September 2016 – Digital Finance Analytics (DFA) Blog

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.

Home Lending Continues Higher

The latest APRA monthly banking stats to end August 2016 shows that total lending for housing rose 0.53%, equivalent to an annualised rate of 6.41%, well ahead of inflation and wage growth. Total loans are now $1.487 trillion, up another $7.9 billion in the month.

Within that, owner occupied loans rose 0.63% (up $6bn) and investment loans rose 0.35% (up $1.8bn). Investment loans comprise 35.55% of loans on book, down just a little from last month.

Looking at the individual banks, Westpac grew their portfolio the largest, up $2.5 billion, followed by CBA. ANZ reduced their investment portfolio – perhaps thanks to restatement of loan purpose? Bendigo dropped their portfolio of owner occupied loans in the month.

Here are the current relative shares.

Finally, here is the investment growth, by lender, which is running on a 3 month annualised basis at 2.6%. We see some of the majors growing their investment loans faster than system but below the theoretical 10% speed limit, which has little use currently. A couple of players are running well over however.

The RBA data, out soon will tell use more about the overall portfolio, including non-banks, and also about the restatement adjustments.

New Home Sales mount a partial recovery in August – HIA

The monthly HIA survey of Australia’s largest volume builders reveals that total seasonally-adjusted new home sales mounted a partial recovery in August 2016.

In the month of August 2016 detached house sales increased in four out of five mainland states, after falling everywhere in July and rising everywhere in June. In August 2016 sales increased by: 12.1 per cent in South Australia; 8.7 per cent in New South Wales; 7.8 per cent in Western Australia; and by 4.2 per cent in Queensland. Detached house sales fell by 5.0 per cent in Victoria during the month.

The number of seasonally-adjusted detached house sales increased by 2.9 per cent in August 2016, following a decline of 7.4 per cent in July. However, ‘multi-unit’ sales dropped by 17.3 per cent in July before recovering by 17.8 per cent in August.

“HIA New Homes Sales fell by a rather hefty 9.7 per cent in July 2016, but then increased by 6.1 per cent in August,” said HIA Chief Economist, Dr Harley Dale.

“Sales of new detached houses and ‘multi-units’ didn’t rebound sufficiently in August to offset the decline in July. These latest New Home Sales figures therefore don’t paint a stellar picture of an August recovery – following as they do a big drop in July, but unless you’re a pessimist looking for a large black hole then this latest update is a long way from a downbeat story.”

“Australia is in the midst of the longest and biggest new home building cycle in the nation’s history,” Harley Dale said. “Despite being at the mature stage of this cycle we still face a situation where key leading indicators such as HIA New Home Sales point to healthy levels of construction ahead, even if volumes will be down on the 2015/16 record high.”

“Total new home sales expanded by 1.5 per cent over the three months to July this year. That is a great result when the level of national new home building has already grown over four consecutive years,” concluded Harley Dale.

Central Bank Balance Sheets Explode

There has been astonishing growth in the balance sheets of Central Banks in recent years, as attempts have been made to deal with fallout from the GFC nearly eight years ago. Globally we estimate the total assets of central banks are now north of US$17 trillion. But it is worth thinking about the implications of this expansion, in both policy and economic terms. In some geographies money has been “created”, leading to asset bubbles when coupled with low interest. But even in markets where “QE” has not been used, Central banks are still more active, and larger. Here is some data on USA, Australia and European central banks underscoring the absolute rate of growth.

A speech given by Minouche Shafik, Deputy Governor, Markets & Banking, Bank of England explores some of the issues.

Gone is the pre-crisis ideal of minimalist central banks with small balance sheets, narrowly defined objectives and tools, and a bias toward non-intervention. Today, major central banks have greater responsibilities and a wider range of tools at our disposal. Our balance sheets are larger and for the most part continuing to increase.

I’d like to use these remarks to offer a number of reflections on these developments, using the Bank of England’s recent experience by way of example, and focussing on four themes.

My first theme is that the broadening of our responsibilities and range of tools at our disposal has facilitated a more joined up approach to how we set monetary policy and pursue financial stability.

Second, the increase in size of our balance sheet has been a necessity of the times we live in. Deep structural forces have combined to depress the level of interest rates at which the economy would be in equilibrium, obliging us to rely evermore on monetary policies that were once considered unconventional. This requires us to operate with multiple instruments in multiple markets meaning that our impact on the financial system – the central bank’s footprint – is larger.

