Yet another inquiry has been announced into mortgage pricing as the ACCC is tasked to examine the banks failure to pass on in full official interest rate cuts engineered by the central bank. The ACCC’s preliminary report is due by 30 March next year, six months before the final report.
Beyond the crocodile tears, there are important questions here, because as we have highlighted, loyalty is not rewarded as the banks cut rates to attract new customers. In addition, deposit margin compression has reach a floor, and funding costs are under pressure. But nothing has fundamentally changed from recent ACCC and Productivity Commission reports. Yet, having another investigation takes pressure off The Treasurer, conveniently.
Via The Guardian. The treasurer, Josh Frydenberg, has asked the competition watchdog to examine why many mortgage holders are being charged rates well above the cash rate record low of 0.75%.
The higher rates have prompted allegations of price gouging by the banks – Commonwealth Bank,
Westpac, ANZ and National Australia Bank – which have previously cited
funding costs as a reason why not all reductions could be passed on.
“We need information about the cost of the funds of the banks and …
why they’re not passing on these rate cuts in full,” Frydenberg told
ABC television on Monday.
The inquiry, which will also include smaller institutions, comes
after an earlier royal commission into misconduct in the banking sector
uncovered predatory practices and dented market confidence.
But Frydenberg shrugged off suggestions that the new inquiry by the
Australian Competition and Consumer Commission would further affect
confidence in Australia’s banks.
“I actually did call the CEOs of the big four banks yesterday and
told them that this could actually help clear the air,” he said. “But at
the same time, you know, they’re defending their patch and will
continue to do.”
The treasurer said the banks need to explain how they balance the competing needs of shareholders and customers.
The official cash rate is at a record low of 0.75% after the Reserve
Bank of Australia cut interest rates three times this year. But the big
four banks on average passed on only 75% of the total reductions to
their customers.
“There are a number of smaller lenders that have actually wasted no
time in passing on these rate cuts on in full,” Frydenberg said.
“If the big four banks had passed on these 75 basis point rate cuts,
then somebody with a $400,000 mortgage would be more than $500 a year
better off in lower interest payments.”
The ACCC’s preliminary report is due by 30 March next year, six months before the final report.
A mortgage brokerage has welcomed and affirmed the sentiment yesterday expressed by Treasurer Josh Frydenberg that “hard-working families” are being negatively impacted by stricter responsible lending rules, via Australian Broker.
Aussie Home Loans
CEO James Symond said, “We are concerned about customers being knocked
back on home loan applications due to stringent interpretations of rules
by APRA and ASIC.”
According to Symond, there is cause for concern over the low property
listings and the downturn in construction activity, despite
historically low interest rates, the likelihood they will continue to
fall and auction clearance rates picking up.
Speaking at The Australian Financial Review’s Property Summit in Sydney yesterday, Frydenberg welcomed the increase in housing prices
and linked the stabilisation in the housing sector to the easing of
lending regulations — measures, he emphasised, that “at the time
achieved their desired objectives” through mitigating risks associated
with investor loans, interest-only lending and serviceability.
Speaking of responsible lending, Frydenberg said, “While these
obligations were first legislated back in 2009, the shadow of the Royal
Commission and recent litigation has given rise to uncertainty as to how
they ought to be implemented in practice.”
“Common sense dictates that a sensible balance needs to be struck
because an unduly restrictive application of these obligations can do as
much harm as an overly lax one.
“Should responsible lending laws be applied too stringently, they
will also negatively impact consumer behaviour with consumers more
likely to remain with their current provider than go through the red
tape burden associated with looking for alternatives.
A recent study commissioned by Aussie revealed an overwhelming lack
of consumer confidence both in the housing market and in their prospects
of securing a home loan.
Just one-third of Australians are more confident about buying a home
than they were five years ago, despite record low interest rates and
lower property prices.
The study also found 70% described the home loan process negatively,
calling it ‘stressful’, ‘a waiting game,’ ‘overwhelming,’ ‘confusing,’
‘difficult,’ ‘painstaking’ and ‘rigid.’
Further, about 29% of Australians are waiting to buy property despite
promising market conditions as the home loan process has been described
as hard to navigate and riddled with red tape.
“This is why it is so important for the regulators to act to restore Australians’ confidence in the housing market and their ability to buy property,” said Symond.
So, just worth remembering the high levels of mortgage stress in the system currently – at ultra low rates, based on our analysis to end August 2019.
As we discussed yesterday, there is only one game in town, more mortgage growth, but that game is deeply flawed….
