Digital Finance Analytics (DFA) Blog – Page 636

East Coast States Top of the Pile – CommSec

The latest CommSec State of the States Report, to end June 2017 shows continued buoyancy in the in NSW and VIC, as well as Canberra.

The data shows housing finance in Canberra is growing at a faster rate than anywhere else in Australia. The number of new mortgages there grew 22.4% above the long term (decade) average, streets ahead of New South Wales, (15%) and Victoria (14.3%0. Plus ACT has a strong construction rating, growing at a rate 21.4% above the decade average, only behind NSW. In fact ACT was the only state or territory to increase construction levels compared to 2016!

NSW has retained its top rankings on both retail trade and dwelling starts. NSW is second on five of the eight indicators. The lowest NSW ranking is third on construction work.

Victoria has lifted from third to second on the economic performance rankings with momentum provided by its leading position on population growth. Victoria is second on two indicators and in third spot on another two indicators.

The ACT has dropped from second spot to third on the rankings. The ACT is top-ranked on housing finance, second on dwelling starts and in third spot on another three indicators. But the ACT has slipped to seventh on the unemployment ranking.

There is little to separate four of the other economies with a further gap to Western Australia.

Tasmania retains its position in fourth spot but is joined by Queensland. And South Australia has edged its way into sixth on the performance rankings from the Northern Territory.

The highest positions for Tasmania are third on population growth and unemployment. Queensland is benefitting from strong export growth which will boost overall growth of Gross State Product (economic growth). Exports are growing at a 56 per cent annual rate.

South Australia is now top-ranked on business investment. But the next best ranking is fifth on dwelling starts and housing finance.

The Northern Territory eases from sixth to seventh position on the economic performance rankings.

The Territory is still ranked first on construction work done, unemployment and economic growth. But on forwardlooking indicators like population growth, housing finance and home starts the Territory lags other economies.

The economic performance of Western Australia continues to reflect the ending of the mining construction boom. But unemployment has eased over the last three months.

Ideally Gross State Product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. And we have previously used state final demand (household and business spending) and exports less imports to act as a proxy for GSP. But the Bureau of Statistics has ceased calculation of state trade data in real terms. So we now use state final demand plus trade in nominal terms and rolling annual totals are used to remove seasonality.

The Northern Territory has retained top spot on economic growth. Economic activity in the ‘Top End’ is 29.4 per cent above its ‘normal’ or decade-average level of output.

Next strongest is NSW, with output 25.3 per cent higher than the decade average level of output. Then follows the ACT (up 25.2 per cent) from Victoria (23 per cent).

At the other end of the scale, economic activity in Tasmania in the March quarter was just 10.2 per cent above its decade average while Western Australian activity was up 10.8 per cent, behind South Australia (up 14.6 per cent) and Queensland (up 17.5 per cent).

The Northern Territory also has the fastest nominal annual economic growth rate in the nation, up by 10.4 per cent on a year ago, ahead of the ACT (up 7.3 per cent), NSW (up 6.9 per cent) and Queensland (up 5.9 per cent).

The weakest nominal annual growth rates are in South Australia (up 1.6 per cent) and Tasmania (up 1.9 per cent).

In terms of economic growth, if trend State Final Demand in real terms is used, comparing the latest result with decade averages reveals some subtle changes in the rankings. Queensland performs better using the nominal data including trade due a strong lift in exports. In the year
to March, Queensland exports were up 56 per cent on a year ago. Similarly Western Australian exports were up by 27 per cent on a year ago.

Will Mortgage Rates Rise Further? – The Property Imperative Weekly 22 July 2017

How much will mortgage rates rise, and when? Welcome to the latest edition of the Property Imperative Weekly, our digest of important finance and property news.

Today we are looking back over the week to 22 July 2017. Banks, Mortgage Rates and Household Finances were all in the spotlight.