Third, we are aware that some of our policies have spillovers and side effects, but we take steps to address them where feasible to do so within our mandate. We know that a bigger footprint means we need to be mindful of our step.

Finally, despite our bigger size, there are some things central banks cannot do. To generate sustainably strong growth over the medium term, monetary and financial stability policy must be part of a balanced package that also includes the government’s economic policies and, given strong global interconnections, international policy co-ordination.

The U.S. economy is in desperate need of a strong dose of fiscal penicillin

From The Conversation.

Despite six years of “recovery” from the Great Recession, America’s middle class still struggles financially amid sluggish economic growth and middling job creation.

The Federal Reserve’s near-zero interest rates have helped stabilize the economy after it nearly went into freefall in 2008 and 2009, but that policy is coming to an end, with at least one quarter-point hike expected this year and more in 2017 and 2018.

So what will support the economy once the Fed’s largesse begins to disappear?

I’ve been exploring the key economic data – from productivity and housing to wage growth and consumer spending – to better understand where we’re headed and what is needed to get out of this no-to-low growth environment, a pernicious state some economists call secular stagnation. The data show clearly why serious attention is needed to foster faster growth, a more competitive economy and more opportunities for American families.

And only one institution, I would argue, is able to do something about it: Congress.

Stagnant growth and productivity

For most of the recovery, economic growth has been lackluster.

Gross domestic product has expanded at an average annual inflation-adjusted rate of just 2 percent since the recession ended in the second quarter of 2009, far below the rate of 3.4 percent from December 1948, when the first recession after World War II started, to December 2007, when the most recent recession began. And in just the past three quarters through June, the economy has barely budged, growing at an anemic 1 percent or so.

Productivity growth, measured as the increase in inflation-adjusted output per hour, is key to propelling strong economic growth because it means that workers are getting better at doing more in the same amount of time. Yet productivity rose only a total of 6.6 percent from the second quarter of 2009 to the second quarter of 2016. That amounts to an average rate of 0.9 percent a year, a fraction of the 2.3 percent we experienced from 1948 to 2007.

Housing hasn’t recovered

When considering what’s keeping the recovery from taking off, housing deserves particular attention since it generally boosts economic growth after a recession. Not this time.

Sales of new single-family homes have been on the rise in recent years, but they’re still well below the historical average before the Great Recession, pushing homeownership down to a 50-year low. Sales averaged about 400,000 a year from 2011 to 2015, compared with 698,000 before the recession – from 1963 through 2007.

Although the pace has picked up in recent months – reaching an annual rate of 609,000 in August – it’s still not enough to stop the slide in the homeownership rate, which was 62.9 percent in the second quarter, down from 67.8 percent at the end of 2007.

And spending on housing fell 7.7 percent in the second quarter of 2016, compared with the first three months of the year.

One of the reasons housing has been slow to recover – the market’s collapse was the primary cause of the Great Recession – is that employment growth has remained mostly moderate. Many are still looking for good jobs despite the sharp drop in headline unemployment to an eight-year low of 4.9 percent.

The average annualized employment growth rate from June 2009 to August 2016 was just 1.4 percent, well below the long-run average of 1.9 percent from December 1948 to December 2007.

While there were 13.6 million more jobs in August than in June 2009 – meaning that the economy regained all those lost during and immediately after the recession – these gains and the comparatively low unemployment rate obscure that many people still cannot find the jobs they want. The jobless rate means about 7.8 million individuals were unemployed in August, yet another 7.8 million were either employed part time for economic reasons (they would have preferred a full-time job) or out of work and wanted a job but weren’t counted in the official rate because they hand’t looked in the preceding four weeks.

And communities of color still have higher unemployment rates than whites. The African-American unemployment rate stood at 8.1 percent, while for Hispanics it was 5.6 percent, compared with 4.4 percent for whites.

Wage growth, income inequality and debt

These lackluster job gains have meant there’s less pressure on employers to raise wages. And sluggish wage growth has meant less consumer spending – which typically makes up more than two-thirds of GDP.

Wages, in fact, have barely kept pace with price increases. Inflation-adjusted hourly earnings of production and non-supervisory workers – about 80 percent of the labor force – have increased only about 4.5 percent since June 2009. This amounts to an annualized growth rate of merely 0.6 percent above the rate of inflation over the past seven years.

Low wage growth has kept income inequality at very high levels. A recent report offered some good news: Real median household income grew at 5.2 percent, from US$53,718 in 2014 to $56,516 in 2015 – the fastest annual growth on record dating back to 1968. But inflation-adjusted median income was still higher in 2007 than in 2015.

