Big four banks change loan contracts to eliminate unfair terms

ASIC says that following a commitment to further review their small business loan contracts, the big four banks have now agreed to specific changes with ASIC to eliminate unfair terms from their contracts.

ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) have welcomed the changes, which mean that:

  • the loan documents will not contain ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.
  • the operation of the banks’ indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.
  • clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer (known as ‘material adverse change event’ clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.
  • banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so.

The banks have all acted on ASIC’s and the ASBFEO’s calls to change their practices although have taken different approaches – and in some instances, gone further than the law requires – to address concerns about these clauses.

For example, NAB has taken an industry-leading position about the application of non-monetary default clauses, while the Commonwealth Bank will provide an industry-leading 90 calendar days’ notice for any changes to loan contracts that the small business customer does not wish to accept.

All four banks have limited the use of financial indicator covenants in small business contracts to certain classes of loans (e.g. property development and specialised lending such as margin loans). The banks have agreed that financial indicator covenants will not be applied to property investment loans.

The banks have agreed that all customers who entered or renewed contracts from 12 November 2016 – when the protections for small businesses began – will have the benefit of the changes agreed with ASIC.

To ensure that the new clauses do not operate unfairly in practice, ASIC will monitor the individual banks’ actual use of these clauses to determine if they are in fact applied or relied on in an unfair way. ASIC will work with ASBFEO when assessing the results of this monitoring.

ASIC will publish more detailed information about the changes agreed with the big four banks so that other lenders to small business can consider whether changes to their contracts may be required.

ASIC Deputy Chairman Peter Kell said, ‘ASIC welcomes the significant improvements made by the banks to their small business lending agreements. The improvements have raised small business lending standards and provide important protections for small business customers. ASIC will be following up with other lenders to ensure that their small business contracts do not contain unfair terms, and we will continue to work with the ASBFEO on these issues.’

The ASBFEO, Kate Carnell said, ‘This reflects nine months of hard work by ASIC working with the big four banks to meet the expectations of the Unfair Contract Term legislation. The banks’ initial underdone response to the legislation serves as a reminder that banks were once again trying to “game” the rules and this erodes trust.  There are now very positive signs that the big four banks are demonstrating industry leadership in embracing best practice.’

Ms Carnell added that, ‘In meeting the law to cover individual loan contracts up to $1million the banks have agreed to extend the cover to small business total loan facilities up to $3 million which is a move in the right direction. Recent reviews have consistently raised that a small business loan facility of $5m is the correct benchmark. This remains a sticking point that will need to be addressed.’

The four banks will shortly commence contacting all relevant small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans.

Background

ASIC released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211) to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services and the protections that are available for small businesses.

From 12 November 2015, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections. Industry was provided one year to prepare their contracts for the legislation coming into effect on 12 November 2016.

In September 2016 the ASBFEO commenced an inquiry into Small Business Loans.

In March 2017, ASBFEO and ASIC completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

In March 2017, ASIC established an Office of Small Business to focus ASIC’s efforts and initiatives to help small business succeed as a key driver of the Australian economy.

In May 2017, ASBFEO and ASIC hosted a round table where the big four banks committed to make significant improvements to their small business loan contracts to ensure they meet the unfair contract terms laws (refer: 17-139MR).

Changes to contracts

As part of industry’s response to the ASBFEO’s Small Business Loans Inquiry, the banks have separately agreed to changes in their small business contracts to limit the specific events of non-monetary default entitling enforcement action by the banks (such as insolvency). The banks will now provide an opportunity for a customer to resolve a breach of most of the specified events, and ensure that enforcement action can only be taken against the small business customer where the breach presents a material credit risk to the bank.

The Housing Magic Bullet May Be Shot

The HIA suggests the housing sector will become less of an economic driver of the Australian economy, and also underscores the various regulatory interventions from state taxes, to limiting foreign investment and investor lending.

Another plank in the argument that the housing party is over, leaving households with a mighty debt driven hangover.

According to the HIA, the Winter 2017 edition of the HIA’s National Outlook Report discusses the downturn in building activity that started in March 2016 and forecasts the length and depth of the cycle. It also highlights the role foreign investment plays in growing housing stock in Australia.