We start with APRA’s announcement that they will require banks to lift their capital ratios over the next few years, to ensure they are, to quote the Financial System Inquiry “Unquestionably Strong”. APRA focussed on the CET1 ratio, and they chose to take a long-term, through-the-cycle approach, rather than tying capital ratios to the top quartile of international banks.

Major banks will be required to hold an additional 150 basis points by 2020, whilst those on the standard capital approach, typically, smaller banks, will need a 50 basis point lift. In fact, most regional banks are already operating well above the target minimums, and the majors have been lifting their capital already, with some like ANZ likely to be at the required levels, whilst others, like CBA will need to bulk up, either using dividend re-investment plans, or by issuing more capital. It does tilt the playing field slightly towards the smaller guys, but those who are investing big to migrate to the advanced IRB capital method will be a bit miffed.

APRA did not address the question raised by the Basel Committee and the new international framework still in the works, which is likely to raise internal-ratings based risk weights for investor mortgages and mortgages with high loan-to-value ratios. This change would further add to Australian banks’ capital needs.

Two points to make on all this. First, APRA has come out with a relatively small lift and below the expectations of many analysts, which is one reason why the bank stocks rose this week. It had all been well signalled. Second, APRA says the net impact will be around 10 basis points on income, and they flag this may be recovered from borrowers or from reduced dividends. If all of this was applied to mortgage portfolios, we think an uplift of 20 basis points or more would be needed. In practice there are so many moving parts in the banks treasury operations, we will never be able to isolate the impact of a single factor. But it does put more pressure, not less, on future mortgage rates

Also this week, the RBA released the minutes of their July meeting. It contained on interesting discussion on what the neutral interest rate in Australia at the moment. The “neutral” official cash rate they estimate is 3.5 per cent – a full 200 basis points above where the cash rate is now. This has two implications, first the current settings are stimulatory, and second, it was taken by many as hinting that rates will rise in the months ahead. The media spoke about a 2% rise in mortgage rates, coming soon.

We have been highlighting for some time now the current cash rate will rise at some point and the RBA language certainly reduces the likelihood of a further cut. How soon a rise will hit though is uncertain, with Malcolm Turnbull on one hand warning households that they should prepare for higher rates, whilst on the other, later in the week, Deputy Governor Guy Debelle seemed to be hosing down expectations of a rise anytime soon. He also indicated that the neutral cash rate is probably lower now than in the past, despite a trend towards rising rates elsewhere.

All of this may be confusing, but our perspective is the next move to the cash rate will be up, not down, and it could come anytime in the next few months, especially if inflation rises, and the growth in employment, as reported this week continues. What this means is that households do need to start planning for higher future rates, and we know from our mortgage stress work that around a quarter of mortgage holders have no wriggle room. Personal insolvencies have risen in the past year.

Whilst the current round of bank led mortgage repricing may have abated – there were no significant hikes for the first time for weeks – we do not think this is the end of rate lifts.

We think there are three groups of households who should be taking great care just now.

There are some amazing offers around for first time buyers, and lenders are falling over each other to try and attract them. This is because banks need new loans to fund their growth. But these buyers should beware. They are buying in at the top of the market, when rates are low. Banks have tightened their underwriting standards, but still they are too lax. Just because the bank says you can afford a loan does not mean it is the right thing to do. Any purchaser should run the numbers on a mortgage rate 3% (yes 3%) higher than the current rates on offer. If you can still afford the repayments, then go ahead. If not, and remember incomes are not growing very fast – best delay.

Second, there are people with mortgages in financial difficulty now. Well over 24% of households do not have sufficient cash-flow to pay the mortgage and other household expenses. The temptation is to use the credit card to fill the gap – but this is expensive, and only a short term fix. Households in strife need to build a budget (less than half have one) so they know what they are spending, and start to cut back. Talk to your lender also, as they have an obligation to assist in cases of hardship. And be very careful about refinancing your way out of trouble, it so often does not work.