Middle-class Americans are only slowly gaining ground as wealthier ones had seen bigger gains, leaving income inequality persistently high. In 2015, the top 5 percent of earners captured 22.1 percent of total income, compared with 11.3 percent for the bottom 40 percent. In 1967, those at the top took home 17.2 percent, versus 14.8 percent for the bottom 40 percent.

This lack of wage growth also makes it difficult for households to dig out from under a mountain of debt, which further contributes to limited spending on housing and other items. Household debt equaled 105.2 percent of after-tax income in the second quarter of 2016. While that’s down from a peak of 135 percent in the fourth quarter of 2007, the current level is still much higher than any level of debt observed in the 50 years before 2002.

Moreover, some especially costly forms of credit have grown. Installment debts – mainly student and car loans – have grown from 14.6 percent of after-tax income in June 2009 to 19.2 percent this past June – the highest share since records began in 1968.

Unsurprisingly, consumer spending growth has been middling as a result, increasing an average of just 2.3 percent a year since the end of the Great Recession, far below the long-term average of 3.5 percent from 1948 through 2007.

Companies on the sidelines

With their consumers still mired in debt with little gain in their pocketbooks, businesses have very few reasons to invest.

Net investment – what companies spend on new capital assets rather than on replacing obsolete items – has averaged 1.9 percent of GDP since the recession started at the end of 2007. This is the lowest since World War II.

To be clear, companies have the money. Corporate profits recovered quickly toward the end of the Great Recession and have stayed high since.

So where is all that money going? Cash reserves and shareholders.

Nonfinancial corporations hold an average of 5.2 percent of all of their assets in cash – a high rate by historical standards. At the same time, they spent on average 99 percent of their after-tax profits on dividend payouts and share repurchases to keep their shareholders happy since the start of the Great Recession.

Breathing room

With consumers not spending money because they can’t and businesses not spending money because they don’t want to, the onus falls on Congress to bolster the economy and the labor market.

Yet federal, state and local government spending has been falling. Their total spending on goods and services as a share of GDP was 17.7 percent in the second quarter of 2016, the smallest share since 1998.

Congress, though, now has room to maneuver. The nonpartisan Congressional Budget Office estimated in August that the federal government will have a deficit of 3.2 percent of GDP for fiscal year 2016. This is much smaller than in recent years, including 2009’s deficit of 9.8 percent of GDP – the widest since World War II.

The shrinking deficit, as well as the government’s near-record-low borrowing costs, could provide enough breathing room to focus on targeted, efficient policies that promote long-term economic growth and shared prosperity, for instance, through investments in infrastructure.

The economy and American families need Congress to use this breathing room to create real economic security.

Author: Christian Weller, Professor of Public Policy and Public Affairs, University of Massachusetts Boston

Residex Says Home Prices Fell In August

According to Residex, as reported in On The House, the national housing market has recorded a slight decline in median house and unit values over August 2016 according to their median value index. The falls in median values have been fairly broad-based across the country.

This continues the confusion about where house prices are going, as we discussed recently. The different data sources appear to be diverging.

The August figures are detailed in Table 1 below (note that Residex median values are non-revisionary and are published monthly. The methodology used to calculate median values is different to Residex’s quarterly repeat sales index).

Table 1: August 2016 Median Value Index Source: Onthehouse.com.au

Across the nation, median house values fell by 0.86% in August and unit values declined by a very similar 0.87%. While most regions have recorded a decline in median values in August, it is quite a different picture over the past 12 months.

Median house values have increased over the 12 months to August 2016 in most regions of the country and are 6.58% higher nationally. In comparison, seven of the 16 regions published in Table 1 have recorded a fall in median unit value over the past year. Nationally, median unit values have increased by 2.91% which is less than half the rate of growth of in house values.

When we look at the median house and median unit data over time, it shows that house and unit values are now below their peak in all regions. The magnitude of these declines varies significantly on a region-by-region basis as well as across different property types.

Graph 1 below highlights the magnitude of decline in median house values from the respective market peaks across the capital cities and nationally.

Graph 1: Change in median house values from their respective peak to August 2016 Source: Onthehouse.com.au

Across the country, median house values are 0.9% lower than their previous peak. In terms of the greatest declines from peak, they have predictably occurred in the regions which have the greatest exposure to the resources sector. Regional Western Australia has been hardest hit with median house values 22.6% lower than they were at their peak. Perth, Darwin and Regional Northern Territory house values have also recorded substantially falls from their respective peaks, down 8.8%, 9.5% and 7.9% respectively.

