement the diamond model, which was designed to circumvent the 48% legislative interest rate cap that would have been applicable to the loans. This conduct demonstrated a lack of judgement, integrity and professionalism on Mr Legat’s part and a disregard for the law. ASIC determined that Mr Legat is not a fit and proper person to engage in credit activities.

ASIC Deputy Chair Peter Kell said, ‘The National Credit Legislation contains important protections for consumers. ASIC will take action against people who seek to deprive consumers of these protections.’

SME’s Are Getting Funds Quicker, Thanks To Alt. Finance

Data from the Digital Finance Analytics Small and Medium Business Surveys highlights that firms who apply for unsecured credit are getting funds more quickly on average now, compared with 2015. You can request a copy of our latest SME report.

However, there are considerable differences between the average timeframes experienced by SME’s when they deal with the major banks, compared with those going to the Fintechs.  The new players are faster.

SME’s as they become more digitally aligned, also have a higher expectation of service, with firms saying that 4.8 days would be considered, on average, a reasonable time to time wait, as we discussed in the Disruption Index, a joint DFA and Moula initiative. The next edition will be out soon.

We think major lenders are responding to the the competitive pressure to turn applications around faster, as the number of Alt. Lenders grows. This is good news for all SME’s seeking a loan.

To underscore this, we note that RateSetter is now offering loans of up to $50k, unsecured, with a 24 hour turn around to the SME sector. RateSetter which launched in 2012 was the first peer-to-peer lender licensed to provide services to all Australians, not just wholesale and sophisticated investors. RateSetter provides secured and unsecured loans to Australian-resident individuals and businesses.

 

FBAA calls out UBS conclusion as ‘assumptions’

From The Adviser.

The Finance Brokers Association of Australia has excoriated UBS for releasing reports “based on assumptions and not data”.

Source: UBS

Earlier this week, banking analysts at UBS released a banking sector update that suggested a third of borrowers with interest-only (IO) loans “do not know or understand that they have taken out an IO mortgage”.

According to the results, 23.9 per cent (by value) of respondents stated that they were on an IO mortgage.

UBS analysts were reportedly surprised by this finding, as it was much below APRA’s figure that stated 35.3 per cent of loan approvals in the year to June were for IO loans.

However, the analysts suggested that instead of its figures/APRA’s figures being at fault, the disparity was down to the ignorance of borrowers.

The report concluded: “While we initially suspected that this was a sample error… We believe a more plausible explanation is that around one-third of IO customers do not know or understand that they have taken out an IO mortgage.”

While the analysts acknowledged that this could appear “farfetched”, they went on to say that the conclusion “needs to be considered in the context of the lack of financial literacy in Australia”.

It’s this conclusion that many, including the executive director of the FBAA, have taken exception to.

Speaking to The Adviser, FBAA executive director Peter White said that the conclusion was “the biggest load of nonsense on the planet”.

He said: “There is no analytical data to support what they’re saying. Their comments are that this is what they believe is the response; they are assuming that people don’t know that they have an interest-only loan. So, the conclusion is based on assumptions, not data.

“When you look at the process that a borrower goes through, it’s impossible for them not to know that they are on interest-only. From the conversation they have with their broker or lender, leading into the paperwork, the quote, credit guide, the loan documentation, communications from the broker or lender, the loan contract, the key fact sheets for their home loan — all of that spells out what kind of loan they have and what kind of repayments they will be making. “

He continued: “There are so many documents that people get over and above just the conversation that is had, that it is impossible for somebody not to know that they have an interest-only facility.”

Mr White did acknowledge that while borrowers may not know the “nuances” of their loan structures, he also did not expect borrowers on principal & interest loans to know all the nuances of their loan either.

“But the reality is that they know they are paying off part interest and part principal and how that works. And the reality is that those with interest-only know they are paying off the interest.”

Ties to ASIC remuneration review

The head of the FBAA went on to decry the trend of data not being taken in context or taken to some considerable degree.

He highlighted that some of the findings and proposals of the ASIC review into broker remuneration was another case where the data “didn’t go to the end of the lending journey”.

Adding that he believed ASIC “did a good job” and that its data research was “extensive”, Mr White suggested that some of the conclusions were “based on assumptions of what the data meant.”

He gave the example of the finding that brokers write higher loan-to-value ratio loans, and were responsible for loans with larger loan sizes.

“They assume that’s perceived to be a bad outcome driven by commission (but, of course, we know that this isn’t commission chasing). But, more importantly, they didn’t ask the borrower whether they thought it was a bad outcome.

“So, while [their conclusion] is one possible result of the data, it’s not the only one.

“Likewise, with the UBS report, they said that they believe that this result came from people not understanding that they are on interest-only. But there is no evidence. That’s absolutely ludicrous. To me, it puts a big question mark over the competencies of the people named as conducting this research.”

Mr White concluded: “UBS are not lenders in this space, so they’re making commentary outside of their knowledge and skill set and coming up with the wrong answers. They aren’t doing themselves any favours.

“Consumers are not idiots. They do understand what they are doing. They are well informed.”

 

NAB’s now using Google Assistant to answer customer questions

From Business Insider.

The next time you have a question for the NAB, the chances are Google might giving you the answer as part of a voice-based automation program.

The “Talk to NAB” pilot is an local first for banking, enlisting Google Assistant on smartphones and the recently launched Google Home to answer general banking questions, ranging from replacing lost cars or resetting passwords.

NAB’s executive general manager of digital and innovation, Jonathan Davey, said the vast majority of customer contacts are now through digital platforms and the bank is experimenting with virtual assistants on a range of fronts, including a virtual banker chatbot for business customers, and a Facebook chatbot pilot.

