Tag: RBA

Household Debt Busts the 190

The latest RBA E2 – Households Finances – Selected Ratios – data has been released. The inexorable rise in debt continues. No wonder mortgage stress is rising.

The ratio of household debt to annualised household disposable income , rose to 190.4, the ratio of housing debt to annualised household disposable income rose to 135, and worryingly the ratio of interest payments on housing debt to quarterly household disposable income has risen to 7.0, thanks to the out of cycle rate hikes and flat or falling incomes.  Of course failing cash rates helped households out, but the lending standards were not adjusted until too late.

As we highlighted on Friday, the current policy settings are plain wrong.  Households are being hung out to dry. The debt overhang will bite harder as mortgage rates rise, and this will have a direct impact on spending power, and thus economic growth.

Time to tighten lending rules further, and add a counter cyclical capital buffer. Get on with it APRA! And apply some debt-to-income rules.

Housing Lending Reached A Dizzy $1.67 Trillion In May

The RBA credit aggregates for May 2017  show continued growth in housing lending, whilst business investment remains anemic.

The adjusted 12 month growth trends tells it all. Investment loans still running ahead of owner occupied lending, business credit slowing and other personal lending falling.  Total credit grew 5% in the year (compared with 6.4% last year), Housing credit grew at 6.6%, compared with 6.9% a year ago, and business credit grew at 3.1% compared with 7% a year ago. These are worrying trends, and makes future economic growth less certain. However, bank profits will be bolstered thanks to ongoing mortgage growth, and the benefit of the recent mortgage repricing, under the alibi of regulatory pressure. Just remember households have to repay this debt at some point, and interest rates will grind higher. Risks continue to rise.

The more noisy, monthly series shows housing grew at 0.6% compared with 0.5% last month, whilst business grew 0.2% compared with 0.4% last month.

Growth in the aggregates show the proportion of investment loans fell just a little, while business lending as a proportion of all lending fell again.

Here are the month on month moves. Owner occupied lending rose $7.8 billion (0.72%) and investment lending rose $1.6 billion (0.28%), both seasonally adjusted.

The RBA says more loans – $1.4 billion –  were switched from investment to owner occupied loans, so the true state of play remains uncertain. $53 billion switched is a big number.

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $53 billion over the period of July 2015 to May 2017, of which $1.4 billion occurred in May 2017. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

It also appears the non-bank sector is growing (take the RBA aggregate from the APRA number earlier reported). $1.67 billion, less $1.56 billion = 0.11 trillion.

 

 

Eight rate hikes in two years? Our economy should be so lucky!

From The New Daily.

A widely-misreported warning of eight rate hikes in two years would in fact be good news for the economy, according to the man who made the prediction.

Dr John Edwards, former economic advisor to Paul Keating, former RBA board member and former chief economist at HSBC, struck fear into the hearts of mortgage holders this week by supposedly forecasting that the official cash rate would rise from 1.5 to 3.5 per cent by the end of 2019.

He actually wrote that the RBA would be forced to lift rates to 3.5 per cent only if the Australian economy substantially improved.

“This implies that within three years Australia’s economic world has returned to more-or-less normal, with wages growth of 3.5 per cent, inflation of 2.5 per cent, and output growth of 3 per cent,” Dr Edwards said.

He admitted such a rosy outcome might never eventuate.

“The pace of tightening will anyway be governed by the strength of the economy,” he wrote.

“If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

The piece prompted warnings that households would be forced to pay hundreds more a year in mortgage repayments, but Dr Edwards himself feared no such disastrous outcome: “The increases will cause less distress than will be widely observed.”

He said this was because housing interest payments were at 7 per cent of household disposable income, compared to 9.5 per cent in 2011 and 11 per cent just before the US-triggered global financial crisis.

These figures ignore the enormous impact of principal repayments. But the latest census data confirmed his point, showing that most parts of Australia were paying less overall on their mortgages than five years ago.

Dr Stephen Koukoulas, former economic adviser to Julia Gillard, said the economy would have to be “on fire” to necessitate eight rate rises, which would be “fantastic” news for workers.

He said GDP growth would have to be closer to 5 per cent, inflation 4 per cent and unemployment 3 per cent for the RBA to push the cash rate up by 200 basis points.

“If it comes to pass, it’ll be because the economy is in an inflation-inspired boom,” Dr Koukoulas told The New Daily.

Such a boom would help regular Australians because inflation is largely driven by household consumption, and “you need wages growth to underpin household consumption”.

A key factor is that the RBA sets the cash rate to target core inflation of 2 to 3 per cent over the medium term.

Because inflation has been below target for so many years, the central bank might allow it to sit at 3.2 or 3.3 per cent for a similar period of time, Dr Koukoulas said.

