RBA – Page 66 – Digital Finance Analytics (DFA) Blog

Household Debt Further Into The Troposphere

The latest statistical release from the RBA includes data of some key household ratios. Of particular interest is the ratio between income and debt, and income to repayments.

The ratio of household debt to income has risen again now standing at 186, as high as it has ever been. The ratio of income to debt is on average 8.5, and has been tracking lower as interest rates fall.

Or to put it another way, as interest rates fall, households are borrowing more. As we saw yesterday, “other personal credit” fell in August, whilst mortgage debt rose again.

This debt to income ratio puts Australia at the top of league and highlights the potential risks which exist due to excessive leverage should rates rise, employment fall, or from some external shock (e.g. a European bank failing!).

The regulators need to start tightening credit availability, so total household debt begins to align better to income growth. Current credit growth rates, be they lower than last year, are still too high.

RBA Data Confirms Home Lending Up – To $1.584 Trillion

The latest RBA credit aggregates to end August 2016, shows that total credit grew again, thanks to higher home lending, which reached a new record of $1.584 trillion. A further $1 billion of loans were reclassified between between owner occupied and investment loans, making $44 billion in total, or 2.8% of all loans.

Seasonally adjusted owner occupied loans grew 0.62% or $6.3 billion, whilst investment lending grew $1.5 billion or $0.27%. Investment loans comprise 34.98% of all home lending, down from a high of 38.6% in June 2015. Business lending went sideways, dropping to 33.2% of all lending, continuing its drift downwards – not a good sign for real future growth. Other personal credit fell slightly.

The 12 month growth analysis shows owner occupied loans sitting at 7.6%, investment loans 4.6%, total housing at 6.5% and business lending at 5.7%. All higher than inflation and income growth. Australia is living with ever higher debt.

The RBA says:

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 $44 billion over the period of July 2015 to August 2016, of which $1.0 billion occurred in August 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 Changing Nature of Payments

Malcolm Edey, RBA Assistant Governor (Financial System) spoke at the Australian Financial Review Retail Summit and discussed the changing face of payments, including the relative volume and costs of various payment methods. Cheques are well out of favour.

A good place to start is an observation that will not be lost on anyone here. That is that the nature of the payments we use is changing, and changing quite rapidly at the moment. Probably the clearest example to most people has been the take-up of contactless, or tap-and-go, card payments. These have taken off extraordinarily quickly in Australia, to the point where Australia is thought of as the leading contactless market in the world. This is a technology that offers a benefit to both consumers and merchants in terms of the time taken to process a payment, and as a result it has been embraced – but many merchants might also notice that their payments costs have risen because of the resulting change in their payments mix. This is a good example of the complex dynamics of competition in the retail payments system.

But the rise of contactless payments is only one of a range of changes that have been occurring to the payments system over time – some of which you might have noticed, some of which you have probably never thought about.

Possibly the most important trend we are seeing is the steady decline in the use of traditionally paper-based payments. Think of when was the last time you wrote or received a cheque. In 2000 the average Australian wrote around 35 cheques per year. In 2015/16 that was down to six. What is more, while cheque use has been declining for two decades, the decline if anything is accelerating; after falling by an average of about 13 per cent per year in the preceding five years, the number of cheques written fell by 17 per cent in 2015/16.

We have been observing the decline in cheques for many years, but more recently it has been a decline in the use of that other traditionally paper instrument – cash – that has been attracting attention. The only real way to adequately measure the use of cash is to survey the users – something the Reserve Bank does via a consumer diary once every three years. We ran the first of these surveys in 2007, when a large majority of consumer payments – 69 per cent – were made with cash. By 2010, that percentage had fallen to 62 per cent and by 2013, 47 per cent, with the decline occurring across all payment values. We will run the survey again this year, but it seems a safe bet that there will be a further, probably quite large, decline in cash use.

This trend is not all about people falling out of love with cash; a significant factor is the rapid rise in online commerce, where of course cash is not an option.

So what has filled the gap left by our paper instruments? In the retail space it is largely cards, which have grown by an average of 11 per cent per year over the past five years. This reflects cards’ large share in online commerce, as well as their having gained ground at the retail point of sale. Based on the Bank’s consumer survey, card payments made up 43 per cent of all consumer payments in 2013, and 55 per cent of those over 50 dollars. The ubiquity of card payments is one reason we care a lot about how those systems operate, as I will discuss more a bit later.

It is also worth noting that in the period measured by our survey, BPAY also gained an increasing share of the market, while the relative newcomer, PayPal showed strong growth from a low base.

The Cost of Payments

Of equal interest to these broader trends in payments usage is the cost of payments. The retail sector clearly has a strong interest in the cost of payments to merchants, and while the Reserve Bank is also interested in this, its principal focus when evaluating the efficiency of the payments system is the resource cost of payments – that is, how much it costs the economy in total to produce a payment – abstracting from the various fees that determine the cost to any single party or sector. Determining resource costs is a large job, requiring detailed information on financial institutions’ costs and things like the cost of processing time for merchants.

