There’s No Stopping The Housing Train

The latest data from the ABS, Housing Finance to July 2017, confirms what we knew. Owner occupied purchases are steaming ahead, while investment lending is stagnating. A clear reflection of the tightening in investor lending regulation, and the availability of new incentives and grants for first time buyers, alongside the attractor loan rates for new borrowers.

We saw first time buyers more active in NSW and VIC, two states where new concessions started in July.

A small but important rise, which is still well below the pre-GFC peak of 30%.

Importantly, owner occupied lending is still rising stronger than inflation or incomes, so the burden of household debt is set to rise further. Some revisions to earlier months data were made, and the RBA already highlighted that $1.4 billion of loans were reclassified between investment and owner occupied loans in the month.

In July, the trend lending flows were $33 billion, up 0.1%, with owner occupied lending up $20.8 billion or 0.7%, and Investment lending down 1% to $12.1 billion.  The number of owner occupied transaction rose 0.6%, construction of dwellings rose 2%, new dwellings, 2% and the purchase of established dwellings 0.3%.

The owner occupied lending trends highlight the rise in loans for construction and new building, as well as a rise in refinanced loans.

In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 16.6% in July 2017 from 14.9% in June 2017. The absolute number of loans also rose.

The number of first time buyer investors fell (using data from our surveys) showing a clear movement towards owner occupied first time buyer purchase.

The number, and proportion of first time buyers rose, and there was a rise in the proportion of loans on a fixed rate, reflecting attractive offers, and concerns about future rate rises.

As a result, in original terms, the total pool of loan stock rose more than $6 billion in the month,  to another record of $1.61 trillion.

  The bulk of the rise was in the owner occupied sector.

So the good news for banks is their loan portfolios are still growing, and their margins are now quite healthy. The longer term social impact of households saddled with massive debt will work out over a generation, but it highlights how exposed the nation is to any potential rise in interest rates.

 

 

 

‘Mortgage buffers’ will protect households from rate rises: Treasurer

From The Adviser.

Treasurer Scott Morrison has said that interest rates are “obviously” going to rise in the future but that many home owners would be able to avoid mortgage stress thanks to “mortgage buffers”.

Speaking on Paul Murray Live on Sky News on Wednesday (6 September), Treasurer Scott Morrison was asked about “mortgage stress”.

Mr Murray said: “[W]e know mortgage stress is a very significant issue for an awful lot of Australians [and] rates have never been lower…. How big of a concern to you is it that the downside of growth is that (at some point) interest rates go up and there’s an awful lot of people who, as they say, have no margin to move within?”

In response, Mr Morrison stated that while rates “are obviously more likely to go [up] than down”, there would “obviously” be an interest rate “event” coming “at some point”.

However, he added that this scenario would not necessarily lead to mortgage stress.

Mr Morrison said: “[T]he sort of scenario you’re forecasting is one where the economy has improved; wages [are] improving, unemployment is going down, so there’s a lot of compensating factors to that. The other thing about the housing market, particularly housing debt, is [that] in the main, many Australians have been getting ahead of their mortgage, so there’s a reserve capacity to draw on their mortgages and this is demonstrated in numbers from the Reserve Bank and the banks themselves.

“Australians have taken the opportunity, in the main, to try and get ahead of their mortgages and that’s a good thing. So, they’ve built a bit of a buffer for that type of event taking place (and at some point, obviously, that’s going to happen), but Australians have been pretty prudent.”

The Treasurer continued: “But the things that they can’t control are things like interest rates … electricity prices, and that’s why we have to do everything within our power to put downward pressure on them.”

Mr Morrison’s comments follow on from the Reserve Bank of Australia’s decision to hold the cash rate at its record low level of 1.5 per cent for the 13 month in a row and amid growing scrutiny and regulation on interest-only lending.