In all other regions analysed, the decline since the market peak has been less than 5%.

Graph 2 following highlights the decline from the respective market peak to August 2016 for median unit values across the major regions of the country.

Graph 2: Change in median unit values from their respective peak to August 2016 Source: Onthehouse.com.au

The results show a similar picture to what has unravelled for housing, with those regions linked closest to the resources sector having recorded the greatest value declines. At a national level, median unit values are currently 0.9% lower than their peak which is an equivalent decline to that recorded for houses. The regions with the largest overall declines in median unit values have been: Regional Western Australia (15.1%), Regional Northern Territory (14.1%), Darwin (13.7%), Perth (11.3%) and Regional South Australia (8.4%).

Across most regions of the country median house values have recorded more moderate overall declines than units however, there have been a handful of exceptions. In Sydney, Melbourne, Brisbane and Regional Western Australia, the overall decline in median house values have been greater than median unit value declines.

The Patchwork Quilt Of Property Losses and Gains

The latest pain and gain report from CoreLogic, highlights the diversity in property outcomes across the country.

The Pain and Gain Report is a quarterly analysis of residential properties which were resold over the quarter. It compares the most recent sale price to the previous sale price in order to determine whether the property sold at a gross profit or gross loss. It provides a proxy for the performance of each housing market and highlights the magnitude of profit or loss the typical seller of a home makes across those regions analysed.

Over the June 2016 quarter, 9.5% of all dwellings resold recorded a gross loss when compared to their previous purchase price. This figure was higher than the 9.3% at the end of the first quarter this year and the highest proportion recorded since March 2014. Across those dwellings which resold at a loss over the quarter, the total value of loss was $459 million with an average loss of $73,009.

Given less than 10% of homes resold at a loss over the quarter, more than 9 out of every 10 homes resold for more than their previous purchase price. Across these sales, the total profit was recorded at $15.7 billion and an average profit of $262,550 per resale. Also important to note is that over the quarter, 29.4% of resold homes transacted for more than double their previous purchase price.

The data also highlights the fact that ownership of property, whether for investment or owner occupier purposes, should be seen as a long-term investment. Across the country, those homes that resold at a loss had an average length of ownership of 6.3 years. Across all sales recording a gross profit the average length of ownership was recorded at 10.3 years, while homes which sold for more than double their previous purchase price were owned for an average of 17.7 years.

The capital city housing markets continue to record a lower proportion of loss-making resales than regional areas of the country. The trends in regional areas are shifting with the proportion of loss-making resales trending lower in most areas linked to tourism and lifestyle. On the other hand, housing markets linked to the resources sector are generally seeing an elevated level of loss-making resales after housing market conditions in many of these locations have posted a sharp correction.

Bendigo Buys High LVR Loans

Bendigo and Adelaide Bank has agreed to acquire a portfolio of approximately $1.35 billion of standard residential loans based in Western Australia, from the wholly owned Western Australian Government entity Keystart Housing Scheme Trust by equitable assignment. The portfolio is selected from the total loan book of approximately $4 billion.

Bendigo has had net interest margin pressure for some time, and this might be seen as a way to help address the hole. The question however is asset quality and net returns on the transaction over time. Ben-FY16NIM

The bank says they have selected customers in the portfolio have on average five years of repayment track record and no arrears. The portfolio is approximately $1.35 billion residential loans and 6,000 customers. The purchase price at a premium of 0.2% or approximately $2.7 million. The average loan size is approximately $225,000, all variable rate owner occupied loans, no interest only loans. The weighted average seasoning is 64 months and the weighted average LVR is 84%. None are covered by Lender’s Mortgage Insurance. Geographically, 67% are in greater Perth, 33% regional Western Australia. They have limited exposure to mining by geography and occupation, with 0.4% of loans domiciled in Pilbara/Kimberley. Keystart will continue to service the customers on behalf of the Bank. To fund the purchase they also announced an equity raising to be launched in October.

The banks said “The acquisition complements our existing business in Western Australia and improves our geographic diversification by increasing the proportion of our loan book in Western Australia from approximately 11 to 13 percent. We will also have potential to provide 6,000 Keystart customers with a range of complementary products and services”.

