“the point of the estimates is that the various caps on the scheme (10,000 loan cap, income and house prices) are likely to be the binding constraint on the amount of loans provided rather than the scheme’s equity funding”.
To provide some context:
Based on ABS numbers, in the year to February there were 110,000 loans to first home buyers. The average loan size in February to FHB was $337,412. Usual caveats apply to these data.
Using the average loan size to FHB and assuming the scheme covers 15 per cent, the government will guarantee around $50,000 per loan. If the scheme has $500 million in funding, this implies
– 9,879 loans if the scheme holds reserves covering 100 per cent of its commitments. – 49,395 loans with 20 per cent reserves. – 98,790 loans with 10 per cent reserves. – 197,583 loans with 5 per cent reserves.
Average loan size data are biased downwards, so can use average house prices instead as arguably an upper bound. In the December quarter ABS average house prices were $650,000. 15 per cent of this is $97,500.
– 5,128 loans if the scheme holds reserves covering 100 per cent of its commitments. – 25,641 loans with 20 per cent reserves. – 51,282 loans with 10 per cent reserves. – 102,564 loans with 5 per cent reserves.
Well, surprise, surprise, the RBA has realised that high mortgage debt reduces household consumption, according to new research they published. Yet they also note the positive economic impact of higher debt, and say the the overall impact is “unclear”! Well, the DFA surveys make it quite clear, many households are “full” of debt” and cannot spend.
New research from the Reserve Bank has highlighted the link between mortgage debt and household spending amid debate over home loan serviceability assessment guidelines.
The Reserve Bank of Australia (RBA) has published new research from its economic research department, which
has identified evidence of a link between “high levels of
owner-occupier mortgage debt” and a fall in household spending, referred
to as the “overhang effect”.
According to The Effect of Mortgage Debt on Consumer Spending report, if
mortgage levels remained at “2006 levels”, annual aggregate consumption
would have been approximately 0.2 to 0.4 per cent higher.
The RBA added that the negative effect of debt on spending is “pervasive” across households with owner occupied home loans.
“Our
results also suggest that an increase in aggregate owner-occupier
mortgage debt can have important implications for aggregate spending,
all else constant, and go at least part of the way to resolving the
post-crisis ‘puzzle’ of unusually weak household spending in Australia,”
the RBA report stated.
The central bank’s research comes amid
continue debate over home loan serviceability assessment standards, with
the Australian Prudential Regulation Authority (APRA) and the
Australian Securities and Investments Commission (ASIC) moving to reform
current practices.
ASIC’s proposed update of its responsible
lending guidance (RG209) has been met with a renewed call from
stakeholders for a revision to the way a borrower’s spending habits are
assessed.
The RBA’s research has supported claims from some stakeholders, including Westpac,
who have noted that changes in a borrower’s spending behaviour after
they assume mortgage debt should be reflected in regulatory guidance.
In
its submission to ASIC during the regulator’s first round of
consultation, Westpac called for greater flexibility in the assessment
of a borrower’s living expenses.
“Adopting a modest lifestyle for a
period of time in order to acquire real property has been the means by
which many Australians have secured long-term financial security,”
Westpac stated.
“Experience shows that many customers are prepared
to, and do actually, make lifestyle adjustments after acquiring a home
and can then service their home loan obligations without substantial
hardship.
“As such, Westpac submits that placing too much emphasis
on the customer’s pre-application living expenses when determining
suitability, without allowing scope for reasonable lifestyles
adjustments (‘belt-tightening’), would have the effect of denying credit
to many customers.”
Impact on economy still ‘unclear’
Despite
confirming the direct impact of higher mortgage debt on household
spending, the RBA has maintained that the impact of the “debt overhang’
on the overall economy remains “unclear’, noting the positive
stimulatory contribution of the credit boom. stating that
“[These] estimates abstract from other stimulatory effects of debt,” the report noted.
“The increase in mortgage debt has likely lifted house prices and by this also supported consumption over this period.
“Our
estimates are thus best interpreted as the loss in consumption had all
other trends, such as the growth in house prices, occurred even though
debt remained constant.”
The RBA concluded: “As a result, the net effect of the increase in debt since the mid-2000s is unclear.”
The Council just updated their charter, and published their latest minutes. At least there is some minimal disclosure now, though high-level. Note the fact that Treasury is one of the members, alongside the RBA, ASIC and APRA.
The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.
The updates charter says:
The Council of Financial Regulators (CFR) comprises APRA, ASIC, the RBA and Treasury. It aims to facilitate cooperation and collaboration between member agencies, with the ultimate objectives of promoting stability of the Australian financial system and supporting effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the CFR recognises the benefits of a competitive, efficient and fair financial system.
