RBA – Page 63 – Digital Finance Analytics (DFA) Blog

Housing Credit Jumps Again

The RBA has released their credit aggregates to end November 2016. Total credit for housing has now risen to $1.607 trillion, seasonally adjusted, up 0.5% in the month and 6.3% in the past year. Within that, investment lending was 35% of the total, up 0.68% whilst owner occupied loans rose 0.4%. So we see investment lending continuing to regain momentum and total credit growth is still running ahead of inflation and wages – so expect the household borrowing ratio to continue to climb.

Business lending was up 0.5% in the month, or 4.9% in the year, whilst personal credit continued to fall (ahead of Christmas) down 1.2% in the year to end November.

We see that share of investment mortgages on the rise, whilst the proportion of lending to business, to the total continues to fall.

There is still noise in the data. The RBA says:

All growth rates for the financial aggregates are seasonally adjusted, and adjusted for the effects of breaks in the series as recorded in the notes to the tables listed below. Data for the levels of financial aggregates are not adjusted for series breaks. Historical levels and growth rates for the financial aggregates have been revised owing to the resubmission of data by some financial intermediaries, the re-estimation of seasonal factors and the incorporation of securitisation data. The RBA credit aggregates measure credit provided by financial institutions operating domestically. They do not capture cross-border or non-intermediated lending.

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 $47 billion over the period of July 2015 to November 2016, of which $0.9 billion occurred in November 2016. 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.

Fears rise as mortgage stress strikes bush, city

From The Australian.

In Lamington, a country area of Western Australia covering mining towns such as Kalgoorlie, 2600 households are suffering “mortgage stress”.

The pain is more severe in Harristown in Queensland, about 130km west of Brisbane, where more than 4500 households are in difficulty.

For the banks, more than 370 in these areas alone are likely to default, or fall more than 30 days behind on repayments, according to data from Digital Finance Analytics.

Research covering the top 20 postcodes with the greatest mortgage stress features many country areas but Melbourne’s Essendon and Preston each have around 2500 households in difficulty, as does western Sydney’s Bossley Park.

Despite record low interest rates and unemployment below 6 per cent, Standard & Poor’s yesterday said arrears ticked higher in October and the proportion of “non-conforming” borrowers behind on payments was near record levels.

DFA’s data, based on a rolling survey of 2000 households a month, suggests the trend will worsen. It also suggests first time home buyers who received help from the “bank of mum and dad” were more likely to default.

“The issue will be what happens to interest rates. If interest rates don’t go up, then some of this won’t flow through, but I think all the expectations are that interest rates will rise,” said DFA analyst Martin North, who is factoring in a 50 basis point increase in rates next year.

Banks in recent weeks have hiked mortgage rates for many customers out of sync with any RBA changes, which analysts said could put customers under greater pressure amid meagre income growth.

Mr North said: “My own models predict a higher rate of loss than they (banks) are currently predicting themselves.”

The RBA yesterday signalled borrowers were unlikely to win any imminent reprieve on their debt repayments early next year.

After cutting rates since late 2011, the RBA’s minutes of its monthly board meeting revealed greater concern about the “balance” between low rates supporting economic growth and the “potential risks to household balance sheets”.

“Members recognised that this balance would need to be kept under review,” the RBA said.

Westpac chief economist Bill Evans said the RBA was concerned the benefits to spending from lower rates were not compensating for the instability in asset markets, heightened by record high household debt.

“This observation is signalling that the hurdle to even lower rates which would be aimed at boosting demand is very high,” he said. As house prices soared more than 65 per cent in Sydney in the past four years while floundering in other areas, some hedge funds and analysts have flagged overgeared households and a sagging real economy were increasing the risks of a housing correction.

US-based asset manager AllianceBernstein yesterday warned that potential “disorder” in the housing sector in the second half of next year clouded the outlook for Australia’s investment markets. Former Commonwealth Bank chief David Murray this month said all the signs of a housing “bubble” were prevalent, such as “people’s behaviour … and defensiveness about any correction”.

Mr Murray told Sky Business that investors owning multiple properties that were cross-collateralised who could become forced sellers were the “risk to the system”. But the big banks have repeatedly tried to ease fears about the risks, citing relatively low unemployment and most customers being ahead on their loan repayments.

Westpac last month reported actual mortgage losses after insurance eased to $31 million, or just 2 basis points of its loan book. The number of consumer properties in possession rose to 262, from 253 in March.

ANZ and Bank of Queensland, however, recently flagged concerns about stagnant wages, underemployment and the apartment glut in eastern cities.