Speaking at the Reserve Bank board dinner held on Tuesday (5 September), RBA governor Philip Lowe said: [T]he RBA has worked closely with APRA to ensure that lending practices remain sound. Rightly, APRA has had a strong focus on loan serviceability calculations.

“In some cases, loans were being made where the borrower had only the slimmest of spare income. APRA has also introduced restrictions on growth of investor loans and restrictions on interest-only lending. This has been the right thing to do.”

Mortgage brokers are also increasingly being asked to provide detailed reasoning as to why they are placing a mortgagor into an interest-only loan and ensure that consumers can afford their repayments.

Many of those in the industry have outlined that mortgagors on interest-only loans should have a buffer of between 2 per cent and 3 per cent to protect against rate rises.

For example, CBA CEO Ian Narev stated at the Aussie conference last month that “the nature of regulation is such that [in] the low interest rate environment there is a buffer to make sure that if interest rates go up, you can still service that loan”.

Noting that the buffer is about 2.5 per cent currently, Mr Narev added that brokers “obviously have to be careful never to stray into financial advice”, stating that the conversation brokers need to have with customers is: “If rates go up — and we know from the test that you are going to be able to afford it — but what are you going to need to stop in order to repay, assuming your wages aren’t going up? And is everyone comfortable with the levels of debt?”

He said: “If the people in this room [i.e., brokers] and the people in the banking system are doing the right thing by the customers, if they are thinking about the long term and having the conversations with the customers to make sure that [if] rates could go up, they will be comfortable, then the lender is going to do it.”

Likewise, Digital Finance Analytics principal Martin North has previously told The Adviser that both brokers and banks have obligations to ensure that there is “detailed analysis” of household expenditure to maintain a 2–3 per cent buffer.

APRA announces panel members and terms of reference for prudential inquiry into CBA

The Australian Prudential Regulation Authority (APRA) announced today it has appointed three panel members to conduct the previously announced prudential inquiry into the Commonwealth Bank of Australia (CBA).

On 28 August, APRA announced it would establish a prudential inquiry following a number of issues which have raised concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group, and have damaged the bank’s reputation and public standing.

APRA has appointed Dr John Laker AO, Chairman of the Banking and Finance Oath, Professor Graeme Samuel AC, Professorial Fellow in the Monash Business School, and company director Jillian Broadbent AO to undertake the inquiry.

As previously announced, the goal of the inquiry is to identify any shortcomings in the governance, culture and accountability frameworks and practices within CBA, and make recommendations as to how they are promptly and adequately addressed. It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes. The full terms of reference for the prudential inquiry, along with biographies of the panel members, is attached to this announcement.

The inquiry panel will be provided with support by APRA, and may obtain other external expertise and advice as its sees fit. The inquiry panel will provide a final report to APRA by 30 April 2018, with a progress report due on 31 January 2018. APRA intends to make these reports public.

APRA Chairman Wayne Byres said: “APRA is pleased to have secured the services of three highly experienced and credentialed panel members to conduct the prudential inquiry. Between them, John, Graeme and Jillian bring an excellent blend of skills and experience to the task, including in matters of corporate governance and organisational culture.”

APRA Prudential Inquiry into CBA: Terms of Reference

The purpose of the Prudential Inquiry is to examine the frameworks and practices in relation to governance, culture and accountability within the CBA group, so as:

  1. to identify, in light of a number of incidents in recent years that have damaged the reputation and public standing of the CBA group, any core organisational and cultural drivers within CBA that have contributed to these incidents.
  2. to assess, at a minimum, whether any of the following areas, or their implementation, are conflicting with sound risk management and compliance outcomes:

    a. the group’s organisational structure, governance framework, and culture;

    b. the group’s framework for delegating risk management and compliance responsibilities;

    c. the group’s financial objectives;

    d. the group’s remuneration frameworks;

    e. the group’s accountability framework; and

    f. the group’s framework for identification, escalation and addressing matters of concern raised by CBA staff, regulators or customers.