 

“The housing sector has already stepped back from its role driving the Australian economy and now is not the time for governments to hit the industry with punitive charges,” warned Tim Reardon, HIA’s Principal Economist.

“Government interventions into the market so far include: state governments imposing punitive Stamp Duty charges on foreign investors, Federal charges for foreign investors, a new set of visa rules that could slow overseas migration, restricting lending to domestic investors and new regulations limiting interest only lending.

“The Chinese government has also imposed restrictions on capital leaving the country which may have a significant impact on Australian home building.

“Foreign investors have been attracted to the Australian housing market and they have been investing billions annually in the construction of new residential dwellings.

“These investors have contributed to activity and employment in metropolitan areas building the supply of new housing stock and easing pressure on rental markets.

“Governments of all jurisdictions should proceed with caution when imposing new punitive measures on this segment of the market.

“Foreign capital is highly mobile and if it is forced from the market rapidly it could accelerate the downturn in the sector unnecessarily.

“A number of state governments have recently hit foreign investors with punitive charges.

“The Australian Government has also imposed additional regulations that will impact on investors in the sector.

“The HIA is forecasting that building activity will decline modestly – from record highs – over a number of years, consistent with typical cyclical trends in the industry. Activity will bottom out in 2019 with activity still at solid levels.

“There is a risk – if uncoordinated and poorly considered policies are introduced to curb foreign investment – that the decline in activity in the sector will be accelerated,” Mr Reardon concluded.

Lenders ‘intentionally disadvantaging borrowers’: FBAA

From The Adviser.

By requiring brokers to meet volume targets in order to retain accreditation, lenders are disadvantaging borrowers and potentially pushing brokers towards risky behaviour.

That’s according to Peter White, executive director of the Finance Brokers Association of Australia (FBAA). He was speaking to The Adviser in the fallout following an ABC Four Corners report that accused brokers and banks of using “aggressive sales tactics” to win customers in a target-based environment.

Responding to suggestions that the commission-based remuneration structure means brokers are prioritising loan volume over suitability, Mr White said that criticism should instead be aimed at the volume-based “hurdles” brokers need to leap in order to maintain their accreditation with lenders.

He said: “Brokers shouldn’t have to maintain minimum volumes just to retain their accreditation because at the end of the day . . . that sort of mentality of ‘you need certain volumes to retain accreditation’ has the risk . . . of potentially causing the wrong style of behaviour.”

Mr White added that accreditation hurdles can end up disadvantaging borrowers. “People shouldn’t be pushed in a certain direction. You should be able to have the freedom of choice that is the most suitable that you can do for your client and not do anything that may put a question over that.

“[The accreditation system] puts at risk them [clients and brokers] being able to access a certain lender, and what the outflow of that is [that] it puts the consumer at a disadvantage. Because, I might be a broker that writes one loan every two months with a specific lender… but every loan they get is the best client on the planet they’ll ever receive. But, if I’m not writing enough volume to sustain that accreditation, my client who may be best suited to that product… doesn’t get the opportunity, because that lender won’t hold my accreditation. So, the consumer misses out.

“So the lenders are intentionally disadvantaging borrowers in this country.”

Time to ‘neck’ the ‘ratbag’ brokers

The prevalence of “cowboy” brokers who enter the sector with hopes of making easy money quickly was also put under Four Corners’ spotlight.

Speaking on the topic, Mr White was unequivocal: “They’re the people that we want out of our industry. We want nothing to do with [those people] who shouldn’t be playing the game. Get rid of them… put them in jail. I don’t care. Get them out the industry.”

He stressed, however, that the instances of shonky “ratbag” broker behaviour were “extraordinarily” low.

“There’s something within the vicinity of 60,000 mortgages done every month. You’ve got one or two examples [of poor behaviour shown on Four Corners].”

Further, cases of borrowers suffering mortgage stress weren’t always brokers’ fault. Borrowers and lenders also need to take responsibility, he said.

“Sometimes it’s not necessarily the broker’s fault, and at the end of the day, it’s the lender who makes the decision on their approval. It’s not a one-stop blame shop. It can be issues on multiple sides, but unquestionably, the broker has a duty of care in their responsibilities and responsible lending conduct.”