According to DFA’s survey, around 80 per cent of households were travelling well and only 20 per cent were under stress, struggling to make repayments or having to cut back on spending.

Mr North said low wages growth and rising education and healthcare costs suggested borrowers’ financial situations would not improve. He predicted the banking industry’s loss rates would rise to about 4 basis points of mortgage loans, varying among lenders’ portfolios.

He said banks concentrated in troubled areas, such as WA, would be harder hit.

After the pick-up in bank stock prices since last month, CLSA analysts yesterday reminded investors that all were at risk of favourable loan-loss trends of recent years reversing and that CBA was more exposed than peers to WA.

WA has the largest proportion of stressed households at 26.4 per cent, just ahead of Victoria, but off a smaller population base, according to DFA’s survey.

Mr North said: “I’m theorising there is more risk in the mortgage book than I think the RBA recognises and more risk than some of the risk models used by the banks. It’s not dramatic … I’m not saying the world is caving in. 80 per cent of the book is fine.

“But it’s enough to at least be aware of.”

RBA Minutes Reaffirms A Holding Stance

The latest minutes from the December meeting reinforces the view that further rate cuts are not likely. They also mentioned the stronger property market, other than in WA.

In considering the stance of monetary policy, members discussed the policy decisions made throughout the easing phase since late 2011, during which the cash rate had been lowered in aggregate by 3¼ percentage points. The lower rates had helped support the economy in the transition following the mining investment boom and, more recently, had been in response to lower-than-expected inflation. Members discussed the effect of lower interest rates on asset prices and the decisions by households to borrow, particularly given the already high levels of household debt. Over recent years the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognised that this balance would need to be kept under review.

Turning to the policy decision for the December meeting, members noted that the international environment had been more positive in recent months, while observing that significant risks to the outlook for global activity persisted. The Chinese economy had remained resilient, supported by expansionary fiscal policy and rapid growth in financing. International financial markets had interpreted the outcome of the US election, specifically the implications for infrastructure spending, as being positive for growth and inflation in the United States. At the same time, there were increased expectations that the Federal Reserve would increase policy rates at the next meeting of the FOMC. Rising commodity prices had also contributed to an assessment that the outlook for global inflation was more balanced than it had been for some time, although inflation remained below most central banks’ targets.

Domestically, data that had become available over the previous month indicated that GDP growth in the September quarter was likely to be lower than the forecast at the time of the November Statement on Monetary Policy. Year-ended growth was expected to decline before picking up to be above potential later in the forecast period, supported by low interest rates and the lower exchange rate since 2013. Members noted that these factors had assisted the economy in its transition following the mining investment boom and that an appreciating exchange rate could complicate the adjustment. Falls in mining investment were expected to subtract less from GDP growth over time and resource exports were expected to continue to make a substantial contribution to growth.

There was still considerable uncertainty about the momentum in the labour market. The unemployment rate had declined over the past year, as had measures of excess capacity that accounted for the number of additional desired hours of work. Part-time employment had grown strongly over the previous year, but employment growth overall had slowed. Members noted that there was expected to be excess capacity in the labour market for some time, which was consistent with further indications of subdued labour cost pressures. This suggested that inflation would remain low for some time before returning to more normal levels.

Housing market conditions had strengthened overall over preceding months, although there was considerable variation across the country and between houses and apartments. Housing credit growth had picked up a little, particularly for investors. The supervisory measures that had strengthened lending standards in the housing market had led some lenders to take a more cautious attitude to lending in certain segments. At the same time, the increase in global bond yields had led some lenders to increase their rates on fixed-interest rate loans.

Taking into account the information that had become available over the previous month, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Dual-Network Cards and Mobile Wallet Technology

The Reserve Bank has today published a consultation paper on dual-network debit cards and mobile wallet technology following discussion of these issues by the Payments System Board at its November meeting.

Dual-network debit cards are debit/ATM cards that allow transactions to be routed through two different networks. They offer convenience for cardholders and enhance the ability of merchants to encourage the use of lower-cost payment methods. Around two-thirds of the debit cards issued in Australia have dual-network functionality.

New technology has enabled mobile devices, such as mobile phones, to be used to make payments via an electronic representation of a payment card, as opposed to a traditional plastic card. The electronic representation of a card is typically contained in a ‘mobile wallet’, which is a software application on a mobile device that enables payments to be made through the card networks. This technology may offer greater convenience for cardholders as it avoids some of the physical limitations of carrying and using multiple plastic cards.

