August 2014 – Digital Finance Analytics (DFA) Blog

Housing Lending Up Again In July to $1.382 Trillion

Today is a big data day, with the monthly banking statistics from APRA and the financial aggregates from the RBA for July. Total credit grew by 0.4% in July, with Housing lifting by 0.5%, Personal Credit at 0.2% and Business Lending at 0.3%. In the last year, overall credit rose 5.1%, Housing 6.5%, Personal Credit 0.8% and Business 3.4%.

Looking in more detail at home lending, we see that overall lending was up to $1.382 billion, from $1,375 billion in June. Owner Occupied Lending rose by $3.5 billion and Investor Lending rose by 3.6 billion. This equates to an annual rise of 4.8% for Owner Occupied loans and 8.5% for Investment loans.

HousingLendingJuly2104 The proportion of Investment loans from ADI’s rose again to 34.9% of all their housing loans, the largest monthly share ever. From an overall market perspective, a little below 34% of all loans written were for investment purposes.

The relative growth in Owner Occupied versus Investment loans is quite stark. Also of note is that growth in both types of loan appears to be slowing recently.

Turning to the banking statistics from APRA, total home lending from the banks was $1,273 billion (the gap between this and the RBA numbers of $109 billion is the non-bank sector). CBA continues to lead the pack on Owner Occupied loans, whilst Westpac leads on Investment loans.

Looking at the share figures, of the main players, CBA and Westpac have the largest footprints and between them have more than half the market.

Portfolio movements highlights significant Investment Loan grow at Westpac, and both types of loan at CBA. Away from the majors, Macquarie and Member Equity Bank grew faster than the other regional players.

Turning to deposits, the total with banks rose to $1,736 billion, up 1.2% in the month. Westpac, nab and ANZ lifted the value of deposits more than Westpac in July.

Finally, in the cards portfolios, the overall value fell by $270 million in July to $40.3 billion. In terms of the portfolio, CBA continues to hold the largest share by value, with Westpac and ANZ following.

Managed Funds Industry Now At A Record $2.4 Trillion

The ABS released their data for the managed funds industry to June 2014 today. At 30 June 2014, the managed funds industry had $2,405.3b funds under management, an increase of $46.1b (2%) on the March quarter 2014 figure of $2,359.2b. The main valuation effects that occurred during the June quarter 2014 were as follows: the S&P/ASX 200 was flat; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 4.2%; and the A$ appreciated 2.2% against the US$.
At 30 June 2014, the consolidated assets of managed funds institutions were $1,895.3b, an increase of $31.3b (2%) on the March quarter 2014 figure of $1,864.0b. The asset types that increased were units in trusts, $12.5b (6%); shares, $9.2b (2%); overseas assets, $9.0b (3%); loans and placements, $4.8b (11%); bonds, etc., $3.3b (3%); short term securities, $2.1b (3%); and derivatives, $0.2b (16%). These were partially offset by decreases in other financial assets, $5.0b (12%); deposits, $4.5b (2%); other non-financial assets, $0.3b (2%); and land, buildings and equipment, $0.1b (0%).

RBA Reinforces Current Policy Settings

The RBA has made a supplementary submission to the Financial System Inquiry. Of note, they want to limit the extent to which SMSF’s can borrow, especially for property purchase; acknowledges the potential systemic risk from more housing lending, and the potential impact on business lending; and continues to be skeptical about the potential benefits of macroprudential tools. A couple of contextual charts may help – $1.85 billion in superannuation, 30% in SMSF, and the property sector is worth $5.2 trillion, with borrowing of $1.375 trillion, and a greater proportion for investment purposes, with a rise in interest only loans.

SUPERANNUATION

Assets should be managed in the best interests of members. Measures to lower costs and fees, optimise liquidity management and limit leverage should be considered”. The Bank endorses the observation that leverage by superannuation funds may increase vulnerabilities in the financial system and supports the consideration of limiting leverage. The general absence of leverage in superannuation was a key source of resilience in the Australian financial system during the financial crisis. Furthermore, the compulsory and essential character of retirement savings implies that it should remain largely unlevered. While still in its infancy, the use of leverage by superannuation funds to enhance returns appears to have been mainly taken up by self-managed superannuation funds (SMSFs). The Bank has previously commented on the risks that may arise from geared property investment through SMSFs, which may act as an additional source of demand that exacerbates property price cycles. Nonetheless, some limited leverage for liquidity management purposes may be appropriate.