The CFR provides a forum for:
identifying important issues and trends in the financial system, with a focus on those that may impinge upon overall financial stability;
exchanging information and views on financial regulation and assisting with coordination where members’ responsibilities overlap;
harmonising regulatory and reporting requirements, paying close attention to regulatory costs;
ensuring appropriate coordination among the agencies in planning for and responding to instances of financial instability; and
coordinating engagement with the work of international institutions, forums and regulators as it relates to financial system stability.
The CFR will draw on the expertise of other non-member government agencies where appropriate for its agenda, and will meet jointly with the ACCC, AUSTRAC and the ATO at least annually to discuss broader financial sector policy.
Their latest minutes:
At its meeting on 5 July 2019, the Council of Financial Regulators (the Council) discussed systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:
Financing conditions and the housing market. The Council discussed credit conditions and ongoing adjustment in the housing market. Housing credit growth has stabilised at a relatively low level, with lending to investors remaining weak, particularly from the major banks. Demand for housing credit has been subdued, though there has also been some tightening in credit supply. Business credit growth has weakened recently, with lending to small businesses declining over the past year. Lenders are themselves applying stricter verification of expenses and income to small businesses, and lending may be affected by declining collateral values as housing prices decline.
Council members discussed the signs of stabilisation in the Sydney and Melbourne housing markets, evident in both housing prices and auction clearance rates. They observed that the adjustment over the past two years has been sizeable and conditions in most other capital cities continue to be soft. Risks to lenders from housing price falls have to date been limited by the strength of the labour market, low interest rates and the improvement in lending standards in recent years. Housing loan arrears have continued to edge higher, but with significant variation between regions.
Members were updated on ASIC’s public consultation on its responsible lending guidance. The responsible provision of credit is a cornerstone of consumer protection and is important to the Australian economy. It was noted that the consultation is not about increasing requirements; but rather, clarifying and updating guidance on existing requirements. For example, ASIC may further clarify areas where the law does not require responsible lending requirements to be applied (e.g. in small business lending). The Council agencies will continue to closely monitor developments in financing and the housing market.
ASIC’s product intervention powers. ASIC updated the Council on its proposed approach to the new product intervention power, legislation for which passed in April 2019. This gives ASIC the power to proactively intervene where a financial product has resulted or is likely to result in significant detriment to consumers. ASIC has launched a public consultation on its approach. Council members discussed possible applications of the new power given it is now available for use.
Product design and distribution obligations. The Council also discussed the implications of new product design and distribution obligations for retail holdings of bank-issued Additional Tier 1 (AT1) instruments. Members encouraged issuers to review their practices for issuing AT1 instruments ahead of the commencement of the new obligations in April 2021. They noted that APRA would continue to treat all AT1 instruments as regulatory capital, capable of absorbing losses in the unlikely event of a bank failure. Members discussed the importance that all holders of AT1 instruments, particularly retail investors, recognise that AT1 instruments could be written down or converted to equity.
Policy developments. Members discussed a number of policy developments, including the implementation of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. APRA provided an update on its policy work, including changes to its guidance on the minimum interest rate used in serviceability assessments for residential mortgage lending (announced on the morning of the meeting). APRA also updated the Council on its planned increases in the loss-absorbing capacity of ADIs to support orderly resolution. Members discussed proposals by New Zealand authorities to significantly increase Tier 1 capital ratios for banks in New Zealand.
Financial market infrastructure (FMI). The Council’s FMI Steering Committee provided an update on the design of a crisis management legislative framework for clearing and settlement facilities. This will ensure the necessary powers to resolve a distressed domestic clearing and settlement facility. A second consultation is now planned for late 2019. The Committee has also considered proposals for enhancements to the agencies’ supervisory powers and other changes to improve the regulatory framework in relation to market infrastructures. The results of the Council’s consultation findings will be provided to Government, to assist with policy design and the drafting of associated legislation (the draft of which would also be consulted on before being introduced to Parliament).
Stored-value payment facilities. The Council discussed elements of a potential regulatory framework for payment providers that hold stored value, following a public consultation in 2018. Discussion focused on suitable criteria to determine the regulatory regime that should apply to providers of stored-value facilities, along with the adequacy of consumer protection arrangements. Once completed, the conclusions of this work will be provided to the Government for consideration.
Competition in the financial system. Council agencies and the Australian Competition and Consumer Commission (ACCC) are developing an online tool to improve the transparency of the mortgage interest rates paid on new loans. This follows a recommendation of the Productivity Commission’s inquiry into Competition in the Australian Financial System. The tool relies on a new data collection and is expected to be available in 2020.
Climate change. Council members noted the work undertaken by regulators to address the implications of the changing climate, and society’s response to those changes, for the Australian financial system.
