Free Windows 10 Will Not Salvage Shrinking PC Sales – Fitch

Microsoft Corporation’s new Windows 10 operating system released on 29 July will not reverse declining PC sales, says Fitch Ratings.

Fitch believes that PC demand will remain structurally weak, exacerbated by users’ adoption of touch screen-enabled larger smartphones and tablets. Demand could fall further as vendors look to raise prices in Europe and Japan to offset the effects of a rising US dollar.

Microsoft’s decision to offer Windows 10 as a free upgrade is likely to shrink PC shipments further, unlike in the past – when a new Windows operating system incentivised consumers to buy new PCs. The free upgrade is likely to extend the PC replacement cycle, given that Windows 7 is compatible with Windows 10. However, Windows 10 should benefit sales in the hybrid laptop market which is still a niche area, with its new gesture- and voice-control features. Annual PC sales have been declining since 2012; and shipments will drop by the mid- to high-single digits to 300 million units in 2015, according to market forecasters.

Notably, too, we expect that Asian sales growth will no longer be strong enough to offset declining sales in the US and Europe. Tablets and smartphones present stronger competition for PCs in developing markets, as a smaller proportion of emerging-market consumers own more than one computing device. Steep declines in global PC shipments in 2015 are also due to a rising US dollar and temporary demand growth stimulated by Microsoft’s 2014 decision to end support for Windows XP.

The profitability of most PC vendors is likely to be hurt by shrinking sales; a market which is consolidating but still competitive; rising inventory levels; and unfavourable currency effects. Average operating margins for the top three PC vendors have halved to about 3%-5.5% since 2011-2012. Of the three, Lenovo has the best operating margin at 5.5%, and derives a large part of its profitability from the Chinese business PC market. The PC operating margin of the second-largest manufacturer, Hewlett Packard  has narrowed to 3% (2011: 5.5%). This should expand, however, from expectations of higher-profit-margin product sales, market share gains and cost restructuring. Dell has stopped disclosing PC profitability following its leveraged buy-out in 2013.

We believe that PC market share will gradually consolidate among the top-three vendors, and could drive a modest expansion in profit margins. Market leaders are focusing on profitable growth and a richer sales mix of hybrids, thin and mobile products, the commercial market and services.

The big three firms have gradually gained market share, and now control about 51% versus 45% in 1Q14. Lenovo’s “protect and attack” strategy – whereby it focuses on protecting its Chinese market share while boosting its share in US and European markets – is bearing fruit. The company has increased its PC market share by 200bp to 19.5%, and has been the PC market leader for eight quarters.

Westpac Follows The Herd On Mortgage Repricing

Westpac today announced an increase in interest rates for residential investment property loans, following the introduction of investor lending growth benchmarks set by APRA. They will lift the rates 27 basis points for Westpac brands, and 25 bps for the brands which sit under the St George umbrella, but sooner (21 August), versus 25 September for Westpac.

The standard variable interest rate on Westpac residential investment property loans for new customers will increase by 0.27% to 5.75%, effective 10 August 2015. For existing customers the increase will be effective 25 September, 2015. This timing is to ensure that there is a smooth transition to the differentiated rates structure for the mortgage portfolio.

Fixed rates on residential investment property loans will increase by up to 0.30%, effective 4 August 2015.

Westpac will decrease fixed rates on owner occupier home loans by up to 0.30% effective 4 August 2015.

Consumer Bank Chief Executive, George Frazis, said: “Today’s announcement is an important step in ensuring that Westpac meets APRA’s benchmark that investor credit growth should be no more than 10 per cent.

“We have already introduced a range of initiatives, including increasing the deposit required for investment property loans to 20 per cent as part of our commitment in meeting APRA’s benchmark.

“However, we are pleased to be able to reduce fixed rates on owner occupier loans. We know that the dream of many Australians is to get into their own home and the new lower fixed rates will benefit customers that are looking for security and peace of mind about their loans and monthly repayments.”

The Westpac delay is probably connected with the system changes which will need to be made, as we highlighted in an earlier post.

ASIC Confirms Poor Underwriting Practices Were Used By Some Lenders

As reported in the SMH.

An official review of lending standards in the red-hot investor property market is set to reveal serious flaws in how lenders have been assessing customers for credit.