  3. to consider, where CBA has initiatives underway to enhance the areas reviewed under (1) and (2) above, whether these initiatives will be sufficient to respond to any shortcomings identified and, if not, to recommend what other initiatives or remedial actions need to be undertaken.
  4. to recommend, to the extent that there are other shortcomings or deficiencies identified under (1) and (2) above that are not already being addressed by CBA, how such issues should be rectified.

The Prudential Inquiry should not make specific determinations regarding matters currently the subject of legal proceedings, other regulatory reviews or investigations by regulators other than APRA, or customers’ individual cases.

The Inquiry Panel appointed to conduct the Inquiry will submit a progress report to APRA by 31 January 2018, and a final report by 30 April 2018.

APRA prudential inquiry panel members

Ms Jillian Broadbent AO

Ms Broadbent has had extensive experience in risk management and governance, through her executive career in banking and as a non-executive director.

Ms Broadbent serves on the board of Woolworths Limited, is Chair of the board of Swiss Re Life and Health Australia Limited and Chancellor of the University of Wollongong.  She was a member of the board of the Reserve Bank of Australia (RBA) from 1998 to 2013.  She was also the inaugural Chair of the Clean Energy Finance Corporation (2012 – 2017) and has been a director on the boards of ASX Limited (2010 – 2012), Special Broadcasting Corporation (SBS), Qantas Airways Limited, Westfield Property Trusts, Woodside Petroleum Limited (1998 – 2008) and Coca-Cola Amatil Limited (1999–2010).

In 2003, Ms Broadbent was made an Officer of the Order of Australia for service to economic and financial development in Australia and the community through administrative support for cultural and charitable groups.

Dr John Laker AO

Dr Laker is Chairman of The Banking and Finance Oath Ltd, a member of the Council of the University of Technology Sydney and a Director of Cancer Council NSW. He is also an External Expert for the International Monetary Fund (IMF) and has participated in reviews of banking systems and supervisory arrangements in the United States, Israel, Indonesia, the Euro Area and Spain. Dr Laker is a member of the External Advisory Panel of the Australian Securities and Investments Commission (ASIC). He also lectures at the University of Sydney.

Dr Laker was Chairman of the Australian Prudential Regulation Authority (APRA) over an 11-year period from 1 July 2003 to 30 June 2014. Prior to his appointment to APRA, Dr Laker had an extensive career in the RBA, holding senior positions in the economic, international and financial stability areas, both in Australia and London. Before the RBA, Dr Laker worked in the Commonwealth Treasury and the IMF.

Dr Laker was made an Officer of the Order of Australia in 2008 for services to the regulation of the Australian financial system and to the development and implementation of economic policies nationally and internationally.

Professor Graeme Samuel AC

Graeme Samuel AC is a Professorial Fellow in Monash University’s Business School and Chair of the Monash Business School Business Advisory Board. He is also a Councillor of the Australian National University and Chair of its Finance Committee, President of Dementia Australia, Chair of the South Eastern Melbourne Primary Health Network, Chair of Data Governance Australia, Chair of Lorica Health Pty Ltd, a CMCRC company, Chair of Airlines for Australia and New Zealand (A4ANZ), Member of CEDA’s Council of Economic Policy, Council Member of the National Health and Medical Research Council and Chair of its Health Innovation Advisory Committee and the National Institute for Dementia Research.

Prof Samuel has held a number of roles in public life including former Chairman of the Australian Competition and Consumer Commission, Associate Member of the Australian Communications and Media Authority and President of the National Competition Council.

He was appointed an Officer of the Order of Australia in 1998. In 2010 he was elevated to a Companion of the Order of Australia for eminent service to public administration through contributions in the area of economic reform and competition law, and to the community through leadership roles with sporting and cultural organisations.

A very low VIX Index weighs against a higher bond default rate

From Moody’s.