The Reserve Bank last went through this exercise in 2014. The most comforting news from that study was that the resource cost of consumer to business payments had declined as a percentage of GDP since the previous cost study in 2006, from 0.80 per cent to 0.54 per cent, even though the number of transactions had risen. Despite the favourable trend overall, the mix of payments within the total acted in the direction of increasing costs.

Looking across the main non-cash retail systems, we see that, unsurprisingly, the highest per-transaction resource costs were generated by the cheque system, with each cheque written costing the economy about $5.12, if account overheads are ignored. This is not surprising given the cost of shipping and processing physical cheques, although there have been some efficiency improvements in the cheque system since the time of the study.

Perhaps of more current interest to the retail sector is the cost of our card systems. Credit cards are quite costly at around 94 cents for the average sized transaction, while MasterCard and Visa debit are less costly and eftpos uses the fewest resources of any of the card systems, at around 45 cents per transaction.

The broad relativities between the resource costs of these systems is similar to those faced by merchants. Another way to think about that is that it is merchants who, by and large, bear the cost of payments. This is largely achieved by the way fees are used in these systems. I think the most telling illustration of that is to compare the actual costs faced by merchants to the costs faced by consumers once fees and benefits to consumers, like interest-free periods and reward points, are taken into account. What you will see is that, despite being more expensive to produce and more costly to merchants, on average a credit card transaction costs a consumer slightly less than a debit card transaction. These are the incentives that shape payment choices by consumers.

Jobs Or Working Hours In The Labour Market?

Interesting paper from the RBA, released today, “Jobs or Hours? Cyclical Labour Market Adjustment in Australia.” It looks at how the labour market has adjusted over the economic cycle, and concludes that in recent times reduced job working hours, rather than job cuts have been the order of the day. One reason why measuring underemployment is so vital.

They argue this is because of the more mild downturns, and labour hoarding.

We find that, while both employment and average hours worked tend to adjust over the cycle, the share of labour market adjustment due to changes in average hours worked has increased since the late 1990s. Indeed, the contribution of average hours to the cyclical variability in total hours worked has tripled, from 20 per cent over 1978–98 to 58 per cent over 1999–2016. Such a large increase in the importance of average hours adjustment was not observed in other developed economies.

Since the late 1990s, a larger share of cyclical labour market adjustment in Australia has come about via changes in average hours worked, as opposed to changes in employment. While empirical evidence is inconclusive (partly due to the difficulty in modelling average hours worked), our view is that the relatively short and shallow economic downturns in the 2000s have played a role in this. Had these downturns been more severe, like the recessions in the 1980s and 1990s, firms eventually may have needed to shed more workers than they did. In other words, it is likely that both employment and average hours tend to adjust in the early stages of a downturn, but relatively more adjustment occurs through employment as the downturn persists and becomes more severe. It is also possible that labour market reforms over recent decades have provided firms with more scope to reduce their use of labour by reducing working hours rather than by redundancies.

We also find that the main driver of the adjustment in average hours during the 2008–09 economic downturn was a reduction in hours worked for employees who remained in the same job (i.e. labour hoarding). Consistent with this, a longer-run historical analysis suggests that changes in the composition of employment have not been the main driver of the decline in average hours during downturns and recessions.

The End of the Commission Remuneration Model In Financial Services?

The wind of change seems to be blowing though the financial services sector as the focus on doing the right thing for customers increases. The industry’s dirty secret is that many in the sector are rewarded on a commission basis for selling products and services, irrespective of whether they are right for the customer concerned. Recent scandals have been all about the interests of the industry coming ahead of consumers, whether employed by the firm, or an “independent” advisor.

This entrenched practice took root as players sought to boost profit by cross selling and up-selling more products to their customers, and targets, plus commissions became a pretty standard, if undisclosed, practice when working with third party advisors.

Whether a bank teller, a financial advisor, a mortgage broker, or other bank employee; behaviour is likely to be influenced by expectations of personal remuneration. This is not transparent to the consumer, who relies on the advice.

But this week we may be seeing signs of a new set of practices emerging. Westpac has said it will no longer pay sales commissions to bank tellers, but performance will be assessed by customer satisfaction. Changes are also afoot in the sales force too.

From next month we’re planning to remove all product related incentives across our 2,000 tellers in the Westpac branch network. Rather, their incentives will be based entirely on customer feedback about the quality of service they received in the branch.

We have also revisited the way we reward specialised sales roles in our network. We will no longer vary reward values based on different products; but rather our people will be rewarded for meeting the full range of our customers’ needs.

The Hansard record of the new RBA Governor’s comments this week made some interesting points about remuneration in financial services and the cultural issues arising.