“There is a serious discussion among central banks that because of the hangover of the GFC, with low inflation still being recorded, let’s tolerate a year or two of above target inflation and let the unemployment rate get back down a little bit.”

Core inflation would only sit persistently above 3 per cent over the next two years if workers were “swimming in cash”, offsetting higher mortgage payments, which Dr Koukoulas said was an “improbable” but “fantastic” scenario.

Tom Kennedy, economist at JP Morgan, saw no such wage boom on the horizon.

In a research note on Thursday, he said next month’s minimum hourly wage increase of 3.3 per cent would be wholly offset by the much-publicised reduction in Sunday penalty rates.

Structural changes, such as underemployment and the increasing share of lower-paid services jobs, meant that the unemployment rate (currently 5.5 per cent) “most likely understates the slack” in the labour market, Mr Kennedy wrote.

Workers would have to get substantially more jobs and hours to enjoy wage rises, he said.

RBA may raise rates eight times over two years

From Bloomberg.

Australia’s central bank could increase interest rates eight times in the next two years, former board member John Edwards said.

The Reserve Bank of Australia (RBA) is probably already considering a program of rate increases given its forecasts for inflation returning to target and economic growth to accelerate to 3% against a stronger global backdrop, Edwards said in a column on the website of the Lowy Institute for International Policy, where he is a non-resident fellow.

Theorising that the long-term cash rate is about 3.5% – lower than the 5.2% average over the past two decades – and the RBA wants to start tightening in 2018 and reach its goal within two years, that would require four quarter-point increases each year, he said. Rates have been on hold at 1.5% since last August.

“It seems to me that something like eight quarter percentage point tightenings over 2018 and 2019 are distinctly possible, if the RBA’s economic forecasts prove correct,” said Edwards, who was on the bank’s board until July last year. “It’s possible the tightening could start earlier, or if not the tightening itself, at least the signaling which should precede it. We may be seeing a little of that now.”

Small steps

The RBA traditionally makes small steps and typically doesn’t commit itself to subsequent moves, making the market wary of predicting where the bank will be in a few years, Edwards said. In the current circumstances, he said we can reasonably assume:

  • The RBA considers its current rate to be exceptionally low
  • If the economy improves as it predicts, the next move will be up
  • If the economy was operating, as the RBA predicts, at 3% output growth and 2.5% inflation, it would think of a sustainable or natural policy rate of at least 3.5%
  • Most importantly, it will want the policy rate increase to match the forecast improvement in Australia’s economic performance, so rising to at least 3.5% by the end of 2019

Edwards noted the risks of rate increases alongside high household debt, with most Australian mortgages on variable interest rates closely tied to the RBA’s cash rate.

“The bigger the household debt, the more impact a quarter percentage point increase in the policy rate will have on household spending,” he said. “In the Australian case, it is certainly possible that high household home mortgage debt will crimp consumer spending if the policy rate returned to what was once considered a relatively low long-term rate.”

Still, Edwards noted that interest paid on Australian mortgages is much less than it was six years ago: while debt has increased, interest rates have fallen a lot. Payments are now 7% of disposable income compared with 9.5% in 2011, and 11% at the peak of the RBA tightening cycle before the 2008 financial crisis, he said.

Moreover, if the standard variable mortgage rate peaked at around 7%, that would still be nearly one percentage point below the 2011 level, and two-and-a-half percentage points below the 2008 peak, he said.

“The pace of tightening will anyway be governed by the strength of the economy,” Edwards said. “If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

RBA Minutes, More of the Same

The RBA released the minutes from their last meeting.  Once again low wage growth, and household debt figured in the discussion, as did a focus on financial stability and the role of prudential supervision.

Members discussed how financial stability considerations bear on monetary policy decisions, reviewing both the academic literature and policy experience in a number of countries, including Sweden and the United States.

The Bank has responsibility for promoting financial stability within its flexible medium-term inflation targeting framework. Over recent times, with interest rates at low levels, the Board has set monetary policy to support the economy in its transition following the mining investment boom, while also paying close attention to trends in household borrowing and related financial stability considerations. Members discussed the effect of monetary policy decisions on financial stability and on future inflation, employment and output. They also discussed the role that prudential supervision can play in promoting financial stability. In view of this, members acknowledged the importance of a strong relationship between the Bank and other regulators, particularly APRA. They observed that the current positive culture of cooperation across the relevant agencies in Australia has been of considerable value to good policy outcomes in recent years and it is therefore important that it be maintained. The strong relationship among regulators is facilitated by the Council of Financial Regulators, which is the coordinating body for the main financial regulatory agencies to promote the stability of the Australian financial system, as well as contribute to the efficiency and effectiveness of financial regulation.