HOUSING MARKET

The Interim Report finds little evidence of a shortage of mortgage finance in Australia, a view that the Bank shares. Even so, the Interim Report raises a number of options in the context of competition in the mortgage market that, if implemented, could result in relatively more finance being directed towards housing. These options should be assessed in terms of the end benefits and risks for consumers and the broader economy. Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses. As noted in the Bank’s initial submission, housing is generally not a particularly risky asset, but because of its size, importance to the real economy and interconnectedness with the financial system it poses systemic risk. With regards to Capital Requirements, the Interim Report highlighted several options for aiding competition through Australia’s capital framework, including changes to mortgage risk weights and providing capital inducements for ADIs that use Lenders’ Mortgage Insurance. Because of the cyclical nature of risk-taking and the large social and economic costs of instability in financial systems, it is crucial that institutions’ capital be allocated according to risk. Hence, changes to the capital framework on competitive grounds should not come at the expense of greater risk, and should not amount to a weakening relative to global regulatory minima.

MACROPRUDENTIAL

The Bank concurs with the Interim Report’s caution regarding unproven macroprudential tools. The Bank and the other CFR agencies view macroprudential policy as being subsumed within the broader financial stability policy framework in Australia. The Interim Report notes the existing framework where APRA, in consultation with the Bank and other CFR agencies, is responsible for administering prudential regulation. Consistent with its existing mandate to promote financial stability, APRA has adapted its prudential intensity in light of developments in systemic risk. For example, following signs of increased risk appetite in the mortgage market, APRA recently surveyed mortgage underwriting standards, released guidance on managing mortgage risk, and asked the major banks to specify how they are monitoring lending standards and the ensuing risks to the economy. Tools like loan-to-valuation ratio and debt-servicing ratio limits on mortgages have only recently begun to be used in developed countries. It is still too early to judge their effectiveness with the available evidence so far mixed; the effects of particular initiatives are not easily disentangled from those of other policy settings, including changes in monetary policy. APRA already has the powers to implement these tools if it was decided they would be beneficial. The Bank is not attracted to arrangements whereby prudential policy setting is spread across multiple agencies or groups of agencies. Australian agencies will continue to closely monitor how these tools perform overseas.

Bank Profits Up To $8.4 Billion In June Quarter – APRA

Yesterday APRA published their quarterly ADI performance statistics to June 2014. So today we look at some of the detail contained in this mammoth release, with a focus on the four major banks, which makes up the bulk of the industry.

APRA reported that the net profit after tax for all ADIs was $8.4 billion for the quarter ending 30 June 2014. This is an increase of $0.1 billion (1.2 per cent) on the quarter ending 31 March 2014 and an increase of $0.2 billion (2.6 per cent) on the quarter ending 30 June 2013. The profit margin for all ADIs was 32.3 per cent for the year ending 30 June 2014, compared to 29.8 per cent for the year ending 30 June 2013. Impaired facilities were $19.9 billion as at 30 June 2014. This is a decrease of $1.8 billion (8.3 per cent) on 31 March 2014 and a decrease of $5.9 billion (22.9 per cent) on 30 June 2013. Whilst there are 161 entities within the data, a quick analysis of net profit shows that the big four have the lions share of profit after tax. So, we will focus our analysis on the majors.

We note that for the majors loans and deposits continue to grow, and they are overall quite well aligned, though deposit growth is slowing slightly more recently.

Looking at income sources for the majors, overall net interest income continues to rise, but the impact of lower rates, and discounting in the home loan market shows that gross interest income from the home loans has fallen from its peak in 2011. Bank margins are rising thanks to a change in funding, and lower international capital market rates.

Looking at fee income, we see fees holding their own in value, but as a percentage of all income, fees are falling, standing at 20% of total income in the most recent quarter.

Lower interest rates have had an impact on the mix of deposits, with more money going into call deposits than term deposits. With rates so low, term deposits, and certificates of deposits are less attractive.

Looking at asset quality, the value of specific provisions have fallen again, as impaired facilities and past due payments have reduced. In fact the bulk of the profit growth can be traced to a reduction in the level of provisions!