Mr THISTLETHWAITE: You mentioned earlier your mandate in terms of financial systems stability. There has been a whole host of scandals in recent years with the banks, particularly with their wealth management arms. It is an issue that this committee is going to inquiry into in the coming months. This is a bit of a left-field question, but, from a regulatory perspective, if you were redesigning our financial system regulation in Australia what would you change?
Dr Lowe: I do not think a whole redesign is required.
Mr THISTLETHWAITE: Would you change anything?
Dr Lowe: APRA is the financial regulator, so it is not the Reserve Bank. And APRA has made many changes to the nature of financial regulation recently—really around capital and liquidity. So I think the finance sector feels like it has gone through a period of very accelerated regulatory change. It is best, probably, to kind of let that settle and see how the system adjusts to it. I sense that you are asking about other types of regulation that really go to the issue of bank culture.
Mr THISTLETHWAITE: Is there anything you want to say about that?
Dr Lowe: I cannot help but agree with you that there have been too many examples of poor outcomes, particularly in the wealth management and insurance industries. That is disappointing to us all.
Maybe I can make two other remarks—and, again, a broader perspective. The Australian bank system has performed well over a couple of decades. We did not have the excessive risk-taking culture in the lead-up to the financial crisis. I think that is really important. If we had a really bad risk-taking culture, we could have ended up in the same situation as many other countries did. Part of it is due to APRA’s good regulation, but the banks did not develop this culture that we saw overseas. So that has given us more stability. Again, that is a first-order point.

In terms of behavioural issues—it is hard. I think it comes down to incentives within the organisations, and that is largely remuneration structures. That is a responsibility of management. And, probably, APRA can play some constructive role in encouraging remuneration structures that create the right incentives within organisations. If there was one thing that I could focus on—it is not my responsibility; it is not the Reserve Bank’s responsibility—is making sure that the remuneration structures within financial institutions promote behaviour that benefits not just the institution but its client.
What I would like to see is, really, banking return to be seen as a strong service profession. I do not know how far away from that we are. Banking, historically, has been a profession—a profession of stewardship, custodians, service, advisory, counsellor. Is not a marketing or product-distribution business; banking is a profession.

I like the Banking and Finance Oath. I do not know whether you have seen this, but a number of people have signed up to this, including me, and I encourage others to do it as well. Its first line is: ‘Trust is the foundation of my profession.’ We have got to move beyond people just signing this oath to actually making that in practice. I do not run a commercial bank. I do not know how to embed within a commercial bank the idea that trust is the foundation of the noble profession that we do. It is largely about incentives and remuneration.

The Australian Bankers Association had previously announced a Independent Review of Product Sales Commissions and Product Based Payments

The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings.

This puts the current ASIC remuneration review of mortgage brokers in a new light perhaps. The outcomes are expected in December. However, this review is being done in secret. As we said in an earlier post:

ASIC has evidently released the final scope of its review of remuneration in the mortgage broking industry – but only to industry insiders. According to media, the corporate regulator has confirmed it will review the remuneration arrangements of “all industry participants forming part of the value distribution chain”. This includes lending institutions, aggregation and broking entities, and associated mortgage businesses – such as comparison websites and market based lending websites – and referral and introducer businesses.

But why, we ask, was the scope not publicly disclosed? Why are ASIC seeking input only from industry participants? We agree the remuneration review is required – but the lack of transparency is a disgrace.

Our guess is that commissions will not be banned, and the findings will focus more on better disclosure.

It is worth remembering that before that the changes to FOFA were disallowed in the Senate in late 2014. The changes would have made if easier for employees to receive incentive payments for product sales.

So now the climate appears to be changing. Will other banks follow Westpac’s lead? Will the remuneration review lead to changes to commission structures (especially trails) or a ban? Could we be seeing signs of fundamental cultural change in the industry? And will consumers be better off?

Worth reflecting on the changes which have emerged in the UK.

From April 2016 investment middlemen, including financial advisers and do-it-yourself investment brokers, will no longer be able to accept commission payments from fund companies.

The changes coming into force are the final phase of a series of new rules that started to apply at the start of 2013, which stopped advisers receiving ongoing, or “trail”, commission on new investments.

This rule has applied to brokers since April 2014. Since this date brokers have not been able to receive ongoing trail commission on new businesses, due to the legislative changes.

But until April 2016 commissions could still be deducted from earlier investments. And it is that backlog of investment which, for many, will soon become cheaper.

From April, instead of taking commissions, all middlemen will have to charge an explicit fee, expressed either as an hourly rate or as a percentage of savers’ investment pot.

The new rules were ushered in to remove any potential bias. But – and this is the catch – these old-style payments will not cease for some investors, such as those who went direct to the fund provider, or invested through a bank.