The recent RBA Bulletin included an article “Bank Balance Sheet Constraints and Money Market Divergence“, which in summary shows that money market trades have generally not been profitable for the four major banks since the financial crisis.
This is partly because debt funding costs have fallen by less than money market returns. In addition, equity funding, which is more expensive than debt, has increased. Consequently, the incentive for banks to arbitrage between money market interest rates has fallen.
They show that residential mortgages are always significantly more profitable than money market trades over the sample period (Graph 4). This suggests that there has been a substantial opportunity cost associated with diverting equity funding away from mortgages and towards lower-margin activities such as money market trading. This is consistent with the balance sheets of the major banks being weighted towards mortgages and away from trading investments.
According to the latest property exposure statistics from the Australian
Prudential Regulation Authority (APRA), the ADI’s sector exposure to
residential mortgages increased by 3.6 per cent when comparing the June
quarter 2019 to the previous corresponding period.
Thus banks tend to prefer more profitable lines of business, such as lending for residential housing, over the narrow margins implied by money market arbitrage. In other words, bank profitability is strongly connected with mortgage growth.
We know that APRA has reduced the rules on minimum lending standards for mortgages in July, and since then, banks have dropped their minimum rate requirements, opening the taps for more loans. As Australian Broker reported recently:
Westpac will decrease its floor rate from 5.75% to 5.35%, effective 30 September.
The same change will go into effect at its subsidiaries: St. George, BankSA and Bank of Melbourne.
After
the initial round of floor reductions across lenders of all sizes,
Westpac matched CBA with the higher floor rate of the big four banks at
5.75%, while ANZ and NAB each amended theirs to 5.50%.
Smaller lenders followed suit, the majority also updating their rates to either the 5.50% or 5.75% figure.
While some went even lower, ME Bank amending its rate down to 5.25% and Macquarie to 5.30%, Westpac has taken a step away from the other majors with its newest update.
With July marking the strongest demand for new mortgages in five years and further RBA
rate cuts expected in the near future, the floor reduction seems well
timed to capitalise on the strong market activity forecasted to
continue into the coming
Now of course there are still tighter guidelines on income and cost analysis for mortgage applications than a couple of years ago, but have no doubt standards are lowering again, and mortgage lending momentum appears to be on the turn, judging by the most recent data.
And the RBA stock data showed a small rise in to total value of owner occupied loans outstanding, though investor loans are still sliding on a 3 month seasonally adjusted rolling basis.
We expect a further rise in the results to be released at the end of September, to end August 2019
In addition, as reported in the AFR, they are being encouraged to lend.
Scott Morrison says Australia’s banks must not shy away
from lending after the Hayne commission as he pushes back against what
he calls an “instinctiveness” in society towards responsible lending
standards that are too onerous.
Speaking to the Australian American Association in New York, the
Prime Minister said that while it was important to implement the
findings of the royal commission, as well as other reforms such as the
Banking Executive Accountability Regime, “we need our banks to keep
lending”.
“We can’t be scared of our own shadows in our economy, the animal
spirits in our economy and the role of the banking and financial system
in extending credit.
And lenders are responding with a tranche of mortgage rate cuts to attract new borrowers or new refinances (rather than passing cheaper funding costs through to existing borrowers).
For example, the Commonwealth Bank of Australia changed its New Wealth Package fixed rates for owner-occupied and investment home loans, for both new and existing customers switching to a fixed rate home/investment home loan as of Tuesday, 24 September.
The largest rate drop is for
owner-occupiers with interest-only home loans on a five-year fixed rate,
who will see rates drop by 90 basis points to 3.99 per cent, as will
investors with an interest-only home loans on a four-year fixed rate.
Owner-occupiers with IO mortgages on
one-year and four-year fixed rates will see rates drop by 65 basis
points (to 3.89 and 3.99 per cent, respectively), while those with a
three-year fixed rate will see their new rate start from 3.79 per cent
(10 basis points lower than previous).
Other sizeable rate drops include
investors with a four-year fixed rate on P&I repayments, who will
see their interest rates fall by 75 basis points to 3.64 per cent.
Investors with P&I repayments on other fixed rate terms will see rates drop from between 5 and 50 basis points.
Owner-occupiers with a P&I home
loan that is on a one-year fixed rate term will see a range change of 60
basis points, dropping the new rate to 3.29 per cent. Those with a
four-year fixed rate will also see their rates drop by the same amount,
bringing the new rate to 3.49 per cent.
And ME Bank announced reductions of up to 49 basis points across its variable home loan products for investors.