The chairman of the Australian Securities and Investments Commission, Greg Medcraft, on Thursday said the watchdog would in August publish a report finding shortcomings among how some lenders were testing borrowers’ ability to cope with higher interest rates.

The report, based on surveillance of 11 banks and non-banks, had also found some lenders’ credit checks used inadequate estimates of customers’ living expenses, he said.

Even though banks are offering new borrowers interest rates of about 4.5 per cent, Mr Medcraft lenders and customers needed to assess whether borrowers could cope with interest rates of 7 per cent.

“That’s what you should be thinking about if you’re looking at your ability to repay the loan,” he said.

But adding to similar concerns raised by the prudential regulator in recent months, Mr Medcraft said the report had made “mixed” findings on whether banks were using a high enough “stress rate.”

He added that some of the underwriting standards had been improved in recent months. “Many of them have since corrected their ways or are correcting them.”

Mr Medcraft also highlighted some borrowers failing to rigorously assess a borrowers’ cost of living, including national indexes that did not reflect local variations.

APRA MBS Says Investment Loans Higher – But Beware!

The APRA monthly banking statistics for the ADI’s to June 2015 were released today.  Home investment lending does not show signs of cooling, so this explains the recent more overt pressure being applied by the regulators. We will look at home lending first. The banks grew their lending book by 1.33% in the month to 1.37 trillion. Remember this is the stock of loans. RBA reported total loans were $1,481 bn, the difference being the non-banks.

Within that, owner occupied loans were down 1.24% and investment loans were up 5.99%.  Investment loans were worth $507 bn. But this is due to a massive adjustment in the data relating to ANZ. Between May and June, the APRA ANZ data shows their owner occupied loans dropped by $16.2 bn and their investment book grew by $23 bn. We think this helps to explains ANZ’s announcement earlier. Clearly some loans have been reclassified between May and June, so this distorts the overall market picture. APRA’s report on revisions does not really help us. That said, here is the detailed analysis.

CBA has the largest share of owner occupied loans, with 27.36% of the market. Westpac has 30% of all investment property lending. ANZ had 15.12% of owner occupied loans, and 16.46% of investment loans (under the revised data in June).

APRA-MBS-June2015-HomeLoanShareThe portfolio movements May to June show the ANZ swing, and not much else!

APRA-MBS-June2015-MonMovementThe APRA speed bump of 10% is well and truly exceeded this month because of the swing in ANZ. The market grew at an annualised rate of over 15% and many large and small players are well above the threshold – ANZ was at 47% – but this is because of the adjustment. The true growth rate is lower. But, no visible impact of the APRA guidelines so far.

APRA-MBS-June2015-INVGrowthFor comparison purposes, here is the data for owner occupied loans – and though no formal speed limit is in place, we have shown the 10% benchmark. The market grew at 4.3% in the past 12 months. The true rate is higher.

APRA-MBS-June2015-OOGrowthTurning to deposits, little change in the month, total deposits were down just a tad to $1.83 trillion. Little movement in relative shares.

APRA-MBS-June2015-DepositShareOn the credit card portfolios, there was a rise of 0.4% in balances outstanding, to $41.5 bn. No significant change in the relative share.

APRA-MBS-June2015-CardsShare

Investment Property Lending Sucking Finance From Business

The latest data form the RBA on credit aggregates to June 2015, tells the continuing story of growing investment property lending, and a relative reduction in lending to business. The data on total loans outstanding (stock) shows there was a fall in lending to business in the month of 0.36%, which translates to a growth of 4.3% for the year to $789 bn. On the other hand, lending for housing rose 0.6% in the month, and 7.3% for the year, (higher than last year at 6.4%) to $1,481 bn. Owner occupied housing rose 0.47% to $945 bn, whilst investment lending grew 1.10% to $536 bn. Other personal lending rose 0.15% to $137 bn.

RBA-Credit-June-2015Total lending to business as a share of all lending fell again to 32.8%, this is not healthy as productive growth comes from business investing in their futures. This is not as strong as we need to sustain the economy.

RBA-CreditBusiness-June-2015Looking at the mix of lending for housing, investment lending was up to 36.2%. It has never been higher. This inflates house prices, and banks balance sheets, but the wealth is artificial, and unproductive.

