Exploring the DFA Mortgage Industry Model

Our latest video blog features a walk through of some of the features contained in our core mortgage industry model.

A quick reminder, the core market model ingests data from our surveys, focus groups and other private data, as well as information from various public sources.

The core model, working off a rolling sample of 52,000 household records enables us to analyse many aspects of the market. We have clients who take a range of outputs from the model.

In this video we walk through some of the key dimensions in the model, including segmentation, mortgage profiles and locations.

Note the data is for demonstration purposes only.

ASIC establishes Financial Advisers Consultative Committee

ASIC today announced the establishment of the Financial Advisers Consultative Committee, designed to improve industry engagement with its regulator, and revealed its initial membership.

‘ASIC has extensive engagement with participants in the financial advice sector as well as financial advice industry bodies and consumer organisations. We saw benefit in extending our interaction with this sector through the establishment of a committee made up of practising advisers,’ said ASIC Deputy Chairman Peter Kell.

The Financial Advisers Consultative Committee (FACC) will supplement ASIC’s existing engagement with the financial advice industry by:

· contributing to our understanding  of issues in the financial advice industry, including those directly impacting on practising advisers;

· improving ASIC’s  capacity to identify, assess and respond  to emerging  trends in the financial advice industry.

The members of the FACC are practising financial advisers with a range of skills drawn from the following areas:

  • investment;
  • insurance;
  • superannuation;
  • self-managed superannuation funds; and
  • digital financial  advice.

The FACC will provide ASIC with views on a broad range of issues relating to the financial advice industry.

FACC Members

The initial members of the FACC are: Craig Banning, Jennifer Brown, Chris Brycki, Steven Dobson, Mark Everingham, Tony Gillett, Adam Goldstien, Cathryn Gross, Suzanne Haddan and Kevin Smith.

Deputy Chairman Peter Kell said, ‘The establishment of this committee is part of ASIC’s ongoing commitment to enhancing its engagement with its stakeholders.’

The High Household Debt Hangover

A new IMF working paper “Excessive Private Sector Leverage and Its Drivers: Evidence from Advanced Economies“, aims to provide a quantitative assessment of the gaps between actual and sustainable levels of debt and identifies the key factors that drive excessive borrowing.

They explain why high household debt – such as we have in Australia – should be a cause for concern. It seems to sum up the current state of play here, very well.

High private debt can have a substantial adverse impact on macroeconomic performance and stability. It hinders the ability of households to smooth consumption and affects investment of corporations. In addition, elevated debt levels can create vulnerabilities as well as amplify and transmit macroeconomic and asset price shocks throughout the economy. Excessive private debt increases the likelihood of a financial crisis, especially when it is driven by asset price bubbles fueled by lending. The subsequent deleveraging could be potentially disruptive for economic activity.

Long-term growth prospects deteriorate significantly following debt-related financial crises. Furthermore, the accelerated pace of private debt accumulation can lead to economic and financial instability, which often coincides with great risk-taking and poorly regulated and supervised financial sector. Finally, spillovers from private balance sheets to the public sector due to government interventions, either direct in the form of targeted programs for debt restructuring or indirect through the banking sector, weaken the fiscal position and increase interest rates. All the above factors may potentially compromise public debt sustainability.

They assess the extent of excessive leverage in advanced economies, and conclude that private sector debt overhang is relatively large, with significant heterogeneity across developed economies. Household excessive leverage is found to be higher in countries with lower interest rates and higher share of working population, but importantly also in countries with rising house prices and greater uncertainty as captured by unemployment. Corporate debt overhang is estimated to be higher in countries with lower profitability, stronger insolvency frameworks and absence of thin capitalization rules.

In assessing the situation, they make the point that using debt to income ratios alone, omits an important aspect of debt sustainability – the strength of the borrower’s balance sheet. Debt can be repaid not only from future income but also by selling assets; hence, solvency indicators, such as the debt to asset ratio, are widely used in debt sustainability analyses.

