Australia’s property market growth comes to a halt

From The New Daily.

Sydney’s deflating house prices have dragged the property market down across the entire country, in the most conclusive sign yet that the boom is over, figures from CoreLogic have revealed.

For the month of October – traditionally a bumper month for property sales – average house prices across Australia’s capital cities posted no growth at all.

Sydney house prices fell by 0.5 per cent, bringing quarterly losses to 0.6 per cent.

Prices in Canberra and Darwin also fell (by 0.1 per cent and 1.6 per cent respectively), while Adelaide and Perth each posted zero growth.

Of the capital cities, only Melbourne, Brisbane and Hobart saw property prices increase, at 0.5 per cent, 0.2 per cent and 0.9 per cent respectively.

Perth’s flat growth was also an improvement on a long period of falling prices.

The poor results will be a disappointment to sellers who assumed a spring sale would optimise the value of their property.

CoreLogic’s head of research Tim Lawless put the low growth down, primarily, to tighter restrictions on lending.

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” he said.

He added that more expensive rates on interest-only loans were acting as a disincentive for property investors, particularly those that offered low rental yield.

Commenting on the NSW capital’s poor results, Mr Lawless said: “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”

However, despite the recent depreciation, house prices in Sydney are still 7.7 per cent higher than they were a year ago.

Turning to Melbourne, Mr Lawless put the city’s continued growth down to “record-breaking migration rate”, which he said was creating “unprecedented housing demand”.

Units v Houses

In most capital cities, houses continued to see higher capital growth than units, due to overdevelopment of the latter. A notable exception to this was Sydney.

Over the year, unit values in Sydney grew by 7.9 per cent, compared to 7.7 per cent for houses.

“While Sydney is seeing a large number of new units added to the market, it seems that high levels of investment activity and strained affordability is helping to drive a better performance across this sector,” Mr Lawless.

The report found that rental yields, while they had grown 2.8 per cent over the year, were still extremely low when compared to house prices – which have on average risen 6.6 per cent over the year.

Sydney and Darwin were exceptions to this.

“If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be a slow process,” Mr Lawless said.

Chinese money dries up

While CoreLogic put the flat growth down to tougher mortgage lending restrictions, a report by Credit Suisse offered a different explanation.

According to the ABC, the report found Chinese capital flows into Australia had fallen in recent months, and this was having a pronounced effect on the domestic property market.

“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” ABC quoted Credit Suisse as saying.

“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.

“This fall foreshadows weakness in NSW housing demand in the year ahead.”

This, Credit Suisse argued, could see the Reserve Bank forced to cut interest rates even further. Currently the cash rate sits at a record low of 1.5 per cent.

Why the RBA would want to create a digital Australian dollar

From The Conversation.

The Reserve Bank of Australia could join the likes of Estonia and Lebanon in creating a cryptocurrency based on the Australian dollar, to reap the benefits of technology like the blockchain but with more stability than other well known currencies like Bitcoin.

The RBA has already been approached by interested startups to create this new digital currency, known as the “DAD” or Digital Australian Dollar.

In contrast with other cryptocurrencies a state-backed digital currency has the advantage of being backed by the government as in fiat currency, but at the same time has the technological advantages shared by other cryptocurrencies.

A digital Australian dollar could remove the role of middlemen and create a cheaper electronic currency system, while at the same time enabling the government to fully regulate the system.

It would also allow transactions to settle faster (several minutes to an hour) than the traditional banking system (several hours to several days), especially in a situation where an international payment is involved.

The difference between a digital Australian dollar and Bitcoin

We already use the Australian dollar in a digital form, for example paying via your smartphone. But banks are essential in this system, moving money on our behalf.

When using a cryptocurrency, you interact with a system like the blockchain, an online ledger that records transactions, directly. Bitcoin, Litecoin, and Ethereum are examples of cryptocurrency that use the blockchain in this way. These currencies are created by the community that use them and are accepted and trusted within the community.