Third there are property investors who are seeing rental incomes and mortgage repayments moving in opposite directions. As a result, despite tax breaks, investment property looks a less good deal. Of course recent capital gains are there – and some savvy investors are selling down to lock in capital value – but be careful now. New property investors are in for a shock as mortgage rates rise further. And multiple investors, are most at risk. Should property values decline, then this will mark the real turning point; but we think the investment property party may be over.

Cutting to the chase, mortgage rates will continue to rise, but the speed of such increases is hard to predict.

Next, the noise about mortgage broker commissions continued with consumer groups reinforcing their view that brokers are conflicted and current commission structures mean consumers are not getting the best outcomes, whilst industry associations continue to rubbish the criticism, and argue that brokers help to propagate competition in the mortgage market, and mortgage rates would be higher without brokers.

We think the right route is to reinforce disclosure. If brokers were to fully disclose their commissions, consumers could make a more informed choice. Some may choose to go with brokers who charge an advice fee, others may run with those offering the current “free” advice in return for payments from lenders. Mortgage brokers do actually offer a valuable service and should be remunerated for their efforts, but conflicts of interest which beset the current arrangements according to ASIC must be addressed. We are not sure the current industry led committee approach will get to the right outcome.

Finally, we published our latest household surveys which shows that whilst there are segmental movements in play, overall demand for property remains intact, despite rising mortgage interest rates and concerns about stalling income growth.

Results from our latest 52,000 survey show that first time buyers are being encouraged by the more generous first home owner grants on offer in several states. On the other hand, the relative benefit of home purchase relative to renting has reduced.

The biggest changes in the barriers first time buyers are experiencing relate to the availability of finance, whilst concerns about future interest rate rises, and rising costs of living reduced a little compared with our May results. Overall first time buyer demand is up.

Turning to property investors, the barriers to purchase are changing with a rise in those concerned about rising mortgage interest rates and availability of finance. The reasons to transact have shifted, with a significant rise in those saying they were driven by tax benefits (both negative gearing and capital gains) whilst there was a fall in those looking to appreciating property prices and low finance rates. Overall, investor demand is down a bit.

Another important group are those refinancing. After a strong swing in 2016 to get a better loan rate, there has been a rise in those seeking to reduce their monthly repayments.

So plotting the change of transaction intention over the next 12 months, we see a significant fall in both portfolio and solo property investors, but a rise in first time buyer purchasers expecting to transact.

Finally, we see that in relative terms, there is a fall in the proportion of property investors expecting to see home prices rising in the next 12 months, whilst first time buyers are a little more positive, and there has been little change in expectation across our other segments.

Putting all this together, we think demand for finance, and for property will remain quite strong, and on this read, it is unlikely home prices will fall much at all in the major eastern state markets. Other states are more at risk of a fall, which once again underscores the diversity in the market across Australia. As a result, lenders will still be able to write more business, though the mix is changing. But affordability will remain a challenge.

Auction Results 22 July 2017 Remain Firm

The preliminary results from Domain show a continuing trend, with slightly lighter volumes, but strong preliminary clearance rates. Melbourne continues to lead the main centres, in terms of volume, but Sydney has a higher clearance rate. Rates are higher than this time last year.

Brisbane achieved 55% on 81 listings, Canberra made 72% from 36 and Adelaide 69% of 62 listed.

New Capital Requirements Will Strengthen Australian Banks – Fitch

The new higher target set for Australian banks’ common equity Tier 1 (CET1) ratios will support their credit profiles and bolster the banking system’s resilience to downturns, says Fitch Ratings. The four major banks should all be able to meet the requirements comfortably through internal capital generation and existing dividend re-investment programmes.

The Australian Prudential Regulation Authority (APRA) has increased the minimum CET1 ratio from 8% to 9.5% for the major banks – ANZ, CBA, NAB and Westpac – and has given them until January 2020 at the latest to meet the new targets. The capital requirements have been raised in response to the recommendation by a 2014 financial system inquiry (FSI) that Australian banks’ capital ratios should be “unquestionably strong”. The decision to focus on CET1 and take a long-term, through-the-cycle approach, rather than tying capital ratios to the top quartile of international banks, was in line with our expectations.