They apply a “deflated” approach to assessing debt, starting from a base year, and compare the subsequent growth. The sum of deflated financial and non-financial assets represents total notional assets. Similar to financial assets, deflated debt is obtained by adding debt transactions to the initial stock of debt. Deflated sustainable debt is then calculated as deflated debt in the initial year, increased by the change in notional assets and corrected for transitory changes in the nominal debt-to-asset ratio (which is assumed stationary). In other words, deflated debt is considered sustainable when it evolves with deflated assets. Excessive leverage is measured by the difference between the actual and sustainable debt.

The results from our empirical analysis suggest that in a number of advanced economies household and corporate debt has increased to levels that may not be sustainable. Most of the debt build-up took place before the financial crisis, but with a few exceptions, there has been little deleveraging in the post-crisis period. In a number of countries, the gap between actual and sustainable debt, calculated on the basis of notional assets continues to grow. The gaps are larger in the household sector; the borrowing behavior of non-financial corporations does not seem to have changed much on aggregate, although there is significant cross-country

Drawing on the theoretical literature on household and corporate debt determinants and building on earlier empirical work, we try to identify the main drivers of excessive leverage. Most of the variables that have been found important in previous studies focusing on indebtedness, turn out to be significant in explaining the debt sustainability gaps as well. In particular, low interest rates and unemployment along with high house prices tend to be associated with larger gaps in the case of household. This implies that policymakers should pay attention to excessively low interest rates and inflated house prices to avoid imbalances that may ultimately pose risks to macroeconomic stability. While we find evidence for importance of institutions, the tax treatment of mortgage debt does not appear to be significant, although the latter could be due to difficult measurement issues. Still, this does not mean that there is no role for policies in containing leverage. For example, generous mortgage-related tax incentives that favor ownership over renting can induce excessive borrowing by households and boost asset prices which, as discussed above, are positively correlated with the sustainability gaps. Furthermore, such incentives have important distributional implications and can be costly in terms of foregone revenue for the budget.

In the case of non-financial corporations, profitability is a significant factor behind leveraging, while thin capitalization rules tend to reduce the debt overhang. Thin capitalization rules can be an effective instrument to limit excessive borrowing but they need to be well designed. In many countries such rules provide escape clauses that effectively limit them to related party debt, implying that these measures aim to reduce debt shifting, but do not deal effectively with the debt bias. Introducing a tax system based on allowance for corporate equity (ACE) would not only reduce the incentives to incur debt but would also stimulate investment as it is effectively a tax only on excess returns or rents. There is also some role for institutions because countries with stronger insolvency  regimes are typically characterized by lower debt overhang.


Note: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Further macroprudential action expected from APRA

From Australian Broker.

Despite the stable growth trends in some of the big four banks, trends in the national property market could see further macroprudential action by the Australian Prudential Regulation Authority (APRA).

In a Morningstar research note looking at the Commonwealth Bank of Australia (CBA), analysts predicted that the “overheating housing market” is likely to force APRA to once more slow the growth of investment lending.

“Likely action, known as macroprudential controls, include the reduction in the current 10% annual growth limit on residential lending to something around 5%-7%.

“Other less likely steps could be raising the minimum loan serviceability buffer to 3% from 2% and lifting the risk-weighted capital floor for new residential investor borrowers holding multiple properties to 75%-100%.”

At present, CBA applies a 7.25% rate to new home loan applicants to determine serviceability. This is 2.25% above the current customer rate.

Analysts said that while APRA does not publicly disclose individual bank capital requirements, it does and could “impose tougher measures on individual banks” if residential investor lending is growing at a rate deemed too risky.

While the 10% cap was introduced in December 2011, it only started to gain traction after peaking at 10.8% in June 2015 and falling to a low of 4.6% in August 2016. Since then however, growth rates have trended upwards, hitting 6.6% as of 31 January 2017.

Despite some concerns about the property market, analysts said the big four banks were “well placed to handle a modest decline in dwelling prices”.

“We believe an extended period of stable house prices or even a modest decline would be good for the housing market and reduce some of the pressure on capital city buyers and lenders.”

While historically, a period of flat house prices for five or seven years is normally expected after strong growth, analysts admitted being in “uncharted waters” with interest rates being at record lows.

Looking at CBA, Morningstar expected the bank to continue growing its home loan portfolio, albeit at a slower rate than before.

