Digital Finance Analytics (DFA) Blog – Page 606

CBA Axes “Foreign” ATM Charges

The CBA today (yes on a Sunday!) has announced they are killing the ATM charge incurred by non-CBA customers withdrawing cash from their ATMs.

In a first for an Australian bank, Commonwealth Bank has removed ATM withdrawal fees so all CommBank and non-CommBank customers won’t be charged an ATM withdrawal fee by us when they take cash out at any of our 3,400 ATMs.

RBA data shows that Australians made more than 250 million ATM withdrawals from banks other than their own last year so the move is designed to increase convenience and bring savings.

“Australians have complained for some time about being charged fees for using another bank’s ATM,” Matt Comyn, Group Executive, Retail Banking Services, said today.

“We have been listening to consumer groups and our customers and understand that there’s a need to make changes that benefit all Australians, no matter who they bank with. This is one of the steps we’re taking to make that happen,” Mr Comyn said.

“As Australia’s largest bank, with one of the largest branch and ATM networks, we think this change will benefit many Australians and hopefully demonstrate our willingness to listen and act on customer feedback.”

No ATM withdrawal fee access applies to CommBank-branded ATMs and excludes Bankwest ATMs and customers using overseas cards.

The number of withdrawals from ATMs (and the number of ATMs in use) are falling, as other non-cash payment mechanisms proliferate – such as pay wave, debit cards and mobile payments. We expect the downward trajectory to accelerate as non-cash alternatives continue to grow. Customers can also get cash out at supermarkets, and this alternative has become popular for those who need to get their hands on real notes.

Under half have a charge attached, those are withdrawals from another bank’s ATMs.

As we said in a recent post there is a generation shift in play as digital natives continue to adopt smartphone based payment options, from Applepay, to NFC transactions in shops, or apps like paypal as well as the move to debt. Even digital migrants are using electronic mechanisms, such as smart phones, internet banking, contactless payments and Bpay is also a popular option.

Data from the RBA shows the volume of ATM cash withdrawal transactions has fallen by 15% over 3 years, whilst the gross value has slipped a little (and fallen in post-inflation adjusted terms). Debit card transactions are more than taking up the slack. But there is also more going on here.

We are approaching a tipping point where the economics of ATMs will not make sense, other than at a few high traffic locations, as there a fixed costs relating to installation and maintenance (including the cash top-up) and income is linked to volumes. There was a proliferation of third party ATMs in for example retail sites in the 1990’s, but these are getting less use too. So we think the number of machines will fall.

Meantime the ubiquitous smart phone is set to become your personal finance assistant, your electronic wallet and electronic credit card. Just do not lose your phone!

As a result, traditional channels such the the branch, ATM and even plastic are all under threat. Cash will become less important in every day life, but it will remain, used perhaps by people less comfortable with the technology, or in the black economy. It would not surprise me if down the track larger bank notes started to disappear under the guise of migration to digitally based more cost-efficient payment solutions, which just happen also to be easier to track.

Meantime, the ATM just got out-evolved by the smartphone.

Around $500 million was charged by banks to customers, and the average fee is $2 per transaction. CBA has the largest fleet of ATMs across the country, with more than 3,400.

This is a move which was expected, given there are overseas precedents to removing ATM fees, and volumes are falling. Of the 70,000 ATMs in the UK network, around 16,000 charge users a fee per withdrawal.

CBA will hope to gain a positive reaction, to counter the recent negative publicity surrounding its business. It will be interesting to see if other banks will follow (some will require IT modifications, so it may take some time), we suspect they might, which would be a small win for consumers.

Auction Results 23 Sep 2017

The preliminary auction results from Domain are in, and Melbourne is still leading Sydney significantly. Sales Volume appear lower compared with last week, and this time last year. We will see where the final counts settle later. This confirms our view that momentum continues to ease.

Brisbane cleared 50% of 94 scheduled auctions, Adelaide 78% of 91 auctions, (above even Melbourne), and Canberra 65% of 65 scheduled.

Going Up? – The Property Imperative Weekly – 23 Sep 2017

We look at another massive week in property and finance, examine the arguments around mortgage rate rises, and consider which households are more likely to buy in the current market.