The major banks already have CET1 ratios that are 150bp-200bp above the current minimum in anticipation of the changes. This capital surplus is likely to fall to a more normal 100bp as the new standards are implemented, which implies CET1 ratios will rise to at least 10.5%, from an average of around 9.5% at end-2016.

It is possible that the major banks will issue fresh equity if they see a benefit in raising the extra capital ahead of schedule. There is also a chance that lending rates could be increased to offset the cost of holding more capital. However, the new capital requirements are unlikely to create significant pressures for any of the four major banks, with APRA estimating that the additional capital could be raised by the deadline without any changes in business growth plans or dividend policies.

The minimum CET1 ratio for smaller banks using standardised models is set to rise by about 50bp, but most already run surpluses above the current requirement and are unlikely to need additional capital.

APRA had hoped that the FSI recommendation could be addressed together with revisions to the risk-weighting framework that are currently being debated by the Basel committee. The new international framework is likely to raise internal-ratings based risk weights for investor mortgages and mortgages with high loan-to-value ratios. This change would further add to Australian banks’ capital needs, but strengthened capital requirements for mortgage lending are already part of APRA’s future regulatory plans to ensure banks are unquestionably strong – and it expects any further capital requirements to be met “in an orderly fashion”.

The paper that APRA released to announce the new minimum capital ratios also noted that capital is just one aspect of creating an unquestionably strong banking system, with liquidity, funding, governance, culture, risk management and asset quality also important. APRA reiterated that its supervisory philosophy will continue to assess all of these factors – as well as the operating environment – when assessing bank risk profiles. It also highlighted improvements since the 2008 global financial crisis in some of these areas, such as liquidity and funding.

RBA Cools Arder On Interest Rate Rises

Speaking at CEDA today, RBA Deputy Governor Guy Debelle seemed to be intent on hosing down expectations of interest rate rises (in stark contrast to the RBA minutes earlier this week). He suggests that even if the Fed continues to lift their benchmark rate, it does not automatically follow we will see a rise here in Australia.

The neutral interest rate provides a benchmark for assessing the current stance of monetary policy. If the real policy rate – that is, the cash rate less inflation expectations – is below the neutral rate, then monetary policy is exerting an expansionary influence on the economy. If the real policy rate is above the neutral rate, then monetary policy is exerting a contractionary influence on the economy. The neutral rate is often associated with the turn of the 20th century Swedish economist Knut Wicksell and was picked up by Keynes. The previous Governor Glenn Stevens discussed the neutral rate in the Australian context more than a decade ago.

There was a discussion of the neutral rate at the most recent Board meeting, as detailed in the minutes of the meeting released earlier this week. No significance should be read into the fact the neutral rate was discussed at this particular meeting. Most meetings, the Board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate.

The neutral interest rate aligns the amount of saving and investment in the economy at a level that is consistent with full employment and stable inflation. That is, the neutral rate is where the policy rate would settle down in the medium term when the goals of monetary policy are being achieved. Accordingly, most explanations of the neutral interest rate start with the factors that influence saving or investment. Developments that increase saving will tend to lower the neutral interest rate; developments that increase investment will tend to raise the neutral interest rate.

There are three main factors that, in my view, affect the neutral rate in Australia:

the economy’s potential growth rate

the degree of risk aversion

international factors.

One of the major determinants of the neutral interest rate is the economy’s potential growth rate. In an economy with a high potential growth rate, because it has strong productivity or population growth, the expectation of increased future demand provides a strong incentive for firms to invest and the prospect of higher real incomes reduces the incentives of households to save. Both of these forces will tend to raise the neutral interest rate. The economy’s potential growth rate tends to evolve quite slowly, and hence we should expect the neutral interest rate also to change only very gradually as a result of this influence.