RBA-CreditHousing-June2015 Finally we think there are some funnies in these numbers, which when we have completed the analysis of the APRA monthly banking statistics, we will comment on further. Suffice it to say, it seems maybe some loans were reclassified last month from owner occupied to investor loans, so might be distorting the data.

DFA Survey Shows Property Demand Remains Strong

Following on from yesterdays video blog on the overall results from the latest household surveys, over the next few days, we will dig further into the data. We start with some cross segment observations, before in later posts, we begin to go deeper into segment specific motivations. You can read about our segmentation approach here. Many households still want to get into property – demand is strong, thanks to lower interest rates, despite high home prices and flat incomes. Future capital growth is expected by many in the market, and by those hoping to enter. This despite a fall in household confidence, as measured in our finance confidence index.

We start with savings intentions. Prospective first time buyers are saving the hardest, despite the lower interest being paid on deposits. More than 70% are actively saving to try and get into the market (though we will see later, more are switching to an investment purchase). Portfolio and solo property investors are saving the least – despite the recent changes to LVR’s on loans.

A significant proportion of those saving are actively foregoing other purchases and spending less, so they can top up their deposits. A higher proportion are also looking to the “Bank of Mum and Dad” for help.

SurveySavingJuly2015Looking next at borrowing intentions over the next 12 months (an indication of future mortgage finance demand), down-traders are slightly less likely to borrow now, compared with a year ago, whilst investors are firmly on the loan path. First time buyers will need to borrow. Refinancers are active, and one motivation we are seeing is the extraction of capital during refinance, onto a lower interest rate.

SurveyBorrowJuly2015Many households are still bullish on house price growth. Investors are the most optimistic, whilst down-traders the least. There are significant state differences, with those in the eastern states more positive than those elsewhere.

SurveyPricesJuly2015So, who is most likely to transact? Portfolio investors are most likely, then down-traders, and solo investors. There is also a lift in the number of households looking to refinance, to take advantage of lower interest rates. The recent public announcements by the banks, about tightening lending criteria appears to have encouraged some to bring forward their plans to purchase, in the expectation that later it may be more difficult to get a loan.

SurveyTransactJuly2015The recent tweaks in rates are having no impact on household plans, as the absolute rates are still very low – lower than ever – for many. We conclude that the demand side of the property and mortgage markets are still intact.

Next time we will look in detail at data from first time buyers, and then investors.

US to Drive Faster Payments

The Federal Reserve System announced the appointment of Federal Reserve Bank of Chicago Senior Vice President Sean Rodriguez as its Faster Payments Strategy Leader. In this role, Rodriguez will lead activities to identify effective approaches for implementing a safe, ubiquitous, faster payments capability in the United States.

Rodriguez will chair the Federal Reserve’s Faster Payments Task Force, comprised of more than 300 payment system stakeholders interested in improving the speed of authorization, clearing, settlement and notification of various types of personal and business payments. In addition to leading faster payments activities, Rodriguez will continue to oversee the Federal Reserve’s Payments Industry Relations Program.

“Sean’s leadership experience across payment operations, customer relations and industry outreach is exactly what we need to successfully advance the vision for a faster payments capability in the United States,” said Gordon Werkema, the Federal Reserve’s payments strategy director to whom Rodriguez will report. “His passion has contributed significantly to the momentum behind our initiative to date and we’re confident in his ability to carry our strategy forward in strong partnership with the industry.”

Rodriguez brings more than 30 years of experience with Federal Reserve Financial Services in operations, product development, sales and marketing.  He helped establish the Federal Reserve’s Customer Relations and Support Office in 2001 and served on the Federal Reserve’s leadership team for implementing the Check 21 initiative.  More recently, Rodriguez was instrumental in the design and launch of the Federal Reserve’s Payments Industry Relations Program charged with engaging a broad range of organizations in efforts to improve the U.S. payment system.

Additional information about the Federal Reserve’s Strategies for Improving the U.S. Payment System, including the Faster Payments Task Force, is available at FedPaymentsImprovement.org.