Welcome to the Property Imperative weekly to 23rd September 2017, our summary of the key events from the past week. Watch the video, or read the transcript.

We start with mortgage arrears. Moody’s said the number of Australian residential mortgages that are more than 30 days in arrears has shot up to a five year high with a 30+ delinquency rate of 1.62% in May this year and with record high rates in Western Australia, the Northern Territory and South Australia. Arrears were also up in Queensland and the Australian Capital Territory while levels decreased in New South Wales, Victoria and Tasmania.

Ratings agency Standard & Poor’s (S&P) Global Ratings also recorded an increase in the number of delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS). This rate rose from 1.15% in June to 1.17% in July. Delinquent loans underlying the prime RMBS at the major banks made up almost half of all outstanding loans and increased from 1.08% to 1.11% from June to July. For the regional banks, this level rose from 2.30% to 2.35%.

Fitch says 30+ days arrears were 3 basis points higher compared with last year despite Australia’s improved economic environment and lower standard variable interest rates. However, default rates on Retail Mortgage Back Securities was 1.17%, 4 basis points better than the previous quarter. They made the point that losses experienced after the sale of collateral property remained extremely low, with lenders’ mortgage insurance payments and/or excess spread sufficient to cover principal shortfalls in all transactions during the quarter. So, banks are protected in this environment, even if households are not.

Much of the debate this week centred on how well the economy is doing, and what this means for interest rates. Globally, the Fed is maintaining its tightening stance, with the removal of some stimulus and further lifts in their benchmark rate soon. The financial markets reacted by lifting bond yields, and if this continues the cost of overseas funding will rise, making out of cycle mortgage rate hikes more likely here.

The RBA was pretty positive about the outlook for the global economy, as well as conditions locally. Governor Philip Lowe said to quote “The Next Chapter Is Coming”. In short, the global economy is on the up, central banks are beginning to remove stimulus, and locally, wage growth is low, despite reasonable employment rates. Household debt is extended, but in the current low rates mostly manageable, but the medium term risks are higher. Business conditions are improving. He then discussed the growth path from here, including the impact of higher debt on household balance sheets. He said we will need to deal with the higher level of household debt and higher housing prices, especially in a world of more normal interest rates. In this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets.

I debated the trajectory of future interest rates, and the impact on households with Paul Bloxham the Chief Economist HSBC on ABC’s The Business. In essence, will the RBA be able to wait until income growth recovers, thus protecting household balance sheets, or will they move sooner as global rates rise, and put households, some of whom are already under pressure, into more financial stress?

The Government announced late on Friday night (!) before the school holidays, a consultation on the formation of a new entity to help address housing affordability – The National Housing Finance and Investment Corporation or NHFIC. It also includes, a $1 billion National Housing Infrastructure Facility (NHIF) which will use tailored financing to partner with local governments in funding infrastructure to unlock new housing supply; and an affordable housing bond aggregator to drive efficiencies and cost savings in the provision of affordable housing by community housing providers.

Actually, this simply extends the “Financialisation of Property” by extending the current market led mechanisms, on the assumption that more is better. Financialisation is, as the recent UN report said:

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

So, we are not so sure about these proposals. Also, we are not convinced housing supply problems have really created the sky-high prices and affordability issues at all. And, by the way, the UK, on which much of this thinking is based, still has precisely the same issues as we do, too much debt, too high prices, flat incomes, etc. Anyhow, the Treasury consultation is open for a month.

More lenders dropped their mortgage rates to attract new business, including enticing property investors. For example, Virgin Money decreased the principal and interest investment rates by between 5 and 10 basis points, for loans with an LVR of 80% or below. Westpac cut its two-year fixed rate for owner-occupiers paying principal and interest by 11 basis points to 4.08 per cent (standalone rate) or 5.16 per cent comparison.