“We expect this strong growth rate to moderate during calendar 2017 and we forecast group home loan balances outstanding to grow an average of 5.5% per year from fiscal 2018-2021.”

US Personal Income Up in 2016, But Varies By State

According to new data from the U.S. Department of Commerce, state personal income grew on average 3.6 percent in 2016, after increasing 4.5 percent in 2015, according to estimates released today by the Bureau of Economic Analysis.

Growth of state personal income—the sum of net earnings by place of residence, property income, and personal current transfer receipts—ranged from –1.7 percent in Wyoming to 5.9 percent in Nevada.

Personal Income: Percent Change, 2015-2016
Earnings. Earnings increased 4.1 percent in 2016 and was the leading contributor to growth in personal income in most states.

Earnings 2015-2016 (Percent Change)
Both personal income and earnings grew faster in Nevada than in any other state. Earnings growth in management; arts, entertainment, and recreation; and construction were the leading contributors to its 7.2 percent growth in total earnings.

Utah, Washington, Florida, and Oregon had the next fastest growth in total earnings.

  • In Utah, earnings growth in construction, and in health care and social assistance, were the leading contributors to the 6.4 percent growth in total earnings.
  • In Washington, earnings growth in information, and in retail trade, were the leading contributors to the 6.3 percent growth in total earnings.
  • In Florida, earnings growth in professional, scientific, and technical services, and in health care and social assistance, were the leading contributors to the 6.2 percent growth in total earnings.
  • In Oregon, earnings growth in health care and social assistance, and in construction, were the leading contributors to the 5.9 percent growth in total earnings.

For the nation, earnings grew in 22 of the 24 industries for which BEA prepares estimates. Earnings growth in health care and social assistance; professional, scientific, and technical services; and construction were the leading contributors to overall growth in total earnings.

Mining earnings fell 13.6 percent nationally in 2016, after falling 13.3 percent in 2015. Lower mining earnings was the leading contributor to declines in total earnings in Oklahoma, Alaska, North Dakota, and Wyoming, and to very slow earnings growth in Louisiana.

Property income. Property income (dividends, interest, and rent) grew 1.9 percent on average in 2016, slower than the 2.8 percent increase in 2015. Dividend income decreased 0.3 percent in 2016, after increasing 2.7 percent in 2015. Growth in rental income slowed to 6.9 percent in 2016, after increasing 8.8 percent in 2015. Growth in interest income, in contrast, accelerated slightly to 0.9 percent in 2016, up from 0.1 percent 2015. The growth in property income ranged from 0.9 percent in Wyoming to 2.8 percent in North Dakota.

Myth busting claims on the impact of the company tax cut

From The Conversation.

In the drawn-out debate on the value of a company tax cut to our economy, there have been a number of claims: that the plan would cost A$50 billion; that the cuts are just a handout to foreign investors; that there will be little benefit for many years; and that there are cheaper ways to stimulate investment.

Many of these claims are misleading or overblown. But the government still needs to make the case that the company tax cut is prudent after a decade of deficits.

Claim: The company tax cut would cost $50 billion

The oft-quoted A$50 billion cost of the company tax cut refers to the ten-year budgetary cost of implementing the plan incrementally, and reflects the expected much higher nominal GDP a decade from now.

But the annual costs, while substantial, are much lower than $50 billion. If the tax rate were cut from 30% to 25% today, Commonwealth revenues would fall by about A$7.4 billion a year, or about 2%.

Over time, as companies accumulate capital, so too would company tax, personal income tax, and GST revenue increase. So the “steady state” budget cost of the company tax cut in an economy the size of Australia’s today would be about A$5 billion.


Claim: Company tax cuts are a handout to foreign investors

Somecommentators claim that foreign investors would be the big winners from a company tax cut. Describing a company tax cut as a “handout” to foreign investors implies that any gain to them must be a loss to Australians.

But Australian shareholders would also benefit, at least initially. We calculate that Australian companies could lift after-tax dividends to Australian investors by about 3% (worth about A$3.5 billion a year) without reducing investment. Those who own shares in listed companies would also receive a capital gain, as foreigners bid up share prices, to reflect their higher value post-tax dividends.

In the longer run, Australian listed and foreign companies can be expected to invest more, build up the capital stock, and so drive up wages (and returns to other fixed factors, such as land).