Updated Charter. The Council agreed to adopt an updated Charter, which is being published today. The Charter emphasises the Council’s financial stability objective, while also recognising the benefits of a competitive, efficient and fair financial system. It also highlights the Council’s focus on cooperation and collaboration to support the activities of its member agencies.
In conjunction with the Council meeting, the Council agencies held their annual meeting with other Commonwealth regulators of the financial sector. This included representatives from the ACCC, the Australian Taxation Office and the Australian Transaction Reports and Analysis Centre (AUSTRAC). Topics discussed included enforcement and data initiatives affecting the financial sector.
We have released the June 2019 mortgage stress results, based on our running 52,000 household surveys. We found that 32% of households are now dealing with mortgage stress, a record, meaning they are having cash flow issues managing their finances and mortgage repayments.
This translates into more than 1,063,000 households spread across the country, and nearly 71,000 risk default in the year ahead, even taking into account the fall in mortgage repayments represented by the recent rate cuts. Banks loses will rise.
This is because the costs of living continue to run ahead of incomes, while households have larger debts (and are being enticed to buy in the current complex risk environment).
The top post codes in stress are those in the outer suburban fringe areas, where many large estates are still being built, and households are super-highly leveraged.
The RBA released their March 2019 data on household ratios. Whilst these series include small business finance, and include households not borrowing, the trends continue to tell the story of debt, and more debt.
The household debt to income ratio is at a record 189.7, while the housing debt to income ratio was 140.1, again a record and the owner occupied housing debt to income ratio was also up, to 109.3. These are high numbers, on a trend and international comparable basis. Households are drowning in debt.
However the asset to income ratios tell another story. As home prices have fallen, so the ratio has decreased, assets are down relative to income. The exception are financial assets, which benefited from the rise in stock prices this year.
The ratio of interest to income continues to rise because households are borrowing at a faster rate than their incomes are growing, helped of course by lower interest rates. This ratio is below that before the GFC because rates have dropped. And this is the one ratio spruikers turn to to defend the high debt levels – but it is myopic, and going in the wrong direction.
Finally, the RBA data debt to assets shows the pincer movement as home prices fall, and debt rises. This is now heading towards the highest we have seen.
The obvious conclusion is that the debt burden is too great, mortgage stress will go on rising, until the balance between debt and income is restored.
The recent loosening of lending standards simply pours more fuel on the fire. Households are being used a canon fodder in the vein attempt to keep the faltering economy afloat.
At the time of writing, cuts of 25bps had been announced by Resimac, State Custodians and Athena Home Loans. Reduce Home Loans cut its rates by 22bps, taking its lowest advertised rate to 2.89% and putting the lender in the sub 3% category with Greater Bank, HomeStar Finance and BOQ.
Unlike last month’s cut, all the majors responded to the RBA’s announcement before the day’s end.
As with last month, ANZ was the first
to react, announcing a full 25bps decrease across all variable interest
rates for Australian home and residential investment loans.
In June, ANZ elected to pass through just 18bps of the RBA’s 25bps
cut, defying Treasurer Josh Frydenberg’s public demand for a full
transference of the reduction.
CBA was next to go public, opting for a 0.19% reduction across both
its owner occupied and investor P&I standard variable rate home
loans.
The interest only home loans, both owner occupied and investment, received the full 25bps cut.
Last month, CBA passed through the 0.25% cut in full.
The bank also announced a special five-month term deposit rate for
savers, introduced at 2.20% per year, which is a 0.20% increase.
“With official interest rate settings already at record lows, we are
focused on balancing the benefits and the costs of further interest rate
reductions between our 1.6 million home loan and over 6 million savings
customers,” said Angus Sullivan, group executive of retail banking
services.
“It is not possible to pass on the full rate reduction to over $160
billion of our deposits, including deposits where interest rates are at
or already near zero,” he added.
In June, NAB also passed through the full 25bps. However, this month
they elected to reduce variable home loan interest rates by 19bps, but
also provided more commentary along with the decision than the other
majors.
“Decisions like these are difficult and reflect the current unique
circumstances, with home loan rates at record lows at the same time as
deposit and savings rates also being at record lows,” said chief
customer officer of consumer banking, Mike Baird.
“The difference between what we charge and how much it costs us to
fund a mortgage remains under pressure and while the circumstances of
each RBA cash rate decision will vary and has some influence on the cost
of borrowing money, it is not the only funding cost driver for NAB.”
“Getting the balance right is an ongoing challenge for banks and,
with 9 million customers, making the right decisions for our customers
matters for the Australian economy,” he explained.
Westpac rounded out the responses yesterday evening, announcing a
reduction of 20bps for variable rates including owner occupier paying
P&I, investment p&I, and owner occupier for interest only
customers.
The rate was reduced by 0.30% for residential investment property
loans for customers for customers with interest only repayments.