How Best To Measure House Prices

Recently the RBA has been talking about house price metrics, and in their recent outings have been downplaying data from CoreLogic preferring metrics from other sources. Was this a case of selecting the data which best fits with your world view? As we said at the time:

The statistical “fog of war” appears to have descended on Australian home prices, partly fueled by the RBA’s recent statements, and the latest chart pack data. Because of perceived issues with the CoreLogic data series, we see plots from a number of data providers.

Today Tim Lawless from CoreLogic has discussed the issue of metrics in “A refresher on housing market measurements“. Naturally he defends CoreLogic’s work, but it is also worth reading to see how complex the question actually is. We think the trend is the important perspective. But of course the picture is complicated when metrics are rebaselined without full disclosure.

Housing is Australia’s largest asset class, worth an estimated $6.7 trillion, so it’s important to measure the performance of this very important asset class in an accurate and timely manner. Recently there has been a lot more focus on the measurements of housing market performance, so it’s timely to provide a summary of the primary methods used for measuring housing market performance from a value/pricing perspective.

The complexities of property data

Before we go into the different measures, it’s worthwhile providing a brief refresher on property data which provides some background about why measuring housing market performance is a complex undertaking.

Firstly, compared with the equites markets, housing is an illiquid asset class. Individual properties are transacted, on average, every 8-10 years. The infrequency of transactions implies that the vast majority of residential properties are excluded from most housing market measurements which are reliant on transactional activity.

Secondly, housing is fundamentally nonhomogeneous; dwellings are unique in their characteristics based on their location and attributes, which makes the measurement of price and value shifts more challenging.

Additionally, the quality and timeliness of property data varies remarkably from state to state and between the private sector data providers. State governments collect a base level set of data which needs to be cleaned and augmented with more timely data and additional data sets such as attribute information to ensure a more complete and timely measure of housing markets is derived.

Regardless of the methodology used to measure dwelling price or value shifts, having housing data that is of the highest quality possible is the first and most important step in producing a reliable and accurate measure of the housing market.

CoreLogic collects and maintains the most comprehensive and current property and mortgage database, with more than 4.2 billion decision points across Australia and New Zealand that is growing in size every day. More than 60% of housing market transactions are collected directly from the industry, which provides a much more timely view of the housing market than relying solely on government provided transaction data.

What indicators are available to measure housing market conditions?

Housing market indices range in complexity from a simple median price indicators, which is subject to large amounts of bias and revision, through to a stratified median, repeat sales index and hedonic regression models. Each of these methods will provide different results for measuring price or value shifts across the housing markets.

Outside of these methodological differences, there will be further differences in results based on the data held by each of the private and public sector index providers as well as the way the data is cleaned, the sampling method, what geographic regions are being reported and what time frames the measures are reported across.

Simple median price

The median is simply the middle sales observation across a series of transactions. The median sale price is subject to a range of biases which can skew the middle observation up or down. Bias in median price can be caused by buyer types who are more active or less active in the market (for example, if first home buyers become more active there is likely to be a downwards bias in the median observation due to more transactions occurring at the affordable end of the pricing spectrum). Bias can also be found if there are changes in the types or quality of stock transacting and the median can be very volatile in markets with low turnover or where there are dramatic differences in the quality of housing. The advantage of median price is that it is very simple to compute and is easy to understand and interpret.

Simple median price measures are generally utilised by some of the real estate institutes and are still a common way of reporting price movements at the suburb or postcode level. Simple medians are useful for understanding what the middle observation for pricing is across a particular region over a specified point in time, however they aren’t all that useful for measuring capital gains over time due to the volatility and bias associated with this measure.

Stratified median

The stratified median measure, although still a measure of the middle observation, attempts to overcome the compositional bias of median price measures by dividing the market into separate strata’s, or segments, that are more alike. The Australian Bureau of Statistics, who use a stratified median measure, bases their stratification across dwelling types, the long term median price and socio economic indicators as specified here: . The ABS index is released quarterly after a significant lag and is non-revising.

Domain also use a stratified median approach, however no documentation appears to be publically available on their method or stratification approach. The Domain index is revisionary, however there is no transparency around the level of revision between quarters. Also, Domain do not appear to release their index results in a freely available format online.

The stratified median approach is a substantial improvement over the simple median for measuring price change across the housing market. As outlined in the simple median method, despite attempts to control for bias, the stratified median approach can be affected by changes in buyer activity or inactivity and by changes in the types or quality of dwellings that are transacting in the market.

It is important to note that non revising stratified median indices will not include off the plan sales data if the sale date has occurred more than three months prior to the reporting date. The reason for this is that such data tend to be quite lagged and reported by the Valuer General after settlement, which can occur several years after the sale date.