Another influence on the neutral rate is the risk appetite of firms and households and the way risk has been priced into market interest rates. This influence can move rapidly. When risk aversion rises, firms require more compensation to make long-term investments with an uncertain return. At the same time, the increased risk aversion will cause households to save more. This lowers the neutral interest rate, as any given level of the policy rate is less expansionary because of the increased risk aversion. If there is an increase in risk aversion, it is also likely that there will be a widening in the spreads between the policy rate and market interest rates that determine the behaviour of households and firms. A given market interest rate will correspond to a lower policy rate if spreads widen. This will further lower the neutral interest rate.

Finally, in an open economy, where capital can move reasonably freely across borders, global interest rates will also influence domestic interest rates. This means that trends in overseas productivity growth, demographics and risk appetite will affect the neutral interest rate in Australia.

So how do we calculate the neutral interest rate? It is not directly observable. There are a number of different ways of estimating it from the behaviour of market interest rates and other economic variables. The shaded area in Graph 4 shows a range of plausible estimates for the neutral real interest rate obtained using a number of different approaches. As you can see, there is a reasonable amount of uncertainty about the exact level of the neutral rate.

Graph 4 also shows the (ex post) real cash rate calculated by deducting the trimmed mean inflation rate from the cash rate. When the real cash rate is above the neutral rate, the monetary policy stance is contractionary. When it is below, the stance is expansionary. As you look at the graph, you can see that this lines up with most assessments of the stance of monetary policy over the past 25 years. It suggests that monetary policy was clearly expansionary in the early 2000s, in 2008 and for the past five years or so.

Graph 4

The estimates of the neutral rate suggest that it was fairly stable for much of the 1990s up until 2007. In Glenn Stevens’ speech that I mentioned earlier, he noted that the neutral real cash rate at the time (2004) was probably somewhere between 2½ per cent and 3¾ per cent. This is consistent with the estimates shown here.

The graph shows a clear step down in all the estimates of the neutral rate in 2007/08 and that it has probably drifted lower since. It suggests that Australia’s neutral interest rate is currently around 150 basis points lower now than in 2007. This decline can largely be accounted for by a slowdown in potential growth and an increase in risk aversion.

The Bank estimates that Australia’s long-run potential growth rate has declined by around ½ percentage point from the mid 1990s. Part of the decline reflects slower labour force growth. The rest of the decline reflects a slowdown in trend productivity growth, which is common to many advanced economies. This slowdown in potential growth has probably translated about one-for-one into a decline in the neutral rate, though the decline has been gradual.

The sharper decline in the neutral rate in 2007/08 can be most easily related to the sharp increase in risk aversion with the onset of the financial crisis. This increased risk aversion probably accounts for most of the large fall in estimated neutral interest rates in Australia and abroad that occurred at this time. This heightened risk aversion has also contributed to an increase in spreads between the cash rate and market interest rates, which should have a roughly one-for-one effect on the neutral interest rate.

At the same time, increased risk aversion means that companies are investing less than one would expect given financing conditions and the economic outlook. Households are less willing than in the past to borrow in order to fund consumption. Although these effects are hard to quantify, they would both lower the neutral interest rate.

To return to a global perspective, Graph 5 compares the average estimate of the neutral interest rate for Australia to a range of international estimates. On average, the neutral interest rate estimates for Australia are similar to those of the United Kingdom and Canada, but higher than those for the United States and the euro area.

As is the case for Australia, estimates of neutral interest rates in other developed economies were fairly stable until around the mid 2000s and have fallen since then. The decline in the neutral rate was particularly sharp in 2007/08 and, again, most likely reflects the increase in risk aversion at the onset of the financial crisis.

Graph 5

Because trends in determinants of the neutral interest rate, such as productivity growth and risk appetite, tend to be highly correlated across advanced economies, it is hard to distinguish between international influences and domestic influences. But it is very likely that global factors have contributed to a decline in Australia’s neutral policy rate.

