Digital Finance Analytics (DFA) Blog – Page 625

Auction Volumes Rise to Highest Level in 6 Weeks

Across the combined capital cities this week, the number of homes taken to auction rose to 2,011, compared with 1,857 over the previous week. This was the largest number of auctions held since the last week of June 2017 and approximately one third higher compared with the same week a year ago.

The preliminary auction clearance rate of 70.5 per cent has increased relative to last week’s final clearance rate, up from 68.2 per cent. However as more results are collected it is expected that the final auction clearance rate will revised lower to remain within the high 60 per cent range where it has tracked since the first week of June.

Over the corresponding week last year, the clearance rate was 75.0 per cent and 1,471 auctions were held. In Sydney, the preliminary clearance rate rose to 72.0 per cent, which was higher than Melbourne’s preliminary clearance rate of 71.0 per cent. Afar Melbourne has remained the stronger performer for many weeks it is possible that Melbourne’s final clearance rate could drop below the 70 per cent mark for the first time since July last year.

More CBA Bad News

Ian Narev, will retire by the end of the 2018 financial year it has been announced.

The Chairman of the Commonwealth Bank of Australia, Catherine Livingstone AO, said today that the Board had decided to provide details of its planned Chief Executive succession process to ensure the market is fully informed and to provide certainty for the business.

Managing Director and Chief Executive Officer, Ian Narev, will retire by the end of the 2018 financial year, with the exact timing dependent on the outcome of an ongoing comprehensive internal and external search process.

Succession planning is an ongoing process at all levels of the Bank. In discussions with Ian we have also agreed it is important for the business that we deal with the speculation and questions about his tenure. Today’s statement provides that clarity and will ensure he can continue to focus, as CEO, on successfully managing the business.

Separately, ASIC said the Commonwealth Bank (CommBank) will refund over 65,000 customers approximately $10 million, after selling them unsuitable consumer credit insurance (CCI).

CCI is a type of add-on insurance, sold with credit cards, personal loans, home loans and car loans. It is promoted to borrowers to help them meet their repayments if they become sick, injured or involuntarily unemployed.

CommBank sold ‘CreditCard Plus’, insurance for credit card repayments, to 65,000 customers who were unlikely to meet the employment criteria and would be unable to claim the insurance.

CommBank is also refunding approximately $586,000 in premiums to around 10,000 customers after it over-insured these customers for Home Loan Protection CCI taken out with a Commonwealth Bank home loan, resulting in the over-charging of premiums.

ASIC Deputy Chair Peter Kell said it was unacceptable that customers were sold insurance that did not meet their needs. ‘One of ASIC’s priorities is addressing poor consumer outcomes associated with add-on insurance, including CCI. Consumers should not be sold products that provide little or no benefit, and banks should have processes in place that ensure this.’

CommBank and CommInsure identified and reported this issue to ASIC.

CommBank will be contacting eligible ‘CreditCard Plus’ customers shortly.

Background

CreditCard Plus

CommBank will remediate customers who were sold ‘CreditCard Plus’ between 2011 and 2015 who were either:

unemployed; or

students.

They were therefore not eligible to claim for unemployment or temporary and permanent disability cover provided by the CCI. The vast majority of customers were students with lower credit card limits.

Home Loan Protection

Between 2007 and 2015 CommBank did not adjust the amount of cover under the CCI policy where the amount the customer borrowed was less than the original loan amount they applied for.

In charging these customers premiums based on the loan amount applied for rather than the amount that was actually borrowed, CommBank charged these customers for more cover than they needed under the policy. In some cases, cover was also provided and paid for before a loan was drawn down. CommBank will continue its review to ensure all affected customers are identified and remediated.

Bendigo and Adelaide Bank FY17 Results

Bendigo and Adelaide Bank released their FY17 results today. It was perhaps stronger than expected and they have a good retail franchise. But they benefited from on-off mortgage loans repricing which helped margin and are now seeing lower mortgage volumes following the APRA guidance, so there remains much to do.