Turning to the immediate decision regarding the level of the cash rate, members noted that the broad-based pick-up in the world economy was continuing. Labour markets had tightened further in many countries and this was expected to lead to a pick-up in wages and prices over time. Headline inflation rates in most countries had moved higher over the past year, partly reflecting higher commodity prices. Nonetheless, core inflation had remained low.

Domestically, members’ assessment was that the transition to lower levels of mining investment following the mining investment boom was almost complete. Surveyed business conditions had improved and business investment had picked up in those parts of the economy not directly affected by the decline in mining investment. Although year-ended GDP growth was expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the figures, members noted that economic growth was still expected to increase gradually over the next couple of years to a little above 3 per cent per annum.

Members noted that, although employment growth had been stronger in recent months, growth in total hours worked had declined. Nevertheless, the various forward-looking indicators pointed to continued growth in employment over the period ahead and a gradual erosion of the spare capacity in the labour market. Wage growth had remained low and this was likely to remain the case for some time yet. However, wage growth and inflation were expected to increase gradually as the economy strengthened. Members observed that low growth in incomes, along with high levels of household debt, appeared to have been restraining growth in household consumption.

The economic outlook continued to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 had also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Conditions in the housing market had continued to vary considerably around the country. Housing prices had been rising briskly in some markets, although there had been some signs that price pressures were starting to ease. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in housing debt had outpaced the slow growth in household incomes. APRA’s recent prudential supervision measures should help address the risks associated with high and rising levels of indebtedness. In response to those measures, increases in mortgage rates, particularly for investors and interest-only loans, had been announced, but were yet to have their full effect.

The Board continued to judge that developments in the labour and housing markets warranted careful monitoring. Taking into account all the available information, including that year-ended growth in output was expected to have slowed in the March quarter, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Australia is facing an interest rates dilemma

From The Conversation.

This week the US Federal Reserve, as expected, raised its benchmark interest rate by 25 basis points, to a range of 1-1.25%. This was the third such hike in the last six months.

Fed Chair Janet Yellen said:

Our decision reflects the progress the economy has made and is expected to make.

Yet not everyone was so jazzed about the decision. In a terrific piece former US Treasury Secretary Larry Summers articulated “5 reasons why the Fed may be making a mistake”.

And whether the Fed view or the Summers view is the better one has tremendously important implications for what the Reserve Bank should do here in Australia.

The nub of Summers’s concern revolves around the implicit model of the economy that the Fed is using – and whether it still works in the economic world in which we find ourselves.

The general worry with keeping rates too low, for too long, is that inflation will take off. In the past, policymakers have worried – with good reason – that waiting to raise rates until inflation starts rising much is dangerous because it can get out of control.

If one is not going to wait to see what happens to inflation, then one needs a way to predict the path of it. The traditional approach that policymakers have taken is to look at the relationship between unemployment and inflation – the so-called Phillips Curve – and predict future inflation based on unemployment.

Summers prefers what he calls the “shoot only when you see the whites of the eyes of inflation” paradigm. This – as the imagery suggests – involves waiting until the last possible point before raising rates. In other words, be really sure that the inflation is happening.

This makes sense if the old model is broken, and Summers makes a persuasive case that it is.

First, he points out that the Phillips Curve (the allegedly stable relationship) may not even exist. And even if it did, scholars have pointed out that it would be very hard to estimate statistically the Goldilocks point where unemployment is such that the rate of inflation is stable (the so-called Non-Accelerating Inflation Rate of Unemployment or NAIRU).

Second, Summers offers a different model of the world – at least in part. That model is one where advanced economies – like the US and Australia – are suffering from “secular stagnation”.

According to Summers, the implication for monetary policy of this are as follows:

there is good reason to believe that a given level of rates is much less expansionary than it used to be given the structural forces operating to raise saving propensities and reduce investment propensities.

I am not sure that a 2 percent funds rate is especially expansionary in the current environment.

Moreover, he sees asymmetric risk with getting it wrong, going on to say:

And I am confident that if the Fed errs and tips the economy into recession the consequences will be very serious given that the zero lower bound on interest rates or perhaps a slightly negative rate will not allow the normal countercyclical response.

Maybe the combination of a fire hose of global savings chasing too few productive investment opportunities has changed what level of interest rate can provide a serious boost to economic activity.

Which bring us to Australia. We, too, have relatively low unemployment by historical standards (the ABS just announced a drop in May to 5.5%), yet wage growth is remarkably low. Those two things happening together suggests that our old understanding of the labour market is off the mark. That low wage growth is a major driver of the low inflation we are also experiencing.