Some stakeholders have recently raised concerns about possible restrictions on competition in the mobile wallet sphere, specifically about conduct that may prevent or make it more difficult for both networks on a dual-network debit card to be enabled on a mobile device. This conduct could have the effect of reducing choice and convenience for cardholders in making mobile payments and reduce the ability of merchants to encourage the use of lower-cost payment methods. This consultation paper discusses these issues and raises a number of specific questions for consultation.

Interested parties are invited to make submissions on the consultation paper by 7 February 2017.

Questions for consultation:

1. What are the views of end-users (cardholders and merchants) regarding dual-network cards, including their use in mobile payments? Are there particular benefits that arise for end-users from having multiple payment networks available on a mobile device? What risks and costs might arise?

2. Are there any impediments or restrictions imposed (or planned or foreshadowed) by card schemes on the mobile wallet provisioning of competing networks on dual-network cards? If so, how significant are these and can they be justified on commercial or other grounds?

3. What are the likely effects – on competition and efficiency in the payments system, as well as more broadly – of the action of any scheme to prevent or discourage the mobile wallet provisioning of a competing network on a dual-network card? Are there benefits for end-users that arise from rules or policies that constrain the provisioning of an additional network on a device?

4. Do cardholders, issuers or others have views as to the feasibility of different possible ways of provisioning dual-network cards?

5. Under the existing voluntary undertakings to the Bank in place since August 2013 (see page 4), schemes have committed to some voluntary principles regarding dual-network cards. Have these principles been an effective response to the competitive issues that arose earlier? Have there been any issues in practice with the operation of these principles? Would an extension of these principles be an appropriate response to the current issues?

6. Are there any foreign precedents that are relevant for the consideration of these issues in Australia?

7. Are the issues raised relevant only to dual-network debit cards or are they also relevant to so-called ‘combo cards’ with credit functionality from one scheme and debit functionality from another?

8. Are there any prospective developments in payment card technology that may be relevant for the Bank as it considers these issues?

9. If the Bank were to contemplate a standard addressing conduct in this area, are there particular compliance costs that would arise for industry?

Dual-network (or ‘co-badged’) cards have attracted the attention of policymakers in a number of other jurisdictions – most notably the United States, Canada and the European Union, with different policy responses. In each case, however, the response has tended to focus on reducing costs to payments system end-users.

In the United States, Section 1075 of the 2010 Dodd-Frank Act, known as the Durbin Amendment, provided for a number of reforms to the debit card market with the intention of providing more competition in the market. One aspect, which came into effect in April 2012, has the effect of requiring that all debit cards be enabled on at least two unaffiliated networks. Networks must also not restrict or limit an issuer’s ability to contract with other networks.

In the European Union, the 2015 regulation on interchange fees makes specific reference to co-badged cards and their role in reducing the cost of payments. The regulation prevents card schemes from having rules that prevent issuers from including payments functionality of two or more networks on one card. It also requires that any scheme rules, routing principles or technical or security standards involving co-badged cards should be objectively justified and non-discriminatory. It specifies that the choice of payment application for transactions using co-badged cards should be made by users, not imposed by card schemes, issuers, acquirers or processing entities.

Individual countries within Europe have different structures with respect to card networks and mobile payments. For example: In Denmark, the domestic debit card system is Dankort; there are also co-badged ‘Visa Dankort’ debit cards. On co-badged cards, domestic transactions are routed via Dankort, while transactions made abroad are routed through the Visa network. In France, Carte Bancaire is the domestic (credit and debit) scheme, often co-badged with MasterCard or Visa, with the latter networks used typically for cross-border transactions and Carte Bancaire used for domestic purchases. In Canada, the Code of Conduct for the Credit and Debit Card Industry in Canada (‘the Code’) explicitly provides for dual-network cards but takes a different approach. It allows for non-competing, complementary domestic applications from different networks to exist on the same debit card but specifies that competing domestic applications from different networks cannot be offered on the same card. In practice, this means that domestic point-of-sale transactions made on co-branded debit cards are processed through one network, in particular the domestic Interac network, while other applications such as on-line payments and payments at foreign point-of-sale terminals may be processed through the other network on the card. Contactless payments are also processed via Interac (‘Interac Flash’ transactions). The Code also states that payment card networks must ensure that co-badged debit cards are equally branded. All representations of payment applets in a mobile wallet or mobile device, and the payment card network brands associated with them, must be clearly identifiable and equally prominent.