So in short, the policy rate in Australia is low because the neutral rate is lower than it used to be as a result of both international and domestic developments. This means that the current (nominal) cash rate setting of 1½ per cent today is not as expansionary as a cash rate of 1½ per cent would have been in the 1990s or the first half of the 2000s.

Looking ahead, the neutral policy rate both here in Australia as well as in other advanced economies is likely to remain lower than it was in the past. It is plausible that the degree of risk aversion might abate in time, which would see the neutral rate rise from its current low level. But other developments contributing to the lower neutral rates, particularly lower potential growth rates, could be more permanent.

Property Demand, Rotating, Not Falling

The latest results from the Digital Finance Analytics Household Surveys, show that whilst there are segmental movements in play, overall demand for property remains intact, despite rising mortgage interest rates and concerns about stalling income growth.

Results from the latest 52,000 survey show that first time buyers are being encouraged by the more generous first home owner grants on offer in several states. On the other hand, the relative benefit of home purchase relative to renting has reduced.

Turning to property investors, the barriers to purchase are changing with a rise in those concerned about rising mortgage interest rates and availability of finance.

The reasons to transact have shifted, with a significant rise in those saying they were driven by tax benefits (both negative gearing and capital gains) whilst there was a fall in those looking to appreciating property prices and low finance rates. Overall, investor demand is down a bit.

Another important group are those refinancing. After a strong swing in 2016 to get a better loan rate, there has been a rise in those seeking to reduce their monthly repayments.

Finally, we see that in relative terms there is a fall in the proportion of property investors expecting to see home prices rising in the next 12 months, whilst first time buyers are a little more positive, and there has been little change in expectation across our other segments.

Putting all this together, we think demand for finance, and for property will remain quite strong, and on this read, it is unlikely home prices will fall much at all in the major eastern state markets. Other states are more at risk of a fall, which once again underscores the diversity in the market across Australia. As a result lenders will still be able to write more business, though the mix is changing.

Affordability may still deteriorate despite a ‘cooling’ housing market

From The New Daily.

Much is being made of a cooling in key property markets, but a senior analyst warns that even a halving of price growth probably won’t help first home buyers.

Louis Christopher, head of SQM Research, said his company’s prediction of 6 to 10 per cent national price growth in 2017 was still looking “intact”, and that even much slower 3 per cent growth in 2018 would be unhelpful.

“Overall, I think affordability will still deteriorate a little in the second half of the year, and that will particularly be the case for Melbourne, where I don’t see a lot of evidence right now of a major slowdown occurring,” he told The New Daily.

“We haven’t made a forecast yet for 2018, but if we were to see smaller price rises but still, say, in excess of 2 to 3 per cent, you would still see affordability deteriorate, assuming interest rates stay where they are.”

Property prices were a huge topic of discussion this week, after Deloitte Access Economics said in its annual business outlook that “gravity may soon start to catch up with stupidity in housing markets”.

UBS also predicted that national price growth would slow to between zero and 3 per cent in 2018.

Treasurer Scott Morrison has even declared victory, saying recently that the Coalition government had achieved a “soft landing” for prices.

In May and June, plenty of data suggested that price growth slowed, auction clearance rates fell and the writing of new home loans, especially to investors, moderated.

But what really matters to first home buyers is price growth, and there is little evidence that affordability has stopped deteriorating, even if prices aren’t growing as ‘stupidly’ anymore.

As seen in the chart above, price growth according to CoreLogic’s measure is only barely moderating, if at all.

And according to SQM Research, Melbourne prices are growing strongly, even if Sydney is showing some weakness.

The blue lines are the asking prices for houses, the purple for three-bedroom houses, red for units and orange for two-bedroom units.

Domain also reported that the national median house price went up 1.7 per cent in the June quarter, and that this pushed the median price to a new record high of $818,416, which was 10 per cent higher than at the same time last year.

Mr Christopher attributed the recent slowdown to APRA’s regulatory intervention, and a blow to investor confidence from the federal budget’s surprise crackdown on negative gearing, via a restriction on tax deductions for plant and equipment depreciation.