Net, net, demand is weakening and the Great Property Rotation is in hand. Lenders are tightening their underwriting standards further. This week NAB said it would apply a loan to income test to interest-only and principal and interest loans. The new ratio, which aims to determine the “customer’s indebtedness to the loan amount” takes the total limit of the loan and divides it by the customer’s total gross annual income (as disclosed in the application). Ratios greater than eight will be declined, according to the new policy. This is still generous, when you consider the LTI guidance from the Bank of England is 4.5 times. But good to see Loan to Income ratios being brought to bear – as they are by far the best risk metrics, better than loan to value, or debt servicing ratios.

Our latest surveys showed that more first time buyers are looking to purchase now. We see that 27% want to buy to capture future capital growth, the same proportion seeking a place to live! 13% are seeking tax advantage and 8% greater security of tenure. But the most significant change is in access to the First Home Owner Grants (8%), thanks to recent initiatives in NSW and VIC, as well as running programmes across the country. The largest barriers are high home prices (44%), availability of finance (19% – and a growing barrier thanks to tighter underwriting standards), interest rate rises (9%) and costs of living (6%). Finding a place to buy is still an issue, but slightly less so now (18%).

On the other hand, Property Investors, who have been responsible for much of the buoyant tone in the eastern states are less bullish. For example, in 2015, 77% of portfolio investors were intending to transact, today this is down to 57%, and the trend is down. Solo investors are down from a high of 49% to 31%, and again is trending lower. Turning to the barriers which investors face, the difficulty in getting finance is on the rise (29%), along with concerns about rate rises (12%). Other factors, such as RBA warnings (3%), budget changes (1%) only registered a little but concerns about increased regulation rose (7%). Around one third though already hold investment property (33%) and so will not be buying more in the next year. So, net demand is weakening.

CBA was the latest major bank to jettison lines of business, as banks all seek to return to their core banking business, by announcing the sale of 100% of its life insurance businesses in Australia (“CommInsure Life”) and New Zealand (“Sovereign”) to AIA Group for $3.8 billion. We have been watching the expansion and contraction cycle for many years, as banks sought first to increase their share of wallet by acquiring wealth and insurance businesses, then found that bankassurance, as the model was called, was difficult to manage and less profitable than expected, as well as being capital intensive. Hence the recent sales – and expect more ahead. We think considerable shareholder value has been destroyed in the process, especially if you also overlay international expansion and then contraction. Now all the Banks are focussing on their “core business” aka mortgages – but at a time when growth here is on the turn. The moves will release capital, and thanks to weaker competition across the local markets, they can boost returns, but at the expense of their customers.

The Productivity Commission Inquiry into Banking Competition is well in hand, with submissions released this week from the Customer Owned Banking Association. They said that we don’t have sustainable banking competition at the moment. A lack of competition can contribute to inappropriate conduct by firms, and insufficient choice, limited access and poor quality products for consumers. The current regulatory framework over time has entrenched the dominant position of the largest banks. Promoting a more competitive banking market does not require any dilution of financial safety or financial system stability. They also showed that borrowers could get better rates from Customer Owned Lenders, compared with the big players. So shop around.

So back to property. The ABS Property Price Index to June 2017 show considerable variations across the states, with Melbourne leading the charge, and Perth and Darwin languishing. Annually, residential property prices rose in Sydney (+13.8%), Melbourne (+13.8%), Hobart (+12.4%), Canberra (+7.9%), Adelaide (+5.0%) and Brisbane (+3.0%) and fell in Darwin (-4.9%) and Perth (-3.1%). The total value of residential dwellings in Australia was $6.7 trillion at the end of the June quarter 2017, rising $146 billion over the quarter.

Auction clearance rates are still quite strong, if off their highs, but we expect loan and transaction volumes to continue to drift lower as we head for summer.

Putting all the available data together we think home prices in the eastern states will still be higher at the end of the year, but as rates rise from this point, price momentum will ease further, that is unless income growth really does start lifting. The current 6% plus growth in mortgage lending, when incomes and inflation are around 2% is a recipe for disaster down the track. Despite all the jawboning about future growth prospects we think the debt burden is going to be a significant drag, and the risks remain elevated.

And that’s the Property Imperative Weekly to 23th September.

Regional banks call for level playing field

Australia’s most recognised regional banks have called on a major competition inquiry to level the playing field and put consumers and the economy first.