The state of the US equity market also helps to give direction to the bond default rate. A well-functioning equity market helps to assure ample liquidity. In the extreme case of infinite liquidity, defaults would be nonexistent.

To the degree business assets are attractively priced, financially-stressed firms will find it easier to obtain relief via injections of common equity capital. For example, firms can secure more cash through the divestment of business assets when equity markets thrive.

Thus, the record shows that the moving 12-month average of the VIX index tends to lead the high-yield default rate. Recently, the VIX index’s moving 12-month average sank to a record low 12.2 points.

As inferred from their long-term statistical relationship, if the VIX index’s yearlong average remains under 13.25 points, the default rate is likely to dip under 2%. It may be premature to consider the possibility of a rising default rate until the VIX index’s unprecedented slide is reversed.

What would it take to raise Australian productivity growth?

From The Conversation.

While productivity is once again growing in Australia, we face a big challenge in getting it to a level that would restore the rate of improvement in our living standards of the last few decades.

Yet the measures required to meet this challenge may not be the ones usually promoted by economists and editorial writers. We need innovation not just in the technologies we use but in our business models and management practices as well.

The problem, according to new Treasury research, is that national income growth can no longer be propped up by the favourable terms of trade associated with our once-in-a-generation mining boom.

Does this mean we are back to the hard grind of productivity-enhancing reform? There are (at least) two opposing schools of thought on this. Some believe reform is needed, but mainly corporate tax cuts and labour market deregulation. Others deny any such reform is even necessary.

What has happened to productivity?

Productivity is a complex issue, but may be simply defined as output produced per worker, measured by the number of hours worked. On this basis we have seen a modest spike in productivity growth over the last five years to 1.8% per year.

This is primarily due to “capital deepening”, an increase in the ratio of capital to labour. Contemporary examples include driverless trucks in iron ore mines, advanced robotics in manufacturing and ATMs in banking.

Before this five-year period, productivity growth was much lower, even negative. This was especially the case during the mining boom itself when capital investment was taking place but had not yet translated into increased output.

The Treasury paper argues that to achieve our long-run trend rate of growth in living standards of 2% a year, measured as per capita income, we now need to increase average annual productivity growth to around 2.5%.

This will require not just capital deepening, but also improvements in the efficiency with which labour and capital inputs are used, otherwise known as “multifactor productivity”.

The hype cycle

Australia is not alone in facing this productivity challenge. Globally, amidst what would appear to be an unprecedented wave of technological change and innovation, developed economies are experiencing a productivity slowdown.

Again, explanations for this vary. Some economists question whether the current wave of innovation is really as transformative as earlier ones involving urban sanitation, telecommunications and commercial flight.

Others have wondered whether it is still feasible to measure productivity at all when innovation comprises such intangible factors as cloud computing, artificial intelligence and machine learning, let alone widespread application of the “internet of things”.

However, there is an emerging consensus that we are merely in the “installation” phase of these innovations, and the “deployment” phase will be played out over coming decades.

This has also been called the “hype cycle”. New technologies move from a “peak of inflated expectations” to a “trough of disillusionment” and then only after much prototyping and experimentation to the “plateau of productivity”. Think blockchain in financial transactions and augmented reality for consumer products.

The world is bifurcating between “frontier firms”, whose ready adoption of digital technologies and skills is reflected in superior productivity, and the “laggards”, which are seemingly unable to benefit from technology diffusion.

These latter firms drag down average productivity growth and, lacking competitiveness, they inevitably find it more difficult to access global markets and value chains.

The increasing gap between high- and low-productivity firms is less a matter of technology as such than the capacity for non-technology innovation. In particular, this encompasses the development of new business models, systems integration and high-performance work and management practices.

Many of the world’s most successful companies, such as Apple, gained market leadership not by inventing new technologies but by embedding them in new products, whose value is driven by service design and customer experience.

