Welcome to the Property Imperative weekly to 8th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
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The big news this week was that after Westpac blinked last week, ANZ then CBA both lifted their standard variable mortgage rates for existing borrowers by 16 and 15 basis points (or 0.16% and 0.15% respectively). This was exactly as I had predicted. They both blamed the rising interbank funding rates, claimed that mortgage rates were still lower than three years ago, and that though it was regrettable, the impact would be minimal.
Let’s be clear, existing borrowers are being caned, and whilst some may be able to shop around for a new loan at those attractive teaser rates, many cannot so they are being milked. And there are more rises to come in my opinion.
To put this in perspective, on a typical mortgage this represents an extra $35 a month, but if you are sitting on a big Sydney or Melbourne mortgage it could be much more. We discussed the shift in rates on our posts this week, including “More Bank’s Follow Suit”, and our discussions with people on the industry front line, including Sally Tindal from RateCity and Mandeep Sodhi from HashChing.
NAB of course has not followed the herd so far, so it will be interesting to see whether they will. But the main point to make is this is just another burden on borrowing households at a time when according to our surveys, household finances remain under pressure.
On Tuesday, leaving the cash rate unchanged, the RBA said” One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high”; and last week “the main risks to financial stability will most likely continue to relate to credit quality. Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue”.
Our analysis of household finance confirms this and the latest responsible lending determinations, where Westpac agreed to pay a very small $35m civil penalty also highlight the issues. Their mortgage hikes will more than cover the penalty.
So no surprise to see mortgage stress continuing to rise. Across Australia, more than 996,000 households are estimated to be now in mortgage stress (last month 990,000). This equates to 30.5% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 59,000 households risk 30-day default in the next 12 months. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead. You can watch our show “August 2018 Mortgage Stress Update” for more details. We also did a number of radio interviews on this.
And have no doubt the credit crunch continues to intensify. The latest ABS lending data for July showed a fall in investor mortgages, and a slowing of first time buyers and owner occupied lending. In fact, apart from a small rise in construction finance, all indicators were down. We discussed this in our post “More Negative Lending Indicators”.
Pile on the reduction of borrowing power of households by as much as 40%, the number of refinanced applications being rejected, still running at 40%, so creating mortgage prisoners now that the banks are finally obeying the lending law, plus property investors now seeing capital being eroded, all this combined means lending will be compressed, and this in turn will drive home prices lower. The latest data shows both home prices and auction clearances are still failing.
One other observation worth making. Though hardly reported, the ABS released their June 2018 data relating the securitised loans in Australia “Assets and Liabilities of Australian Securitisers“. It showed that in the past year residential mortgages securitised rose by 8.9% to $108.8 billion. Overall securitised assets rose by 8.2%, which shows mortgage assets grew stronger than system.
This reflects what we have seen in the market with non-bank and some bank lenders using this funding channel. The rise of non-bank securitisation is a significant element in the structure of the market. As major lenders throttle back their lending standards, higher risk loans are moving into the non-bank and securitised sectors. Of course a decade ago it was the securitised loans which took lenders down in the US and Europe.
The growth we are seeing here is in our view concerning, bearing in mind the more limited regulatory oversight. Plus. on the liabilities side of the balance sheet, around 90% of the securities are held by Australian investors, a record.
This includes a range of sophisticated investors, including super funds, wealth managers, banks, and high-net worth individuals. But the point to make is that if home price falls continue, the risks in the securitised pools will grow, and this risk is fed back to the investor pools.
This is yet another risk-laden feedback loop linked to the housing sector, and one which is not fully disclosed nor widely understood. The fact that the securitised pools are rated by the agencies does not fill me with great confidence either!
Even the broader economic data, which showed that Australian economy grew 0.9 per cent in seasonally adjusted chain volume terms in the June quarter 2018, showed that new dwelling investment continued to prop up the numbers, along with government and domestic consumption.
But the two key, and concerning trends are a significant fall in the households’ savings ratio (as they dip into them to support their spending), and the slower GDP per capita growth, which shows that much of the GDP momentum is simply population related. This is based in trend data.