The rate reduction announcement comes a week following ME bank’s 2019 financial year results, which saw its home loan portfolio grow by 7.3 per cent, from $24.5 billion to $26.3 billion (or 2.5 times system growth).
The bank has cut rates for investors on both principal and interest (P&I) and interest-only (IO) loans with a loan-to-value ratio of less than, or equal to, 80 per cent.
The changes have been applied to the
“flexible home loan member package” for investors, as well as the “basic
home loan” investor product, with all changes effective as of Tuesday,
24 September 2019.
The largest rate reduction (49 basis
points) was applied to the bank’s basic home loan product, for investors
making principal and interest repayments.
For investors on the bank’s basic home loan product, the new rates are as follows:
P&I repayments, any loan amount – 49 basis point reduction to 3.68 per cent p.a. (3.70 per cent comparison rate)
IO repayments, any loan amount – 45 basis point reduction to 3.89 per cent p.a. (3.79 per cent comparison rate)
Investors currently on the flexible home loan package (which requires an annual fee of $395) will see the following changes:
P&I
repayments on a loan amount above $700,000 – 14 basis point reduction to
3.63 per cent p.a. (4.06 per cent comparison rate)
IO
repayments on a loan amount between $400,000-$700,000 – 23 basis point
reduction to 3.89 per cent p.a. (4.19 per cent comparison rate)
So to Philip Lowe’s recent speech “An Economic Update” where he said that…
…the global economy is that while it is still growing reasonably well, the risks are increasingly tilted to the downside. The main source of these downside risks are geopolitical developments in many parts of the world. These developments are creating considerable uncertainty and this uncertainty is causing businesses to reconsider their spending plans. This is making the international environment more challenging for us.
On the Australian economy, he said after having been through a soft patch, a gentle turning point has been reached. While we are not expecting a return to strong economic growth in the near term, we are expecting growth to pick up. Against this backdrop, the main source of domestic uncertainty continues to be the strength of household spending.
He went on to say over the past year, there has been no growth at all in consumption per person, which is an unusual outcome at a time when employment is growing strongly (Graph 9). An important part of the explanation here is that household disposable income has been increasing only slowly for an extended period, reflecting both subdued wage increases and strong growth in taxes paid.
The persistence of slow growth in household income has led many people to reassess how fast their
incomes will increase in the future. As they have done this, they have also reassessed their spending,
particularly on discretionary items, which has been quite weak over recent times (Graph 10). Not
surprisingly, spending on household essentials has been much less affected.
Another part of the explanation for weak growth in household spending is the adjustment in the housing
market. As housing prices have fallen, there has been a marked decline in housing turnover, with the
turnover rate having declined to the lowest level in more than 20 years (Graph 11). With fewer
of us moving homes, spending on new furniture and household appliances has been quite soft. So too has
expenditure on moving costs and real estate fees. More broadly, the correction in the housing market has
also affected the economy through its impact on residential construction activity.
Thus, we can join the dots, if banks lend more and stoke the housing market, this may reverse the weak consumer spending and drive the economy harder. This is of course why the Government and regulators are doing all they can to pull prices higher (though volumes remain very low, and the number of new listings have hardly moved).
And according to the ABC, more building firms are failing.
Statistics, provided by ASIC, show 169 NSW-based construction companies went into administration, receivership or a court-ordered shutdown in the June quarter — the highest number since the September quarter in 2015.
Over the whole 2018-19 financial year, 556 construction companies went under — 101 more than the previous financial year.
Yet, despite all this in a Q&A the Governor was asked if he was concerned about the recent developments in the housing market. Lowe said the RBA was not worried about the recent lift in dwelling prices and he does not expect credit growth to materially lift due to lower interest rates – meaning that the recent acceleration in the housing market will not be an impediment to a near term rate cut.
In fact the only point of resistance against looser lending and more credit is ASIC’s appeal against the recent ruling relating to HEM (Household Expenditure Measures) that found knowing a customer’s current living expenses was immaterial to deciding whether they could afford repayments on a loan.
In the most famous line of his judgment, Justice Perram found that
“Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum [of how much one can spend without going into “substantial hardship”] is. But it is that conceptual minimum which drives the question of whether I can afford to make the repayments on the loan.”
ASIC commissioner Sean Hughes said the regulator felt compelled to
appeal after Justice Perram ruled that a lender “may do what it wants in
the assessment process”.
“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower,” he said in a statement.
“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.
“For those reasons, ASIC will appeal to the Full Court of the Federal Court.”
If ASIC loses then the final drag on future credit growth will be blown away.