However, since the community runs the system, the price of the cryptocurrency solely depends on the market mechanism. When the demand increases, the price increases, but when the demand decreases, the price also decreases. While it might create an opportunity for speculators to gain profit from trading, it also creates risk for the cryptocurrency holders.

In comparison to cryptocurrency, the Digital Australian Dollar might be well managed that the price volatility could be reduced significantly. The government holds the capability of increasing or decreasing the money supply in the system. This power can be used to stabilise the market supply of the new digital currency.

The blockchain technology also reduces the fee for every payment made. This is made possible by removing the role of banks or other intermediary parties charging fees for their services. However, a small transaction fee still needs to be introduced to protect the system from being flooded by adversaries with insignificant transactions.

The characteristics of cryptocurrency itself might limit its usage to daily transactions. As the pioneer of cryptocurrency, Bitcoin was created to become a payment system, but the users gain incentive by simply saving their cryptocurrency and not using them to purchase goods or services.

They believe the future price of the cryptocurrency is higher than the current price and thus does not make a good medium of exchange nor a store of value. There is no guarantee that the cryptocurrency will hold any value in the future. Since there is nothing to back up the value, users will lose their wealth when the community no longer acknowledges the value of cryptocurrency.

Cryptocurrency might also jeopardise the local government’s effort of implementing regulations to minimise illegal activities. Perpetrators create cryptocurrency transactions easily without being detected by the government’s financial monitoring system.

The privacy features of cryptocurrency also make it hard for law enforcement agencies to determine the actors behind illegal activities. Although most governments in the world have enforced the coin exchange services to identify their users, the operation of the cryptocurrency is beyond their reach.

There are other state-backed digital currencies

The idea of creating a national cryptocurrency is not new. Estonia has explored ways to create Estcoin, following an initiative on the blockchain-based residency registration called e-Residency. Lebanon’s central bank has also started to examine the possibility of creating one.

Despite the efforts of those central banks, several questions must first be addressed before launching the real product to the public. The user’s financial data could be exposed since the blockchain will make all transactions created in the system transparent.

Consumer protection is also a concern since all transactions made in the blockchain are permanent without the possibility of being reversed. Without firm solutions to those problems, the Digital Australian Dollar will not satisfy all requirements to be the next groundbreaking innovation for the country’s financial system.

Author: Dimaz Wijaya, PhD Student, Monash University

Australia’s housing boom is ‘officially over’ – and that could have a big economic impact

From Business Insider.

Australian house price growth stalled in October, according to data from CoreLogic, thanks largely to a 0.5% decline in Sydney, the nation’s largest and priciest property market.

Prices in Australia’s largest city fell in the two months, leaving the decline since July at 0.6%, the largest over a comparable period since May 2016.

As a result of the weakness in Sydney, prices nationally have grown by just 0.3% since July in weighted terms, seeing the increase on a year earlier slow to 6.6%.

On the recent evidence, a Sydney-led national housing market slowdown is now underway.

Tim Lawless, Head of Research at CoreLogic, called it a “significant turn of events”, acknowledging that if historical patterns are repeated, there’s likely to be further declines to come.

He’s not alone on that front.

To George Tharenou, economist at UBS, the weakness in CoreLogic’s Home Value Index signals that Australia’s housing boom is now “officially over”.

“Australia’s world record housing boom is ‘officially’ over after a large ‘upswing’ of 6556% price growth in 55 years,” he says.

“After dwelling price growth was resilient at a booming 10% [plus annual] pace earlier this year, there is now a persistent and sharp slowdown unfolding.

“Indeed, the weakness in auction clearing rates, and the near flat growth in prices in the last 5 months, suggest the cooling may be happening a bit more quickly than even we expected.”

If the chart below from UBS is anything to go by, the decline in auction clearance rates in recent months points to the likelihood that annual price nationally will continue to decelerate into early 2018.

Source: UBS

 

“Price growth now seems likely to end 2017 around 5% year-on-year, below our expectation for 7%,” Tharenou says.