Repeat sales

A repeat sales index relies on identifying sales pairs and measuring the capital gain across these individual resales. The repeat sales method is very useful for measuring the demonstrated capital gain across individual properties that have resold, however the method excludes all transactions that don’t have a previous sale associated with the property. Inherently, the repeat sales method excludes new properties, which is a significant weakness at a time when a record amount of new housing stock is entering the market place. Additionally, the repeat sales index can be biased by property resales that have been affected by capital works (eg renovations and subdivisions) and can also be biased by properties that are transacted more frequently such as units and investment owned properties which generally have a higher turnover rate.

Residex (which is a CoreLogic owned company) publish a repeat sales index which is revisionary and released quarterly.

Off the plan sales are not accounted for in repeat sales indices as this methodology requires at least two sales for a property to make it eligible for inclusion.

Hedonic regression

The hedonic method of measuring housing market performance aims to track the true value shifts across the overall portfolio of housing, rather than price based movements based on observations of only those properties that have transacted. The hedonic imputation technique, which is used exclusively in Australia by CoreLogic, imputes the value of every Australian dwelling each day, taking into consideration every single data point we knew about the housing market at the point in time of calculation. Factors such as lot size, the number of bedrooms and bathrooms, car spaces and whether the home has a swimming pool or view are some of the hedonic attributes factored into the analysis. Based on a flow of around 1,400 new transactions received each day as well as a constant flow of new attribute data, our most accurate view of the imputed value of the property market is updated each day.

The benefits of a hedonic regression index include the sheer timeliness of the reading (virtually a real time indicator), the lack of any bias that can push the index higher or lower, as well as the fact that the index tracks true value shifts across the entire housing asset class rather than only across those properties that have recently transacted.

CoreLogic provides free public access to a full 12 month back series of the daily hedonic index, as well as a monthly summary of the end of month index results across each capital city by dwelling type. The index is published on the first working day of each month and has been independently peer reviewed and audited, the results of which are published on the CoreLogic web site, along with full documentation of the hedonic method used to build the index.

In summary, there are a variety of measures available to track dwelling prices and values across Australia. Each method presents its own pros and cons and there will always be differences in the results based on the different methods being uitlised, but also based on the differences in data quality, cleaning and sampling techniques, data timeliness, geographic context and time frames of the calculation. Other technical differences will also play out in the data based on specific ways each method treat the underlying data sets. For example, using a settlement date rather than a contact date in the analysis will show a difference in results, particularly at a time when a great deal of off the plan unit sales are flowing into the market where the difference between the contact date and settlement date could be several years.

While there will be divergence in these measurements of price and value changes from period to period, over a longer period, each of the methods used will tend to show broadly similar results. One notable exception is the presence of off the plan transactions, which will cause the hedonic index to diverge from repeat sales and non-revising median indices from time to time. Repeat sales indices and non-revising median indices (in particular based on sales data over the prior quarter) are more likely to broadly track one another because they both exclude off the plan sales.

CoreLogic privately calculates all of the indices described above, however our primary reference for measuring the change in house and unit values is the hedonic regression index thanks to the timeliness of the measure, the absence of any bias in the measurement and the fact that the index measures value growth across the entire housing portfolio rather than only those properties that have transacted.

In order to get a complete understanding of the housing market there is a vast array of other housing market measures that need to be viewed in context with indices that measure price and value movements. CoreLogic also provides weekly updates on auction markets and clearance rates, private treaty metrics such as average selling time and vendor discounting rates, transaction numbers, listing counts and rental information as some examples.

Additionally the performance of the housing market will vary substantially across the different product types and geographically, so it’s important to analyse the housing market at more granular levels than just capital city dwelling performance.

At CoreLogic, we place the utmost importance on our data and analytics assets. We dedicate more than $20 million each year in acquiring and maintaining our data sets. Our collection, analysis and research methods are audited regularly, and we are independent of any real estate, media or banking interests. CoreLogic continues to grow with over 480 people employed in ten locations in Australia and New Zealand. Over 20,000 customers and 150,000 end users in property, finance and government use CoreLogic services and platform more than 30,000 times a day.

Mortgage Refinance Momentum Remains Strong

Continuing our examination of the latest household survey results, today we look at the refinance segment. This sector of the market is poorly understood, not least because refinance of investment loans are not separately reported in the official statistics. However, yesterday we got some insights from the new RBA Governor’s handout pack.

It shows that currently more than 30% of all home loan approvals are for refinancing (and this data includes estimates of investor refinancing). This is an all time high.

Graph 12: Refinancing Approvals

Actually, the average term for a home loan is dropping, to below 4 years, and a quarter of the book is churning each year. Here is the reason.

Graph 11: Variable Housing Interest Rates

New loans are being deeply discounted, (compared with rates being paid by loan holders). The RBA says:

The spread between the benchmark SVRs and the lowest available advertised rates has increased in recent years. The difference reflects both advertised and unadvertised discounts. It is not unusual for the discounts to be up to 1½ percentage points. Changes in discounts only affect new borrowers (and not the existing stock of mortgages).