If Summers is right, and there isn’t some big point of difference between Australia and the US in this regard, then the unmistakable implication is that the RBA should probably cut rates – perhaps twice – later this year.

But there is that whole housing price thing in Australia. A rate cut could fuel further price rises which, as bad as that is for affordability, is also deeply problematic for financial stability.

Yet, if the Australian economy really does need a rate cut, and governor Philip Lowe holds steady because of housing price fears, then that could trigger a further slowing of GDP growth, put wages under even more pressure, and trigger a recession itself. And that would be bad news for financial stability, too.

Let’s see how the RBA handles that Gordian Knot.

Bank Fee Income Growing More Slowely

The latest RBA Bulletin includes a section on Bank fees. In 2016, domestic banking fee income from households and businesses grew at a relatively
slow pace of 1.7 per cent, to around $12.7 billion.

Deposit and loan fee income relative to the outstanding value of products on which these fees are levied was slightly lower than in the previous year.

Banks’ fee income from households grew by 1.5 per cent in 2016. This represented a slowing in growth from the previous year, reflecting lower
growth in fee income from housing lending and credit cards.

Growth in fee income from credit cards slowed in 2016 to slightly below the average since 2010, but remains the largest component of fee income from households. The growth in fees was supported by continued take-up of credit cards bundled with home loan packages. There were also more instances of fees being charged, with some banks no longer waiving fees for transferring a credit card balance to a new card provider.

Total fee income from businesses increased by 1.9 per cent in 2016, around the slowest pace for a decade. Slower growth was recorded for fee income from both small and large businesses. By product, growth in fee income
was driven by increases in business loan fees and merchant service fee income from processing card transactions. Fee income from deposit accounts also increased slightly, while fee income from bank bills and other sources declined. The increase in business loan fees mainly
reflected higher reported fee income from small businesses.

Growth in merchant service fee income was mainly attributable to increased transaction volumes, particularly for credit cards due to wider
acceptance of contactless payments. Increased use of platinum and business credit cards, which attract higher interchange fees, also contributed to growth in merchant service fee income from small businesses. Nevertheless, growth in merchant service fee income was evenly spread across small and large businesses.

Total fee take was $12.6 billion, still a substantial sum, but small beer compared with the $31 billion grabbed by the superannuation industry.

Household Debt Rising Further – RBA

The latest chart pack from the RBA to June 2017 includes the worrisome chart on household debt levels.

No sign of a change in trajectory, despite low wage growth and some lending tightening. The last available data point on household debt to income is 188.7 from December 2016.  The March data should be out soon and will be higher again.

Of course this is an average, and some households are in deep debt strife, right now, as higher mortgage rates hit. See our latest mortgage stress analysis released a couple of days ago.

Once Again RBA Holds

The latest from the RBA continues the mixed story, with some better economic indicators, but also higher risks from household debt. As a result they held the cash rate again.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices are generally higher than they were a year ago, providing a boost to Australia’s national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases.

Headline inflation rates in most countries have moved higher over the past year, partly reflecting the higher commodity prices. Core inflation remains low, as do long-term bond yields. Further increases in US interest rates are expected over the year ahead and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.

Domestically, the transition to lower levels of mining investment following the mining investment boom is almost complete. Business conditions have improved and capacity utilisation has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment. Year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures. Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.

Indicators of the labour market remain mixed. Employment growth has been stronger over recent months, although growth in total hours worked remains weak. The various forward-looking indicators point to continued growth in employment over the period ahead. Wage growth remains low and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens. Slow growth in real wages is restraining growth in household consumption.

The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Conditions in the housing market vary considerably around the country. Prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders have also announced increases in mortgage rates, particularly those paid by investors and on interest-only loans.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Total Housing Lending Still Powering On

Today the RBA released their financial aggregates for April.  Total credit grew by 0.4%, or 4.9% over the past year. Housing lending rose 0.5%, or 6.5% over the past year, personal credit fell by 0.1% or 1.5% in the past 12 months, and business lending rose 0.4% or 3.1% over the past year.

There was $1.1 bn of mortgages switched between investment and owner occupation categories in the month.

The 12 month view shows investor lending still accelerating, whilst business lending and other personal credit continues lower.

The more volatile measures shows a fall in housing lending and a rise in business lending.

The aggregates show total housing was $1.66 trillion, up 0.5% of $8.1 billion.  Within that owner occupied loans rose 0.55% of $6 billion and investor loans grew 0.36% or $2.1 billion.

The proportion of lending to productive business fell again, so housing lending is still dominating the scene to the detriment of the broader economy and sustainable long term growth.

The RBA noted:

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $52 billion over the period of July 2015 to April 2017, of which $1.1 billion occurred in April 2017. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.