Like Lawless at CoreLogic, he says the Sydney-led slowdown is a lagged response to macroprudential tightening from Australia’s banking regulator, APRA, something that has led to out-of-cycle mortgage rate hikes as a result of tougher lending standards.

“This slowdown in house prices has coincided with a sharp slowing of investor housing credit growth to a 5.5% annualised pace in the last three months to September,” Tharenou says.

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth ahead via a fading household wealth effect.”

Source: UBS

 

Given his expectation that weaker house price growth will soften household consumption, the largest part of the Australian economy, Tharenou says it will prevent the Reserve Bank of Australia from lifting interest rates until the second half of next year.

Should house price growth weaken further in the months ahead, it must surely cloud the outlook for residential construction, another crucial part of the Australian economy and the third-largest employer in the country.

With new home sales and building approvals both rolling over from the record levels reported last year, a bout of price weakness may exacerbate that slowdown, creating negative second-round effects across the broader economy given the sheer size of the residential construction sector.

Latest Insolvency Data Highlights Regional Risks

The latest data from the Australian Financial Security Authority  gives us data for the September 2017 quarter on personal insolvencies across the country. They changed the format of their reports so trending data is not easy. But WA and QLD are where the relative higher proportion of defaults are to be found, especially business related failures.

Lets look at the absolute count of new debtors by areas. The blue line shows the number of new debtors. The most new ones were in Greater Sydney, Regional Queensland, Greater Brisbane and Greater Melbourne. These are areas of relative high populations, so on one level no surprise.

But, a better way to compare the relative impact is to use a relative measure – the number of new debtors per 100,000 population, using the ABS data.

On this basis, the Regional Queensland, Greater Brisbane and Rest of Tasmania have the highest concentration. Queensland is clearly a problem area. Greater Sydney and Melbourne are at the lowest end of the spread.

Finally, we sort the data by proportion of business failures. That shows Greater Perth and Regional WA, then Regional Queensland have the higher business related failure rates.

The largest numbers of debtors entering a business-related personal insolvency in Greater Perth in the September quarter 2017 were in:

  • Wanneroo (20 debtors)
  • Rockingham (19 debtors)
  • Joondalup (14 debtors).

The largest numbers of debtors entering a new business-related personal insolvency in rest of Western Australia in September quarter 2017 were in:

  • Goldfields (8 debtors)
  • Bunbury (7 debtors)
  • Wheat Belt – North (5 debtors).

The largest numbers of debtors entering a new business-related personal insolvency in rest of Queensland in the September quarter 2017 were in:

  • Ormeau – Oxenford (23 debtors)
  • Townsville (17 debtors)
  • Mackay (16 debtors).

We find these data series to be helpful in assessing the risks of default within our Core Market Models.

Westpac tightens up on responsible lending

From Australian Broker.

Westpac has brought in a number of responsible lending changes affecting how brokers enter in requirements and objectives (R&O) questions for clients.

“As a bank, Westpac is committed to responsible lending and meeting our conduct obligations under the National Consumer Credit Protection Act. Requirements and Objectives are a part of our responsible lending obligations,” the bank wrote in a note to brokers on Monday (30 October).

Effective from 14 November, brokers will be required to complete additional R&O questions and declarations for clients taking out certain loan types including but not limited to:

  • Fixed interest loans
  • Loans requiring lenders’ mortgage insurance
  • Loans with interest only repayments
  • Line of credit loans
  • Loans for refinancing or debt consolidation

The questions are designed to help brokers understand their client motivations, align the products to their needs, and prompt brokers to explain consequences around each choice of product to the client.

Additional R&O questions will also apply for each applicant of the loan, including for clients with foreseeable changes, special circumstances, current financial hardship, or those approaching retirement age.

“Westpac Group takes its responsible lending obligations seriously and is committed to ensuring good outcomes for our customers across first and third party lending,” Tony MacRae, general manager of third party distribution at Westpac, told Australian Broker.

“We’ll be working closely with all brokers over the coming months to support them with this new way of working – many had already adopted this approach and have been working this way for some time.”

