Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
AMP Bank has announced it will accept investor property loan applications effective 16 November following a temporary withdrawal from the market in response to regulatory growth guidelines.
The return to investor property lending is in line with AMP Bank’s commitment to return to the market in 2015.
Investor property lending to SMSFs remains on hold in order to meet AMP Bank’s regulatory commitment for the SMSF portfolio. The bank is expected to return to SMSF lending later this year.
Showing again that mortgage repricing is more about margin protection than meeting capital requirements, non-IRB bank, Bank of Queensland has announced it will increase interest rates on its variable home loan products by 0.18 per cent per annum.
The increase will see the Bank’s Clear Path variable rate home loan lift to 4.60% per annum, the standard variable rate home loan for owner-occupiers move to 5.74% per annum, and the standard variable rate home loan for investors increase to 6.03% per annum.
Matt Baxby, Group Executive Retail Banking, said the decision was driven by the need to balance growth, risk and margins over the longer term.
“Standardised banks like BOQ still carry much higher funding costs and capital requirements than the major banks and we need to get the balance right between sustainable growth over the longer term, risk and margins,” he said.
“These are always difficult decisions but on balance we believe it is the right one in the current environment.
“The more resilient and financially strong that standardised banks are, the more we can compete on a range of fronts including further investment in our customer-facing systems and processes.”
The new rates will be effective from 20 November 2015.
They had a round of uplifts earlier in the year, and combined their margins will be fattened significantly.
Given the recent changes in the mortgage data set between owner occupied and investor loans, some would suggest the regulators have been flying blind. I discussed this with Ross Greenwood on 2GB tonight. Whilst that may be an overstatement, the reasons for the recent changes are beginning to become clearer. In a speech today RBA Deputy Governor Philip Lowe addressed this head on. More importantly, he highlights that the apparently dramatic switch away from investment loans may be overstated.
The basis of good analysis is good data. Improvements over time in the quality and comprehensiveness of the data on housing prices have, for example, helped improve the general understanding of housing market developments. In contrast, unfortunately, recent problems with the data relating to banks’ owner-occupier and investor housing loans have worked in the other direction, complicating our understanding of what is going on in the housing market.
These data problems have emerged as lenders have taken a closer look at their housing loans following increased supervisory scrutiny. As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us.
There are two issues that are worth drawing your attention to.
The first is that over the past six months there have been very large upward revisions to the value of investor loans outstanding, with offsetting downward revisions to owner-occupier loans. Material revisions have been made by more than 10 institutions, including two of the largest lenders. The scale of these revisions can be seen in Graph 1, which shows the stock of investor credit outstanding as reported in each of May, June and September this year. The cumulative effect of the upward revisions has been to increase the stock of investor credit outstanding by around $50 billion, or 10 per cent. According to these new data, investor loans now account for 40 per cent of total housing loans outstanding, not the 35 per cent reported earlier in the year.
Graph 1
While the reasons for some of these earlier errors have been identified, in other cases the reasons are unclear and lenders have not been able to provide comprehensive back data. As a result, when calculating growth rates for investor and owner-occupier credit, the RBA has had to make adjustments for what are effectively breaks in the series.
The second data issue has emerged over the past couple of months and has worked in the other direction, with lenders reporting that some loans that were previously recorded as investor loans were really loans to owner-occupiers. This is partly because, when faced with the higher interest rate on investor loans, some borrowers have indicated to their bank that they are not an investor, but rather an owner-occupier, and so should not have to pay the higher rate. Our liaison with lenders suggests that further reclassifications of this nature could be expected over coming months.
The effect of these recent reclassifications on measured growth rates can be seen in Graph 2. Taken at face value, the data suggest a very sharp slowing in growth in investor credit and a sharp pick-up in owner-occupier credit (shown as the dotted lines). However, if we make adjustments for these reclassifications then the changes in growth rates are much less pronounced (the solid lines).
Graph 2
These various data problems have reinforced our view that the supervisory focus on investor lending has been entirely appropriate. And it is disappointing that some lenders’ internal systems have not been up to the task of reporting accurate data on the split between investor and owner-occupied housing loans.
This issue was discussed at the most recent meeting of the Council of Financial Regulators, with Council members considering what steps could be taken to improve the quality of data. Among other things, it has been decided that APRA, the RBA and the Australian Bureau of Statistics will, next year, undertake a thorough review of the data collected from authorised deposit-taking institutions regarding their domestic books.