Keystart customers are typically first home buyers who do not have sufficient initial savings for a deposit. The Keystart loan is designed to be a transitionary product, with approximately 80 to 90% of Keystart customers refinancing to a mainstream lender over time. They are full documentation owner occupied loans. They have approved loans for approximately 60,000 households for more than 27 years. Their total loan book is approximately $4 billion with approximately 18,000 customers. They have approximately 18% of the first home buyer market in Western Australia, with a “strong and consistent record” of low arrears and loan losses.

Whilst this makes sense in terms of geographic expansion and book growth, the higher LVR nature of the book will require higher risk weights to be applied. A quick estimate suggests it will provide a small lift to earnings, but only if the defaults remain low. Given the rising level of arrears in WA and slowing house prices, this may hit the loan performance later.

Broker commissions total more than $1.1bn

From Australian Broker.

Investors and property owners are not the only ones to benefit from rising house prices across Australia, with commissions paid to mortgage brokers totalling more than $1bn in the year to August.

According to the latest Mortgage Industry Model from Digital Finance Analytics (DFA), growing broker market share, rising loan values and tweaks to commission structures resulted in total commissions paid to brokers overt the 12-month period pushing past $1.1bn.

Speaking to Australian Broker, DFA principal Martin North, said while the total commission figure is high, it isn’t overly surprising.

“I’ve been tracking it for the last 10-12 years through the modelling that I do and it was quite high pre-GFC and then it went off the boil a little,” North told Australian Broker.

“To my mind it’s quite a big number, but it’s in-line with the volumes that we’ve seen and in-line with the fact that commissions are related to the size of the loan. As house prices go up, the size of loans go up, so it’s not really surprising,” he told Australian Broker.

The DFA research comes as broker remuneration remains a contentious issue and North hopes people are able to look past the $1.1bn figure and see why an increase has occurred.

“It’s important that people don’t just grab the headline figure without looking at the drivers,” he told Australian Broker.

“Some of the banks have tweaked their commissions to be a little bit more generous, but the main factor is to do with that commission is a percentage of the loan value, therefore as the loan value goes up, commission goes up.

“It’s also clear that the bank’s strategy is to use brokers more. If you look at the majors then they’ve definitely increased their penetration through the broker channel.”

North likened the current commission environment in Australia to that of the UK before the industry there moved to a fee-based system, rather than commissions. While he doesn’t believe that will occur in Australia, he does believe the industry has been somewhat responsible for the negative perception that currently exists around commissions.

“To me it’s more about disclosure, rather than the remuneration model,” he told Australian Broker.

“Consumers are very unclear about what commissions are paid, they’re unclear about trail, they’re unclear about soft commissions, they’re unclear about discounts and bonuses and target commissions and all those things.

“The critical thing is that consumers should go into dealings with a broker understanding the basis under which advice is being provided and understanding how commissions are paid. Transparency is the crucial issue.”

ME Bank’s Mortgage Driven Profit

Industry super fund-owned bank ME has reported an underlying net profit after tax of $74.7 million for FY2016, a rise of 29% on the previous reporting period.

In FY16 ME settled over 16,000 new home loans totalling $4.6 billion. The Bank achieved home loan settlements of $2.6 billion in the second half of the year, which was a record for the Bank and ensures strong momentum heading into FY17.

The increase was driven largely by a 6% increase in total assets to $24.7 billion combined with stable net interest margin of 1.55%.

ME CEO, Jamie McPhee, said the Bank has maintained a strong growth path over the last four years with the NPAT increasing by an annual compound growth rate of 32% since 2012.

The Bank’s Member Benefits Program, which capitalises on its relationship with its industry super fund and union network, grew to a record participation of more than 100 industry super funds and unions, and is now generating over 10% of ME’s home loan settlements.

Cost-to-income ratio continued to fall, reducing 270 points to 65.8%. McPhee said there was more work to do but the ratio had continued on its downward trajectory since June 2009 (when the ratio was 84.5%), and will further improve due to productivity gains from the new technology.

Customer numbers grew 8% to 365,520 in FY16 and have increased by a compound annual growth rate of 10% since 2012, while customer deposits grew by 19% to $10.5 billion reflecting the ongoing diversification of ME’s funding profile.

Return on Equity increased by 80 basis points to 8.2%, continuing the trend towards the medium term target of 10%.

The new brand identity and external brand campaign activities across TV, outdoor, radio, online, social media and cinema advertising resulted in a 10 point increase in prompted awareness during the financial year to 50%.