Engaging our creativity

Recent international studies have shown that a major explanatory variable for productivity differences between firms, and between countries, is management capability.

It is noteworthy that Australian managers lag most behind world-best practice in a survey category titled “instilling a talent mindset”. In other words, how well they engage talent and creativity in the workplace.

Most organisations today would claim that “people are our greatest asset”, but much fewer provide genuine opportunities for participation in the decisions that affect them and the future of the business. Those that do are generally better positioned to outperform competitors and demonstrate greater capacity for change.

More survey work on this issue is under way.

A more inclusive approach

Wages are also related to productivity but not always in the way that is commonly assumed. It is said that productivity performance determines the wages a company can afford to pay, with gains shared among stakeholders, including the workforce.

But evidence is emerging that causation might equally run in the reverse direction, with wage increases driving capital investment and efficiency.

This casts the current debate on productivity-enhancing reform in a very different light. It may now be a stretch to argue that corporate tax cuts will be much of a game-changer in the absence of any incentive to invest in new technologies and skills. The same may be said about the ideological insistence on labour market deregulation, if all that results is a low-wage, low-productivity economy.

The populist revolt against technological change and globalisation has its roots not just in the failure to distribute fairly the gains from productivity growth, but in a longstanding effort in some countries to fragment the structures of wage bargaining and to exclude workers from any strategic role in business transformation. This has assigned the costs of change to those least able to resist, let alone benefit from it.

The next wave of productivity improvement, if it is to succeed, must be based on a more “inclusive” approach to innovation policy and management.

As jobs change or disappear altogether, Australia’s workforce can make a positive contribution. But workers will only be able to do so if they have the skills and confidence to take advantage of new jobs and new opportunities in a high-wage, high-productivity economy.

Author: Roy Green, Dean of UTS Business School, University of Technology Sydney

A House Divided

From The Real Estate Conversation.

The Bank of mum and dad is growing the divide between those who can and those who can’t buy property. The latest Adelaide Bank/REIA Housing Affordability Report shows affordability is worsening, just as new research from Mozo shows increasing numbers of parents are stepping in to help their children get a foot on the property ladder. This chimes well with our own Bank of Mum and Dad research published recently.

The latest Adelaide Bank/REIA Housing Affordability Report shows affordability is worsening in Australia, just as new research from Mozo shows growing numbers of parents are stepping in to help their children get a foot on the property ladder. The trend is causing “a growing divide between the younger generation who have had assistance and those who have not,” Kirsty Lamont, Mozo Director, told SCHWARTZWILLIAMS.

The latest Adelaide Bank/REIA Housing Affordability Report shows that buying a house became even less affordable during the June quarter.

The deterioration in affordability comes as research from Mozo.com.au shows almost a third of all parents are helping their children to buy their first home.

The Adelaide Bank/REIA Housing Affordability Report shows the proportion of median family income required to meet average home loan repayments increased by 0.2 percentage points to 31.4 per cent.

The share of first-home buyers in the market is at its highest level since 2010

There is a bright spot in the data though. The number of loans to first-home buyers increased by 14.0 per cent, with increases in all states and territories except Tasmania.

“First home buyers now make up 14.3 per cent of total owner occupied housing,” said REIA President Malcolm Gunning.

Darren Kasehagen, Head of Business Development at Adelaide Bank, said, “A slight increase in housing affordability shouldn’t overshadow the welcome news that the number of first home buyers  increased by 14.0 per cent during the quarter.”

The rate of first-home buyers has been dropping steadily over the last five years, but appears to have stabilised over the past 18 months, said Gunning.

Rental affordability improved

In the June quarter, the proportion of median family income required to meet rent payments declined by 0.6 percentage points to 24.3 per cent. The improvement was recorded across all states and territories except in Tasmania and the Australian Capital Territory, said Gunning.

Rental affordability is the best it has been since the March quarter 2010, according to Gunning.