I have to say, I find this whole narrative very unconvincing. Remember home prices relative to income remain very stretched, the debt burden has never been higher, and yet people are being encouraged to borrow big, and help resurrect the housing market (and the economy), at any cost.
If rates are cut again, the flow of credit will rise (thanks to the APRA changes and heightened competition among lenders). And of course the main driver of this is that banks need lending growth to drive future profitability. But my own modelling suggests that as we approach the zero bounds, profitability will actually be squeezed some more. That said, we can see why it is that Mortgage Growth is The Only Game In Town. From Polys, to Regulators, to Lenders, they all want it. Household though will bear the consequences.
Fitch Ratings says residential mortgage loans in Scandinavia, the Netherlands and Switzerland have seen exceptionally strong performance despite high loan-to-value (LTV) ratios and significant household debt. This reflects generous social security systems and large household wealth, which are a common denominator of these ‘AAA’ rated jurisdictions with strong public finances.
The growth of housing
debt in Scandinavia, the Netherlands and Switzerland can be explained
by a combination of tax deductibility, low interest rates, and unique
features of each respective mortgage market. These include long
contractual tenors and interest-only periods. Limited repayment has made
borrowers more sensitive to house price decreases. However,
macro-prudential requirements in each country are helping to address the
risk that high household debt could jeopardise financial stability.
Macro-prudential
measures were originally focused on maximum LTV and stressed
affordability at origination, but lower mortgage rates continued to
stimulate mortgage growth. Banking authorities therefore imposed minimum
mortgage loan amortisation as well as maximum loan-to-income (LTI) or
debt-to-income ratios. Such restrictions have contributed to the recent
adjustment in Norwegian and Swedish house prices and limited lending
growth in Denmark. Swiss regulators have tightened capital requirements
for banks and promoted self-regulation, which established minimum
amortisation for mortgages above 66% LTV. Gradual changes to tax
incentives and underwriting standards were introduced by the Dutch
authorities, especially since 2013, which have made the mortgage market
more resilient.
Australian prime home loan arrears fell in July in all states except NSW and South Australia, but they remain above their five-year average, new data from Standard & Poor’s has shown, via The Adviser.
The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages dropped to 1.49 per cent in July 2019, down from 1.51 per cent a month earlier, S&P Global Ratings’ recent RMBS Arrears Statistics: Australia report showed.
According to the data, which measures
the weighted average of residential mortgage loans that are more than
30 days past due in publicly and privately rated Australian RMBS
transactions, prime arrears typically drop in spring and are expected to
decline during the third quarter of the year.
However, while the arrears index dropped month-on-month, the data showed that arrears were 11 basis points higher than they were in July 2018 and remain above their five-year average of 1.25 per cent.
Looking at arrears on a national
level, arrears improved in six states and territories, with NSW and
South Australia showing an uptick in arrears.
NSW saw an increase to 1.29 per cent, while South Australia saw arrears rise to 1.54 per cent in July 2019.
Western Australia recorded the largest drop in arrears during July, with the rate decreasing 14 basis points to 2.91 per cent.
According to S&P, the majority of
this improvement was for loans 30-60 days in arrears. Loans more than
90 days in arrears, however, continued to increase in the western state.
Owner-occupier arrears improved in July, falling by 3 basis points to 1.71 per cent.
However, investor arrears remained mostly unchanged in July, falling by 1 basis point to 1.46 per cent from the previous month.
According to S&P, this partly reflects the “generally tighter lending conditions for investors in the current environment”.
“We expect arrears to continue to
decline as the recent rate cuts filter through. These improvements are
likely to be seen in the earlier arrears categories, which are more
sensitive to interest-rate movements. We expect longer-dated arrears to
remain elevated in a softer economic environment,” S&P analysts
stated.
“Recent rises in housing finance
approvals could bolster refinancing conditions, which started to improve
in July, rising 5.4 per cent in seasonally adjusted terms. This will
help to stabilize arrears and prepayment rates if the current momentum
continues because refinancing is a common way for borrowers to
self-manage their way out of arrears.”
RBA on the rising arrears rate
The level of mortgages past due has been noted in recent months, with the Reserve Bank of Australia’s head of financial stability, Jonathan Kearns, noting in June
that the number of people in arrears on their home loans had reached
the highest level recorded since the global financial crisis.
In an address to the 2019 Property
Leaders’ Summit in Australia in June, Mr Kearns discussed the factors
contributing to the continual rise in home loan arrears.
Mr Kearns claimed that “cyclical
upswings” in arrears were attributable to weak economic conditions,
which include falling or stagnant wages and softness in the housing
market – which may inhibit some borrowers from selling their property to
ease their mortgage burden.