This discounting is supported by lower funding costs.

Graph 13: Cash Rate and Funding Costs

As a result, bank net interest margins are largely unchanged.

Graph 1: Net Interest Margin

The gap is being closed by lower deposit interest rates (other than for long-dated term deposits which the RBA says accounts for about 2% of bank funding only).

So against this backcloth, the 1.3 million households in the refinance segment are seeking to refinance, driven by the desire to reduce monthly payments (38%), better rates (18%) or to lock in an attractive fixed rate (17%). Poor service only accounts for a small proportion of the transactions.

If we analyse the drivers by loan size, we see that brokers are tending to be more proactive when the loan is larger, and here refinance is more about releasing cash than just a lower rate. Indeed, much of this cash release is going back into the investment property sector, as we discussed yesterday.

Overall, households with loans in the $250-500k band are most likely to refinance.

Larger loans are more likely to be refinanced to an interest only loan.

So refinancing activity is supporting market momentum. Though total dwelling transfers are down, as shown by the ABS data, released this week, remember that a refinanced transaction would not necessarily be counted.

This chart, using ABS data, shows the total transfers of all dwellings (houses and other) and we see a fall in total transfers from Sept 2015, a peak of more than 120,000 to below 100,000 per quarter. Mapping the main centres, and smoothing the data a little, we see that Brisbane fell 10%, Melbourne 9% and Sydney 6%. So beware using this data to argue that housing momentum is easing, it is not that simple. The latest data may also be revised later by the ABS.

So, refinancing is an important element in understanding the current dynamic, and there are more households in the market now for a refinanced deal than a year ago. This explains the adverts “has your home loan got a 3 in front of it?” as shown below….

Services Employment Up, Economic Outcomes Down

In a CEDA speech “The Changing Nature of the Australian Workforce“, Alexandra Heath, Head of Economic Analysis Department, RBA has highlighted the rise in services sector employment. Much of this is related to a burgeoning healthcare sector, thanks to demographic shifts. Then we see growth in property, and property related sectors. Many other sectors are shrinking.

But we would stress that wages have risen little in the healthcare sector, which is one reason why household income is static, and employment in this sector, (and the property sector), whilst important, does not create new wealth, it merely transfers existing wealth. This lack of new wealth creation is why growth is under pressure. This is a the structural issue which needs to be addressed.

The decline in the share of routine manual jobs in industries such as agriculture and manufacturing as a result of technological change has had a long history (Graph 2). The offsetting increase has been in service sector jobs.

Graph 2

The health care & social assistance industry has made the largest contribution to employment growth over the past 15 years or so, and most of this has been in non-routine work (Graph 3). After health care, the two industries that have made the largest contributions to growth in non-routine jobs over this period are professional, scientific & technical services and education & training.

Graph 3

Some of the increase in health care employment is related to the ageing of the population. Similar demographic trends are also likely to have contributed to the strong increase in employment in social assistance because it includes in-home support services. The stability of relative wages in the health sector over most of the past 15 years suggests that the expansion of demand for health care workers has been more or less met by an increase in the number of people who are able to work in the sector (Graph 4). The vocational education and training system has played an important role in providing qualifications in a range of these occupations, including child care, aged care and occupational therapy.

Graph 4

In contrast, education & training, construction and mining have all experienced a trend increase in their relative wages over the past 15 years or so. This suggests that the supply of workers with the right skills has not kept up with the increase in demand from these industries. In the case of mining and construction, the mining boom is an important part of the story (Kent 2016).

The relative wages for professional, scientific and technical services increased over the 5 years to 2013, but have since fallen. One possible explanation for this is that there was some difficulty meeting increasing demand and that supply of qualified workers responded with a lag. Another possibility is that rapid technological change has meant that some of the growth in employment in this industry has been in entirely new jobs that take some time to be captured in some wage measures.

RBA Minutes Add Little

The latest minutes from the RBA tell us very little more than we already knew about the decision to keep the cash rate steady. They did continue to stress the benefit of rate cuts to households overall, because borrowers are more leveraged than savers (as discussed in their recent outing). We think they should be more concerned about the lack of business investment than they appear to be, net of housing.

Domestic Economic Conditions

Members commenced their discussion of domestic economic conditions by noting that the prices of Australia’s commodity exports had increased since the previous meeting and were around 30 per cent above the lows of early this year. Further reductions in production of bulk commodities by high-cost producers in China had contributed to these price increases. Reflecting the rise in commodity prices since earlier in the year, the terms of trade had increased in the June quarter.

The ABS capital expenditure survey and measures of work done on non-residential construction indicated that mining investment had continued to fall in the June quarter, in line with the forecast presented in the August Statement on Monetary Policy. The estimate of nominal investment intentions from the capital expenditure survey implied a further large decline in mining investment in 2016/17, in line with earlier expectations. However, the peak subtraction from GDP growth was still expected to have occurred in 2015/16 and members noted that there had been some signs of an improvement in sentiment in parts of the mining industry.

