Auction Clearance Rates Still High, But On Lower Volumes

The preliminary auction clearance results are in from Domain. Nationally, it stands at 79.5% on 1,111 sales, compared with 71.8% last week and 69.7% a year ago. Melbourne has greater volume with 645 sold, at a rate of 81.7%, compared with 74.5% last week and 72.6% last year. Sydney cleared 388 at 80.3%, higher than last week.

Brisbane cleared 53% on 85 listed, Adelaide 73 on 65% and Canberra 58 on 64%.

So to real evidence to suggest a slowing market.

The Property Imperative Weekly Launched

Today we launch the first of our regular Property Imperative Weekly Update Blogs and Vlogs; the next stage in the development of the Digital Finance Analytics site and in response to requests for a summary service.

We have been publishing regular reports on the residential property and mortgage industry in Australia for many years, in our Property Imperative series. Volume 8 is still available.

With so much happening in the property and mortgage sector, we will discuss the events of the past week in an easy to watch summary. We also will deploy the video blog on our YouTube channel and provide a transcript here, with links to the key articles.

This is the first.  Watch it here.

We start with the latest data from the Reserve Bank and APRA for March showed that investment mortgage lending grew more strongly than owner occupied loans, and also that the non-banks are getting more active in this less regulated segment of the market. Pepper for example reported strong loan growth.

Smaller regional banks are getting squeezed, and mortgage lending overall is accelerating despite regulatory pressure. As the total mortgage book grew at more than 6% in the past year, when household incomes are static, the record household debt is still growing. More definitive action from the regulators is required.

APRA Chairman Wayne Byers discussed the residential and commercial property sectors this week at CEDA, and indicated the 10% speed limit on investment loan growth was maintained to protect the pipeline of dwellings under construction. This seems a bit circular to me!

In the past week, the upward momentum in mortgage rates continued with both Westpac and ANZ lifting fixed rate and interest only loan rates, by up to 30 basis points, though some owner occupied loans fell a little. These moves follow recent hikes from CBA and NAB, and continues the cycle higher in response to regulatory pressure, funding costs, competitive dynamics and the desire to repair net interest margins. The regulators have given the banks a perfect alibi!

For investors, these out of cycle rises are now getting close to 1%, though owner occupied borrowers, on principal and interest loans have not been hit as hard. However, even small rises are hitting households in a low income growth environment.

Mortgage stress was in the news this week, with a good piece on the ABC’s 7:30 programme, looking at stress in Western Australia, and citing the example of a property investor who is now in trouble. Our research into stress was also covered in the media, with a focus on Melbourne. Our latest analysis, for April shows a further rise in households in mortgage stress. More of that later.

Meantime, Finder.com published analysis which suggested more than half of mortgage holders were close to a tipping point if mortgage repayments rose by just $100. This would equate to a rate of just 5.28%, not far from current rates at all.

Mortgage Brokers were in the news again thanks to evidence given to the Senate Standing Committee on Economics looking at a consumer protection in the banking and finance industry. Evidence suggested commission aligned to achieving specific volume targets and the use of lender lists may mean the interest of consumers are compromised. We discussed this on the DFA blog last year. In addition, ASIC highlighted deficiencies in the information flows between brokers and banks, and suggested that more robust systems and processes are needed, especially around commission data and broker performance.

Also, the risk of loans originated via brokers was discussed again, with the argument being mounted that financial incentives make broker loans intrinsically riskier.

Meantime whilst the government switched the narrative to good and bad debt, housing affordability remained in the news, with the HIA arguing again that supply side issues are the key, despite the fact that the average number of people living in each dwelling across Australia has hardly changed in years.

We think supply is not the big issue. Yes, there should be more focus on building more affordable social housing, but the main focus needs to be the reduction in investor tax incentives. The financialisation of property is the real underlying issue, but this is hard to address, and explains why the government is now wanting us to look elsewhere.