In a joint submission lodged with the Productivity Commission, AMP Bank, Bank of Queensland, Bendigo and Adelaide Bank, ME Bank and Suncorp highlighted five key areas that require policy reform to achieve sustainable competition and competitive neutrality:

Further policy reform to reduce the artificial funding cost advantages enjoyed by the major banks. While the new Major Bank Levy has reduced this advantage, it only recoups a small proportion of the overall credit rating uplift enjoyed by the majors;

Further reform of risk weights to address the significant gap that still exists between the capital requirements of the major banks and standardised banks. While there has been some risk weight narrowing following the FSI, the gap remains significant, and is particularly stark for loans with the lowest risk;

A review of macro-prudential rules to better balance macro outcomes such as stability, without undermining banking competition. One option would be for APRA to give greater policy weight to minimum capital requirements. Macroprudential rules set by APRA have effectively ‘locked-in’ market share of loan books at current levels, thus leaving smaller banks with no room to challenge the already dominant position of major banks;

Mortgage aggregators and brokers owned by major banks should publicly report on the proportion of loans they direct to their owners. While we do not suggest that major banks should be banned from owning broker networks, we do believe that where this occurs it should be managed in an open and transparent way to ensure customers are able to make fully informed decisions; and

Before any new regulations are introduced, greater consideration should be given to the impacts on smaller banks. The unprecedented pace and volume of new regulation and compliance has a disproportionate impact on smaller banks which stifles sustainable competition.

The banks also support the ABA’s submission calling for more care and attention into the shadow banking sector, which continues to compete free of many regulations and APRA oversight.

The CEOs said while Australia had been well served by a strong and highly regulated banking sector, it was important that stability did not overshadow competition and good consumer outcomes.

Suncorp Banking & Wealth CEO David Carter said: “We believe there can be a balanced and fair framework allowing banks of all sizes to compete on a level playing field, while still meeting all sound, prudential principles. We would like to see more attention on macro-prudential rules to promote customer choice and competitive pricing, as opposed to maintaining the status quo – which is in effect similar to the ‘yellow flag’ being waved at the Grand Prix, where all drivers are then prohibited from overtaking one another.”

ME CEO Jamie McPhee said: “Regulatory imbalances have allowed a small group of banks to dominate the Australian market. Reform is needed if we want to create a fairer banking system so smaller banks can compete. A more competitive banking system is about improving customer choice and promoting economic growth.”

AMP Bank Group Executive Sally Bruce said: “Access to cheaper funding plus lower capital requirements for like-for-like loans gives the big banks a huge advantage over smaller players. Combined with the blanket approach to compliance and macro-prudential limits, we have a system of issues which impede competition and the best outcomes for customers. We are at risk of keeping big banks big and small banks small unless we address.”

The CEOs said improving competitive neutrality will deliver better customer outcomes and drive greater innovation in the sector.

“A strong banking system is good for all Australians and smaller banks bring vital competition and choice to the market,” they said.

“While the market is competitive today, it is vital this competition is fair, productive and sustainable.

“The bottom-line test must be: what is good for customers is good for the economy.”

Australian 2Q17 Mortgage Arrears Remain Stable

Australia’s mortgage arrears remained stable in 2Q17, with a 4bp decrease to 1.17% from the previous quarter, reflecting Fitch Ratings‘ expected seasonal recovery from Christmas and holiday spending.

The 30+ days arrears were 3bp higher from 2Q16, despite Australia’s improved economic environment and lower standard variable interest rates for owner occupied lending.

Unemployment improved by 20bp and real wage growth was low, but positive. Underemployment also improved by 20bp, reflecting a proportional increase of full-time employment during the quarter.

Repayment rates have decreased as borrowers recover from Christmas and holiday spending. The Dinkum RMBS Index borrower payment rate fell to 21.2% at end-2Q17, from 21.9% in the previous quarter. The conditional prepayment rate also dropped qoq to 19.1%, from 19.8%.

Losses experienced after the sale of collateral property remained extremely low, with lenders’ mortgage insurance payments and/or excess spread sufficient to cover principal shortfalls in all transactions during the quarter.