The Federal Reserve believes that the U.S. payment system is at a critical juncture in its evolution. Technology is rapidly changing many elements that support the payment process. High-speed data networks are becoming ubiquitous, computing devices are becoming more sophisticated and mobile, and information is increasingly processed in real time. These capabilities are changing the nature of commerce and end-user expectations for payment services. Meanwhile, payment security and the protection of sensitive data, which are foundational to public confidence in any payment system, are challenged by dynamic, persistent and rapidly escalating threats. Finally, an increasing number of individuals and businesses routinely transfer value across borders and demand better payment options to swiftly and efficiently do so.

Considering these developments, traditional payment services, often operating on decades-old infrastructure, have adjusted slowly to these changes, while emerging players are coming to market quickly with innovative product offerings. There is opportunity to act collectively to avoid further fragmentation of payment services in the United States that might otherwise widen the gap between U.S. payment systems and those located abroad.

Collaborative action has the potential to increase convenience, ubiquity, cost effectiveness, security and cross-border interoperability for U.S. consumers and businesses when sending and receiving payments.

Since the Federal Reserve commenced a payment system improvement initiative in 2012, industry dialogue has advanced significantly and momentum toward common goals has increased. Many payment stakeholders are now independently initiating actions to discuss payment system improvements with one another—especially the prospect of increasing end-to-end payment speed and security. Responses to the Federal Reserve’s Consultation Paper indicate broad agreement with the gaps/opportunities and desired outcomes advanced in that paper. Diverse stakeholder groups have initiated efforts to work together to achieve payment system improvements. There is more common ground and shared vision than was previously thought to exist. We believe these developments illustrate a rare confluence of factors that create favorable conditions for change. Through this Strategies to Improve the U.S. Payment System paper, the Federal Reserve calls on all stakeholders to seize this opportunity and join together to improve the payment system.

What Factors Drive A House Price Boom?

Interesting working paper from the IMF – “Price Expectations and the U.S. Housing Boom”. Essentially, expectation of future prices – unrelated to any fundamentals –  has had a significant role to play.

Between 1996 and 2006 the United States has experienced an unprecedented boom in house prices. There is no agreement on the ultimate cause for the boom. Explanations include a long period of low interest rates, declining credit standards, as well as shifts in the supply of houses and the demand for housing services. Several studies have, however, pointed out that it is difficult to explain the entire size of the boom with these factors and have offered speculation or “unrealistic expectations about future prices” as an alternative explanation. The empirical argument for an important role of house price expectations is often indirect: it is a residual that cannot be explained by a model and its observed fundamentals.

Instead of treating speculation as a deviation from a benchmark, the present paper aims to identify shifts in house price expectations directly and compare their importance to other explanations. To that purpose, we estimate a structural VAR model for the United States and use sign restrictions to identify house price expectation shocks. We then compare their effect to other shocks, including shocks to mortgage rates and shocks to the demand for housing services and the supply of houses.

Results indicate that house price expectation shocks are the most important driver of the recent U.S. housing price boom between 1996 to 2006, explaining about 30 percent of the increase. Over the entire sample, their contribution to fluctuations in housing prices in the U.S. has been smaller, accounting for about 20 percent of the long run forecast error variance of house prices. This suggests that the large contribution of price expectation shocks is historically exceptional. Regarding other shocks, mortgage rate shocks are the second most important driver of the boom: their contribution amounts to about 25 percent. Over the entire sample, they are the most important driver and account for almost 30 percent of the long run forecast error variance. Shocks to the demand for housing services and supply of houses play a subordinated role for fluctuations in house prices, both for the boom period and over the entire sample. Taken together, the four shocks explain about 70 percent of the house price boom, leaving a residual of about 30 percent. This indicates that attributing the entire residual that cannot be explained by standard shocks to price expectations will lead to an overestimation of their contribution. We also find that a model-based measure of house price expectations is positively correlated with leads of a survey based measure of house price expectations. The positive correlation with leads indicates that our measure contains similar information as a survey-based measure. In addition, it tends to provide the information more timely.