In broader economic news, inflation rose a tad, thanks to a strong rise in Victoria, and as a result there is less reason to expect an RBA cash rate cut. That said, the official CPI understates the real experience of many households, not least because housing costs are so significant now. We maintain our view that the next RBA rise will be up, not down, unless we get a significant external shock. Of course a cash rate rise will likely flow on to mortgage holders, putting them under more under pressure.

Finally, in preliminary news from CoreLogic they suggest that Sydney home prices may have stalled in April. Whilst some reports say this is the top, there are a range of technical issues which suggests it is too early to make this call. We need to see more data, and the Auction clearances may be an indicator of what is to come.

Nevertheless, we hold the view that we have probably reached the peak, and as mortgage lending tightens, and investors become more sanguine, prices in the major centres are likely to slide, mirroring the falls in WA, now, in some places down more than 20%. It then becomes a question of whether is turns into a rout, or whether prices drift sideways for some long time.

And that’s the Property Imperative week to the 29th April!

 

What is reflation and is Australia experiencing it?

From The Conversation.

Since the 2007 global financial crisis, policy makers have been fighting deflationary (falling prices) and disinflationary (prices rising at slow rate) pressures. But the global economy finally appears to be entering reflation – a period of higher prices together with stronger growth.

This is good news for households, businesses and governments around the world.

Reflation means the end of below trend growth, and this has widespread benefits. As demand grows, firms will expand production and will require more staff. This is good for job seekers, but ultimately it should also lead to higher wages. Although there is scant evidence of that so far in Australia.

The federal government will also benefit from reflation via increased tax revenue, as corporate profits increase and individuals return to the workforce. Meanwhile, government spending should reduce as benefit payments fall.

Year-on-year changes in Australian and US consumer prices. Author provided

Seeing reflation

In its recent update on the World Economic Outlook, the International Monetary Fund (IMF) increased growth expectations both globally and in Australia.

The IMF noted there has been a recovery in investment, manufacturing, and trade. This is consistent with recent manufacturing data that signals there will be solid growth in the coming months.

The manufacturing data also noted that costs are increasing, largely thanks to rising prices for raw materials. Indications are that consumer prices are also turning upwards.

The latest figures show Australian inflation creeping into the lower end of the Reserve Bank of Australi’s target range, but smoothed underlying inflation (which takes out extreme price fluctuations) is still just 1.8%.

This pick up in economic activity has occurred at the same time as corporate earnings have improved. This is a global phenomenon, but Australia is able to benefit from this via trade, particularly in the resource sector.

Investors have been taking advantage of the “reflation trade”, by piling into assets that benefit from rising growth and inflation – companies in emerging markets and who sell discretionary items, such as cars and jewellery, to consumers.

In the 6-month period since the US election, stock markets in the US and Australia have each increased around 11%.

Stock markets continue to rise since the US election. Author provided

What’s causing reflation?

Following the financial crisis, central bankers slashed interest rates to all-time lows, and greatly expanded their balance sheets by purchasing assets, in a bid to stimulate their economies. Until recently this had failed to stimulate global demand, but that appears to be changing.

The White House has moved to deregulate industries, and has promised to increase infrastructure spending in the US.

As the world’s largest economy, reflation in the US results in economic growth elsewhere, particularly in countries like Australia that sell goods and raw materials into the US.

Finally, the political uncertainty of the Brexit referendum and US Presidential election have passed. Both consumers and producers are confident, and this is feeding into other decisions.

Will reflation keep going?

Whether reflation continues is far from guaranteed.

For starters central bankers could raise interest rates more quickly than expected if they think inflation will get out of hand. Already, the US Federal Reserve has indicated discomfort with high share prices. Increasing interest rates, or selling some of its recent asset purchases, could impact demand.

Second, there are already questions about the Trump adminsitration’s ability to enact legislation. The prospects of tax reform and infrastructure spending are fading. The infrastructure package, especially, had potential to increase inflation.