Cardholders in Canada are now able to provision non-competing domestic networks on dual-network cards for mobile use. Although there is no unifying precedent so far regarding how public policy will evolve regarding mobile payments and dual-network cards, many authorities recognise the benefits of competition among different schemes and have sought to avoid artificial restrictions on competition. A press release from the European Commission in June this year indicates its expectation that dual-network card functionality will be available in both physical and mobile forms.7 In particular, the Commission noted that under its new interchange fee regulation, consumers will be able to require their bank to co-badge a single card (or in the future their mobile phone) with any card brands that they issue to the consumer.

Household Debt Rises Again

The latest RBA chart pack included the updated household debt to income ratio, which is higher again. This is a function of low income growth, and high debt, especially mortgages. Not pretty. Whilst low rates makes this manageable for many, the mortgage rate trend is likely to rise from here, putting more pressure on already stretched household budgets.

‘Big shakeout’ in housing looms because of low rates

From The NewDaily.

The Australian property market, overheated by ultra-low interest rates, faces a day of reckoning, senior economists have warned.

The Reserve Bank on Tuesday held the official cash rate at the historic low of 1.5 per cent, as expected. This marked the fourth consecutive month Australia’s central bank made no change to rates, since cutting them by 25 basis points in August.

The RBA should continue to sit on its hands for as long as possible, or risk further distortions, experts urged.

“It does look like there’s some big shakeouts about to occur in the financial markets,” Industry Super Australia chief economist Dr Stephen Anthony told The New Daily.

“I can’t tell you if it’ll happen this year, next year or the year after, but common sense says that things are very highly priced.”

Across the developed world, low rates have pushed investors into property, stocks and bonds, which drive up market prices but do little to fuel much-needed economic growth, Dr Anthony said.

“The RBA should just leave things where they are and sit back and use APRA and any other regulatory mechanism it can to slow price growth in Sydney and Melbourne.”

The widespread expectation is that the bank’s next movement will be up, given that the US Federal Reserve is likely to raise this month. But some, such as prominent economist Stephen Koukoulas, have urged further cuts.

Wednesday’s GDP figures may provide an argument for a cut next year. The result is expected to be soft, in the vicinity of 0.2 per cent for the September quarter. This would take annual growth to 2.5 per cent, missing the RBA’s forecast of about 3 per cent.

The RBA will also start 2017 with inflation at historically low levels, with little prospect that demand will recover quickly.

There are also plenty of global shocks in the making. Will Donald Trump help or hinder the world’s recovery? Will the defeat of the Italian referendum rock the country’s troubled banks?

Despite these challenges, cutting further would likely worsen the economic distortion, according to Dr Mark Crosby, a macroeconomist at Monash University.

“It’s always hard to call the top, but it’s definitely the case that there are risks being caused by these very low rates, especially in the Australian housing markets,” Dr Crosby told The New Daily.

“The point of low rates is to stimulate demand, but when that hasn’t happened and that liquidity goes elsewhere, that creates other problems, so yes there are definitely risks being built up, and that’s a worry for the Reserve Bank and other central banks, for sure.”

Even some experts connected to the Liberal Party think the property market is overheated.

Financial economist Christopher Joye, hired by Malcolm Turnbull at Goldman Sachs, and formerly an analyst at the Liberal-aligned Menzies Research Centre, said this week that properties are overvalued by about 25 per cent in Melbourne and Sydney, and that “mayhem” may be coming.

In fact, the anticipated ‘shakeout’ may have already begun, according to RMIT economist Dr Ashton De Silva, a housing market expert.

Prices in some parts of the market, such as off-the-plan apartments in Sydney and Melbourne, have already been hit, he said, with potentially worse to come.

“There are stories emerging where people are purchasing stuff off-the-plan, but then finding out when they actually take possession a couple of months or years later, the contract price is actually higher than the retail price,” Dr De Silva told The New Daily.

“My view is that there’s a very, very good chance that we’re going to see a significant correction in some dwelling types in some areas.”

RBA Holds Cash Rate, As Expected

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

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year. Economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets, although headline inflation rates have increased recently. Globally, the outlook for inflation is more balanced than it has been for some time.

Commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income.

Financial markets are functioning effectively. Government bond yields have risen further with the adjustment having been orderly. Funding costs for some borrowers have also risen, but remain low. Globally, monetary policy remains remarkably accommodative.