Still, there may be losers. Some domestically-funded firms might lose. And if policymakers were to permit migration to grow strongly in response to a stronger demand for labour, wages would not rise much, and stronger population growth would push up rents and land values.

Claim: There are no benefits for many years

Some argue that any benefits will take many yearsto appear.

It is true that the full benefits of a company tax cut would take many years to accumulate and that there are short-term costs. Cutting the company tax rate to 25% this year would reduce national income by about A$4 billion immediately. Treasury estimates a fully-funded company tax cut would add 0.6% to national income in the long run, the equivalent of A$10 billion in 2017, as the economy grows on account of increased investment. Is it worth the wait?

Investment would probably pick up quickly, and about half of the economy’s adjustment would take place within a decade. It would take about six years after the tax cut for national income to be higher than it would have been.

If the tax cut were assessed like a business investment, we calculate it would have a payback period of just over 10 years; its rate of return would be over 15% – not bad for a government that can borrow at 3%.


Claim: There are cheaper ways to stimulate investment

Some argue that it would be cheaper to provide a tax cut on new investment, without applying it to existing capital, as a company tax cut does. Two alternatives are often proposed.

First, accelerated depreciation, recently supported by ANZ Chairman David Gonski, allows firms to immediately write off a proportion of all new asset purchases, and therefore claim a large tax deduction upfront. Such a scheme already exists for some highly durable assets (to limit the distorting effects of the company tax) and for small businesses.

We calculate that permitting firms to instantly write off about 22% of their asset purchases would provide investment incentives equal to those offered by a 5 percentage point company tax cut. In the long run, such a scheme would cost the budget less than cutting the company tax rate. But the cost to the budget would be higher in the early years.

The second proposal – an investment allowance – would permit firms to make an upfront tax deduction on new asset purchases in addition to the standard depreciation schedule. We calculate that an investment allowance of about 15% would have a similar impact on investment incentives as a cut in the company tax rate from 30 to 25%.

The scheme could be about 25% cheaper than a company tax cut. But it may have other disadvantages. Firms may seek to relabel operating expenses as capital expenses in order to qualify for an investment allowance, making it more costly for government to administer.

The scheme would also benefit firms investing in assets with short lives, like computers, rather than assets with long lives, like buildings, that are already discouraged by the company tax. For these reasons, it is difficult to recommend investment allowances as a long-term alternative to a company tax cut, though they could play a role as temporary incentives.

Overall, there are genuine uncertainties about the costs and benefits of a company tax cut, but many of the objections that have dominated public discussion seem overblown. The main problem for the Government is that, in an era of persistent budget deficits, it has failed to show why it’s fiscally prudent to offer an unfunded tax cut.

Authors: Jim Minifie,Productivity Growth Program Director, Grattan Institute; Cameron Chisholm, Senior Associate, Productivity Growth, Grattan Institute

UK Bank Capital On The Rise

The latest release from the Bank of England shows that the common equity Tier 1 (CET1) capital ratio for the UK banking sector increased by 0.3 percentage points (pp) on the quarter to 15.1%, 1.1 pp higher than in Q4 2015.

The quarterly increase was driven by small movements in both the level of CET1 capital (increase) and in the level of total risk-weighted assets (decrease).

The reduction in risk-weighted assets was driven by small decreases in most risk categories.

The USA’s New Debt Bubble

From Mises Wire.

The New York Fed’s most recent household debt report showed ballooning debt and delinquency in student and auto loans. Total household debt has just about reached its previous late-2008 high of over $12.5 trillion.


You’ll notice that housing debt (blue) has not increased much since its 2013 low, meaning that the increases in total debt have mostly come from non-housing debt (red). A closer look at the composition of non-housing debt reveals that the biggest increases in debt have come from student and auto loans (red and green, below).


In fact, the numbers make it look like the housing bubble was almost exactly replaced by new bubbles in education and cars. From 2008 to 2016, housing debt has decreased by $1.01 trillion, while student and auto loan debt together have increased by $1.04 trillion. The Board of Governors of the Federal Reserve has an even higher estimate than the NY Fed for current student loan debt, at $1.41 trillion.