They reported an after tax statutory profit of $429.6m for the 12 months to 30 June 2017. The full year dividend was maintained at 68 cents fully franked.

Underlying cash earnings was $418.3 million, up 4.2% on the prior year.

They reported mortgage growth of 7.7%, with a strong NIM improvement of 8 basis points in the second half despite a 1 basis point fall across the year, achieving 2.26% half on half. They gave away deposit margin to grow their funding base.

Their exit margin was 2.34%. Keystart’s NII contribution was $11.3m.

Funding includes 80. 2 percent from deposits, with retail deposits up 4.7 per cent. The mix of call to term deposits swung a little to call (term down 1.1% and call up 2%).

Home lending showed a fall in approvals IH17 $8,711m approved compared with $5,419m in the 2H17.

They were impacted by APRA’s lending caps as shown by interest only flows

… and investor credit growth.

Settlements are sitting at ~$1bn per month. They say 45% of customers are ahead of minimum repayments, and 29% three or more repayments ahead.

Home loan 90+ days past due shows a persistent rise in WA (Keystart included from Jun-17 and is below the WA average). QLD was also higher.

Homesafe contributed $90.4m

Homesafe overlay reflects an assumed 3% increase in property prices for the next 18 months, before returning to a long term growth rate of 6%

Retail mortgage provisions are 0.02% in FY17, down from 0.03% at Jun-16. Business arrears were lower, and there was a small rise in credit card arrears, to above 1.5% in Jun-17. The specific provisions balance was $89.5m, reflecting 0.15% of gross loans compared with 0.22% a year ago.

The cost income ratio fell 2% to 56.1 per cent, on nearly flat expenses. They had 118 less FTE in FY17 and included redundancies of $4.2m.

They continued to invest in, and capitalise software.

The CET1 ratio is 8.27%, up 30 basis points from December 2016, and they say the “unquestionably strong” target will be achieved – but no details.

They continue progress towards advanced accreditation, and the investment has improved their risk management capability, whether or not they decide to switch (given APRA’s moving target!). Again, no details. Our own view is that the benefit of advanced has been significantly eroded by APRA.

Bank compensation bills for scandals hit $355 million

From The New Daily.

The bill for the big banks in recompensing clients over financial scandals is continuing to rise, with the ANZ last week ordered by regulator ASIC to boost by $6 million to $10.5 million its compensation to mistreated OnePath superannuation customers.

That news “is a shock but not a surprise” said Erin Turner, campaigns director with consumer group Choice, although “it shows another disappointing outcome”.

While the extra cash will be welcomed by wronged ANZ customers, it’s small beer compared to what the banks have had to pay all up. In recent years a series of scandals have seen the big banks hit with compensation bills of at least $355.4 million.

Most of that money came as a result of mistreatment by bank financial advisory arms which, among other things, involved forging client signatures to switch investment choices without permission. Banks also charged clients advisory fees without giving any financial advice.

The figures are staggering with ASIC demanding the banks pay back a total of $204.9 million and of that only $60.4 million has been paid to date. The banks still owe $144.2 million, plus an interest component which has not been detailed.

A spokesman for ASIC said the shortfall in payments is not the result of a time payment regime drawn up by the regulator.

It is the result of the fact that the banks are having to trawl through their records to find details of the customers concerned and how much money they are owed, which apparently takes time. Just how much time presumably depends on the banks.

The list provided does not include all the high-profile scandals of recent years. The cost to the CBA of the money laundering scandal involving 53,700 transactions breaching reporting laws is yet to be determined and there are other issues under investigation or legal challenge.

There are also bank-related issues like the $500 million collapse of Timbercorp and the $3 billion Storm Financial collapse where incentives and lax lending saw the life savings of thousands go up in smoke, often at the latter stages of life when recovery was impossible.