Broker Ross Le Quesne of Aussie Parramatta agreed. He said that brokers do the legwork to ensure loans are suitable and repayable for clients, even when faced with a 2 per cent rate increase. He also added that “no one” forces a borrower to take out a loan.

“For someone like myself, that’s been in the industry for 15 years and been through many, many different cycles, I think… brokers do give them [clients] the best flexibility, the best choice and quite often the cheapest rate, because we have a variety of lenders and can review their products.”

The relationships brokers form with clients are designed to “create a client for life”, he said. The difference between brokers and home finance bank staff is that “if anyone’s good [at the bank], they get promoted and moved up the ranks and don’t maintain a relationship with the same person”.

He added: “There is so much to be said for having a good, ethical mortgage broker that does the right thing by you.

“I think the whole [negative attitude towards brokers] is unfair on mortgage brokers. Most of the brokers that I know… want to do the right thing by their clients.”

Non-banks call for more limited APRA scrutiny

From Australian Broker.

Four leading non-bank lenders have criticised the extensive nature of powers proposed to the Australian Prudential Regulatory Authority (APRA) to be implemented over the non-ADI lending sector.

In a joint submission to the Treasury, Pepper Group, Liberty Financial, Firstmac and RESIMAC addressed these potential new APRA powers.

While the lenders appreciated the need for financial stability and sound lending practices, they pointed out that non-ADI lenders and ADIs are significantly different.

“While non-ADI lenders provide a range of essential functions and products to all Australians, they do not provide as broad a range of products, nor do they accept deposits, nor are they responsible for key pieces of banking infrastructure. Non-ADI lenders promote healthy competition within the finance sector, and service areas and customers that ADIs lenders cannot or are unable to service.”

The regulation of non-banks should thus be limited to “exceptional circumstances” if activity from a non-ADI lender is deemed to threaten the stability of the financial system.

The Treasury’s recent exposure draft on these proposed powers creates “unnecessary regulatory intervention” and “regulatory uncertainty” within the sector, they said.

“It casts an extremely wide net, both in terms of the proposed entities to be regulated and the level of regulatory oversight. We recommend that the legislation be modified to facilitate a more targeted regulatory approach to avoid causing unintended instability in the capital markets, the non-ADI lending sector and the Australian economy more generally.”

The submission, which was prepared by legal firm King & Wood Mallesons, proposes a number of specifics with regards to any future regulatory powers granted to APRA:

  • The definition of non-ADI lenders should be restricted only to those engaging in lending finance or in activities which directly result in the origination of loans
  • When assessing the impact of non-ADI lending practices on financial stability, the activities of non-ADI lenders related to ADIs should be excluded
  • Specific details of when APRA can create a ‘rule’ to further regulate a non-ADI lender should be contained either within the legislation or the guidance notes accompanying that rule
  • APRA will assess competitive issues within the relevant markets prior to exercising its rule-making power
  • This rule-making power will be limited to target macro-prudential concerns rather than regulating overall business aspects of the non-bank lender
  • APRA must consult with any affected non-ADI lender prior to creating a rule relating to that firm
  • A transitional period will be held before a rule comes into effect to ensure that the lender can meet its commitments to borrowers prior to any restrictions
  • Proposed rules that apply to the non-ADI lending sector will be no worse than any specific rule applying to the ADI sector
  • Directions to refrain from lending activities should only be made in the event of repeated and severe non-compliance by the lender

“Given the nature of a non-ADI lender and its industry, the rule making and enforcement power needs to be more specific, and different from the prudential standard and oversight approach taken with ADIs,” the joint submission said.

The statement continued, saying that vague regulation would negatively affect the confidence of the investors funding non-bank lenders, reducing the sustainability of the lender’s business model and thus restricting competition.

“In the absence of certainty as to when, how and why APRA may regulate, investors may question the non-ADI business model which may reduce the availability of capital markets funding and increase funding costs and limit the availability of warehouse funding, which in turn may have the unintended adverse effect on the level of loans and pricing in the retail lending market.”

Banks shouldn’t underestimate the risk of concentration in the housing market

From The Conversation.

The view of Australian banks on the risk that mortgage stress poses to our economy and the banks’ own viability is worrying. Shayne Elliott, CEO of ANZ Bank commented in this week’s Four Corners report:

The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of relatively small loans across ah across the country.