The bank of mum and dad is stepping in, expanding the divide between those who can afford to get into the market and those who can not

With it getting harder for first-home buyers to get into the property market independently, the ‘bank of mum and dad’, as lending from parents has become known, has ballooned to being the fifth largest home lender in Australia, sitting behind, ANZ, the Commonwealth Bank, NAB and Westpac.

New research from financial comparison site, Mozo.com.au, shows 29 per cent of parents, or more than 1 million families, help their children purchase a home. Around $65.3 billion has been lent to children, with 67 per cent of parents not expecting any repayment.

The average amount lent to children is $64,206.

“For many first homebuyers, it takes years to scrimp and save for a home deposit and all the while house prices are continuing to skyrocket, making the great Australian dream exactly that – a dream,” said Lamont.

Australian property prices have risen 618 per cent in the last 30 years; wages growth hasn’t kept pace

“With Australian property prices rising by a staggering 618 per cent over the past 30 years and wages failing to keep up, many mums and dads across the country feel they have no choice but to dip into their own savings to help their children get a foot on the property ladder.”

Lamont said by dipping into their own savings and helping out their children, parents are actually shaping the property market.

“We knew that mums and dads were helping their children out, but the reality is they are actually changing the face of the Australian property market,” she said.

“We expect the Bank of Mum and Dad to remain a major player in the property market for years to come, and it’s likely to cause a growing divide between the younger generation who have had assistance and those who have not.”

“Those young Australians who don’t have access to parental assistance may have to shelve the property dream and consider other ways to invest their money and build wealth,” said Lamont.

“The bank of mum and dad is proof of family generosity, but also points to a broken property market for younger generations.”

  • NSW is the most generous state for parental lending with an average lend of $88,250 per family, totalling $32.7 billion.
  • VIC and SA rank second equal, lending around $63,000 per family.
  • ACT and NT are the least generous, lending $20,083 and $15,000 per family respectively.

The most popular ways for parents to help their kids get a foot on the property ladder is by allowing their children to live at home rent free. Other ways parents help is by acting as a guarantor, helping with repayments, or buying property on behalf of or as a partner with the child.

How Australian parents are helping their kids onto the property ladder

How Australian parents are financing their contribution to their children

Data from the Adelaide Bank/REIA Housing Affordability Report from across the nation

Victoria

The number of loans to first home buyers in Victoria increased by 10.0 per cent in the June quarter. In Victoria, first home buyers now make up 21.1 per cent of the state’s owner-occupier market. Rental affordability improved for the quarter with a decrease of 0.7 per cent of income required to meet median rents.

New South Wales

The proportion of family income required to meet loan repayments is 6.6 per cent higher than the nation’s average. New South Wales remains the least affordable state or territory in which to buy a home. Of the total number of Australian first home buyers that purchased during the June quarter, 18.2 per cent were from New South Wales. First home buyers now make up only 13.0 per cent of the state’s owner-occupier market – the lowest level across the nation. Rental affordability improved for the quarter with a decrease of 0.4 per cent of income required to meet median rents.

Queensland

The proportion of income required to meet home loan repayments increased to 27.2 per cent, a 0.5 percentage point increase over the quarter. Of all Australian first home buyers over the quarter, 25.4 per cent or 6003 were from Queensland while the proportion of first home buyers in the State’s owner-occupier market was 25.3 per cent. Rental affordability improved slightly for the quarter with a decrease of 0.7 per cent to 23.0 per cent of income required to meet median rents.

South Australia

South Australia recorded a decline in housing affordability with the proportion of income required to meet monthly loan repayments increasing to 26.8 per cent, an increase of 0.6 percentage points over the quarter but a decrease of 0.1 percentage points compared to the June quarter 2016. In the national breakdown, 5.8 per cent of first home buyers were from South Australia while the proportion of first home buyers in the State’s owner-occupier market recorded an increase of 12.6 per cent. Rental affordability improved by 0.7 percentage points.