Where recompense is made it doesn’t necessarily fully compensate for losses. For example the CBA repaid Storm Financial investors around $140 million when estimates of losses by those who borrowed through CBA were far higher than that.

Naomi Halpern, an activist who suffered personal losses in the Timbercorp collapse, says often compensation arrangements are inadequate. ANZ was a significant lender to Timbercorp investors.

“They’re not even giving back all of what has been lost. There is no recompense for the trauma and suffering people go through, you only get a percentage of the loss,” she said.

Ms Halpern is working with the review of banking dispute resolution led by Professor Ian Ramsay. She said while the committee is consulting widely the banks to date have only agreed to a prospective scheme that will compensate for future wrongs.

“They’re not interested in a retrospective scheme,” she said.

To date CBA has been hit with the biggest bills for compensation following the banking scandals. Payments will total $245.8 million when its compensation over financial planning misbehaviour are completed.

The bank reported a record profit of $9.88 billion last week and its theoretical liability over the money laundering issue totals almost $1 trillion.

Any settlement is likely to be far lower than that but with ASIC now pledging to look at the actions of CBA directors over the issue, there looks like being considerable personal and financial angst experienced at the bank before the issue is laid to rest.

Home Prices In Hong Kong Climb To Record Highs Even As Chinese Buyers Pull Back

From Zero Hedge.

Chinese banking regulators’ efforts to force the country’s largest conglomerates to deleverage after an unprecedented binge on foreign assets has already spurred a pullback in foreign real-estate investment, part of a broader decline in foreign investment more generally.

But with wealthy Chinese buyers suddenly out of the real-estate market, housing analysts are anticipating a wave of sharp declines in housing prices in some of the world’s most expensive markets like New York City, London and Hong Kong.

But during the first half of the year, real-estate prices in these markets have continued to climb. Even in Hong Kong, one of the most expensive markets, and also one of the first places one might expect the impact of a mainland pullback to be felt, prices have instead climbed to all-time highs, according to Bloomberg.

The Centaline Property’s Centa-City Leading Index of existing home prices surged to a record high 160.3 as of July 30. The index has climbed 11 percent this year, and more than 50% in the past five years.

Over the past five years, the rapid runup in home prices has caused densely populated Hong Kong to become the world’s most expensive housing market.

“Hong Kong’s housing affordability ratio, which measures the proportion of income spent on mortgages, worsened to about 67 percent for the quarter, the government said Friday, up from 56 percent in the year-earlier period.”

Reining in housing prices in the former British colony is a top priority of the HKMA – the city’s de facto central bank – and its incoming Chief Executive Carrie Lam. Home prices have been a major driver of inequality; for example, now takes a household earning the median income 18 years to afford a home, according to data from Demographia. Every housing auction is hopelessly oversubscribed.

Back in May, HKMA’s current Chief Executive Norman Chan warned about the bubble-like behavior in the city’s housing market, saying levels of demand were reminiscent of 20 years ago, just before Hong Kong suffered a property bust. Chan cautioned people with limited financial resources to stop speculating in property based on the expectation that prices would rise indefinitely.

With wealthy foreign buyers stepping away, there’s probably enough repressed demand in the local market to keep prices buoyant for now. The number of residential transactions surged 43 percent to 18,892 in the second quarter, helping to push prices higher.

Unfortunately for investors, without a supply of wealthy mainland buyers willing to pay the “Chinese premium,” prices will soon slide back to Earth.

Auction Results 12 Aug 2017

The preliminary results from Domain are out, and, yes, we still have momentum so far as auction clearances are concerned. Sydney has a higher clearance rate at 73.7% compared with Melbourne, at 71.7, but more property continues to be sold in Melbourne. Most of the action remains in these two main centres.

Brisbane cleared just 41% of 78 scheduled auctions, Adelaide did a little better at 62% of 64 scheduled, and Canberra achieved a massive 91% clearance on 51 scheduled auctions. In fact, on several metrics the Canberra market could be said to be the most buoyant – helped by the Public Sector pay rises!