Members observed that developments in commodity prices and mining investment had continued to have significant effects on economic activity in resource-rich regions of the country and that the effect of the spillovers from the decline in mining investment and commodity prices would persist for some time. The regional differences had been apparent in labour market outcomes. Members noted that a decline in full-time employment since the beginning of the year had been recorded in New South Wales, Western Australia and Queensland, but that part-time employment growth had been broadly based across the country. The relative strength of part-time employment had partly reflected growth in industries that have a higher proportion of part-time jobs, such as household services, although liaison contacts had also reported that employers more generally had been taking a cautious approach to hiring. Forward-looking indicators suggested that employment growth would remain relatively subdued in Western Australia and Queensland but would be stronger elsewhere. Overall, the forward-looking indicators were consistent with little change in the unemployment rate in the coming months; the unemployment rate had fallen slightly in July to 5.7 per cent.

Growth in the aggregate wage price index (WPI) had stabilised at low levels; the private sector WPI had increased by 0.5 per cent in each of the past six quarters. Growth in the WPI had continued to be lowest in the mining-exposed industries and states, although it also looked to have stabilised in these areas.

Members noted that the June quarter national accounts, which would be released the day after the meeting, were expected to record moderate GDP growth. Net exports were expected to have made a smaller contribution to GDP growth following strong growth in resource exports in the March quarter, whereas data released during the meeting indicated that public demand had made a noticeable contribution in the June quarter. Over the first half of the year, GDP growth had been expected to have been close to estimates of potential, which was consistent with the slight change in the unemployment rate that had been observed over that period.

Growth in household consumption was expected to have remained around average in the June quarter. Household perceptions of their personal finances had continued to be above average, although growth in retail sales had declined slightly in recent months. Members discussed the effect of lower interest rates on consumption growth via the cash flow channel of monetary policy. They noted that the positive effect of lower interest rates on the disposable income of borrowing households is larger than the negative effect on the income of lender households, as the average borrower household has two-to-three times more net interest-bearing debt than the average lender household has in net interest-earning assets. In addition, on average, borrower households are likely to be significantly more responsive to changes in income that are related to changes in interest rates because they are more likely to be liquidity constrained. Members noted that, since the global financial crisis, borrower households have been likely to use more of an increase in their cash flow from any source to prepay their debt, which might imply a delay in the response of consumption spending to lower interest rates.

Private residential building approvals had increased in July, to be around the high levels observed in 2015, and there continued to be a significant amount of work in the pipeline. Members noted that this could be expected to support high levels of dwelling investment for some time.

Conditions in established housing markets had generally eased over 2016. Growth in housing prices had declined at the national level and across most capital cities over the past year, although there remained considerable variation by location. Housing prices had been declining in year-ended terms in Perth for some time. In the rental market, inflation had remained around historical lows and had also eased across most capital cities, most notably in Perth, where rents had continued to decline. The aggregate rental vacancy rate had drifted higher and was close to its long-run average.

Other indicators for the housing market had also generally pointed to weaker conditions than a year earlier. In the established housing market, the number of auctions had declined and remained lower than a year earlier, even though auction clearance rates had increased of late (particularly in Sydney). In the private treaty market – where, nationally, over 80 per cent of transactions occur – turnover had also declined since the previous year and the average number of days that a property was on the market had been on an upward trend. Members noted that sales of new properties were included in the turnover data, but that there might be measurement problems related to the long lag between purchasing and settling new properties bought off the plan, which could lead to revisions. Finally, in recent months the value of housing loan approvals had been broadly steady and housing credit growth had been lower than a year earlier, consistent with the earlier tightening in lending standards and low turnover.

Business investment had fallen further in the June quarter, driven by a decline in mining investment in line with earlier expectations. The ABS capital expenditure survey also indicated that non-mining business investment had been little changed over the past couple of years. Members noted that uncertainty about future demand growth still appeared to be weighing on non-mining business investment. The pipeline of non-residential construction work had remained low, although non-residential approvals had increased a little in recent months and survey measures of business conditions and capacity utilisation had remained above their long-run averages. Growth in business credit had eased a little, although non-mining profits looked to have increased.

Statement on the Conduct of Monetary Policy

The Treasurer and Governor of the Reserve Bank have reaffirmed the statement on the Conduct of Monetary Policy. Both the Reserve Bank and the Government agree that a flexible medium-term inflation target is the appropriate framework for achieving medium-term price stability. They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time.

The Statement on the Conduct of Monetary Policy (the Statement) has recorded the common understanding of the Governor, as Chair of the Reserve Bank Board, and the Government on key aspects of Australia’s monetary and central banking policy framework since 1996.

The Statement seeks to foster a sound understanding of the nature of the relationship between the Reserve Bank and the Government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way policy is conducted, and the independence of the Reserve Bank.