Finally, there are new sources of political uncertainty. Trump appears to have reversed course on engagement in the Middle East and North Korea. The UK faces a surprise general election and Marine Le Pen is still in the running in the French Presidential election.

More uncertainty inhibits firms making investment and employment decisions.

At present, the economic signs are good for a continued reflation of the global economy. This will benefit households as well as investors and corporations. However, this recovery is still fragile and may be thrown off course by policymakers and further increases in geopolitical tensions.

Author: Lee Smales, Associate Professor, Finance, Curtin Graduate School of Business, Curtin University

Banks and Fintech – Where Do They Fit?

US Fed Governor Lael Brainard spoke on “Where Do Banks Fit in the Fintech Stack?” at the Northwestern Kellogg Public-Private Interface Conference on “New Developments in Consumer Finance: Research & Practice”

In particular she explored different approaches to how banks are exposing their data in a fintech context and the regulatory implications. Smaller banks may be at a disadvantage.

Different Approaches to the Fintech Stack

Because of the high stakes, fintech firms, banks, data aggregators, consumer groups, and regulators are all still figuring out how best to do the connecting. There are a few alternative approaches in operation today, with various advantages and drawbacks.

A number of large banks have developed or are in the process of developing interfaces to allow outside developers access to their platforms under controlled conditions. Similar to Apple opening the APIs of its phones and operating systems, these financial companies are working to provide APIs to outside developers, who can then build new products on the banks’ platforms. It is worth highlighting that platform APIs generally vary in their degree of openness, even in the smartphone world. If a developer wants to use a Google Maps API to embed a map in her application, she first must create a developer account with Google, agreeing to Google’s terms and conditions. This means she will have entered a contract with the owner of the API, and the terms and conditions may differ depending on how sensitive the particular API is. Google may require only a minimum amount of information for a developer that wants to use an API to display a map. Google may, however, require more information about a developer that wants to use a different API to monitor the history of a consumer’s physical locations over the previous week. And in some cases, the competitive interests of Google and a third-party app developer may diverge over time, such that the original terms of access are no longer acceptable.

The fact that it is possible and indeed relatively common for the API provider–the platform–to require specific controls and protections over the use of that API raises complicated issues when imported to the banking world. As banks have considered how to facilitate connectivity, the considerations include not only technical issues and the associated investment, but also the important legal questions associated with operating in a highly regulated sector. The banks’ terms of access may be determined in third-party service provider agreements that may offer different degrees of access. These may affect not only what types of protections and vetting are appropriate for different types of access over consumers’ funds and data held at a bank in order to enable the bank to fulfill its obligations for data security and other consumer protections, but also the competitive position of the bank relative to third-party developers.

There is a second broad type of approach in which many banks have entered into agreements with specialized companies that essentially act as middlemen, frequently described as “data aggregators.” These banks may lack the budgets and expertise to create their own open APIs or may not see that as a key element in their business strategies. Data aggregators collect consumer financial account data from banks, on the one hand, and then provide access to that data to fintech developers, on the other hand. Data aggregators organize the data they collect from banks and other data sources and then offer their own suite of open APIs to outside developers. By partnering with data aggregators, banks can open their systems to thousands of developers, without having to invest in creating and maintaining their own open APIs. This also allows fintech developers to build their products around the APIs of two or three data aggregators, rather than 15,000 different banks and other data sources. And, if agreements between data aggregators and banks are structured as data aggregators performing outsourced services to banks, the bank should be able to conduct the appropriate due diligence of its vendors, whose services to those banks may be subject to examination by safety and soundness regulators.