Shahein Nasiripour at Bloomberg showed the relative changes based on the same data this way:


While both student and auto loan debt have increased substantially, delinquency rates are higher for student loans. In 2012, student loan delinquency spiked up enough to claim the top spot, probably due to the number of people who chose more school over searching for employment during the bust. The graph below shows that student and auto loan delinquency rates are the only ones not decreasing.


Of course, this is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped. Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another.

The redirection is mostly guided by new government interference in markets. Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts, and income-based student loan repayment have funneled spending, borrowing, and increasing prices into education and autos.

Some recent headlines already signal a collapse in used car prices this year. Meanwhile, college tuition increases are still the norm every year, despite the decreasing value of a diploma. According to this AP report, “the average amount owed per borrower rose to $30,650 in 2016, after rising steadily for years. In 2013, borrowers on average owed $26,300.”

Another recent release by the NY Fed contains data on labor outcomes for college graduates versus all other laborers. There have been dramatic swings in employment across the board since 2008, but comparing September 2008 to September 2016 on net, the unemployment rate for college graduates has increased while the unemployment rate for all other workers has decreased. The underemployment rate (“defined as the share of graduates working in jobs that typically do not require a college degree”) for recent graduates has hovered around 45% since 2008. An indexed measure of job postings indicates that demand for laborers with a college degree has not increased as much as demand for laborers that don’t need a college degree, though both reached a peak late 2015.


The overwhelming conclusion from all of this data is that we almost certainly have new bubbles in education and the auto industry. A trillion dollars of housing debt has been replaced by a trillion dollars (or more) of student and auto loan debt. Delinquency rates are increasing for student and auto loans, while other loan types have seen a decrease in delinquency. Finally, the value of both the university education and the automobiles people are buying don’t seem to justify the amount being borrowed and spent, from a big picture perspective. Their prices are artificially inflated due to the Fed and the federal government teaming up to create new bubbles, just like they did to create the housing bubble.


ABA Responds To Code of Banking Review

The Australian Bankers’ Association has today released its response to the independent review of the Code of Banking Practice, supporting the vast majority of recommendations.

“The Code is central to making sure banks do the right thing by their customers,” ABA Executive Director – Retail Policy Diane Tate said.

“Significant changes will be made to the Code to raise standards in banking and deliver on the industry’s commitment to make banking better.”

Some of the changes customers can expect in a new Code include:

  • Plain-English language so that Australians can better understand their banking rights and responsibilities.
  • An easier way to cancel credit cards or reduce the credit limit, and a commitment by banks when offering cards to assess someone’s ability to pay the full credit limit in a reasonable time period.
  • A new dedicated section for small businesses, and a commitment by banks to simplify terms and conditions and give more notice when loan contracts change.
  • Increased help for people experiencing, or at risk of, financial difficulty, so they can take control of their finances.

“Of the 99 recommendations, the banking industry supports 61 in full. There are 29 recommendations that we support in principle or in part, and the remaining nine we either need more time to consider, or are not in a position to adopt,” Ms Tate said.

“There are also a number of related Federal Government reviews underway which we need to take into account before we can finalise our work on some of the recommendations.

“By accepting the vast majority of recommendations, banks are demonstrating they are taking action to change as well as being honest about the things which are more complex to resolve.

“In most cases where the industry does not support a recommendation, we have put forward an alternative that addresses the underlying intent of the recommendation.”

Ms Tate said the banking industry committed to an independent review of the Code which is now complete.

“Mr Phil Khoury, the independent reviewer, consulted widely as part of his review and it is clear the Code needs to change to meet the evolving needs of customers and the wider community.

“The new Code will have a clear commitment to ethical behaviour by banks, in a similar way that the Banking and Finance Oath demonstrates a personal commitment to high ethical standards.

“The Code will be redrafted in plain English so it is easier to read and our customers can better understand banks’ commitments to them, as well as their rights and responsibilities,” she said.

Ms Tate said the industry would work with stakeholders and other interested parties to redraft the Code.

“The industry recognises it is important for customers that we make these changes as soon as possible. We are aiming to have a new Code redrafted by the end of the year. This timeframe is ambitious, but we are determined to deliver change fast, while taking care to get it right.