Things may change a bit a the results are finalised over the next few days. But seems to support our view that the market remains quite hot.

When Will Rates Rise? – The Property Imperative Weekly 12 Aug 2017

Demand for housing credit remains firm, which explains the ongoing high auction clearance rates. So has the property market further to run and what is the RBA likely to do?

Welcome to the Property Imperative weekly to 12^th August 2017, our weekly digest of the latest finance and property news.

Company results released this week included the full-year outcomes from the CBA, half year from AMP, and 3^rd Quarter results from NAB. There was a common theme through them all. Mortgage loan growth has continued, and thanks to loan and deposit repricing, net interest margins have improved in recent months. This was also helped by more benign conditions in the international capital markets. In addition, overall provisions for bad loans were reduced, despite higher delinquency rates in the troubled Western Australia market. We think the banks, overall, will continue to churn out larger profits as they use repricing to cover the extra regulatory costs and bank taxes. In fact savers are taking a lot of the pain, especially on term deposits, as rates fall even lower, this gets less focus compared with all the commentary is on mortgage interest rates.

Mortgage Brokers were in the news again, this week, with NAB suggesting that changes do need to be made to “improve the trust and confidence that consumers can have in brokers”. UBS put out a research note suggesting that broker commissions will be trimmed soon, whilst CBA reported a fall in the volume of new mortgages sourced via brokers, compared with their branch channels. We are beginning to see significantly differentiated distribution strategies, with some suggesting a migration to digital will reduce the importance of the branch, whilst other lenders, like CBA are investing in new, smaller, outlets with the expectation of driving more business generation through them. On the other hand, CBA, as a result of John Symond exercising his put option, is also buying the remaining 20% interest rest of Aussie Home Loans. Interesting timing!

RBA Governor Philip Lowe’s Opening Statement to the House of Representatives Standing Committee on Economics today contained a few gems.

Globally monetary policy stimulus may be reducing, whilst low wage growth is linked to a complex range of global factors, from technology, competition and lack of security. Locally, business investment is still sluggish, and the RBA says, household are adjusting to lower wage growth plus rising power prices and the burden of household debt. They still back 3% growth in the years ahead. The next move in the cash rate will be up, but not for some time yet.

Ten years ago this week, French bank BNP Paribas wrote a warning of the risks in the US securitised mortgage system. Later, UK lender Northern Rock saw customers queuing to get their money from the bank, a reminder of what happens when confidence fails. Later still, Lehmann Brothers crashed. In the ensuing mayhem, as banks fell from grace and were either left to die, or were bailed out – mostly with public funds – and as mortgage arrears rocketed away in many northern hemisphere centres.

Whilst much has changed, and banks now hold more capital, we still think there are risks in the financial system. In fact, if the RBA does raise rates here, there is a risk we could have our own version of the GFC. It was the sharp move up in mortgage rates which finally triggered the crash a decade ago. We have very high household debt, high home prices, flat income, rising living costs and ultra-low, but rising mortgage rates. We also have a construction boom, with a large supply of new (speculative) property, and banks that have around 60% of their assets in residential property. Arguably lending standards are still too lose despite recent tightening (which note, had to be imposed on the lenders by the regulators!). So the RBA will need to lift rates carefully to avoid a crash.

Lending data from the ABS showed owner occupied housing lending rose 0.5% in trend terms in the past month – or around 6% annually, well ahead of inflation. Lending for new construction rose. But lending for investment housing fell 0.85% month on month, despite ongoing strong demand from investors in Sydney and Melbourne. First time buyers were more active in June, they made up 15.0% of transactions, compared with 14.0% in May. Property demand is actually stronger than a couple of months ago as confirmed by the still strong auction clearance rates. Other personal finance fell 1.8%.