Fitch’s Dinkum RMBS Index tracks arrears and performance of mortgages underlying Australian residential mortgage-backed securities.

U.S. Home Prices Climb to Pre-Crisis Levels

Home prices in the United States have now climbed to levels last seen a decade ago, though unlike 10 years prior, much of the country’s growth is now sustainable, according to Fitch Ratings in its latest quarterly U.S. RMBS sustainable home price report.

Home prices grew at nearly a 5% annualized rate last quarter and are 36% higher nationally since reaching their low in 2012. As a result they are now slightly above peak levels reached in 2006 – 2007. The difference this time around compared to a decade ago rests with several other notable factors aside from the much talked about low mortgage rates and falling unemployment.

“The U.S. population has increased by more than 30 million people and personal income per capita has increased by more than 30% since 2006,” said Managing Director Grant Bailey. “Both the significantly higher population and income levels provide much greater support for the price levels today.”

That said, growth remains somewhat disjointed in some regions of the US. “Prices in major metro areas of Texas are now more than 50% higher than they were in 2006, while prices in New York, Philadelphia and Washington DC are still 4% – 10% below 2006 levels,” said Bailey. “Elsewhere, home prices in major cities throughout Florida remain more than 15% below 2006 levels.”

The overheated home price pockets remain largely in the Western United States (Texas, Portland, Phoenix and Las Vegas), which Fitch lists at more than 10% overvalued.

The Business Does Rate Rises and Households

A segment from ABC’s The Business, in which I discuss with Paul Bloxham Chief Economist HSBC, the question of when the RBA may lift rates, and the potential impact on households.

In essence, will the RBA be able to wait until income growth recovers, thus protecting household balance sheets, or will they move sooner as global rates rise, and put households, some of whom are already under pressure, into more financial stress?

You can read about the results from our mortgage stress surveys here.

The BEAR Roars!

The Treasury released the exposure draft of the Banking Executive Accountability Regime, open for consultation until 29th Sept 2017.

The Bill amends the Banking Act to establish the BEAR: an enhanced accountability framework for ADIs and persons in director and senior executive roles.

The BEAR imposes a clearer accountability regime on ADIs and people with significant influence over conduct and behaviour in an ADI. It requires them to conduct themselves with honesty and integrity and to ensure the business activities for which they are responsible are carried out effectively.

It does this by creating a new definition of ‘accountable person’. An accountable person is a Board member or senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group.

The general requirement placed on accountable persons is framed in the context of their particular responsibilities. These will be clearly defined in accountability statements for each accountable person and an accountability map for each ADI group.

Accountability maps and statements are designed to give APRA greater visibility of lines of responsibility. The maps will clearly allocate responsibilities throughout the ADI group, to ensure that all parts or elements of the group are covered.

An ADI must comply with its BEAR obligations. These include new accountability, remuneration and key personnel obligations. An ADI must ensure that it has a remuneration policy consistent with the BEAR, its accountable person roles are filled and it has given accountability statements and maps to APRA.

ADIs must set remuneration policies deferring an accountable person’s variable remuneration to ensure accountable persons do not engage in behaviours inconsistent with BEAR obligations.

APRA will have additional powers concerning examination and disqualification to let it implement the BEAR.

If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court.

Recognising there are different business models and group structures in the banking industry, the Bill uses both high level principles as well as prescribed detail. The BEAR will work with existing legislative and regulatory frameworks

The ABA were unimpressed in a statement from Anna Bligh, Australian Bankers’ Association Chief Executive:

“The seven day consultation period announced by the Federal Government on new banking executive accountability laws is grossly inadequate and playing fast and loose with a critical sector of the economy.

“The industry recognises that improving senior executive accountability is crucial for customers to have trust in banks.

“Banks want to work with the Federal Government to get this right, but just seven days to consult is not good enough.

“This is a significant piece of reform that impacts on the integrity of banks and the stability of the financial system and it needs thorough scrutiny.

“It’s an entirely new addition to the system of corporate governance in Australia. The Government’s timeframe risks serious unintended consequences.

