Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
A segment broadcast 18 April 2018 discussing the issues raised in the inquiry, and shortcomings of the regulator.
More evidence of bankers behaving badly (on purpose) and regulators “asleep at the wheel”.
And remember the number of financial planners continues to increase..
Later in the evening, Matter of Fact went further into the structural issues arising.
Good segment from the ABC, in which UBS chief economist George Tharenou says house prices are going to fall because the royal commission will make banks lift their lending standards, making it much harder for people to get credit and be able to bid up prices. As we have already said, its all about credit!
A brief segment on Thursday’s programme discussed the Royal Commission in Financial Services Misconduct examination of the mortgage broking industry.
The segment highlighted the significant fees, and the risks of misaligned incentives.
Questions over just who’s interest mortgage brokers act in have reverberated through the $50-billion industry. The broking industry has hit back insisting the customer comes first.
The ABC cited a Western Australian borrower who managed to get mortgages – often interest only loans – for more than a dozen properties without the financial status to service them.
I provided some grabs for the segment, referring to the size of the impending IO loan problem across the country.
Highly relevant in the context of the upcoming Royal Commission hearings which start tomorrow. They just published a background paper on: Everyday Consumer Credit – Overview of Australian Law Regulating Consumer Home Loans, Credit Cards and Car Loans
We contributed to a segment aired last night on irresponsible lending. From ABC’s business reporter Phillip Lasker. Banks, not just customers are potentially exposed.
Investment guru Warren Buffet wasn’t commenting on the Australian mortgage market when he said, “Only when the tide goes out do you discover who has been swimming naked”, but it is no less relevant.
Key points:
- 42 per cent of home loan customers told banks they had incomes in excess of $500,000 last year
- Westpac is the first bank to face ASIC court action over irresponsible lending allegations
- Mortgage contracts can be voided if the bank provides credit to someone who cannot afford it
When interest rates start rising and/or if property prices fall, the market’s vulnerabilities will be exposed.
The prospect of higher interest rates is considered a distant threat because inflationary pressures will take time to build.
We also know households are sitting on a mountain of property debt and one false interest rate move by the RBA could trigger a collapse with far-reaching consequences.
That isn’t the only trigger.
Overstated income
The banks’ Achilles heel — irresponsible lending — is shaping up as a major threat to the banks and financial system, depending on the outcome of the banking royal commission and a low-profile battle currently being waged in courts.
“Irresponsible lending is endemic in Australia,” Digital Finance Analytics director Martin North said.
“More than 900,000 households are already in mortgage stress.
“We’re seeing a lot of households who are actually getting loans that are five, six, seven, eight, nine times income and that is astronomically high and in my mind will lead to grief later.”
Even though customers of the big four banks are representative of the Australian population, their claims about the incomes of those customers are not.
“The free and loose lending standards that banks have demonstrated, particularly over the last decade through the use of benchmarking tools and interest only loans, has the potential to be catastrophic for the Australian economy,” Maurice Blackburn lawyer Josh Mennen said.
Financial planning crisis, money laundering scandals, market manipulation … you ain’t seen nothing yet.
An ABC segment on the issues facing the Royal Commission, with reference to poor lending practice, including comments from DFA.
The royal commission — the one the Government still doesn’t want — opens its doors on Monday, February 12, and is sure to hear more harrowing stories of bad behaviour by banks.
It’s officially known as the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry. Given the big banks dominate the sector, it is really a royal commission into banks.
Even as the banks tell everyone who will listen they have lifted their game — and in some areas they have — the bad news stories keep on coming.
A segment on ABC 7:30 discussed the problem faced by many interest only mortgage holders as tighter lending standards bite, forcing some to higher payment P&I loans or to sell.
We discussed this issue some time back, and made an estimation that $60 billion of such loans are likely to fall foul of the tightening.
Real estate sales companies are using big commissions to tempt mortgage brokers, financial planners and accountants to sell overpriced properties to unsuspecting clients. Here is the segment from ABC The Business.
It is a business model that has been operating for years, but is raising more concern now that many of Australia’s largest property markets are heading for a potential apartment glut.
Developers generally contract out sales to these companies when they are having difficulty shifting their stock, such as when there is an oversupply of new apartments or houses in the area.
Real estate agents say developers use these sales companies, which often market themselves as property investment firms, because they can achieve higher-than-market prices.
One reason the properties are so far above market prices is to cover the cost of the commissions going to the marketing firm.
Those fees can add tens of thousands of dollars to the cost of a new apartment or house.
A large part of those commissions are often then passed on to mortgage brokers, accountants or financial planners who refer their clients to the marketing firms.
The Real Estate Institute of Australia (REIA) said it has been “ferociously lobbying” both the federal and state governments to impose more regulation on this type of property sales tactic.
In the meantime, the REIA’s president, Malcolm Gunning, said clients need to do their homework if offered a property deal that sounds too good to be true.
“This is really aimed at, I suppose, the new investor or the lazy investor who really doesn’t want to go out and do their own due diligence,” he said.
“You should always cross-check. You should go off, walk down to your local real estate agent who’s been there for 25 years and say, ‘if I buy this property, what rent can I get for it and what in your opinion is the current market value?’
“So at least you’re making an informed decision. Don’t rely just on one source of information.”
So if an adviser or broker tries to sell you a property investment, it is worth asking who is paying theirs.
The ABC is reporting that a Treasury FOI request has shown that Federal Labor’s negative gearing overhaul would likely have a “small” impact on home values, official documents reveal, contradicting Government claims the policy would “smash” Australia’s housing market.
The previously confidential advice to Treasurer Scott Morrison from his own department said the Opposition’s plan might cause “some downward pressure” and could have “a relatively modest downward impact” on prices.
We had the chance to discuss the outlook for the Australian property market on ABC News 24, which was rebroadcast on ABC Radio.
Here is the audio from the segment.