In June, Westpac reduced rates for owner occupiers paying P&I by
just 0.20%, and rates for investor customers with interest only payments
by 0.35%
Courtesy of Philip Lowe, speaking in Darwin tonight. Savers do not even warrant a mention… more the shame!
As I am sure you are aware, this morning the Board decided to reduce the cash rate by a quarter of a percentage point to 1 per cent. This follows a similar adjustment last month. This easing of monetary policy will support jobs growth across the country and provide greater confidence that inflation will be consistent with the medium-term target of 2 to 3 per cent.
Our assessment is that despite the Australian economy having performed reasonably well over recent years, there is still a fair degree of spare capacity in the economy. It is both possible and desirable to reduce that spare capacity. We should be able to achieve a lower rate of unemployment than we currently have and we should also be able to reduce underemployment. If, as a country, we can do this, we could expect a further lift in wages growth and stronger growth in household incomes. These would be good outcomes. As I hope you are aware, the Reserve Bank’s monetary policy framework is centred on the inflation target, but the ultimate objective of our policies is to promote the collective economic prosperity of the people of Australia.
In the Board’s judgement, the easing of monetary policy last month and this month will help promote our collective welfare. At the same time, though, we recognise that the benefits are not evenly distributed across the community and that there are some downsides to monetary easing. Partly for these reasons, over recent times I have been drawing attention to the fact that, as a nation, there are options other than monetary easing for putting us on a better path.
One option is fiscal support, including through spending on infrastructure. This spending adds to demand in the economy and – provided the right projects are selected – it also adds to the country’s productive capacity. It is appropriate to be thinking about further investments in this area, especially with interest rates at a record low, the economy having spare capacity and some of our existing infrastructure struggling to cope with ongoing population growth.
Another option is structural policies that support firms expanding, investing, innovating and employing people. A strong, dynamic, competitive business sector generates jobs. It can help deliver the productivity growth that is the main source of sustainable increases in our wages and incomes. So, as a country, we need to keep focused on this.
To repeat the point, it is important that we think about the task ahead holistically. Monetary policy does have a significant role to play and our decisions are helping support the Australian economy. But, we should not rely on monetary policy alone. We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.
The two cuts in interest rates the Board has delivered recently will make an important contribution to putting us on a better path and winding back spare capacity. It is also worth drawing your attention to a few other developments.
First, borrowing costs for almost all borrowers are now the lowest they have ever been. As an illustration, the Australian Government can borrow for 10 years at around 1.3 per cent, the lowest rate it has faced since Federation in 1901. It is also able to borrow for 30 years at an interest rate of less than 2 per cent. Private businesses and households also face low borrowing rates. This is not only because official interest rates are low, but because credit spreads are low too.
Second, Australia’s terms of trade have risen again, largely due to higher iron ore prices. Investment in the resources sector is also expected to increase over the next few years, after having declined steadily for almost seven years. To be clear, we are not expecting another major mining boom, but we are expecting a solid upswing in the resources sector, which will help the overall economy. I hope that, in time, the effects of this upswing will be felt here in the Northern Territory too.
Third, the exchange rate has depreciated over the past couple of years and, on a trade-weighted basis, is at the bottom end of its range of recent times. This is helping support important parts of the economy.
And fourth, we are expecting stronger growth in household disposable income over the next couple of years, partly due to the expected implementation of the low and middle income tax offset. Stronger growth in incomes should support household spending.
Together, these various developments will help the Australian economy.
At the same time, though, we need to watch global developments very closely. Over recent times, the uncertainty generated by the trade and technology disputes between the United States and China has made businesses in many countries nervous about investing. Many are preferring to sit on their hands, rather than commit to capital spending that is difficult and costly to reverse. The result is less international trade and a weakening trend in investment globally. If this continues for too much longer, the effects on economic growth are likely to be significant. For this reason, the risks to the global economy remain tilted to the downside.
The combination of these persistent downside risks and continuing low rates of inflation has led investors around the world to expect interest rate reductions by all the world’s major central banks. In Europe and Japan, official interest rates are already negative but investors are expecting the central banks to go further into negative territory. And in the United States, investors are expecting a substantial reduction in interest rates over the period ahead. This is quite a different world from the one we were facing earlier in the year.
What all this means for us here in Australia is yet to be determined.
We need to remember that the central scenario for both the global and Australian economies is still for reasonable growth, low unemployment and low and stable inflation. As I discussed a few moments ago, there are a number of developments that are providing support to the Australian economy. So we will be closely monitoring how things evolve over coming months. Given the circumstances, the Board is prepared to adjust interest rates again if needed to get us closer to full employment and achieve the inflation target in a way that supports the collective welfare of all Australians, including those who call the Northern Territory home