From 8 January 2018, changes to submitted loan applications will no longer be accepted by email and will instead have to be completed through ApplyOnline.

“This will ensure that the correct R&O are captured accurately for all applications submitted and resubmitted and there is a central location that incorporates all the R&O information that has been discussed between yourself and the client with documented evidence of any loan changes,” the bank said.

Top 20 Fund Managers By Country

Following this mornings data on the top 500 Fund Managers, which has passed US$80 trillion under management in 2016 (contained in the 2017 report) and which helps to explain the inflated asset prices of property and the stock market; it is worth looking at the country break down by percentage of funds under management, all stated in US$.

More than half of assets are held by managers in the USA, followed in descending order by UK, France, Germany, Canada and Japan. Australia has 1.39% of assets, but that may be overstated as this includes Macquarie who has more business off shore than on shore.

Here are the top 20 globally, by manager. Black Rock is by far the largest.

Here are the top 20 from the USA.

Here are the top 20 from the UK.

Switzerland is dominated by funds managed by UBS.

Here are the Australian top 20.

Finally, here is the China footprint – given the wealth accumulation there, I have little doubt they will be overtaking Australia, and moving well up the rankings in the years ahead.

 

Bendigo and Adelaide Bank Feel The Cold Hand Of The Regulator

Bengido and Adelaide Bank’s CEO provided a brief trading update as part of the FY17 AGM. There are some interesting comments on the FY18 outlook.

First they have been forced to “slam on the breaks” on mortgage lending to ensure they comply with APRA’s limits on interest only loans and investor loans. As a result their balance sheet will not grow as fast as previously expected.

On the other hand, this should help them maintain their net interest margins, their previous results had shown a steady improvement and strong exit margin.  They are forecasting 2.34%.

The recent ATM fee changes will have a negative impact, with costs rising ~2% although the amount is not stated from their ~1,700 ATM’s.

Finally, the slower loan book growth means they will be in a better capital position, and will be able to meet APRA’s “unquestionable strong” metric, on a standard basis, and perhaps 50 basis points above. The journey towards advanced accreditation appears still uncertain, but they believe there will be a more “level playing field”.

ADI’s Still Doubling Down On Mortgages

The APRA ADI data released today to September 2017 shows that owner occupied loan portfolio grew 0.48% to $1.03 trillion, after last months fall thanks to the CBA loan re classifications. Investment lending grew just a little to $550 billion, and comprise 34.8% of all loans. Overall the loan books grew by 0.3% in the month.

This confirms our view that last months results were more to do with CBA’s changing their loan classification, rather than macroprudential biting.  The relative mix of investment loans did fall a little, so you could argue the tightening of interest only loans did help.

Overall market shares were pretty static with CBA still the largest owner occupied loan lender and Westpac the largest investment property lender.

The 12 month loan growth for investor loans is well below the 10% speed limit imposed by APRA, and all the majors are below the threshold.

We see some significant variations in portfolio flows, with CBA, Suncorp, Macquarie and Members Equity bank all reducing their investment loan balances, either from reclassification or refinanced away. The majors focussed on owner occupied lending – which explains all the attractor rates for new business. Westpac continues to drive investor loans hard.

Comparing the RBA and APRA figures, it does appear the non-banks are lifting their share of business, as the banks are forced to lift their lending standards. But they are still fighting hard to gain market share, which is not surprising seeing it is the only game in town!

 

Lending In Sept 2017 Still Fixated On Housing

The RBA has released their financial aggregates to September 2017.  The data confirms the growth is still in the mortgage sector, with both owner occupied and investment lending growing quite fast, significantly faster than productive business lending. So expect to see household debt rise still further. The settings are just not right to create sustainable economic growth, rather they still support a debt driven property splurge.

There was a significant volume of loans switched in the month – $1.4m are shown in the aggregates table, but are corrected in the growth tables, which is why investor lending is reported more strongly there.

Overall lending for housing rose 0.5% in the months, or 6.6% for the year, which is higher than the 6.4% the previous year. Personal credit rose slightly in the month and down 1.% in the past year.  Lending to business rose just 0.1% to 4.3% for the year, which is down from 4.8% the previous year.