Capital ratios stand at 12%, the highest they have been, although these are relatively modest compared with some other countries. We commented on the capital ratio question recently.

So, overall, the banks remain strong, but the big four which dominate the banking scene in Australia are relying largely on the release of provisions and improved margins to maintain profit growth and profit margins.

Australian non-conforming loans are higher quality than pre-2008 US and UK equivalents – Moody’s

Interesting release from Moody’s today on securitisation of non-conforming loans in Australia. Non-conforming loans are defined those who fall outside normal credit approval criteria, for example because of a negative credit history, or because borrowers provided limited verification of their financial situation, or required an abnormally large loan, and as a result they do not meet the standard underwriting criteria of prime lenders and lenders mortgage insurance providers.

In the analysis today of the APRA data we highlighted a rise in non-standard approvals.

Moody’s calculate that some 7% of all Retail Mortgage Backed Ssecurities (RBMS) were backed by non-conforming loans but says the underwriting standards and overall quality of borrowers in Australian non-conforming residential mortgage backed securities (RMBS) portfolios after the global financial crisis in 2008-09 are better than in comparable transactions in the Australian market before the financial crisis, and better than in subprime transactions in the US and UK written pre-2008. Moody’s report says that currently, all Australian mortgage portfolios, including non-conforming RMBS are performing strongly, supported by the country’s low interest rate environment, stable economy and continued house price appreciation.

As we highlighted recently, overall securitisation is well below pre-GFC levels.

Moody’s says:

In contrast to the US subprime, US Alt-A, and UK non-conforming RMBS issued pre-2008, Australian non-conforming RMBS did not experience a significant rise in delinquencies and defaults after the financial crisis, because Australia did not suffer the severe economic stress and house price declines that affected the US and UK markets from 2007 onwards. Moody’s report says that while there are many common elements between Australian non-prime loans, and pre-2008 UK and US mortgages granted to borrowers who did not meet the traditional prime lending criteria, current market practices and legislation in Australia have put strict constraints on lenders, such that the average quality of borrowers in Australia is better than in typical pre-2008 UK non-conforming, US subprime or US Alt-A portfolios.

According to Moody’s report, Australia’s non-conforming RMBS market re-emerged in 2013, after stalling as a result of the global financial crisis. Over the last 18 months, 10 new transactions totaling AUD3.0 billion have been issued, including USD200 million in USD denominated issuance from Australian originators.

Moreover, while competition has been strong among non-conforming lenders in Australia post-2008, there has been no evidence of a loosening of underwriting standards to gain customers. Instead, lenders have focused on price to attract borrowers.

Interest Only Loans Up To 43.2% In June – APRA

APRA just released their quarterly data on housing exposures of the Authorised Deposit-taking Institutions in Australia for the June 2014 quarter. As at 30 June 2014, the total of residential term loans to households held by all ADIs was $1.23 trillion. This is an increase of $29.7 billion (2.5 per cent) on 31 March 2014 and an increase of $97.2 billion (8.6 per cent) on 30 June 2013. Owner-occupied loans accounted for 66.2 per cent of residential term loans to households. Owner-occupied loans were $811.7 billion, an increase of $16.5 billion (2.1 per cent) on 31 March 2014 and $56.5 billion (7.5 per cent) on 30 June 2013.

ADIs with greater than $1 billion of residential term loans held 98.4 per cent of all residential term loans as at 30 June 2014. These ADIs reported 5.1 million loans totalling $1.21 trillion and an average loan size was approximately $237,000, compared to $230,000 as at 30 June 2013.

There are a number of interesting observations within the data, but the one which stands out is the continued growth in interest only loans. Looking at the new loans written, we see that 43.2% were interest only loans. This is the highest ever, and reflects the growth in investment loans where tax offsets are maximized by keeping the balance as high as possible.

We also see a growth in the number of loans which are approved outside normal criteria. It lifted to more than 3.5% of all loans written in the quarter. At a time when regulators are stressing the importance of good lending practice, this is a surprise, but reflects the fact that larger loans are required by some to chase inflated house prices.

The proportion of new loans originated via brokers was 43%, based on the value of loans written. This is the highest for 5 years.

Low documentation loans continue to make up only a small proportion of all loans written.