“It basically turned thousands of properties from being cashflow positive after tax to being cashflow negative, and that was a direct hit upon negative gearing and fitted in with this view of the Libs being Labor-lite.”

However, prices in the two biggest markets of Sydney and Melbourne appear to be rebounding, and annual price growth rates are holding steady. According to Corelogic, annual price growth for the five capital cities was still sitting around 9 per cent, and monthly price growth for July was tracking around 2 per cent for Sydney and Melbourne.

Even the auction clearance rate is improving slightly. Nationally, the capital city clearance rate was 69.4 in the week ending July 16, up from 68.4 the week before.

Mr Christopher also noted that stamp duty concessions for first home buyers in Victoria and New South Wales were likely to offset any slowdown.

“Basically, it means a saving for a first home buyer of upwards of $25,000 in each state. That’s pretty big money and that type of saving in the past, through former first home owners grants, have moved the market.”

There is of course a sure-fire way to kill price growth: substantial rate hikes by the Reserve Bank. Mr Christopher said national prices could go backwards if we saw six rate increases in a row.

“If we were to see a 150 basis point rise over two years, that would be enough to create a correction in the national market.”

He also noted that even if national price growth continues, there are bargains to be found in Adelaide, Hobart and Perth.

“I can’t stress enough that it’s very much a mixed market and the national number masks a lot of what is happening on a city-by-city basis.

“It’s focussed on Melbourne and Sydney and look, yes, the majority of the population is in those two large capital cities. But affordability is better elsewhere.”

Mortgage Rate Warnings Get More Strident

More people are now saying that households need to brace for mortgage rate rises. Among the crowd is Malcolm Turnbull who warned households to prepare for interest rates to climb.

It is all a bit late given the level of debt which we have across Australia. As we discussed before, the debt quagmire will really hurt.

It is not that employment is too bad, but incomes are static, costs are rising, and underemployment is the spectre at the feast.

But lets be clear, it is not a financial stability problem, yet. It is highly unlikely the banks will see their mortgage defaults rise that much, because currently many households are still protected by lofty capital gains sufficient to repay the lender. They also have tremendous pricing power, as has been demonstrated in the past few months, with a litany of out of cycle rate hikes. Expect more to come. Their capital base is strong, and rising (and APRA has been light on them). As a result, banks profits will rise – this explains recent stock market moves.

No, the real impact is among households. We think here are three groups of households who should be taking great care just now.

Third there are property investors who are seeing rental incomes and mortgage repayments moving in opposite directions. As a result, despite tax breaks, the investment property looks a less good deal. Of course recent capital gains are there – and some savvy investors are selling down to lock in capital value – but be careful now. New property investors are in for a shock as mortgage rates rise further. And multiple investors, are most at risk. Should property values decline, then this will mark the real turning point; but we think the investment property party may be over.

This will play out over the next couple of years, but the bottom line is simply, mortgages will be more expensive, and households need to prepare now. Turnbull is right.

Trend full-time employment growth continues

Monthly trend full-time employment increased for the ninth straight month in June 2017, according to figures released by the Australian Bureau of Statistics (ABS) today. The trend unemployment rate in Australia decreased by less than 0.1 percentage points to 5.6 per cent in June 2017.

This is good news, in that more people are employment, but of course household income growth is still sluggish and underemployment remains a continuing issue.

Full-time employment grew by a further 30,000 persons, while part-time employment decreased by 4,000 persons, underpinning an increase in total employment of 26,000 persons.

The state by state data (based on original stats) shows an improvement in SA, but a fall in ACT. The smaller states tend to be more volatile.

“Full-time employment has increased by around 187,000 persons since September 2016, with particular strength over the past five months, averaging around 30,000 persons per month,” Chief Economist for the ABS Bruce Hockman said. “Full-time employment now accounts for about 68 per cent of employment, however this is down from around 72 per cent a decade ago.”