This view is in contradiction to research from the United States which finds housing markets there are less diversified than previously thought. This means any house price shocks will likely occur simultaneously across the country, causing large cumulative losses to borrowers and banks via mortgage defaults. Australian housing markets are likely to be even more concentrated than in the US because of the population size of Sydney and Melbourne.

Banking regulator the Australian Prudential Regulation Authority (APRA) has already issued guidelines to the banks on tracking exposure to mortgages and limiting the growth of loans to investors, in particular for interest-only loans. An independent review by Stephen Sedgewick on behalf of the industry also recommended banks stop paying mortgage brokers based on the volume of loans they secure, in an effort to reduce risks. But these steps might not be enough to ensure security.

Australian bank exposure to mortgage risk

Bank losses during the global financial crisis were in large parts driven by borrowers not being able to make their mortgage repayments. After receiving a loan, borrowers may experience income shocks like loss of jobs or demotion and expense shocks like higher petrol prices or interest rates, that affect their ability to service their mortgages.

Australian mortgage contracts are risky for borrowers in international terms. Unlike other countries, Australian banks offer to lend only up to five years at a fixed rate and the majority of loans are at a variable rate.

This leaves Australian borrowers exposed to interest rate increases. In the past few years, interest rates were lowered as Reserve Bank of Australia economists targeted low inflation rates.

Interest rates are now close to zero, limiting the ability of the RBA to stimulate economic growth. There’s the possibility the RBA could raise interest rates, causing shocks to mortgage borrowers. My research shows this shock could increase bank losses substantially.

At the moment 23% of consumer expenses are housing related and this number is likely higher for mortgage borrowers and could be growing. Interest rate increases, in combination with the current high debt levels, are therefore likely to increase inflation and trigger further interest increases.

Dealing with the risk of mortgage stress

Current bank portfolios are not well diversified, if 60% of bank assets are in mortgages. Other loan classes such as commercial real estate loans and small to medium enterprise loans are also often property-backed.

Bank lending standards need to be more consistent to avoid borrowers shopping around for the lender that offers them the highest loan amount. Lending standards should also consider the concentration of housing income and expenses in a borrower’s portfolio.

Banks should promote fixed rate mortgages. This type of mortgage transfers interest rate risk from borrowers to the banks, that are better placed to manage this risk. This may come at an additional cost but should be small compared to the cost borne by consumers should the housing bubble ever burst.

There also needs to be more scrutiny of the use of offset accounts and redraw facilities, being used as an offset for outstanding loans. Borrowers often use these funds to purchase additional properties and they may not be available in the case of mortgage default. Instead of promoting offset accounts it may be better to give borrowers a prepayment on their mortgage, but not an option to redraw. Should consumers want to draw down on the equity in their homes, they could then apply for a second mortgage.

Mortgage brokers should act as independent advisers, a tool for consumer information and bank competition, as smaller lenders in particular rely on mortgage brokers. The Sedgwick report suggested the loan to value ratio of mortgages should be considered when paying mortgage brokers. This would mean that loans with high loan-to-value ratios (where the borrower is more likely to default) would earn a lower fee.

The Sedgwick banking review has been a step in the right direction, but the focus should be on banks rather than mortgage brokers, as it’s ultimately the bank that is in a contract with the consumer.

Some of this may require a fundamental value change. It’s not likely the Australian appetite for property will change but this means we need to hedge our bets against any risks by improving diversification and the way banks finance mortgages.

Author: Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology Sydney

Beijing Restrictions Will Cause Chinese Buyers To Retreat From Global Property Market

According to the South China Morning Post, cash-rich Chinese firms – the big spenders in the global property market in the past four years – are getting cold feet as Beijing tightens controls on outbound investment.

“Requests for overseas acquisitions are already drying up,” said Paul Guan, a partner with global law firm Paul Hastings who advises Chinese institutional investors on overseas real estate.

“Business owners all know the Chinese government has sent a clear signal this time that they want to curb overseas investment in the property sector,” Guan said.

The move will put pressure on prices in key property markets from New York to London. The top three overseas destinations for Chinese property investors in 2016 were the United States, Hong Kong and Australia, while pending deals have accumulated mainly in Britain and the US over the past six months, according to Real Capital Analytics.