The head of financial stability also
acknowledged that tighter lending standards can conversely impact a
borrower’s ability to meet their mortgage repayments, pointing to
previous restrictions on interest-only lending, which prevented
borrowers from rolling over the interest-only period.
Mr Kearns also conceded that tighter serviceability measures may prevent distressed borrowers from refinancing their loan, cited by S&P as one of the factors contributing to the rise in delinquencies.
However, Mr Kearns pointed to
internal data collected by the Reserve Bank, which suggested that the
application of tighter lending standards has been “effective” in
improving credit quality.
Mr Kearns said at the time that he expected the overall arrears rate to continue rising, but he claimed the trend would not pose a significant threat to financial stability.
“To the extent that we can point to
drivers of the rise in arrears, while the economic outlook remains
reasonable and household income growth is expected to pick up, the
influence of at least some other drivers may not reverse course sharply
in the near future, and so the arrears rate could continue to edge
higher for a bit longer,” he said.
“But with overall strong lending
standards, so long as unemployment remains low, arrears rates should not
rise to levels that pose a risk to the financial system or cause great
harm to the household sector.”
Non-bank lender Pepper Money has launched mortgage lending operations in New Zealand, offering advisers in New Zealand the technology and tools to write its prime, near-prime and specialist loans. Via The Adviser.
Following more
than a year of consultation with advisers and intermediaries, lending
partners, regulators and borrowers, Pepper Money has today (16
September) opened its business in New Zealand.
This builds on the international reach of the non-bank lending group, which already operates in Australia, the UK, Spain, Ireland and Asia.
New Zealand-born Aaron Milburn,
Pepper Money’s director of sales and distribution in Australia, will
head up the New Zealand business from today. His new job title will be director of sales and distribution for Australia and New Zealand.
Speaking to The Adviser about the new
business, Mr Milburn said that Pepper Money will primarily distribute
through the third-party channel, as it does in Australia.
Mr Milburn added that while while the
company may look to launch mortgages directly in future, “the initial
plan – and for the foreseeable future – is to utilise the adviser
network over there”.
He explained: “We will initially
distribute through the adviser network in NZ through all of the major
aggregators that operate in New Zealand.
“Pepper’s business is 95 per cent
driven through brokers in Australia and in the UK, and we see no need to
change that model as we enter NZ.”
He continued: “We think that advisers
do a wonderful job in New Zealand, and we would like to continue to
support that area of distribution as we enter NZ, as we do in
Australia.”
Mr Milburn told The Adviser that his
first priority in his expanded role will be to launch the suite of
products in New Zealand and “deliver what advisers have been asking for
at our various feedback sessions and study tours”.
According to the director of sales and distribution for Australia and New Zealand, this largely focuses around filling a “significant
gap in the near-prime space in New Zealand, where families are
potentially paying too much or have been in the wrong products due to a
lack of choice” and providing advisers with supporting tools to help
deliver these products.
He explained: “We had advisers in New
Zealand contacting Pepper asking us to go over there and really inject
some competition into the market and make it easier for advisers and,
ultimately, Kiwi families to realise their goals.”
Pepper Money will therefore also offer advisers the Pepper Product Selector (PPS)
tool in New Zealand, which will enable brokers to “get indicative
offers for their customers in under two minutes”, as well as a “fully
online integrated submission platform for brokers,” the marketing
toolkit, the social media toolkit and the Pepper Insights Roadshow.
Pepper Money to pay trail
Notably, while the majority of lenders in New
Zealand went through a “no trail” period starting in 2006 (when
payments went from 0.65 of a percentage point in upfront commission plus
0.20 of a percentage point in trail commission to an average of 0.85 of
a percentage point in upfront only), several lenders have begun returning to trail commission to reduce instances of churn.
According to Mr Milburn, Pepper Money in New Zealand will be offering advisers an upfront and trail commission.
He told The Adviser: “Overwhelmingly, the feedback was that an upfront and trail model was preferred.
“A number of banks have either
re-implemented trail in NZ or are looking to in the near future, so we
took the opportunity to put trail back into the New Zealand market with
our products.”
Mr Milburn concluded that the new operation in New Zealand would build on the practice and service offerings built in Australia.
He said: “We will continue to deliver
the level of service and solutions that we do today and continue to
really focus on that technology improvement side of things.
“We want to make it easier and faster
for brokers to provide solutions for their customers and help build
their brand out in the community and the focus will continue in the back
end of 2019 to 2020.”