Some banks have opted for a more “closed” approach to fintech developers by entering into individual agreements with specific technology providers or data aggregators. These agreements often impose specific requirements rather than simply facilitating structured data feeds. These banks negotiate for greater control over their systems by limiting who is accessing their data–often to a specific third party’s suite of products. Likewise, many banks use these agreements to limit what types of data will be shared. For instance, banks may share information about the balances in consumers’ accounts but decline to share information about fees or other pricing. While recognizing the legitimate need for vetting of third parties for purposes of the banks fulfilling their responsibilities, including for data privacy and security, some consumer groups have suggested that the standards for vetting should be commonly agreed to and transparent to ensure that banks do not restrict access for competitive reasons and that consumers should be able to decide what data to make available to third-party fintech applications.

A third set of banks may be unable or unwilling to provide permissioned access, for reasons ranging from fears about increased competition to concerns about the cost and complexity of ensuring compliance with underlying laws and regulations. At the very least, banks may have reasonable concerns about being able to see, if not control, which third-party developers will have access to the banking data that is provided by the data aggregators. Accordingly, even banks that have previously provided structured data feeds to data aggregators may decide to limit or block access. In such cases, however, data aggregators can still move forward to collect consumer data for use by fintech developers without the permission or even potentially without the knowledge of the bank. Instead, data aggregators and fintech developers directly ask consumers to give them their online banking logins and passwords. Then, in a process commonly called “screen scraping,” data aggregators log onto banks’ online consumer websites, as if they were the actual consumers, and extract information. Some banks report that as much as 20 to 40 percent of online banking logins is attributable to data aggregators. They even assert that they have trouble distinguishing whether a computer system that is logging in multiple times a day is a consumer, a data aggregator, or a cyber attack.

For community banks with limited resources, the necessary investments in API technology and in negotiating and overseeing data-sharing agreements with data aggregators and third-party providers may be beyond their reach, especially as they usually rely on service providers for their core technology. Some fintech firms argue that screen scraping–which has drawn the most complaints about data security–may be the most effective tool for the customers of small community banks to access the financial apps they prefer–and thereby necessary to remain competitive until more effective broader industry solutions are developed.

Clearly, getting these connectivity questions right, including the need to manage the consumer protection risks, is critically important. It could make the difference between a world in which the fintech wave helps community banks become the platforms of the future, on the one hand, or, on the other hand, a world in which fintech instead further widens the gulf between community banks and the largest banks.

 

Don’t bet the house on a property market correction

From The New Daily.

Experts have warned against predicting that property prices have peaked just yet.

A flurry of headlines this week generated by UBS analysts, Australian Financial Review columnists and others all warned that Sydney and possible Melbourne prices had peaked and we should brace for a correction.

Most were based on slower price growth in Sydney dwelling values and slight reductions in auction clearance rates compiled by CoreLogic, a property data firm.

However, CoreLogic director of research Tim Lawless cautioned against reading into the results (especially dwelling values, which are yet to be officially released for April) because April and May are generally weaker periods.

“Potentially there is some seasonality creeping into these numbers and that’s one of the reasons why I would probably suggest caution calling the peak right now before we see a few more months and see if the trend actually develops,” Mr Lawless told The New Daily.

“When we look at, say, a year ago or any sort of seasonality in the marketplace, yeah, we do generally see some easing in our reading around April and May.”

A further complication is that CoreLogic adjusted how it calculated dwelling values in May 2016 to account for seasonality. The result, according to Mr Lawless, is that “technically speaking, there are some challenges and complexities making a year-to-year comparison”, although he said the adjustments were “quite minor” and values could still be compared.

The change sparked a scandal last year, with the Reserve Bank ditching the company as its preferred data source after claiming it had overstated dwelling values in April and May.

Despite this, CoreLogic remains the most widely cited property data source because it reports dwelling values daily. But the most authoritative is the Australian Bureau Statistics, which has measured similar quarter-on-quarter falls in the past, especially between the December and June quarters. And yet, the trend has been ever upwards.

IFM chief economist Dr Alex Joiner agreed we shouldn’t jump to conclusions based on the latest statistics.