The trend series for the value of commercial finance commitments rose 1.8%. Non housing fixed lending rose 3% and revolving credit rose 1.8%. So, perhaps, finally, we see lending by business beginning to gain momentum! This is needed for sustainable growth. The ANZ Job ads were also stronger in July, and the NAB business confidence indicators were also higher. All pointing to strong business investment, perhaps.

On the other hand, the July DFA household finance confidence index was lower with the average score at 99.3, down from 99.8 last month and below the neutral setting. However, the average score masks significant differences across the dimensions of the survey results. For example, younger households are considerably more negative, compared with older groups. This is strongly linked with property owning status, with those renting well below the neutral setting (and more younger households rent these days), whilst owner occupied home owners are significantly more positive. We also see a fall in the confidence of property investors, relative to owner occupied owners. Across the states, we see a small decline in confidence in NSW from a strong starting point, whilst VIC households were more confident in July.

The driver scorecard shows little change in job security expectations, but lower interest rates on deposits continue to hit savings. Households are more concerned about the level of debt held, as interest rate rises bite home. The impact of flat or falling incomes registers strongly, with more households saying, in real terms they are worse off. Costs of living are rising fast, with the changes in energy prices, child care costs and council rates all hitting hard. That said, the continued rises in home prices, especially in the eastern states meant that net worth for households in these states rose again, which was not the case in WA, NT or SA.

Sentiment in the property sector is clearly a major influence on how households are feeling about their finances, but the real dampening force is falling real incomes and rising costs. As a result, we still expect to see the index fall further as we move into spring, as more price hikes come through. In addition, the raft of investor mortgage rate repricing will hit, whilst rental returns remain muted.

So, overall, we see a mixed and complex picture, with demand for property remaining firm, lending still rising, incomes still under pressure and lenders able to buttress their profits thanks to lifting margins. This puts pressure on the RBA, who continues to warn of the risks to households but then cannot lift rates very far. This tension will all play out, not just in the next few months, but over the next two or three years.

And that’s the Property Imperative to 12^th August 2017. If you found this useful, do subscribe to get future updates, and check back for the latest installment.

Term deposits ‘copping it’

From The New Daily.

Australian banks are borrowing money at record-low rates from their term-deposit customers, despite needing their cash more than ever.

Dozens of institutions have cut the interest rates they pay on locked-away savings, even though the Reserve Bank hasn’t touched the official cash rate since August last year.

The RBA reported in recent days that rates on three-month and six-month term deposits have fallen to record lows.

Martin North, finance expert at Digital Finance Analytics, said savers are “trapped” and “copping it”.

“The banks have quietly been eroding the returns on deposits at the same time as they’ve been lifting the interest rates on their mortgages,” he told The New Daily.

“It frustrates me that everybody is fixated on mortgage rates, but we’ve got this other segment of the population that is intrinsically trapped by these lower interest rates.”

Average rates on three-month term deposits peaked at 6.55 per cent in 2008, just after the global financial crisis, and have plunged ever since. In July, the latest figures available, the average rate fell below 2 per cent for the first time since records began in 1982.

Back in 2008, a saver with $10,000 could have earned $163 for locking away their cash for three months. Now, with the average rate at just 1.95 per cent, they’d be lucky to get $48 for their trouble.

Since the RBA cut rates last year, 59 institutions have slashed their three-month term rates (compared to four increases); 47 have cut one-year rates (with only 17 increases); and 24 have cut five-year rates (compared to just six increases), according to comparison website Canstar.

“My suspicion is we’re not going to see term deposit rates go up until we see the Reserve Bank go up,” said Steve Mickenbecker, chief financial spokesperson at Canstar.

“The banks have not felt any need to compete harder.”

More galling for borrowers is the fact, revealed by the RBA, that banks need term depositors more than ever.

RBA assistant governor Christopher Kent told an event in Sydney on Wednesday that banks are increasingly borrowing from everyday Australians the money they use to fuel their profits, rather than from expensive overseas bond markets like New York.