Turning to the portfolio data, (the stock of all loans held by ADI’s) we see the continued growth in interest only loans, to 35% of all loans, the continued fall in low document loans,

The average loan balances across the portfolio for loans with offsets, and interest-only mortgages continues to rise, with the average balance for the latter now at $299,000.

Investment loans across all ADI’s now make up 33.8% of all lending in the portfolio.

We see that the number of lending entities fell again to 162, highlighting continued concerns about the competitive tension in the industry.

Latest On Australian Securitisers

The ABS published their data on Australian Securitisers to June 2014 today. At 30 June 2014, total assets of Australian Securitisers were $131.3b, up $2.5b (2.0%) on 31 March 2014. Still below below the pre-GFC peak of more than $250,000 million.

During the June quarter 2014, the rise in total assets was due to an increase in residential mortgage loans (up $3.4b, 3.3%). This was partially offset by decreases in other loans (down $0.4b, 2.5%) and cash and deposits (down $0.3b, 8.0%). Residential and non-residential mortgage assets, which accounted for 82.7% of total assets, were $108.6b at 30 June 2014, an increase of $3.4b (3.2%) during the quarter.

At 30 June 2014, total liabilities of Australian securitisers were $131.3b, up $2.5b (2.0%) on 31 March 2014. The rise in total liabilities was due to increases in loans and placements (up $2.1b, 14.8%) and long term asset-backed securities issued in Australia (up $1.1b, 1.2%). This was partially offset by a decrease in asset backed securities issued overseas (down $0.3b, 2.7%).

At 30 June 2014, asset backed securities issued overseas as a proportion of total liabilities decreased to 9.5%, down 0.4% on the March quarter 2014 percentage of 9.9%. Asset backed securities issued domestically as a proportion of total liabilities decreased to 76.8%, down 0.7% on the March quarter 2014 percentage of 77.5%.

The snapshot shows that the securitised sector is still in the doldrums, and that the bulk of loans are being purchased by local investors, rather than overseas. Growth is below loans system growth for the same period. Note that in this issue revisions have been made to the original series as a result of improved reporting of survey data. These revisions have impacted on the assets and liabilities for March 2014 and December 2013.

Super Balances Now Up To $1.85 trillion – APRA

APRA just published their Quarterly Superannuation Performance data to June 2014. Superannuation assets totalled $1.85 trillion at the end of the June 2014 quarter. Over the 12 months to June 2014 there was a 15.3 per cent increase in total superannuation assets. Over the June 2014 quarter, total superannuation assets increased by 2.6 per cent.

There were $27.6 billion of contributions in the June 2014 quarter, up 5.9 per cent from the June 2013 quarter ($26.1 billion). Total contributions for the year ending June 2014 were $95.0 billion. Outward rollovers exceeded inward rollovers by $531 million in the June quarter. There were $14.7 billion in total benefit payments in the June 2014 quarter, an increase of 8.3 per cent from the June 2013 quarter ($13.6 billion). Total benefit payments for the year ending June 2014 were $55.3 billion. Net contribution flows (contributions plus net rollovers less benefit payments) totalled $12.4 billion in the June 2014 quarter, an increase of 15.1 per cent from the June 2013 quarter ($10.8 billion). Net contribution flows for the year ending June 2014 were $37.3 billion.

The number of entities with assets of more than $50m fell by 3 in the last 12 months, from 213, to 210.

The self managed super fund sector, according to the ATO, accounted for 30.05% of all assets.

The value of assets in SMSF continues to grow, standing at $557 billion (the red area), although the absolute percentage has fallen in the past year, from 30.8% to 30.05% (the blue line).

Where Capital Growth In Property Lives

In the Opening Statement to House of Representatives Standing Committee on Economics today, Glenn Stevens made the following points:

not only are funding costs low, but banks want to lend and are competing to do so more actively than they have for some years;

net worth per household has risen by about $120,000 over the past two years;

the community’s monetary assets have risen by around 13 per cent – over $180 billion – over the same period;

It is worth reflecting on the fact the main reason for the increase in net worth is a bounce in the stock market, and lift in capital values of property, thanks to rising prices. After all real income is falling for many. In addition, the average hides the differences.