“The ABA urges the Government to extend the consultation period and do the proper due diligence to ensure that the objective of improving senior executive accountability is met.”

Government Consults on National Housing Finance and Investment Corporation

The Government, late on Friday night (!) before the school holidays, has issued a consultation on the formation of a new entity to help address housing affordability. The National Housing Finance and Investment Corporation is central to the Government’s plan for housing affordability.

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

So, we are not so sure. Also, we are not convinced housing supply problems have really created the sky-high prices and affordability issues at all. And, by the way, the UK, on which much of this thinking is based, still has precisely the same issues as we do, too much debt, too high prices, flat incomes, etc.

Anyhow, the Treasury consultation is open for a month. We will take a look at the three elements to the proposal:

The National Housing Finance and Investment Corporation (NHFIC) – a new corporate Commonwealth entity dedicated to improving housing affordability;
A $1 billion National Housing Infrastructure Facility (NHIF) which will use tailored financing to partner with local governments in funding infrastructure to unlock new housing supply; and
An affordable housing bond aggregator to drive efficiencies and cost savings in the provision of affordable housing by community housing providers.

They argue that Australians’ ability to access secure and affordable housing is under pressure and that housing supply has not kept up with demand, particularly in our major metropolitan areas, contributing to sustained strong growth in housing prices. This is impacting the ability of Australians to purchase their first home or find affordable rental accommodation.

The average time taken to save a 20 per cent deposit on a house in Sydney has grown from five to eight years in the past decade, while the time taken to save a similar deposit in Melbourne has grown from four to six years over the same period. Half of all low-income rental households in Australia’s capital cities spend more than 30 per cent of their household income on housing costs. Meanwhile, across Australia, community housing providers (CHPs) currently provide 80,000 dwellings to low-income households at sub-market rates, and around 40,000 Australians are currently on waiting lists for community housing and an additional 148,000 are on public housing waiting lists.

The National Housing Finance and Investment Corporation is central to the Government’s plan for housing affordability

In the 2017–18 Budget, the Government announced a comprehensive housing affordability plan to improve outcomes across the housing continuum, focused on three key pillars: boosting the supply of housing and encouraging a more responsive housing market, including by unlocking Commonwealth land; creating the right financial incentives to improve housing outcomes for first-home buyers and low-to-middle-income Australians, including through the Government’s First Home Super Saver scheme; and improving outcomes in social housing and addressing homelessness, including through tax incentives to boost investment in affordable housing.

The Government’s plan includes establishing:

the National Housing Finance and Investment Corporation (NHFIC) — a new corporate Commonwealth entity dedicated to improving housing affordability;

a $1 billion National Housing Infrastructure Facility (NHIF) which will use tailored financing to partner with local governments (LGs) in funding infrastructure to unlock new housing supply; and

an affordable housing bond aggregator to drive efficiencies and cost savings in CHP’s provision of affordable housing.

These measures are important but can only go so far in improving housing affordability. As noted by the Affordable Housing Working Group (AHWG), further reforms to increase the supply of housing more broadly have the capacity to improve housing affordability and alleviate some of the pressure on the community housing sector. To this end, they would be complemented by the development of a new National Housing and Homelessness Agreement with an increased focus on addressing housing affordability.

The Government’s objectives for the NHFIC reflect its priorities to improve affordable housing outcomes for Australians. The NHFIC intends to grow the community housing sector, and increase and accelerate the supply of housing where it is needed most.

Governance of the National Housing Finance and Investment Corporation

Entity structure – The NHFIC is expected to be established through legislation as a corporate Commonwealth entity. It will be a body corporate that has a separate legal personality from the Commonwealth, but will be subject to an investment mandate prescribed by the Treasurer that reflects the Government’s objective of improving housing outcomes. It is currently envisaged that both the NHIF and the affordable housing bond aggregator functions would be established as separate business lines within the single corporate entity. The final structure of the NHFIC will be determined in accordance with the Commonwealth Governance Structures Policy administered by the Department of Finance. The Governance Structures Policy provides an overarching framework to ascertain fit-for-purpose governance structures for all entities established by the Government. The NHFIC Board may also engage third-party providers with the requisite expertise to provide treasury, loan administration and other back-office support for its bond aggregator and/or NHIF business lines.