“I wouldn’t suggest that anyone looks at any month-to-month data in Australia and makes firm conclusions from it,” Dr Joiner told The New Daily.

“People might want to rush to call the top, but the trends are for gradually decelerating growth, and I think that’s about right.”

But if this is not the peak, the market is “very much approaching it” because the Reserve Bank and the banks are likely to lift interest rates even as wage growth stays low, Dr Joiner said.

“When that actually decelerates price growth, whether it’s this month or later in the year, I don’t know. But we’re certainly eeking out the very last stages of price growth in the property market.”

New statistical methods would let researchers deal with data in better, more robust ways

From The Conversation.

No matter the field, if a researcher is collecting data of any kind, at some point he is going to have to analyze it. And odds are he’ll turn to statistics to figure out what the data can tell him.

A wide range of disciplines – such as the social sciences, marketing, manufacturing, the pharmaceutical industry and physics – try to make inferences about a large population of individuals or things based on a relatively small sample. But many researchers are using antiquated statistical techniques that have a relatively high probability of steering them wrong. And that’s a problem if it means we’re misunderstanding how well a potential new drug works, or the effects of some treatment on a city’s water supply, for instance.

As a statistician who’s been following advances in the field, I know there are vastly improved methods for comparing groups of individuals or things, as well as understanding the association between two or more variables. These modern robust methods offer the opportunity to achieve a more accurate and more nuanced understanding of data. The trouble is that these better techniques have been slow to make inroads within the larger scientific community.

What if these mice aren’t actually representative of all the other mice out there? Cmdragon, CC BY-SA

When classic methods don’t cut it

Imagine, for instance, that researchers gather a group of 40 individuals with high cholesterol. Half take drug A, while the other half take a placebo. The researchers discover that those in the first group have a larger average decrease in their cholesterol levels. But how well do the outcomes from just 20 people reflect what would happen if thousands of adults took drug A?

Or on a more cosmic scale, consider astronomer Edwin Hubble, who measured how far 24 galaxies are from Earth and how quickly they’re moving away from us. Data from that small group let him draw up an equation that predicts a galaxy’s so-called recession velocity given its distance. But how well do Hubble’s results reflect the association among all of the millions of galaxies in the universe if they were measured?

In these and many other situations, researchers use small sample sizes simply because of the cost and general difficulty of obtaining data. Classic methods, routinely taught and used, attempt to address these issues by making two key assumptions.

First, scientists assume there’s a particular equation for each individual situation that will accurately model the probabilities associated with possible outcomes. The most commonly used equation corresponds to what’s called a normal distribution. The resulting plot of the data is bell-shaped and symmetric around some central value.

Curves based on equations that describe different symmetric data sets. Inductiveload

Second, researchers assume the amount of variation is the same for both groups they’re comparing. For example, in the drug study, cholesterol levels will vary among the millions of individuals who might take the medication. Classic techniques assume that the amount of variation among the potential drug recipients is exactly the same as the amount of variation in the placebo group.

A similar assumption is made when studying associations. Consider, for example, a study examining the relationship between age and some measure of depression. Among the millions of individuals aged 20, there will be variation among their depression scores. The same is true at age 30, 80 or any age in between. Classic methods assume that the amount of variation is the same for any two ages we might pick.

All these assumptions allow researchers to use methods that are theoretically and computationally convenient. Unfortunately, they might not yield reasonably accurate results.

While writing my book “Introduction to Robust Estimation and Hypothesis Testing,” I analyzed hundreds of journal articles and found that these methods can be unreliable. Indeed, concerns about theoretical and empirical results date back two centuries.

When the groups that researchers are comparing do not differ in any way, or there is no association, classic methods perform well. But if groups differ or there is an association – which is certainly not uncommon – classic methods may falter. Important differences and associations can be missed, and highly misleading inferences can result.

Even recognizing these problems can make things worse, if researchers try to work around the limitations of classic statistical methods using ineffective or technically invalid methods. Transforming the data, or tossing out outliers – any extreme data points that are far out from the other data values – these strategies don’t necessarily fix the underlying issues.