However, what incentives are there for lenders to provide the right data to the regulators? And what penalties should be imposed when they fail to provide adequate data? Without good data, we are all flying blind.
Adelaide Bank announced an increase to its standard variable interest rate as follows, effective Friday, 20 November.
The rates are as follows:
Bendigo and Adelaide Bank Managing Director Mike Hirst said the decision to adjust rates takes into account a wide range of factors, including the needs of all stakeholders, maintaining competitive pricing and capital requirements.
The fact that another non-IRB lender has lifted rates to existing mortgage holders (ME Bank already did), demonstrates that the repricing is all about market competition and margin protection using the alibi of regulator driven capital changes. It also provides room for deep discounting on new owner occupied loans, where the battle currently lies. We do not see changes to deposit rates, so the banks pocket the difference.
We expect other banks to follow the herd.
The monthly data from APRA on the banks for September makes interesting reading. This month we will focus on the home loan story (cards and deposits being pretty much as normal). First the total value of home loans in the bank’s books rose by 0.84% to $1.388 bn (compared with a total market of $1,495 bn as reported by the RBA – the gap is the non bank sector). Among the ADI’s, owner occupied loans rose 1.48% to $856 bn, whilst investment lending FELL by 0.57% to $532 bn, and is 38.3% of all home lending. We saw a fall the previous month in investment loans of 0.75%, so investment lending continues to drift lower as the pressure from the regulators finally flows through.
Of course, the banks still need the mortgage lending drug, so they have switched to grabbing owner occupied refinance loans, and are discounting heavily now (thanks to the back book repricing they have shots in the locker).
Looking at the bank specific data (and yes, we think the data is still noisy), the market shares in September look pretty similar, with Westpac still the king pin for investment lending, and CBA the champion of owner occupied loans.
Looking at the portfolio movements though, from August to September, we see a significant swing at three of the big four, with Westpac, CBA and ANZ all dropping their investment loan portfolio a little, whilst driving owner occupied loans really hard. Suncorp also went backwards on investment lending. The focus is clearly owner occupied loans.
Looking at the 12 month moving data on investment loan portfolio growth, we see that some are still above the 10% speed limit, but several of the majors are now below the hurdle. The industry average is now at 7.75%. We expect it to fall further, because more banks will need to throttle back to keep their annual rates below 10%.
Growth in owner occupied loans is stronger now than it has been for some time. The market annual average is 7.45%, and we expect the rate of growth to continue to rise. This begs the question, at what point will the regulators decide to erect a speed trap on the owner occupied side of the ledger?
The deep discounting of new owner occupied loans more than offsets any price increases on the headline rates for existing borrowers. We do not think the RBA should cut rates, as this will just stoke owner occupied demand further.
After the big four have announced their uplifts, Bankwest, part of CBA, has said it will increases variable home loan interest rates by 18 basis points for owner occupiers to 5.65% p.a. (5.70% p.a. comparison rate) and to 5.97% p.a. (6.02% p.a. comparison rate) for investors, effective 17 November 2015.
However, ME Bank has said they will increases variable home loan interest rates by 0.20% to 5.08% p.a. (comparison rate 5.09% p.a.) for its Flexible Home Loan effective 20 November 2015.
We expect price hikes to continue to ripple through the market.
The last of the big four, ANZ has confirmed it will lift variable rates on owner occupied and investment home loans, effective 20 November.
The standard variable rate for owner-occupier home loans will increase by 0.18% to 5.56% whilst the standard variable rate for residential investment property loans will also increase by 0.18% to 5.83%.
Its the same story, ANZ also refers to rising regulatory capital requirements causing the rise.
“This decision reflects the significant additional cost of capital banks are now required to hold against home lending,” ANZ CEO Australia Mark Whelan said.
ANZ says the 18 basis point increase will add $36 per month to the average home loan of $242,000 and currently 42% of ANZ home loan customers are already at least one month ahead on their repayments.
Now, the fun begins – will the regionals tag along?
Following WBC and CBA, NAB has announced a rate hike today. Effective 12 November, rates on mortgages will rise 17 basis points, so NAB’s standard variable rate will be 5.60%.
Today’s announcement responds to market conditions, as well as regulatory changes that require NAB to increase the amount of capital applied to residential mortgages.