Chinese were the biggest foreign investors in US and Australian real estate last year, accounting for 25 per cent of deals in the US and 26 per cent in Australia.

They also accounted for 25 per cent of all central London commercial property acquisitions in 2016, while some 80 per cent of residential land sold in Hong Kong so far this year was bought by Chinese firms, according to data from Morgan Stanley. Chinese investment in the city has quadrupled since 2012, the financial services firm said.

“Transaction volumes will definitely go down in the hot destinations, and property prices could also be affected,” said Hans Kang, chief investment officer of InfraRed NF Investment Advisers.

On Friday, the State Council said it would restrict overseas investment in a number of areas including property, hotels, the film industry and other forms of entertainment, and sports clubs. Investors would have to seek special approval from the regulators for such ventures.

Dalian Wanda Group on Tuesday backed away from a £470 million (US$605.63 million) acquisition of the Nine Elms Square site in London, after the government’s new capital controls were announced.

Outbound investment by Chinese companies has surged since 2013, with Beijing pushing for more of them to go global and as foreign exchange reserves continued to pile up.

But the government has since 2015 become worried about the scale of capital outflows, particularly in property, at a time when the yuan has sharply depreciated and there are fears of a domestic property bubble, creating problems for the country’s balance of payments.

Added to those fears are companies that borrow money on mainland China to buy overpriced overseas assets, which runs counter to President Xi Jinping’s deleveraging efforts.
“That could hit the financial stability of China’s banking system if there are any fluctuations in outside markets,” Kang said.
“Chinese buyers accounted for 25 per cent of all central London commercial property acquisitions in 2016, according to Morgan Stanley.

In past months, policymakers have tightened regulations on “irrational overseas investment” and ordered banks to check the credit exposure of a number of aggressive dealmakers including Wanda, Fosun International, HNA Group and Anbang Insurance Group.

All of those companies had been on a shopping spree in overseas property markets in recent years.

Anbang, for example, made headlines in 2014 with its US$2 billion purchase of New York’s Waldorf Astoria hotel.

HNA Group, which owns Hainan Airlines, meanwhile bought a 25 per cent stake in Hilton Worldwide Holdings for US$6.5 billion last year. It has also paid a record HK$27.2 billion for four residential sites in Hong Kong since November.

And Wang Jianlin, who runs one of China’s biggest property developers, Wanda, has invested some A$2 billion (US$1.58 billion) in two mega mixed-use projects in Australia since 2014.

Wang Jianlin, who runs Wanda, has invested US$1.58 billion in two mega mixed-use projects in Australia since 2014.

But now those dealmakers find themselves under intense government scrutiny, their ambitious global plans have come to a screeching halt and their focus is shifting back to the domestic market.

Wang told financial media outlet Caixin last month that his company would “actively respond to the state’s call and divert its main investments to China” after it sold off US$9.3 billion of assets to rivals in order to repay debts.

The retreat is already being felt in global markets. Outbound property investment by mainland Chinese firms was down 82 per cent in the first half from a year ago – and it’s expected to plummet 84 per cent for the whole year to US$1.7 billion, according to Morgan Stanley. The total investment in 2016 was US$10.6 billion.

That trend will create headwinds for prices in Hong Kong, the US, Britain and Australia over the medium term – especially for office assets in Manhattan, central London and Hong Kong, which is the most exposed, it said.

Guan from the law firm said prices in the high-end residential market in New York were also likely to be hit by the loss of Chinese buyers.

For the first time since October 2012, no contracts worth over US$10 million were signed in the city last week, according to data from Olshan Realty.

Others were more positive, and believed the impact of the restrictions would be limited to related markets, which would continue to be shaped by broader macroeconomic trends and fundamentals.

“Fortunately, the United States’ key markets are still desirable enough that without one particular flow of capital from a region, the impact should be nominal if all economic and market conditions are normal and healthy,” said Andrew Feldman of New York-based real estate agency Triplemint.

Added to that, many Chinese companies had already moved currency overseas and could continue to issue debt or equity through offshore platforms if they wanted to invest in property, according to Ben Briggs, executive vice-president of Briggs Freeman Sotheby’s International Realty based in Xiamen.

“They will just do the investments in a more quiet and sophisticated way,” Briggs said.