A new way

Recent major advances in statistics provide substantially better methods for dealing with these shortcomings. Over the past 30 years, statisticians have solidified the mathematical foundation of these new methods. We call the resulting techniques robust, because they continue to perform well in situations where conventional methods fall down.

Conventional methods provide exact solutions when all those previously mentioned assumptions are met. But even slight violations of these assumptions can be devastating.

The new robust methods, on the other hand, provide approximate solutions when these assumptions are true, making them nearly as accurate as conventional methods. But it’s when the situation changes and the assumptions aren’t true that the new robust methods shine: They continue to give reasonably accurate solutions for a broad range of situations that cause trouble for the traditional ways.

Depression scores among older adults. The data are not symmetric, like you’d see in a normal curve. Rand Wilcox, CC BY-ND

One specific concern is the commonly occurring situation where plots of the data are not symmetric. In a study dealing with depression among older adults, for example, a plot of the data is highly asymmetric – roughly because most adults are not overly depressed.

Outliers are another common challenge. Conventional methods assume that outliers are of no practical importance. But of course that’s not always true, so outliers can be disastrous when using conventional methods. Robust methods offer a technically sound – though not obvious, based on standard training – way to deal with this issue that provides a much more accurate interpretation of the data.

Another major advance has been the creation of bootstrap methods, which are more flexible inferential techniques. Combining bootstrap and robust methods has led to a vast array of new and improved techniques for understanding data.

These modern techniques not only increase the likelihood of detecting important differences and associations, but also provide new perspectives that can deepen our understanding of what data are trying to tell us. There is no single perspective that always provides an accurate summary of data. Multiple perspectives can be crucial.

In some situations, modern methods offer little or no improvement over classic techniques. But there is vast evidence illustrating that they can substantially alter our understanding of data.

Education is the missing piece

So why haven’t these modern approaches supplanted the classic methods? Conventional wisdom holds that the old ways perform well even when underlying assumptions are false – even though that’s not so. And most researchers outside the field don’t follow the latest statistics literature that would set them straight.

There is one final hurdle that must be addressed if modern technology is to have a broad impact on our understanding data: basic training.

Most intro stats textbooks don’t discuss the many advances and insights that have occurred over the last several decades. This perpetuates the erroneous view that, in terms of basic principles, there have been no important advances since the year 1955. Introductory books aimed at correcting this problem are available and include illustrations on how to apply modern methods with existing software.

Given the millions of dollars and the vast amount of time spent on collecting data, modernizing basic training is absolutely essential – particularly for scientists who don’t specialize in statistics. Otherwise, important discoveries will be lost and, in many instances, a deep understanding of the data will be impossible.

Author: Rand Wilcox, Professor of Statistics, University of Southern California – Dornsife College of Letters, Arts and Sciences

Sydney property prices down: CoreLogic

From The Real Estate Conversation.

CoreLogic has revealed the property market has been largely flat during the month of April, ahead of the release of its end-of-month numbers on Monday.

CoreLogic’s hedonic home value index for Australia’s top five property markets held virtually steady in the first 27 days of the month, indicating that the current cycle could be moving through its peak.

Sydney prices recorded a “subtle” decline, according to CoreLogic, a dramatic though welcome turnaround from the blistering 18.8 per cent increase recorded in March. The five-city aggregate also recorded an exceptionally strong result in March, rising 12.9 per cent despite a 4.7 per cent decline in Perth prices.

Leeanne Pilkington, deputy president of the Real Estate Institute of New South Wales, says the April decline in Sydney prices was only very slight, and will vary from suburb to suburb.

“None of my agents are telling me they’re worried about prices going down,” she said.

However, Pilkington said her agents are saying there a lower numbers at open houses, which means there could be less competition in the market between buyers.