Deposits now account for 60 per cent of bank funding, Mr Kent said, up from lows of 35 per cent before the financial crisis – a shift he described as “quite stark”.

This is because the market and regulators have pressured the banks to rely more on term deposits, as this source of funding is considered more resilient to economic shocks.

Here’s how to make the banks pay more for the money they need.

Term is better than nothing

Finance analyst Martin North said many Australians have their money in online savings accounts, without realising they could be getting a better deal from a term deposit.

“There are many people holding their money at call, rather than in term. They will probably not be aware how much their interest rates have dropped in recent times because a lot of people set and forget,” he said.

In July, online savings accounts were paying a miserable 1.65 per cent on average – compared to 1.95 per cent for three and six-month terms, 2.25pc for a year, and 2.5pc for three years.

“If you can afford to tie your money up for a bit longer, it’s probably worth it because you’ll get better rates.”

Never break a contract

Mr North said it is “almost always” a bad idea to pull money out of a term deposit before it reaches maturity in order to take up a better offer elsewhere, as you will often be charged a hefty penalty.

“If you’ve got money in a term deposit, you’ll be locked into a specific term. It’ll be a contract,” he said.

“So be very careful about breaking contract to chase higher rates, as you’ll be charged an arm and a leg to do that.”

Look beyond the big banks

Term deposits are not just offered by the big four banks. They are available at smaller banks, community banks, credit unions and building societies across Australia, so it could be a good idea to compare widely before choosing an account.

“Don’t just automatically assume that the bank you’re with gives you the best rate, because they may not. There’s no guarantee they are,” Mr North said.

“So shop around.”

Never auto-renew

Steve Mickenbecker at Canstar said one of the biggest mistakes made by term depositors was rolling over at the same institution, without comparison shopping.

“If you go into term deposits, be prepared to be a little bit active. Maybe that means going for your six or 12-month term, but be prepared to shift when you get to the end of that term,” he said.

“Never do an auto renew. Look at the rates on offer every time you approach maturity.”

Be wary of super-long terms

Banks may be keen for long-term customers, but the market expects the RBA to lift rates relatively soon.

Mr North said locking away your money for too long could mean you miss out when rates eventually rise.

“Bear in mind that the likelihood in the medium term is that rates will go higher still, so you probably don’t want to go out too far because effectively you might be sitting on a rate that in two years time looks rather cheap.”

Consider an annuity

An alternative to the term deposits sold by banks are short-term annuities offered by life insurance companies, with terms of one year or more.

Justin McMillan, financial planner at Perth-based Smart Wealth, said annuities have better rates because providers are “aggressively” chasing new customers.

“Annuities are basically like extended term deposits, but the rate, because it’s from a life insurance company rather than from a bank, is normally better,” Mr McMillan said.

“They are a growing product, so it’s really a market share play.”

Anyone is eligible, and two of the biggest providers are Challenger and CommInsure. But remember: unlike term deposits, they are not guaranteed by the government.

Editors note. DFA changed the wording in the fourth paragraph as the original article as written confused borrowers with savers!

Global Factors Are Driving Low Wage Growth – RBA

RBA Governor Philip Lowe’s Opening Statement to the House of Representatives Standing Committee on Economics today contained a few gems.

Since we last met in February, the global economy has strengthened. As a result, in most advanced economies, economic growth has been sufficient to push unemployment rates down further. A number of countries now have unemployment rates that are close to, or below, conventional estimates of full employment. Conditions have also improved in many emerging market economies, partly due to an increase in global trade. Commodity prices have mostly risen over recent months.

In China, growth has surprised on the upside a little of late. The main challenge there continues to be containing the risks from the build-up of debt, while at the same time keeping growth on a steady path. This remains a work in progress. Economic growth has also picked up in the euro area, with conditions the best they have been since the euro area crisis in 2012. On the other side of the ledger, though, in the United States the earlier optimism that the new administration’s fiscal policies would spur stronger growth has dissipated.