We have been looking at capital growth for the average household, across the states, and between the main urban centres and the rest of rest of the state. From our surveys we have been able to assess the relative growth in the value of property, over time, by marking property to market and comparing that with its purchase price. The chart below shows the relative growth in net capital value of property since 2004 (where our surveys start). It subtracts the original purchase price from the current value, to give a theoretical capital or wealth value. It shows that in the early 2000’s there was a similar level of growth in the cities and regional centres, but that more recently it has diverged. In the past 2 years, the average capital appreciation in the urban centres was $79,000, whereas in the regional centres, it was just $18,000.

However there are significant variations across the states. In Sydney, households in the past 2 years, have on average enjoyed a lift in net worth of more than $230,000 thanks to price hikes, whereas Brisbane, Adelaide, and regional areas in SA and TAS have not experienced much of an increase at all.

Looking at the longer term trends, across states, the situation gets even more interesting. Of course people have bought in at different times, but we can plot the overall capital growth trend. For example, In NSW, a household who bought in Sydney in 2004 and held the property would on average be nearly $300,000 better off now. If they had bought in early 2012, though they could have nearly earnt the same gain! All the action has been in the last couple of years, in Sydney itself. There have been a more gentle lift in regional NSW. Note that I have not corrected for inflation in any of the current calculations, if I did, the regional centres in NSW would have stood still.

In VIC, the situation is somewhat similar. It is worth noting that compared to NSW, the correction in 2009 was less severe.

Turning to QLD, there has been no capital growth in either Brisbane, or the regional centres since 2010. If you were to correct for inflation, it would be going backwards.

In WA, growth peaked in 2010 in Perth, with a further small peak recently, whilst in the regional centres, values are falling in real terms, before inflation. We compared Perth and Sydney recently, in more detail.

Looking at SA, growth in Adelaide is back to 2011 levels, but in the regional areas, growth is still lower than in 2010.

In TAS, since a peak in 2010, both Hobart and regional centres are flat, before inflation.

Finally, we look at the remaining states. Growth in Darwin has been sustained, whilst regional NT and Canberra are flatter since 2011.

So, my conclusion is simple, some households especially in Sydney and Melbourne, may be experiencing the wealth effect halo of smugness, but many households across other states and regional centres are not enjoying capital growth. Indeed, for many there has been a reduction in true value, before inflation since 2011. It is unlikely therefore that we will see a sudden surge of consumer spending activity in response to the housing boom (which is not uniform across the country as we have shown). It is really a Sydney and Melbourne boom. The RBA may be waiting for a long time if they are expecting households to start spending big.

A Tale Of Two Cities – Demand and Supply In Action

Last week we reported on the ABS house stock data, which valued property at more than 5.2 trillion in Australia. We have been looking in more detail at this data, and cross relating it to information from our own household surveys. Today we compare the markets in NSW and WA, because there are some interesting observations to note. First, NSW and WA have the highest mean dwelling prices in Australia. NSW stands at more than $650,000 and WA $595,000, ahead of VIC and ACT. TAS has the lowest mean at just over $300,000.

In addition, when we look at the decomposition of the $5.2 trillon by state, NSW has the largest share, WA has a smaller, but significant share, behind VIC and QLD.

But, there are some interesting differences between NSW and WA. Population growth, from all sources (migration, births, and interstate movements), shows that WA is growing faster than NSW. So, from the demand perspective, we would expect prices in WA to be responding to that demand.In fact, dwelling prices in WA have been growing at a significantly lower speed than in NSW. In fact, most recent data suggests prices in WA are going slightly backwards.

So, whats making this happen? We need to look at the supply side of the equation. WA have been building more properties, significantly more, than NSW. So demand and supply in WA are more in balance, even taking the faster population growth into account.

We also checked out the status of property purchase by SMSF’s and the like, and there are similar trends in the two states, so that element can be discounted from the analysis. We have previously highlighted the shrinking average plot size for new developments, and noted that WA has been allowing plot sub-division and new builds on sub-250 sqm plots. So it is interesting to note NSW’s recent announcement to release land in the west for smaller development plots. Supply and demand are clearly in action, and NSW house prices won’t adjust from their stratospheric levels until substantial supply side issues are addressed. The way to address Australia’s housing issues is to release more land, and build more houses.