In Australia, the economy is continuing its transition following the mining investment boom. Some slowing in the year-ended growth rate is likely, before it picks up again. Further increases in exports of resources are expected as completed projects come on line. The outlook for business investment remains subdued, although measures of business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although some measures of labour underutilisation are little changed. There continues to be considerable variation in employment outcomes across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

Conditions in the housing market have strengthened overall, although they vary considerably around the country. In some markets, prices are rising briskly, while in others they are declining. Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago. Supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

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

RBA Credit Aggregates Confirms Higher Home Lending Growth

The RBA have released their Financial Aggregates for October 2016. Housing grew 0.6%, making an annual rate of 6.4%, still well above inflation. Personal finance was static, whilst business lending rose 0.5% making an annual rate of 4.4% (in original terms).

Looking at the seasonally adjusted data set, investment lending is growing at 5.3% and rising, owner occupied lending is 7.1% and falling, business lending is growing at 4.4% and falling, and other personal finance is down 1.1%. Investment lending is the only element to rise.

Looking at the detailed data, seasonally adjusted, owner occupied lending rose 0.54% in the month, by $6.6 billion, to $1.04 trillion, investment lending rose 0.59%, by $3.3 billion to $560 billion, and business lending rose 0.27%, by $2.3 billion to $864 billion.

We see therefore a fall in the relative share of lending to business, compared with housing, and the momentum in investment housing stronger than owner occupied housing. Both signs of trouble ahead. Investment lending is 35% of all housing, and business lending 33% of all banking lending.

There were further adjustments to loan classification in the month, just to confuse further. The RBA said:

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 $46 billion over the period of July 2015 to October 2016, of which $0.8 billion occurred in October 2016. 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.

The State of the States

The RBA’s Christopher Kent, Assistant Governor (Economic) highlighted the economic variations across states in Australia. He makes the point that in a country as large and diverse as Australia, the behaviour of the economy as a whole often misses important differences across the country.

A key reason for the differences across the states over recent years has been the effect of the large declines in mining investment and commodity prices. These have contributed to weaker economic conditions in the mining states and, therefore, weighed on economic conditions nationally. But those forces are waning; indeed, the terms of trade have even risen of late. Hence, there are reasonable prospects for stronger growth of nominal demand in the mining states and, by extension, for the economy overall. That would contribute to a rise in domestic inflationary pressures and a gradual return of inflation to more normal levels.

A close examination of the differences across the states can shed some light on the outlook for the Australian economy.

The modest growth of non-mining business investment over recent years masks the stronger growth in some parts of the country and declines in others.

The weakness in full-time employment nationally over the past few years owes much to the subdued demand for labour in the mining states.

Housing market conditions are far from uniform. Prices are falling in Perth after a ramp up in supply combined with a fall in population growth. Meanwhile, Melbourne is seeing stronger population inflows, perhaps benefiting from strong growth of supply for some years and lower prices than in Sydney.

Housing price growth has picked up in Sydney and Melbourne, where auction clearance rates have increased to high levels. In addition, loan approvals to investors have increased over recent months.

In contrast to Sydney and Melbourne, housing market conditions remain subdued in Perth. Prices of apartments and detached dwellings there have declined further and are around 8 per cent below the peak. Rents in Perth have also declined by about the same amount. Those changes are consistent with the weakening in general economic conditions in Western Australia. Moreover, as the graph above shows, population growth in Western Australia has declined significantly since the peak of mining investment in 2012. And yet the full extent of the decline in population growth may not have been readily appreciated by buyers and builders of housing. That would be consistent with the fact that building approvals in Western Australia actually picked up noticeably from 2012 and did not peak until 2014, which was also about the same time that housing prices and rents reached a peak in Perth. This meant that the housing supply was still ramping up at the same time that population growth was declining. This is apparent in the following graph, which shows the growth in the number of people in each of the large states relative to the number of new dwellings completed at that time . The ‘dashes’ show the average number of people per household from the various censuses.

Graph 10: Population and Dwelling Completions

In Western Australia, this ratio has fallen sharply to about one additional person in the state per new dwelling completion. That’s well below the average number of inhabitants per dwelling. In other words, there are a lot of dwellings being completed relative to the needs of the slower growing populace. That is consistent with the sharp rise in vacancy rates in Perth and the adjustment to rents and housing prices. It also suggests that dwelling construction and construction employment are likely to remain subdued for some time. That is having a knock-on effect to other industries linked to the property market. These linkages are one way in which the decline in the resource sector has been extended and amplified through to other parts of the economy.

These are a few examples of how the experiences of the different states and industries can provide useful insights into the behaviour of the overall economy. The Bank puts time and resources into understanding these sorts of differences across regions and industries. We examine a range of publicly available data and build on that knowledge through our extensive liaison program. While the Bank sets monetary policy for the nation, an appreciation of the different parts gives us more confidence about our understanding of the behaviour of the whole.