The centrepiece of the Statement is the inflation targeting framework, which has formed the basis of Australia’s monetary policy framework since the early 1990s.

The Statement has also been updated over time to reflect enhanced transparency of the Reserve Bank’s policy decisions and to record the Bank’s longstanding responsibility for financial system stability.

Building on this foundation, the current Statement reiterates the core understandings that allow the Bank to best discharge its duty to direct monetary policy and protect financial system stability for the betterment of the people of Australia.

Relationship between the Reserve Bank and the Government

The Reserve Bank Governor, its Board and its employees have a duty to serve the people of Australia to the best of their ability. In the carrying out of their statutory obligations, through public discourse and in domestic and international forums, representatives of the Bank will continue to serve the best interests of the people of Australia with honesty and integrity.

The Governor and the members of the Reserve Bank Board are appointed by the Government of the day, but are afforded substantial independence under the Reserve Bank Act 1959 (the Act) to conduct the monetary and banking policies of the Bank, so as to best achieve the objectives of the Bank as set out in the Act.

The Government recognises and will continue to respect the Reserve Bank’s independence, as provided by the Act.

The Government also recognises the importance of the Reserve Bank having a strong balance sheet and the Treasurer will pay due regard to that when deciding each year on the distribution of the Reserve Bank’s earnings under the Act.

New appointments to the Reserve Bank Board will be made by the Treasurer from a register of eminent candidates of the highest integrity maintained by the Secretary to the Treasury and the Governor. This procedure ensures only the best qualified candidates are appointed to the Reserve Bank Board.

Objectives of Monetary Policy

The goals of monetary policy are set out in the Act, which requires the Reserve Bank Board to conduct monetary policy in a way that, in the Reserve Bank Board’s opinion, will best contribute to:

the stability of the currency of Australia;

the maintenance of full employment in Australia; and

the economic prosperity and welfare of the people of Australia.

These objectives allow the Reserve Bank Board to focus on price (currency) stability, which is a crucial precondition for long-term economic growth and employment, while taking account of the implications of monetary policy for activity and levels of employment in the short term.

Both the Reserve Bank and the Government agree on the importance of low and stable inflation.

Effective management of inflation to provide greater certainty and to guide expectations assists businesses and households in making sound investment decisions. Low and stable inflation underpins the creation of jobs, protects the savings of Australians and preserves the value of the currency.

Both the Reserve Bank and the Government agree that a flexible medium-term inflation target is the appropriate framework for achieving medium-term price stability. They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time. This formulation allows for the natural short-run variation in inflation over the economic cycle and the medium-term focus provides the flexibility for the Reserve Bank to set its policy so as best to achieve its broad objectives, including financial stability. The 2-3 per cent medium-term goal provides a clearly identifiable performance benchmark over time.

The Governor expresses his continuing commitment to the inflation objective, consistent with his duties under the Act. For its part the Government endorses the inflation objective and emphasises the role that disciplined fiscal policy must play in achieving medium-term price stability.

Consistent with its responsibilities for economic policy as a whole, the Government reserves the right to comment on monetary policy from time to time.

Transparency and Accountability

Transparency in the Reserve Bank’s views on economic developments and their implications for policy are crucial to shaping inflation expectations.

The Reserve Bank takes a number of steps to ensure the conduct of monetary policy is transparent. These steps include statements announcing and explaining each monetary policy decision, the release of minutes providing background to the Board’s policy deliberations, and commentary and analysis on the economic outlook provided through public addresses and regular publications such as its quarterly Statement on Monetary Policy and Bulletin. The Reserve Bank will continue to promote public understanding in this way.

In addition, the Governor will continue to be available to report twice a year to the House of Representatives Standing Committee on Economics, and to other Parliamentary committees as appropriate.

The Treasurer expresses support for the continuation of these arrangements, which reflect international best practice and enhance the public’s confidence in the independence and integrity of the monetary policy process.

Financial Stability

Financial stability, which is critical to a stable macroeconomic environment, is a longstanding responsibility of the Reserve Bank and its Board.

The Reserve Bank promotes the stability of the Australian financial system through managing and providing liquidity to the system, and chairing the Council of Financial Regulators (comprising the Reserve Bank, Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury).

The Payments System Board has explicit regulatory authority for payments system stability. In fulfilling these obligations, the Reserve Bank will continue to publish its analysis of financial stability matters through its half-yearly Financial Stability Review.

In addition, the Governor and the Reserve Bank will continue to participate, where appropriate, in the development of financial system policy, including any substantial Government reviews, or international reviews, of the financial system itself.

The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions. However, the Reserve Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management. In fulfilling this role, the Reserve Bank will continue to coordinate closely with the Government and with the other Council agencies.

The Treasurer and the Governor express their support for these longstanding arrangements continuing.