Since we last met, the Federal Reserve has increased interest rates twice and the policy rate in the United States now stands at 1¼ per cent. Despite this, the US dollar has depreciated in global markets, which has surprised many observers. The Bank of Canada has also increased its interest rate, reversing some of the policy insurance it took out earlier when the outlook was less positive. Elsewhere, there is no longer an expectation that central banks will announce yet further monetary stimulus and some central banks have indicated that they may scale back some of the current stimulus if conditions continue to improve. This is a positive development.

As well as this change in the outlook for global monetary policy, another prominent theme in discussions of the global economy of late has been the slow growth in wages. Despite the success that a number of countries have had in generating jobs, wage growth remains low. This is contributing to a continuation of inflation rates that are below target in most advanced economies, although in headline terms they are mostly higher than a year ago.

The reasons for the low growth in wages are complex. The fact that it is a common experience across countries suggests some global factors are at work. One possibility is that workers feel a heightened sense of potential competition; either from advances in technology or from international competition. More competition means less opportunity to put your price up. In the case of workers, it means slower rates of increase in wages. At the same time, many workers feel an increased sense of uncertainty and they feel less secure. This too is contributing to slow aggregate wage growth. The slow growth in wages is underpinning the low inflation outcomes in much of the world. It is possible that these effects will pass and that the normal relationship between tighter labour markets and higher wages will reappear. It is also possible that the current environment turns out to be quite persistent. How things turn out on this front is likely to have a significant bearing on the next stage in the global economic cycle.

I would now like to turn to the Australian economy.

The most recent GDP data are quite dated now and are for the March quarter. They showed growth weaker than we had earlier expected. This, however, partly reflected temporary factors, including weather-related disruptions to production and quarter-to-quarter volatility in resource exports. Since then, the recent run of data has been consistent with a pick-up in growth. There has been an improvement in survey-based measures of business conditions and capacity utilisation has increased. Employment growth has also picked up and retail spending has been a bit stronger of late. Financial conditions remain favourable, with interest rates remaining low and banks willing to lend.

The Reserve Bank released its latest forecasts for the economy last Friday. In summary, our central scenario is for GDP to grow at an average of around 3 per cent over the next couple of years. This would be better than we have seen for some time. The transition to lower levels of mining investment following the mining investment boom is now almost complete. This means that falling levels of mining investment will not be a drag on the economy for much longer. Instead, with some large LNG projects reaching completion soon, GDP growth is expected to be boosted by a lift in LNG exports.

For some time we have been looking for a strong pick-up in private business investment outside the resources sector. This is taking longer to occur than expected. While we do see positive signs in parts of the economy, many firms still show some reluctance to commit to significant investment, often citing a range of uncertainties. It is possible that this reluctance will continue for a while yet. But it is also possible that the improvement in business conditions that we have seen will give firms the confidence to invest more, after a period of under-investment. We have incorporated a middle path into our own forecasts.

On the investment front a positive development has been an increase in spending on public infrastructure, particularly transport. This is directly supporting aggregate demand and is having some positive spin-offs elsewhere in the economy. It is also addressing earlier under-investment and should improve the supply side of the economy.

Another factor that has a bearing on the outlook is the behaviour of households. There is an adjustment going on, with many people getting used to lower growth in their real wages. Many now see this as more than just a temporary development, with wage increases of 2 point something per cent now the norm. In my view, the underlying drivers of the slower wage growth in Australia are much the same as we are seeing overseas. At the same time, the household sector is also dealing with higher levels of debt relative to income. Higher electricity prices are also affecting household budgets. This all means that consumer spending behaviour is something we continue to watch carefully.