“We know they want more self-service capability and they want to be able to solve basic questions in a channel that suits them and when it’s convenient for them,” Davey said.

“This is very much a first step for us in the voice-based smart assistance space; we will continue to develop our capability with the Google Assistant over time so it can answer more questions and perform more tasks for NAB customers”.

The Talk to NAB program is now live and available to NAB customers who have Google home or a smartphone with assistant.

Mortgage holders struggling under rate hikes

From Australian Broker.

A significant percentage of mortgage holders are struggling to cover their monthly repayments while a large proportion has already been slugged with higher interest rates despite the official cash rate remaining steady at 1.5%.

These results come from new research commissioned by mortgage brokers iSelect through Galaxy Research which polled over 1,000 Australian households. The study found that 25% were experiencing difficulty covering their mortgage repayments. In the same vein, the research suggests that 33% have had their interest rates increased in the past year.

“A third of home owners have had their rate increase during the past 12 months and if the RBA was to increase the official cash rate, no doubt most lenders would quickly follow suit. This would mean more and more Aussie homes will have to find ways to cut back in order to afford their increased home loan repayments,” said Laura Crowden, spokesperson for iSelect Home Loans.

She expressed her concern that a quarter of households were already in financial difficulties given that the official rate has been forecast to rise in the coming year.

“Despite having access to low interest rates, record house prices have forced many families to significantly extend themselves with almost 40% of households making their payments without having a surplus left over,” she said.

“As such it is not surprising that many Aussie home owners are already struggling to make their monthly repayments even while interest rates are low.”

The research found if interest rates were to rise by 1%, more than 780,000 mortgage holders would struggle to make repayments. This includes 632,000 households which would have to cut back costs to cover repayments and 150,000 which would be forced into further debt.

“We know from speaking to our customers that many Aussies are really feeling the pinch of rising cost of living pressures on their stretched household budget, especially as energy bills continue to skyrocket across much of the country,” Crowden said.

The research also found that a large percentage of mortgage holders were paying too much despite the low cash rate. In fact, 54% were paying an interest rate of 4% or more while 13% were paying over 5%.

The data is mixed but worrying signs from mortgagees

From The Conversation.

Data released this week in Australia and the United States showed continued strength – or at least a lack of weakness – in consumer spending and unemployment.

New car sales in Australia – one measure of consumer sentiment and spending – declined slightly in September from the year before. However, new car sales are still slightly ahead (0.2%) of last year’s numbers, on a yearly basis.

Building approvals also showed some mixed signs. The data shows overall approvals were up 0.4% in August. They had fallen 1.2% (on revised figures) in July. This was driven by apartment approvals, which were up 4.8%, while approvals for houses fell 0.6%. Year-on-year the news is still bleak. Approvals are down 15.5% on that basis – the 12th consecutive month they have fallen.

Perhaps developers don’t like to build into property bubbles, at least not forever.

In the US there was continued strong employment data, this time from payroll processing records. ADP data showed that US private-sector employers added 135,000 jobs in September. This was well above market forecasts that were subdued due to Hurricanes Harvey and Irma. It is now expected that the US unemployment rate will stay at the current very low 4.4% when official data is released.

However, the US Federal Reserve is still concerned about the low level of inflation, which has been persistently below its target range. Recently, Fed Chair Janet Yellen observed that:

My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.

That was a very candid observation, but perhaps just as importantly, Yellen pointed out one important reason why it matters, saying:

Sustained low inflation such as this is undesirable because, among other things, it generally leads to low settings of the federal funds rate in normal times, thereby providing less scope to ease monetary policy to fight recessions.

Meanwhile, in Australia the RBA left the official cash rate at 1.50% for the 13th (lucky for some?) consecutive meeting, with no rate rise in sight. RBA governor Philip Lowe said this week:

…slow growth in real wages and high levels of household debt are likely to constrain growth in household spending.

This underlines the consistent bind that Lowe finds himself in. If he raises rates then he could put already debt riddled households under further pressure and crater spending – which accounts for roughly three-quarters of GDP – as those households try and adjust their balance sheets in the face of stagnant wages.

It has been a consistent theme of this column that both the Fed and RBA are in something of a bind – if for slightly different reasons. And both Yellen’s and Lowe’s remarks highlight this.

But the truly scary news this week was about Australian mortgages, with a survey from UBS saying that one-third of Australian borrowers don’t know their mortgages are interest only. Or as UBS put it:

We are concerned that it is likely that approximately one-third of borrowers who have taken out an IO mortgage have little understanding of the product or that their repayments will jump by between 30-60 per cent at the end of the IO period.

Now, economists don’t normally put much stock in surveys – we like “revealed preference” data. But this survey I will listen to.

This has US circa 2008 written all over it. Back then, many borrowers with adjustable-rate mortgages didn’t realise that the rates ratcheted up sharply after (typically) five years. When those rates did, and the borrowers couldn’t refinance because of market conditions, there was a meltdown that led to Bear Sterns and Lehman Brothers going to the wall. And then, of course, the whole financial crisis.

If UBS is right, Australia has a similar time-bomb ticking away. Maybe not quite as bad, but I don’t know. Remember ANZ chief executive Shayne Elliot on Four Corners telling us how his mortgage book was super-diversified because they were all uncorrelated individual mortgages? Well, not if his book includes folks who don’t understand their loan contracts.

Whatever APRA is doing right (or wrong), it can’t deal with loans that have already been written. That puts the RBA in a bind – and should make us all cautious about how robust the Australian economy really is.

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