 

Western Australia

The number of first home buyers in Western Australia increased by 16.0 per cent over the quarter and by 3.8 per cent compared to the same time last year. 17.5 per cent of all Australian first home buyers were from Western Australia. Housing affordability declined with the proportion of income required to meet loan repayments increasing to 23.6 per cent or 0.2 percentage points over the quarter but a decrease of 0.3 percentage points year on year.

Tasmania

Housing affordability in Tasmania declined with the proportion of income required to meet home loan repayments increasing to 23.9 per cent, an increase of 0.3 percentage points over the quarter and an increase of 0.2 percentage points year on year.  Rental affordability in Tasmania improved with the proportion of income required to meet median rents decreasing to 25.8 per cent, a 0.8 percentage point drop over the quarter but an increase of 0.8 percentage points year on year.  First home buyers in Tasmania decreased by 3.3 per cent over the quarter and by 17.6 per cent compared to the same quarter last year.

Australian Capital Territory

The number of loans to first home buyers in the Australian Capital Territory increased to 570, an increase of 49.6 per cent over the quarter and an increase of 21.8 per cent compared to the June quarter 2016. Housing affordability in the Australian Capital Territory improved with the proportion of income required to meet home loan repayments decreasing to 19.8 per cent, a 0.3 percentage point drop over the quarter and a decrease of 0.7 percentage points compared to the same quarter last year.  Rental affordability remained stable. The proportion of income required to meet the median rent remained at 17.9 per cent.

Northern Territory

Housing affordability in the Northern Territory improved with the proportion of income required to meet loan repayments decreasing to 20.3 per cent in the June quarter or 0.8 percentage points. This was a decrease of 1.8 percentage points year on year.  Rental affordability in the Northern Territory also improved with the proportion of income required to meet the median rent decreasing to 23.1 per cent or 0.6 percentage points over the quarter or a decrease of 2.0 percentage points compared to the June quarter 2016.

Retail turnover relatively unchanged in July

Further evidence of household financial pressure.

Australian retail turnover was a relatively unchanged 0.0 per cent in July 2017, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

This follows a rise of 0.2 per cent in June 2017.

In seasonally adjusted terms, there were falls in household goods retailing (-1.7 per cent), department stores (-2.8 per cent) and clothing, footwear and personal accessory retailing (-0.2 per cent). There were rises in food retailing (0.7 per cent), other retailing (1.3 per cent), and cafes, restaurants and takeaway food services (0.2 per cent) in July 2017.

“The falls in household goods retailing and department stores come after strong rises during the June quarter,” said Ben James, Director of Quarterly Economy Wide surveys for the ABS.

In seasonally adjusted terms, there were falls in New South Wales (-0.4 per cent), South Australia (-0.8 per cent), Tasmania (-0.9 per cent) and the Northern Territory (-0.1 per cent). There were rises in Victoria (0.4 per cent), Western Australia (0.6 per cent), Queensland (0.2 per cent) and the Australian Capital Territory (0.1 per cent).

The trend estimate for Australian retail turnover rose 0.3 per cent in July 2017 following a 0.4 per cent rise in June 2017. Compared to July 2016, the trend estimate rose 3.5 per cent.

Online retail turnover contributed 4.3 per cent to total retail turnover in original terms.

The Oldest Trick In The Book

The focus on power prices and the behaviour of the power companies where households end up on higher rates, draws attention to the oldest trick in the book – offer attractive rates for new business, but rely on consumer apathy/confusion or create hurdles to continue to get the best prices. Companies seeking to maximise their returns from hapless consumers.

The same is true in financial services, where both on the mortgage and deposit side of the ledger, it is easy for households to drift to rates which are not the best available.  The banks rely on this to protect their margins and profits, just like the power companies.

Now of course the power companies, under duress, are going to write to some consumers to help them find better deals. So why not the banks too?