Thomas Lam, senior director of Knight Frank, agreed that the restrictions would not stop Chinese companies from investing abroad.

“In the longer term, going global will continue and it will remain an essential means for Chinese companies to diversify risks and secure sustainable returns,” Lam said.

CBA to face shareholder class action battle

Law firm Maurice Blackburn Lawyers has united with Australia’s largest litigation funder IMF Bentham to pursue the largest Australian Securities Exchange (ASX) listed company, Commonwealth Bank of Australia (CBA).

The potential class action announced by Maurice Blackburn and IMF Bentham today, looms as the largest shareholder class action the country has seen.

CBA’s 800,000-odd registered shareholders suffered a significant share price drop on the back of news that Australia’s financial intelligence and regulatory agency, AUSTRAC, had initiated legal proceedings against the CBA alleging serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

Online registrations are now open for aggrieved shareholders who purchased ordinary CBA shares during the period from 17 August 2015 to 3 August 2017 and still held some or all of those shares on until after 1pm on 3 August 2017.

“AUSTRAC alleges that CBA contravened the AML/CTF Act on more than 53,000 occasions. The AUSTRAC allegations are extensive and it is astounding that the market would not be advised of such serious and repeated breaches as soon as the company became aware of them,” National Head of Class Actions at Maurice Blackburn, Andrew Watson said.

“Instead the CBA has said that its Board was aware of the breaches in the second half of 2015 but chose to say nothing to the ASX until 4 August 2017.

“As the largest company on the ASX shareholders would expect the CBA to take a leadership role in setting high standards of corporate conduct.  The AUSTRAC allegations, if proven, show an abject failure of corporate governance and risk management.  The failure to make proper disclosure to the market regarding those failures adds insult to injury for shareholders.”

After news of the AUSTRAC legal proceedings became public, CBA shares dropped from an intra-day high of $84.69 on 3 August 2017 to an opening price of $80.11 on 7 August 2017, a significant movement for an otherwise stable stock.

“Our investigations and analysis show that this drop was in the top one per cent of price movements that CBA experienced in the past five years, making it apparent that the news was of material significance to shareholders,” Mr Watson said.

Hugh McLernon, Director of IMF Bentham, said that from today, shareholders could register their claims on the IMF website as work is finalised by the solicitors and counsel on the Federal Court pleading to commence the class action.

“CBA is facing most serious allegations from AUSTRAC, and there are serious questions to be answered about what the company knew and when,” Mr McLernon said.

In a statement today released to the ASX, CBA noted that is has not been severed with any legal proceedings:

Commonwealth Bank statement regarding potential shareholder class action

Wednesday, 23 August 2017 (Sydney): We are aware that Maurice Blackburn and IMF Bentham announced today that they are investigating a potential shareholder class action against Commonwealth Bank.

Commonwealth Bank has not been served with any legal proceedings.

We will keep the market informed of developments.

 

 

Meet The Eleventh Largest and Totally Unregulated Bank In Australia

More households are only able to purchase residential property with help from parents – the Bank of Mum and Dad. This has become a critical factor in helping first time buyers in particular break into the very expensive property market, especially as lenders tighten their underwriting standards.

But here is an astonishing fact – the Bank of Mum and Dad, on our latest estimate, is the eleventh largest lender in Australia, ahead of AMP Bank, HSBC and most of the community banks and mutuals. We estimate at least $16 billion is outstanding with the Bank of Mum and Dad, and it is growing fast.

The average advance to a prospective purchaser is now $88,096, and this continues to rise.

More than half of first time buyers need help from the Bank of Mum and Dad, either a cash gift or loan, or other help such as paying stamp duty, helping with mortgage repayments or child care costs.  This is because of the equity held by those owning property, which is accessible when needed. But it does reinforce the inter-generational issues, and the risks in the market.

We wonder how many lenders check specifically to see if the saved deposit a prospective first time buyer has is a gift or private loan.

The mix of loans is interesting in that we see a relative rise in the number of owner occupied transactions where the Bank of Mum and Dad is active.  In 2015, more investor loans were funded than owner occupied loans, that has reversed now.

Across the states, the relative proportion in VIC is growing, although NSW still has the largest number of loans. But the Bank of Mum and Dad is active is all states and territories.

Three points worth considering.