“We’ve seen that [trend] with the lower clearance rate last week,” she said. Pilkington said clearance rates above 80 per cent were not sustainable, and that a modest decline in clearance rates would actually be desirable.

“We really want some stability in the market,” she said.

Pilkington said April was a holiday month, containing both Easter and ANZAC day, so the numbers for the month may not reflect the true state of the market. Auction clearance rates over the weekend will provide clearer guidance, she said.

Tim Lawless, head of research Asia Pacific with CoreLogic, attributes the flat overall result to recent regulatory changes which have led to higher mortgage rates and weaker investment demand, causing a “dampening” effect on the property market.

Prudential perspectives on the property market

Wayne Byers APRA  Chairman spoke at  CEDA’s 2017 NSW Property Market Outlook in Sydney  today.  Of note, he explains the reason why the 10% investor speed limit was not reduced, because of the potential impact on commercial propery construction!

My remarks today come, unsurprisingly, from a prudential perspective. Property prices and yields, planning rules, the role of foreign purchasers, supply constraints, and taxation arrangements are all important elements of any discussion on property market conditions, and I’m sure the other speakers today will touch on most of those issues in some shape or form. But I’ll focus on APRA’s key objective when it comes to property: making sure that standards for property lending are prudent, particularly in an environment of heightened risk.

Sound lending standards

Our recent activity in relation to residential and commercial property lending has been directed at ensuring banking institutions maintain sound lending standards. Our ultimate goal is to protect bank depositors – it is, after all, ultimately their money that banks are lending. Basic banking – accepting money from depositors and lending to sound borrowers who have good prospects of repaying their loans – is what it’s all about. Of course, banking is about risk-taking and it is inevitable that not every loan will be fully repaid, but with appropriate lending standards and sufficient diversification, the risk of losses that jeopardise the financial health of a bank – and therefore the security offered to depositors – can be reduced to a significant degree. The banking system is heavily exposed to the inevitable cycles in property markets, and our goal is to seek to make sure the system can readily withstand those cycles without undue stress.

Our mandate goes no further than that. We also have to take many influences on the property market – tax policy, interest rates, planning laws, foreign investment rules – as a given. And there are credit providers beyond APRA’s remit, so a tightening in one credit channel may just see the business flow to other providers anyway. For those reasons, there are clear limits on the influence we have. Property prices are driven by a range of local and global factors that are well beyond our control: whether prices go up or go down, we are, like King Canute, unable to hold back the tide.

Of course, that is not to ignore the fact that one determinant of property market conditions is access to credit. We acknowledge that in influencing the price and availability of credit, we do have an impact on real activity – and this may feed through to asset prices in a range of ways. But I want to emphasise that we are not setting out to control prices. Property prices will go up and they will go down (even for Sydney residential property!). It is not our job to stop them doing either of those things. Rather, our goal is to make sure that whichever way prices are moving at any particular point in time in any particular location, prudentially-regulated lenders are alert to the property cycle and making sound lending decisions. That is the best way to safeguard bank depositors and the stability of the financial system.

Residential property lending

APRA has been ratcheting up the intensity of its supervision of residential property lending over the past five or so years. Initially, this involved some fairly typical supervisory measures:

  • in 2011 and again in 2014, we sought assurances from the Boards of the larger lenders that they were actively monitoring their housing lending portfolios and credit standards;
  • in 2013, we commenced more detailed information collections on a range of housing loan risk metrics;
  • in 2014, we stress-tested around the largest lenders against scenarios involving a significant housing market downturn;
  • also in 2014, we issued a Prudential Practice Guide on sound risk management practices for residential mortgage lending; and
  • we have conducted numerous hypothetical borrower exercises to assess differences in lending standards between lenders, and changes over time.

These steps are typical of the role of a prudential supervisor: focusing on the strength of the governance, risk management and financial resources supporting whatever line of business is being pursued, without being too prescriptive on how that business should be undertaken.