Plus, real national disposable income per capita fell by 0.2% over the quarter though it was up 2.1% over the year. Worse, the real average compensation per employee fell another 0.4% in the year to June 2018 to be 4.2% lower since March 2012. And average remuneration per employee rose by only 1.7% in the year to June, so remains underwater after adjusting for inflation (2.1%). Households remain under the gun. Economist John Adams and I discussed this in our show “A Disastrous Set of Results”.
Of course GDP is a really poor set of measures by which to assess the economy in any case….
One emerging question is the real risks in the banks’ mortgage portfolios as home values fall, and poor lending practices are revealed.
UBS said this week in their latest Australian Banking Sector Update, which involved an anonymous survey of 1,008 consumers, there was a “sharp fall” in the number of “misstatements” reported in mortgage applications over the fourth quarter of 2018 (4Q18). The survey revealed that 76 per cent of respondents reported that the mortgage applications were “completely factual and accurate”, up from 65 per cent throughout the first three quarters of 2018. According to UBS, the improvement in lending standards was largely driven by the scrutiny placed on the industry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and not off the back of regulatory intervention.
Despite the improvement, UBS claimed that it’s concerned about the 10 per cent of respondents that reported that their broker-originated applications were “partially factual and accurate”, which it considers a “low benchmark”. Moreover, UBS stated that it continues to find that a “substantial number of applicant’s state that their mortgage consultant suggested that they misrepresent on their mortgage applications”. According to the figures, of those who misstated their broker-originated loan applications, 40 per cent said that their broker suggested that they misrepresent their application, which UBS claimed implies that 15 per cent of all mortgages secured via the broker channel were “factually inaccurate following the suggestion of their broker”.
“This is concerning given the heightened scrutiny on the industry, in particular following findings of broker misconduct and broker fraud in the royal commission,” UBS added.
There was an important video out this week, courtesy of the CEC in which Denise Brailey of the Banking and Finance Consumers Support Association (BFCSA), a real consumers champion, discussed mortgage fraud in the system. To cut to the chase, she says that many lenders deliberately built systems and processes to trick customers into loans they should never had got. The central issue is the way the Loan Application Form (LAF) was used. But she also touches on the cultural issues and fake statistics endemic in the system. You can watch the whole story. It is frankly disturbing.
Add to the substantial “liar loans” issue, the fact home price values continue to fall, and funding costs are rising, and we conclude the risks to the banking system are significant. Yet the regulators and bank auditors are not in our view doing their job. As more of this is exposed, expect bank share prices to slide further.
The ASX 200 was down 0.27% on Friday, to 6,144, having reacted to the latest GDP numbers and the bank mortgage repricing. CBA ended the week at 70.5 up 0.53% but was down on recent numbers. Westpac ended at 27.80 down 0.14% and only slightly above the low of 27.30. ANZ was also lower at 28.40, down 0.46%. Expect more downside, as the Royal Commission reports, and more mortgage related issues emerge.
The Aussie fell against the US Dollar, down 1.29% to 71.05 A New Low. While AUD/USD’s descent was not as potent as last week, the pair breached under the December and May 2016 lows below 71.452. Technically, its now cleared to descend to the January 2016 lows at 68.274.
Indeed, not only broken through 71.452, but it also fell under a descending range of support which helped control its decline since May. However, the pair stopped just short of the 61.80% Fibonacci extension at 70.888 which might as well stand as immediate support going forward.
The push through range support also marked the pair’s single largest decline in a day since August 23rd which was over two weeks ago. If the dominant downtrend in AUD/USD once again resumes, a push under 70.888 exposes the 78.6% Fibonacci extension at 70.092.
Meanwhile, near-term resistance is a combination of the December/May 2016 lows and the descending range. Pushing above 71.60 then opens the door to testing the 38.2% extension at 72.007 followed by the 23.6% level at 72.699. With that in mind, the descent through key support levels prolongs the bearish AUD/USD technical outlook.
Moody’s said this week The U.S. economy and financial markets have been pulling away from the rest of the world. Of special importance is the lagging performance of emerging market economies, which, not too long ago, had been the primary driver of world economic growth. The combination of higher U.S. interest rates and the relatively stronger performance of the U.S. economy has triggered a notable and potentially destabilizing appreciation of the dollar versus a host of emerging market currencies.