NAB Group Executive for Personal Banking Gavin Slater said the NAB had carefully considered the decision to raise interest rates.
“There are a range of factors that come into consideration in interest rate decisions. The home loan market is dynamic, with multiple changes being seen across the industry,” Mr Slater said.
“Regulatory changes on capital requirements also increase the costs associated with providing home loans. In May this year, NAB took early steps to strengthen our capital position by raising $5.5 billion to begin to address expected changes in capital requirements.
“Today’s decision has not been easy, but we believe this is right decision for the long term. We know we have to balance the interests of our customers with the needs of our more than 550,000 shareholders.
“Interest rates are at historically low levels and NAB remains committed to providing a competitive proposition for our customers.
“We appreciate that price is important, but we also know that customers want us to provide the right help and advice, the right products, and deliver innovative digital capability.”
Same rationale, capital requirements. Fixed rate home loans and business rates remain unchanged.
Who’s next?
As predicted, another major has announced hikes in its mortgage rates. Commonwealth Bank will increase in its variable home loan rates by 15 basis points for both owner occupied and investment variable rate mortgages, partially offsetting costs associated with recent changes to capital requirements.
As a result, for owner occupiers, the standard variable home loan rate will increase to 5.60% per annum. For investment home loan standard variable rate customers, interest rates will rise to 5.87% per annum. The new rates will be effective from 20 November 2015.
The bank cites the higher capital requirements as the driver, and says it has carefully tried to balance the interests of its customers and shareholders in pitching the quantum of the increase.
Matt Comyn, Group Executive for Retail Banking Services said: “The Commonwealth Bank is supportive of an Australian financial system that is strong, stable and competitive. We recently raised $5.1 billion to strengthen our capital position in line with new regulatory requirements implemented in response to the Financial System Inquiry. We have now reviewed our home loan pricing in light of these changes.
“As Australia’s largest home lender, we are committed to delivering competitive products and services to our customers, while maintaining an unquestionably strong capital position.
“Any decision to change interest rates is carefully considered. The cost of the new capital required to make the Australian banking system more secure needs to balance the interests of our customers, as well as the nearly 800,000 households who are direct shareholders and the millions more who are invested through their superannuation funds.”
Fixed rates and business rates remain the same, with the current Owner Occupier Wealth Package 2-year fixed rate remaining at 4.29% per annum.
Expect other lenders to follow, using the capital and financial stability alibis to protect margins.
In addition, some will argue the RBA should now cut rates in November, to adjust for recent home lending rate rises, but given the high growth rates in lending, as APRA highlighted today, we think this would be inappropriate.
ASIC has released a suite of online tools to help consumers better understand the risks of interest-only mortgages, to complement its review of loan providers’ compliance with responsible lending laws.
The new tools, available on ASIC’s MoneySmart website at moneysmart.gov.au, include:
ASIC Deputy Chairman, Peter Kell, said while ASIC’s review had found that banks and other lenders needed to lift their game to ensure compliance with responsible lending obligations, consumers can help themselves by doing their homework before taking on such a large financial commitment.
‘For most Australians, a mortgage is one of the most significant financial decisions they will make in their lives,’ Mr Kell said.
‘While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run. Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages.
‘Anyone thinking of taking out an interest-only mortgage needs to have a clear plan of action when the interest-only period ends to ensure they can afford the repayments, which may increase significantly,” said Mr Kell.
Mr Kell suggests consumers who are considering an interest-only mortgage, or who already have one at present, should consider the following:
ASIC’s recent probe into interest-only mortgages reinforced the fact that lenders and brokers need to meet responsible lending obligations and ensure the interest-only loans they arrange meet their customers’ requirements and objectives.
‘We expect that lenders and brokers arranging interest-only mortgages would do so in a way that is consistent with their customers’ plans,’ Mr Kell said.
On 20 August 2015, ASIC released a report of its review into how lenders provided interest-only mortgages to both investors and owner occupiers (refer: 15-220MR). The review found that lenders providing interest-only mortgages needed to lift their standards to meet important consumer protection laws.
ASIC’s MoneySmart website provides trusted and impartial guidance and online tools for Australians on issues relating to money and finances. Visit ASIC’s MoneySmart at moneysmart.gov.au.
Australia is currently experiencing low interest rates. Consumers should build in a buffer over the minimum repayment for any interest rate rises and increases in repayments, especially if they have taken out an interest-only mortgage.