NHFIC Board

The Government intends to appoint an independent, skills-based Board to govern the NHFIC. Board members are expected to be selected by the Government on the basis of expertise in finance, law, government, housing, infrastructure and/or public policy. The Board will be responsible for the entity’s corporate governance, overseeing its affairs and operations. This includes establishing a corporate governance strategy, defining the entity’s risk appetite, monitoring performance and making decisions on capital usage. The Board will be responsible for ensuring that investment decisions made for the NHIF and the bond aggregator comply with the NHFIC investment mandate. The Board will also ensure that the NHFIC is governed according to best-practice corporate governance principles for financial institutions, including compliance with the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

The affordable housing bond aggregator

The NHFIC will also operate an affordable housing bond aggregator designed to provide cheaper and longer-term finance to CHPs. CHPs are an important part of the Australian housing system. They provide accommodation services for social housing, managing public housing on behalf of state and territory governments. They also own their own stock of housing, which they offer to eligible tenants at below market rents. CHP tenants range from people on very low incomes with rents set at a proportion of their income (generally 25 to 30 per cent) to tenants on low to moderate incomes with rents set below the relevant market rates (usually set at 75 to 80 per cent of market rents).

Many CHPs (over 300) are registered either under the National Regulatory System for Community Housing (NRSCH) or other state and territory regulatory regimes (which is the case in Victoria and Western Australia).

Although the community housing sector has grown over recent years, it remains relatively small at around 80,000 properties (less than 1 per cent of all residential dwellings) in 2016. This is compared to more than 2.8 million properties (around 10 per cent of all residential dwellings) in the United Kingdom in 2015. There are substantial barriers to the community housing sector achieving the scale and capability necessary to meet current and future demand for affordable rental accommodation. These include the fragmentation of the sector, its limited financial capability (including the degree of financial sophistication), and the funding gap — the inability of sub-market rental revenues to cover the costs of providing affordable housing — which constrains the extent of services that CHPs can offer.

Bond aggregator model

The bond aggregator aims to assist in addressing the financing challenge faced by the CHP sector. It improves efficiency and scale by aggregating the lending requirements of multiple CHPs and financing those requirements by issuing bonds to institutional investors. The bond aggregator will act as an intermediary between CHPs and wholesale bond markets, raising funds on behalf of CHPs at potentially lower cost and over a longer term than traditional bank finance (which generally offer three to five-year loan terms). This structure will provide CHPs with a more efficient source of funds, reduce the refinancing risk faced by CHPs and will reduce their borrowing costs. This should enable CHPs to invest more in providing social and affordable rental housing.

However, the bond aggregator alone will not close the funding gap experienced by CHPs. This will require ongoing support from all levels of government. In their respective reports, the AHWG15 and Ernst and Young (EY) both highlight the important role of the bond aggregator, while noting that it is only a partial solution to closing the funding gap for CHPs.

Key findings of the EY report

Analysis undertaken by EY for the Affordable Housing Implementation Taskforce in 2017 found that an affordable housing bond aggregator is a viable prospect in the Australian context and recommended a number of design features. EY found that a bond aggregator could potentially provide longer tenor and lower cost finance to CHPs. The interest savings could be in the order of 0.9 to 1.4 percentage points for 10-year debt (depending on the level of Government support).

Furthermore, EY estimated that the CHP sector will need to access around $1.4 billion of debt over the next five years, which should provide the necessary demand and scale needed to support affordable housing bond issuances.

Virgin Money drops P&I investor rates

From Australian Broker.

Virgin Money has decreased the principal and interest investment rates on a number of its loan products for new applications.

The following changes will apply on Virgin Money variable interest rate for loans with an LVR less than or equal to 80%:

A rate of 4.09% for loans between $75,000 and $499,999 (decrease of 10 basis points)
A rate of 4.09% for loans between $500,000 and $749,999 (decrease of five basis points)
A rate of 3.99% for loans $750,000 and above (decrease of 10 basis points)

These rate cuts will come into effect on 25 September.