Excluding the collapse of Venezuela’s currency, other noteworthy appreciations by the dollar since yearend 2008 include the dollar’s 102% surge against Argentina’s peso, the 74% advance in terms of Turkish lira, the 25% climb versus Brazil’s real, the 24% ascent against South Africa’s rand, the 15% increase versus India’s rupee, the 10% climb in terms of Indonesia’s rupiah, and the 11% increase vis-à-vis Pakistan’s rupee.
Emerging market countries having especially large current account deficits relative to GDP are vulnerable to dollar exchange rate appreciation. The funding of large current account deficits requires large amounts of foreign-currency debt that is often denominated in U.S. dollars. As the dollar appreciates vis-à-vis emerging market currencies, it becomes costlier to service dollar-denominated debt in terms of emerging market currencies.
So to the US markets, where the Dow Jones Industrial Average fell 0.31%, to 25,917 while the S&P 500 ended at 2,871, down 0.22%. On the corporate news front, Tesla stock dropped 6.3% after Chief Accounting Officer Dave Morton resigned as the “the level of public attention placed on the company,” prompted him to rethink his future. It ended at 263.24
Gripped by fear the United States and China are heading further down the path toward a full-blown trade war, investors reined in their bets on riskier assets like stocks, pressuring the broader averages. With the administration already expected to impose tariffs on $200 billion worth of goods from China, Trump upped the ante on trade, threatening levies on another $267 billion of goods. The levies on the list of goods could reportedly cover a wide range of products from popular tech companies, including Apple, according to Bloomberg. Apple later confirmed in a letter that the tariffs would affect the Apple Watch, AirPods and Apple Pencil.
“It is difficult to see how tariffs that hurt U.S. companies and U.S. consumers will advance the Government’s objectives with respect to China’s technology policies,” Apple said in the letter.
Apple Inc. fell 0.81% to 221.30 fell on the news, exerting further pressure on the beaten-up tech sector. The NASDAQ slide further, down 0.25% to 7.903 and twitter continued its fall, down 1.04% to 30.49 as a number of the big social media tech stocks were hit after testaments to congress on election interference and moderating content, including charges of censorship.
There were also no new developments as Canada negotiated with the U.S. about a revamp of NAFTA.
The U.S. employment report for August augured strong economic growth. But markets were spooked by an acceleration in wage inflation, which boosted expectations for the Federal Reserve to hike rates twice more this year. Beyond the creation of 201,000 jobs in August and a jobless rate holding near 18-year lows, at 3.9% the focus was on the 2.9% increase in wage inflation, its fastest since April 2009. Although a quarter-point rate hike was already fully priced in for the Sept. 25-26 Fed meeting, odds for an additional increase in December rose to about 76% compared to 70% ahead of the report.
Energy, meanwhile, did little to stem losses in the broader market after ending the day roughly unchanged, as oil prices were pressured by a rising dollar and concerns about oil-demand growth, amid rising trade tensions. On the New York Mercantile Exchange crude futures for October delivery settled at $67.84 a barrel, towards the top the price range. Gold was down 0.21% to 1,202, driven by strength of the US dollar, despite rumours of buying by a number of central banks, including China.
Bitcoin dropped on Friday down 1.31% to 6,420, having plunged from 7385 to 6830, or 7.5%, on Wednesday in reaction to a Business Insider report that Goldman Sachs as decided to drop a year-ago decision to create a crypto-currency trading desk. Apparently Goldman is “uncertain” about the regulatory environment.
Before I go, a couple of reminders, first is that next Sunday 16th September Nine’s 60 Minutes will be running a segment on the outlook for the Property Market. You may recall I was in Sydney a couple of weeks back for a recording. A couple of days ago they came back to get some additional material, as the market is evolving so quickly. It will be interesting to see how they tell the story.
Next we will be launching our new series on the capital markets next week, where we will look at the concepts of the time value of money, bonds and derivatives. Given the size of these markets, and the risks embedded within them, this will be an important series.
And finally, our next live stream Q&A event is scheduled for Tuesday 18th September at 20:00 Sydney, you can set a reminder and also send me questions ahead of time. We will be looking in detail at the property market in the session. I look forward to your questions in the live chat.
If you value the content we produce please do consider joining our Patreon programme, where you can support our ability to continue to make great content.