First, new buyers are ever more reliant on assistance from parents, but this creates inter-generation pressure with older home owners perhaps giving away value which should be part of their retirement nest egg, and younger buyers holding additional debt obligations below the water line. All caused by our silly property market, as Four Corners discussed. Those who do not have “wealthy” parents have little chance of entering the market, another factor in the inequality debate.

Second, this is of course totally (rightly) unregulated, but suggests that overall housing debt is even higher than might be thought from the official statistics.  Often the arrangements are not formalised, and this can lead to issues down the track. Bank underwriting standards need to take account of this phenomenon.

Third our analysis suggests that households who receive such assistance are more likely to get into financial difficulty later, because they have not had the discipline of saving and so over-reach property wise.

Just one more element to consider when trying to understand the complex property finance sector.

Auswide hikes rates by 40bps

From The Adviser.

A Queensland-based bank has announced a 40 basis point increase to its investment products, citing a need to ensure that investment lending growth is “responsible”.

The Auswide Bank changes come into effect 23 August and apply to new fixed rate investment lending. As such, the new rates for loans without the bank’s Freedom Package start at 4.89 per cent per annum (p.a.) for three-year fixed rate loan terms and rise to 5.19 per cent p.a. for five-year fixed rate loan terms.

Home Loan Plus loans with the Freedom Package start at 4.79 per cent p.a. for two and three-year fixed rate loan terms and climb to 5.09 per cent p.a. for five-year fixed rate loan terms.

Additionally, Auswide has advised that all new investment lending will need to sit below a maximum loan-to-value ratio of 80 per cent.

Banks’ repricing of loans has become a regular occurrence following a May directive by the Australian Prudential Regulation Authority (APRA) instructing lenders to keep new interest-only lending to below 30 per cent and slow the growth of banks’ investor lending portfolios to at most 10 per cent per quarter.

Why investor-driven urban density is inevitably linked to disadvantage

From The Conversation.

The densification of Australian cities has been heralded as a boon for housing choice and diversity. The up-beat promotion of “the swing to urban living” by one of Australia’s leading developer lobby groups epitomises the rhetoric around this seismic shift in housing.

Glossy advertisements for luxury living in our city centres and suburbs adorn the property pages of our newspapers.

Brochures boast of breathtaking city views from uppers storeys and gush about amenity, lifestyle and “liveability” – often touting the benefits of adjacent public infrastructure investments (but please don’t mention “value sharing”).

Depictions of attractive younger people, occasionally clutching a smiling infant, are prominent as the image of all things new, urban and desirable.

Long gone are the days when the manifestations of property marketeers’ imaginations were restricted to images of low-density master-planned estates on the urban fringe. We hardly ever hear about these nowadays.

There’s truth in the claims that housing choice and diversity have indeed widened in the last few decades as a result. The statistics clearly show a much greater spread of dwelling options in our cities.

The rise and rise of the apartment block

Apartments now account for 28% of housing in Sydney and 15% in Melbourne. As the maps below show, most recent growth in apartment stock is clearly in and around the inner city. Yet even the more distant suburbs have had an increase in higher-density residential development.

Changes in the number of flats and apartments, 2011 to 2016, in Sydney (above) and Melbourne (below). Data: ABS Census 2011, 2016, Author provided
Data: ABS Census 2011, 2016, Author provided

For many, inner-city apartment living is clearly a preferred choice for the stage in their life when an upcoming, “vibrant” neighbourhood is attractive. High-density urban renewal has been a boon for hipsters and students alike.

But the issue of choice needs to be unpacked carefully. For many others, the “swing to urban living” is more of a necessity.

True, the surge in apartment building has put many properties onto the market to rent or buy that are clearly cheaper than houses in the same suburb. From that point of view, they have added to the affordability of these neighbourhoods.

However, affordable to whom is an open question. At A$850,000 and upwards for a standard two-bedder in Waterloo, South Sydney, and $500,000 or more in Melbourne’s Docklands for a similar property, these are not exactly a cheap option for anyone on a low income.

But other than in the prestige areas where higher-income downsizers and pied-à-terre owners can be enticed to buy in some comfort, much of what is being built is straightforward “investor grade product” – flats built to attract the burgeoning investment market.