“While the Code has legal effect through subscribing banks’ terms and conditions, we have heard we need to do more to give customers confidence in the Code. That’s why the ABA will work with the Australian Securities and Investments Commission on approving the Code, and on giving greater powers to the Code Compliance Monitoring Committee.

“Banks will need time to make any necessary changes to adopt the new Code. At this stage we anticipate a transition period of 12 months, but this will be revisited once we have a new Code.

“We will publish quarterly progress updates on the redraft and implementation of the Code, so customers can have confidence we’re delivering on our commitment to make banking better,” Ms Tate said.

More information, including a response to each of the recommendations, is available here.

The “not supported” recommendations are:

  • Clause 28 of the Code should be amended to include a new provision that a signatory bank may, at its discretion, decide to waive a small unsecured debt if the bank is provided with evidence that the person is in long term financial hardship and the circumstances warrant a compassionate approach.
  • The Code should specify that a guarantee is unenforceable if the signatory bank fails to comply with the pre-execution requirements. Similarly non-compliance with a post execution requirement means that the guarantee is unenforceable in relation to debt or costs that accrue after that time.
  • The Code should be amended to prohibit signatory banks from signing a guarantor, who has not been legally advised, until at least the third day after the provision of all required information to the guarantor.
    This provision should also apply to a guarantor of a small business credit facility below $5 million with an exception at the election of a sole director guarantor, a trustee guarantor or a commercial asset financing guarantor.
  • Clause 29 of the Code should specify that a credit facility is unenforceable against a person who is accepted as a co-debtor but who, the signatory bank should have known, was not receiving a substantial benefit under the credit facility. In the case of a credit facility for the purpose of a small business, the clause 29 obligation should only apply to a credit facility below $5 million.
  • The Code should specify that a guarantee is unenforceable if the signatory bank fails to comply with the pre-execution requirements. Similarly non-compliance with a post execution requirement means that the guarantee is unenforceable in relation to debt or costs that accrue after that time.
  • The Code should be amended to include a new obligation that prohibits banks from offering a credit card credit limit increase to a Code customer, other than in response to a customer-initiated specific request for a higher credit limit. The drafting should make it clear that the requirement for a customer-initiated specific request is not met by the customer ‘opting in’ to the bank making credit limit increase offers to the customer.
  • The Code should be amended to include:
    a) A prohibition on signatory banks charging Code customers interest on the portion of their credit card balance that is paid off by the due date.

The “additional time” recommendations are:

  • The Code should be amended to prohibit a signatory bank from enforcing a credit facility against:
    a) a customer who is an individual; or
    b) a small business customer where the credit facility is below $5 million,
    if the customer has complied with loan payment requirements and has acted lawfully.
    The ABA should consult with stakeholders including the Australian Small Business and Family Enterprise Ombudsman about any exceptions, for example, to permit enforcement of a small business credit facility where an insolvency event has occurred.
  • Clause 29 of the Code should be redrafted to require a co-debtor to receive a “substantial benefit” under the credit facility and a signatory bank to make reasonable enquiries to ensure that this is the case (thereby reversing the position currently achieved by the words “it is clear, on the facts known to us”). In the case of a credit facility for the purpose of a small business, the clause 29 obligation should only apply to a credit facility below $5 million.
  • The Code should either:
    a) restrict signatory banks from charging a home loan customer for lenders mortgage insurance more than the actual cost incurred by the signatory bank net of any discount or commission paid by the insurer to the signatory bank and require a signatory bank to pass on to a home loan customer any rebate of premium that the signatory bank receives if the customer repays or refinances their loan; or
    b) impose a disclosure regime whereby signatory banks disclose to their customers any discount, commission or rebate obtained by the bank at the inception of the policy and at the time of cancellation of the policy.



ABC The Business Does Mortgage Rate Rises

A segment from The Business last night which discussed the rising mortgage rate environment.

The big four banks and many of their smaller competitors have raised interest rates in step with each other but out of step with the Reserve Bank. Investors will experience the biggest rises, as banks seemingly heed the warning of regulators to cool the heated property market.

They referred the to Trump effect on funding costs, the differential repricing of investment loans, and suggested that more rises are due, irrespective of what the RBA might do.