Over the past year, trend employment increased by 227,000 persons (or 1.9 per cent), which is the same as the average year-on-year growth over the past 20 years. It has increased since December 2016, when the year-on-year growth was at 0.8 per cent and reflected relatively low employment growth through most of 2016.

The trend monthly hours worked increased by 6.2 million hours (0.4 per cent) to 1,691.5 million hours in June 2017. Most of this increase was hours worked by full-time workers.

The trend unemployment rate in Australia decreased by less than 0.1 percentage points to 5.6 per cent in June 2017.

Trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted number of persons employed increased by 14,000 in June 2017. The seasonally adjusted unemployment rate remained steady at 5.6 per cent, after the May 2017 number was revised up to 5.6 per cent, and the seasonally adjusted labour force participation rate increased to 65.0 per cent.

RBNZ Considers The Australian Connection

One really interesting observation from the recent IMF review of New Zealand’s financial system was the structural inter-dependency with financial services in Australia, not least because much of the banking footprint in NZ stems from Australian parent companies. Now the Reserve Bank in New Zealand has published its response. The Reserve Bank will consider how it can more actively cooperate and coordinate with the Australian Prudential Regulation Authority (APRA) in the on-going regulation and supervision of the large Australian-owned banks.

The IMF recommends a number of steps to strengthen institutional arrangements, define responsibilities, and to clarify the objectives necessary to support the operational independence of New Zealand’s financial regulators. These recommendations cover prudential regulation and supervision, crisis management, and macro-prudential policy.

The IMF notes that the Reserve Bank, as a financial regulator, must have a suitable distance between itself and the executive branch of government. Independence is a necessary pre-condition for optimal policy and supervisory outcomes, albeit this needs to be supported by a robust framework that holds the Reserve Bank accountable to both government and the public.

Cooperation with Australian authorities

The IMF recommends strengthening collaboration and cooperation with the Australian authorities in order to recognise the important interdependencies between the two financial systems. The IMF recognise that there are already well-developed working relationships between the New Zealand authorities and their Australian counterparts.

This is reflected in on-going supervisory contact between the Reserve Bank and its counterpart in Australia, as well as through forums such as the Trans-Tasman Banking Council (TTBC) which is a body comprising various New Zealand and Australian agencies.

Reserve Bank response

The Reserve Bank has already begun the process of reviewing all the relevant findings and recommendations. The initial focus is on the extent to which greater alignment with international orthodoxy – as envisaged in most of the recommendations – might further contribute to the Reserve Bank’s statutory objectives tied to the promotion of a sound and efficient financial system.

The Reserve Bank continues to believe that its three-pillar framework, and an emphasis on self- and market discipline, has served New Zealand well. That said, there are a number of recommendations that, if adopted, may support financial system outcomes and the statutory purpose of the Reserve Bank.

In this regard the Reserve Bank will consider how it can more actively cooperate and coordinate with the Australian Prudential Regulation Authority (APRA) in the on-going regulation and supervision of the large Australian-owned banks.

The Reserve Bank will work with the Treasury to consider those recommendations tied to the ‘institutional boundary’ question in order to preserve and enhance a suitable degree of operational autonomy.

More generally, the Reserve Bank will be closely examining those recommendations that taken together may enhance the three-pillar approach to regulation and supervision. Elements of this model could include more independent verification or validation of information provided by regulated institutions, and a greater use of thematic reviews.

Other elements of this enhanced BAU model could include more clearly articulated (and enforceable) policy requirements, a re-emphasis on conservative and simple regulatory settings, and a more systematic and consistent approach to disclosure in the insurance sector. The review of the bank attestation regime currently in progress is likely to provide some insights into the value of the attestation process, how it could be enhanced and possibly how it could be applied to other sectors the Reserve Bank supervises.

The Reserve Bank will provide quarterly reporting, along with other agencies, to the Minister on progress in implementing FSAP findings and recommendations via CoFR.