We find that the contribution of price expectation shocks to the U.S. housing boom in the 2000s has been substantial. In our baseline specification, price expectation shocks explain roughly 30% of the increase. Another 30% of the increase in house prices remains, however, unaccounted for by the four identified shocks. This indicates that attributing the entire residual that cannot be explained by standard shocks to price expectations will lead to an overestimation of their contribution. We also find that a model-based measure of house price expectations is strongly positively correlated with leads of a survey based measure of house price expectations. This indicates that our measure contains similar information as a survey-based measure, but tends to provide the information more timely. Our approach to identify price expectation shocks leaves the reason why expectations change open. When using an additional constraint to distinguish realistic from unrealistic price expectation shocks, we provide evidence that the housing boom was driven to an important extent by unrealistic price expectations. The analysis has focused on exogenous changes in expectations. An interesting topic for future empirical research is how expectations respond endogenously to other shocks.

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.

So Where Does The Mortgage Industry Go From Here?

We have just completed the latest DFA household survey, and in today’s DFA Video we summarise some of the main themes which we will cover in more detail in later posts.  In the video blog we discuss the key demand and supply issues and make some observations about the future direction of house prices.

In essence, demand for property is still strong. Investors are still keen to purchase, first time buyers are flocking to the investment sector, down-traders are looking to property for income, so are keen to grab an investment property, and the number of portfolio investors is rising. We also see a significant rise in the number of investors via SMSF. Some are bringing their purchase decision forward to try and avoid credit tightening later. Foreign investors remain active (and are finding ways to buy established property – still.) Rental income is static, but investors are still getting benefits from negative gearing, and believe further capital gains will be delivered (again tax efficient). Geographically speaking, investors are most positive in Sydney, least in Perth. Property is seen as an investment asset class.

On the owner-occupied side of the ledger, first time buyers are finding it hard to purchase, thanks to a lack of suitable property, contention with investors, and tighter underwriting standards. Our surveys also highlight the low interest rates on deposits is making saving for a larger deposit harder.  There is considerable interest in refinancing to a lower interest rate, and recent “great” deals on offer are encouraging more churn.

The proportion of property inactive households continues to rise.

On the supply side, there are concerns about the supply of property, and the supply of mortgage finance. We think mortgages for investment loans will be harder to get, will cost more, and some will miss out. Ongoing repricing and less discounting will provide to wider margins for the banks. Non-banks and some of the players operating below the 10% guide growth rate are still wanting to do deals.

To offset this, we expect to see rates for owner occupied refinance to be discounted, and a fierce battle for customers is breaking out. Discounts are still on offer here and other incentives are in play.

Brokers will need to change their tune a little, and tap some of the smaller players on behalf of their clients. Absolute volumes of investment loans are likely to fall, but owner occupied refinancing will likely fill the gap.

So on balance we think the demand/supply disequilibrium will continue to support house prices in the eastern states in coming months, although momentum will fall from current levels. The tweaks to interest rates, of a few basis points will not be large enough to kill the golden goose, (and for many are offset thanks to negative gearing) but the higher serviceability buffers and lower LVR ratios will make it harder for some to enter the market.

The killer blow to house prices will be a substantial rise in interest rates – if rates were to rise just 150 basis points, that would be enough to put many households under pressure. But in the current environment, we do not think a rise in rates is likely for a couple of years, so property momentum has some way to go.

 

Building Approvals Fell 1.2% In June

Australian Bureau of Statistics (ABS) building approvals show that the number of dwellings approved fell 1.2 per cent in June 2015, in trend terms, and has fallen for four months. The fall in unit approvals was the reason, confirming a continued slow down.

Building-Approvals-June-2015There were some significant state variations.

Dwelling approvals decreased in June in South Australia (4.1 per cent), New South Wales (2.9 per cent), Victoria (1.8 per cent) and Western Australia (0.4 per cent) but increased in the Australian Capital Territory (14.6 per cent), Northern Territory (8.7 per cent), Queensland (0.2 per cent) and Tasmania (0.1 per cent) in trend terms.

In trend terms, approvals for private sector houses were flat in June. Private sector house approvals rose in New South Wales (2.0 per cent), Queensland (0.3 per cent) and South Australia (0.2 per cent) but fell in Victoria (1.3 per cent) and Western Australia (1.0 per cent).

The value of total building approved fell 0.9 per cent in June, in trend terms, and has fallen for four months. The value of residential building fell 1.0 per cent while non-residential building fell 0.6 per cent in trend terms.