It can be argued that the investor has always been a major target of apartment developers, even in the 1960s and 1970s when strata units became common, particularly in Sydney. But it is even more so today.

Despite the clamour to control overseas investors perceived to be flooding the market, the bulk of investors are home grown. We don’t need to rehearse the debates on the factors that have fuelled this splurge, but clearly the development industry has been savvy to the possibilities of this market.

In the last decade, backed by state planning authorities and politicians desperate to claim they have “solved” housing affordability by letting apartment building rip, developers have got involved on an unprecedented scale. The figures bear this out: in 2016, for the first time, Australia built more apartments than houses. The majority end up for rent.

Problematic products with too few protections

In the rush, we, the housing consumer, have been offered a motley range of new housing with a series of escalating problems. Leaving aside amateur management by owners’ bodies in charge of multi-million-dollar assets, problems of short-term holiday lettings and neighbour disputes, there are more serious concerns over build quality, defective materials and fire compliance.

The apartment market has been left wide open for poor-quality outcomes by building industry deregulation. This includes:

  • moves toward complying development approval for high-rise;
  • self-certification of building components;
  • complex design and non-traditional building methods;
  • relaxation of defect rectification requirements;
  • long chains of sub-contractors;
  • poor oversight by local planners and authorities; and
  • cheap or non-compliant fittings and finishes.

Plus there’s the rush to get buildings up and sold off. Not to mention fly-by-night “phoenix” developers who vanish as soon as the last flat is occupied, never to be found when the defects bills come in.

The lack of consumer protection in this market is astounding. The average toaster comes with more consumer protection – at least you can get your money back if the product fails.

‘Vertical slums’ in the making

These chickens will surely come home to roost in the lower end of the market, which will never attract the wealthy empty-nesters or cashed-up young professionals with the resources to ensure quality outcomes.

In Melbourne, space and design standards, including windowless bedrooms, have come under critical scrutiny, as has site cramming. Tall apartment blocks stand cheek-by-jowl in overdeveloped inner-city precincts.

At least New South Wales has State Environmental Planning Policy 65, which regulates space and amenity standards, and the BASIX environmental standard to prevent the more egregious practices.

But people are most likely to confront the problems of density in the many thousands of new units adorning precincts around suburban rail stations and town centres. These have been built under the uncertain logic of “transport-orientated development”, often replacing light industrial or secondary commercial development.

These developments attract a mixed community of lower-income renters. Many are recently arrived immigrants and marginal home buyers – often first-timers. Many have young children, as these units are the only option for young families to buy or rent in otherwise unaffordable markets. Overall, though, renters predominate.

What will be the trajectory of these blocks, once the gloss wears off and those who can move on do so? You only have to look at the previous generation of suburban walk-up blocks in these areas to find the answer.

Far from bastions of gentrification, the large multi-unit buildings in less prestigious locations will drift inexorably into the lower reaches of the private rental market.

Town centres like Liverpool, Fairfield, Auburn, Bankstown and Blacktown in Sydney point the way. The cracks in the density juggernaut are already showing in many of the more recently built blocks in these areas – literally, in many cases.

This inexorable logic of the market will create suburban concentrations of lower-income households on a scale hitherto experienced only in the legacy inner-city high-rise public housing estates.

With the latter being systematically cleared away, the formation of vertical slums of the future owned by the massed ranks of unaccountable, profit-driven investor landlords is a racing certainty. The consequences are all too easy to imagine.

The call for greater regulation of apartment, planning, design and construction is being heard in some quarters. The 2015 NSW Independent Review of the Building Professionals Act highlights these concerns.

But don’t hold your breath for rapid reform. No-one wants to kill the goose that’s laying so many golden eggs for the development industry and government alike – especially in inflated stamp-duty receipts.

The market has a habit of self-regulating on supply. Evidence of a marked downturn in apartment building is a clear sign of that. But don’t expect the market to self-regulate on quality, at least with the current highly fragmented, confusing (not least to builders and bureaucrats), under-resourced and largely unpoliced regulatory system.

The legacy of this entirely avoidable crisis is completely predictable, but will be for future generations to pick up

Author: Bill Randolph, Director, City Futures – Faculty Leadership, City Futures Research Centre, Urban Analytics and City Data, Infrastructure in the Built Environment, UNSW