One positive development in this area over recent times has been a pick-up in employment growth, which should boost incomes. A little while ago, employment growth was on the weak side and the unemployment rate had ticked up. In contrast, in recent months employment growth has been noticeably stronger and more people have entered the labour force. Encouragingly, the gain in jobs is evident in all states, including in Western Australia and Queensland, which have been adjusting to lower levels of mining investment. Our central scenario is for the national unemployment rate to move gradually lower, although it is likely to be some time before we reach what could be considered full employment in Australia.

Another area that we continue to watch closely is the housing market. Conditions continue to vary significantly across the country. The Melbourne and Sydney markets have been much stronger than elsewhere. There are some signs of slowing in these two markets, although these signs are not yet definitive. In some markets, a large increase in the supply of new dwellings is expected over the next year as new buildings are completed. This increase in supply is expected to have an effect on prices.

In terms of inflation, when we last met I suggested that inflation was at a trough and was expected to increase gradually. Recent outcomes have been consistent with this. Both headline and underlying inflation have risen and are currently running a little under 2 per cent. Inflation is likely to continue to move higher gradually, with the headline measure boosted by higher prices for tobacco, electricity and gas. A consideration working in the other direction is increased competition in the retail sector, particularly from new entrants. This is likely to continue for a while yet. The low wage increases are also contributing to the subdued inflation outcomes.

One factor that is influencing the outlook for both economic growth and inflation is the exchange rate. The recent appreciation means lower prices for imported goods and it is weighing on the outlook for domestic output and employment. Further appreciation, all else constant, would cause a slower pick-up in inflation and slower progress in reducing unemployment.

Since August last year, the Reserve Bank Board has held the cash rate steady at 1.5 per cent. This setting of monetary policy is supporting employment growth and a return of inflation to around its average rate of the past couple of decades. The Board is seeking to do this in a way that does not add to the medium-term balance-sheet risks facing the economy. It has been conscious that a balance needs to be struck between the benefits of monetary stimulus and the medium-term risks associated with rising levels of debt relative to our incomes.

As a result, the Board has been prepared to be patient. The fact that the unemployment rate has been broadly steady has allowed us this patience. We have preferred a prudent approach, which is most likely to promote both macroeconomic and financial stability consistent with the medium-term inflation target.

The Reserve Bank has continued to work closely with APRA through the Council of Financial Regulators to address financial risks. Our assessment is that the various supervisory measures – including a focus on lending standards and placing limits on investor and interest-only lending – will work to strengthen household balance sheets over time. Financial institutions have adjusted to the new requirements and these requirements are contributing to the resilience of the system as a whole.

Business Lending Stirs

The ABS data on lending finance released today for Jun 2017, provides the last piece of the lending jigsaw puzzle. Here is the overall picture, in one chart.

The key take outs are that proportion of lending for housing is falling, whilst the proportion for business lending is rising. The share of lending for investment property fell slightly.

The total value of owner occupied housing commitments excluding alterations and additions rose 0.5% in trend terms.

The trend series for the value of total personal finance commitments fell 1.8%. Fixed lending commitments fell 2.6% and revolving credit commitments fell 0.5%.

The trend series for the value of total commercial finance commitments rose 1.8%. Fixed lending commitments rose 1.8% and revolving credit commitments rose 1.8%. This includes lending for investment housing purposes. We separate that out in the chart.

The month on month movements, depicted below, show a rise in business lending unrelated to housing by 3%, whist lending for investment housing fell 0.85% month on month. So, perhaps, finally, we see lending by business beginning to gain momentum! This is needed for sustainable growth. The yellow triangles show the % change (reading the scale on the right), whilst the value is shown by the blue bars (reading the sale on the left).

The bulk of lending for investment housing still came from NSW, then VIC, where the markets are still hot.

There were a number of revisions to earlier months data, which the ABS said was a result of improved reporting of survey and administrative data. These revisions have affected the following series:

Commercial Finance for the periods between March 2017 to May 2017.
Personal Finance for the periods between March 2017 to May 2017.
Investment housing finance for the month of April 2017