In the past year lenders repriced their mortgage books aggressively, to increase margins, and imposed out of cycle rate hikes on all borrowers.  The trajectory of those varied between investor and owner occupied loans.

This chart, using data from the RBA tracks the rates on offer and we overlay the cash rate on the second axis.   They have built quite a war chest!

But in fact, the best new attractor rates are more than 100 basis points lower for some low risk customers, but only for new ones. It is harder for existing customers to get better rates, (but it is still worth being proactive and asking). There are costs involved in switching, and work to be done to find the deals out there.

Philip Lowe commented recently on how competitive dynamics drove lenders to take more risk:

One might ask why lenders themselves did not do more to constrain their activities in these areas, given the earlier trends were adding to risk in the overall system. When everything is going well, it appears that any single institution has difficulty pulling back. Each worries about their competitive position and about the market reaction. Individual institutions are also more likely to focus on their own risks, rather than the risks to the system as a whole.

We suspect the same argument would be mounted internally – replace risk, with profit – against the idea of helping customers to optimise the returns from their deposits and reduce their mortgage rates. But we think this is precisely where differentiation can and should emerge.

If a bank was really interested in customer outcomes, they would be proactive in suggesting products with better rates, rather than relying on inertia. Actually this could become a significant point of differentiation, and would be a touchstone for brand improvement and cultural change.

Imagine using the information systems inside the bank to analyse existing product footprints and proactively suggest better alternatives. No better way to build customer trust a loyalty, something which is sadly missing in the current profit at all cost drive approach. The truth is that long term shareholder value is actually aligned to building true customer loyalty. Yet this is largely ignored at the moment.

What about a proactive financial health check, where the bank and customer could jointly discuss options and alternatives?  This is even something a robo-banker might do.

Time for someone to step out from the pack.

ASIC bans flex commissions in car finance market

ASIC has formally banned flex commissions in the car finance market, with the legislative instrument to ban these commissions registered on the Federal Register of Legislative Instruments today.

Flex commissions are paid by lenders to car finance brokers (typically car dealers), allowing the dealers to set the interest rate on the car loan. The higher the interest rate, the larger the commission earnt by the dealer.

ASIC is banning these commissions because it has found that they lead to consumers paying excessive interest rates on their car loans. The ban comes after ASIC led a public consultation on banning these commissions.

“We found that flex commissions resulted in consumers paying very high interest rates on their car loans. We were particularly concerned about the impact on less financially experienced consumers,” ASIC Deputy Chair Peter Kell said.

Mr Kell thanked those who had provided feedback to ASIC’s consultation: “The feedback we received from stakeholders provided us with helpful insights, and we thank all stakeholders for their cooperation.”

Background

The legislative instrument operates so that:

  • The lender not the car dealer has responsibility for determining the interest rate that applies to a particular loan. The car dealer cannot suggest a different rate that earns them more commissions.
  • Car dealers will have a limited capacity to discount the interest rate and receive lower commissions, leading to lower costs for credit.

The legislative instrument and the Explanatory Statement can be found here.

Lenders and dealerships will have until November 2018 to update their business models, and implement new commission arrangements that comply with the new law.

Under flex commissions:

  • The lender and the dealer agree that a range of interest rates will be available to any consumer (from a ‘base rate’ up to a prescribed maximum rate)
  • The dealer can set the interest rate for a particular loan within that range and will earn a greater upfront commission from the lender the higher the interest rate
  • There is no criteria used to set the interest rate which has been shown to  result in opportunistic pricing arrangements

The commission paid on a loan is determined by the ‘flex amount’ – which is the difference between the base rate and the interest rate of the loan sold to the consumer.

The lender and dealer share the flex amount. The percentage of the flex amount kept by the dealer varies significantly and can be up to 80 per cent of the interest charges.

Bank of Canada increases overnight rate target to 1 per cent

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth.  There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.

The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.

While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.

Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.