Owner occupied lending grew $5.5bn or 0.5% to $1.11 trillion while investment lending rose $1.9% or 0.3% to $583 billion. Lending to business rose just $0.3 billion and personal credit rose $0.3 billion or 0.2%, the first rise since February 2017.

The share of investment lending remained at 34.3% of lending for housing, while the share of all lending to business fell to 32.7%.

Looking at the adjusted RBA percentage changes we see that over the 12 months investor lending is still stronger than owner occupied lending, both of which showed a slowing growth trend, while last month growth in business lending continued to ease.

The RBA noted that:

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $59 billion over the period of July 2015 to September 2017, of which $1.4 billion occurred in September 2017. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

The Next Round In The Payments Wars

The Commonwealth Bank, Westpac, and National Australia Bank are working together to build the next generation of mobile payments and wallets in Australia.  These banks are not offering the Apple Pay solution, unlike ANZ. They sought unsuccessfully  to negotiate collectively with Apple in order to gain access to the iPhone’s near-field communications (NFC) chip which would allow their own apps to make contactless payments.

The first initiative of the new joint venture will be the development of a payment app that will enable instant payments for all Australians, including small businesses, regardless of who they bank with.

Beem will be a simple and convenient free app enabling anyone to make an instant payment using their smartphone, and request payment from someone who owes them money or to split a bill. The hope is that it will become an industry-wide payment solution, and is open to interest from other banks, industry, and retail players.

Beem will work on both iOS and Android smartphones, and will be compatible across devices and different banks – users won’t need to be customers of CBA or Westpac or NAB.

Commonwealth Bank Group Executive of Retail Banking Services, Matt Comyn, said Beem will give Australians a simpler way to pay and request payments, a pain point for both consumers and small businesses.

“Two thirds of small businesses say they are owed money for completed work, with around $7,300 owed to small traders. Beem will give small businesses a cost effective and easy way to collect payments instantly and on the go for their goods and services, without having to take the larger leap into using merchant credit facilities, or issuing invoices to be paid later,” Mr Comyn said.

Beem will benefit from bank level security and encrypted user account information. Every transaction will be authenticated and subject to real-time fraud monitoring.

Westpac Chief Executive, Consumer Bank, George Frazis, said Beem expands payment choices for customers, and is the latest offering in Australia’s long history of innovative payment solutions, including EFTPOS, Pin@POS, chip, tap and pay, and wearable payment devices.

“We are committed to giving our customers more choice by supporting a range of convenient ways for them to pay and transfer their money. Customers will soon be able to ‘Beem’ free payments instantly using any smartphone, regardless of who they bank with and without the need to add account details.

Innovations such as Beem and wearables are leading the way in payment solutions because they’re convenient, easy to use, and fit in with people’s lifestyles – we firmly believe in going to where our customers are and providing them with greater choice,” Mr Frazis said.

NAB Chief Operating Officer, Antony Cahill, said the bank is continually looking for opportunities to make banking easier, simpler, and more convenient for its customers, both consumers and businesses.

“Think about all the times you’ve gone out for dinner and split the bill – this app will make it easy for Australians to pay their family and friends instantly. Or, when you go to the local market and need to pay the butcher – this means instant payment through your phone. This is the industry working together to deliver an innovative payments solution, no matter who you bank with,” Mr Cahill said.

Commonwealth Bank is currently conducting user testing of a Beem prototype, with the app to be available for download on iOS and Android smartphones later this year.

Beem will initially have a sending limit of $200 a day ($6,000 per month), with a monthly receiving limit of $10,000 as an initial risk control measure.

Beem will be available to all bank customers and small businesses that hold a global scheme debit card issued by an Australian Authorised Deposit-taking Institution (ADI).

The joint venture will be independently run, with a mandate to actively seek new participants to join the initial three participants. Future product initiatives beyond the payments facility are being planned, including digital wallet features and capabilities.