But from the end of 2014, we stepped into some relatively new territory by defining specific lending benchmarks, and making clear that lenders that exceeded those benchmarks risked incurring higher capital requirements to compensate for their higher risk. In particular, we established quantitative benchmarks for investor lending growth (10 per cent), and interest rate buffers within serviceability assessments (the higher of 7 per cent, or 2 per cent over the loan product rate), as a means of reversing a decline in lending standards that competition for growth and market share had generated.

I regard these recent measures as unusual, and not reflective of our preferred modus operandi. We came to the view, however, that the higher-than-normal prescription was warranted in the environment of high house prices, high household debt, low interest rates, low income growth and strong competitive pressures.  In such an environment, it is easy for borrowers to build up debt. Unfortunately, it is much harder to pay that debt back down when the environment changes. So re-establishing a sound foundation in lending standards was a sensible investment.

Since we introduced these measures in late 2014, investor lending has slowed and serviceability assessments have strengthened. But at the same time, housing prices and debt have got higher, official interest rates have fallen further and wage growth remains subdued. So we recently added an additional benchmark on the share of new lending that is occurring on an interest-only basis (30 per cent) to further reduce vulnerabilities in the system.

Each of these measures has been a tactical response to evolving conditions, designed to improve the resilience of bank balance sheets in the face of forces that might otherwise weaken them. We will monitor their effectiveness over time, and can do more or less as need be. We have also flagged that, at a more strategic level, we intend to review capital requirements for mortgage lending as part of our work on establishing ‘unquestionably strong’ capital standards, as recommended by the Financial System Inquiry (FSI).

Looking at the impact so far, I have already noted that our earlier measures have helped slow the growth in investor lending (Chart 1), and lift the quality of new lending. Serviceability tests have strengthened, although as one would expect in a diverse market there are still a range of practices, ranging from the quite conservative to the less so. Lenders subject to APRA’s oversight have increasingly eschewed higher risk business (often by reducing maximum loan-to-valuation ratios (Chart 2)), or charged a higher price for it.

For example, there is now a clear price differential between lending to owner-occupiers on a principal and interest basis, and lending to investors on an interest-only basis (Chart 3). And as a result of our most recent guidance to lenders, we expect some further tightening to occur.

Looked at more broadly, the most important impact has been to reduce the competitive pressure to loosen lending standards as a means of chasing market share. We are not seeking to interfere in the ability of lenders to compete on price, service standards or other aspects of the customer experience. We do, however, want to reduce the unfortunate tendency of lenders, lulled by a long period of buoyant conditions, to compete away basic underwriting standards.

Of course, lenders not regulated by APRA will still provide competitive tension in that area and it is likely that some business, particularly in the higher risk categories, will flow to these providers. That is why we also cautioned lenders who provide warehouse facilities to make sure that the business they are funding through these facilities was not growing at a materially faster rate than the lender’s own housing loan portfolio, and that lending standards for loans held within warehouses was not of a materially lower quality than would be consistent with industry-wide sound practices. We don’t want the risks we are seeking to dampen coming onto bank balance sheets through the back door.

Commercial real estate lending

For all of the current focus on residential property lending, it has been cycles in commercial real estate (CRE) that have traditionally been the cause of stress in the banking system. So we are always quite interested in trends and standards in this area of lending. And tighter conditions for residential lending will also impact on lenders’ funding of residential construction portfolios – we need to be alert to the inter-relationships between the two.

Overall, lending for commercial real estate remains a material concentration of the Australian banking system. But while commercial lending exposures of APRA-regulated lenders continue to grow in absolute terms, they have declined relative to the banking system’s capital (partly reflecting the expansion in the system’s capital base). Exposures are now well down from pre-GFC levels as a proportion of capital, albeit much of the reduction was in the immediate post-crisis years and, more recently, the relative position has been fairly steady (Chart 4).

The story has been broadly similar in most sub-portfolios, with the notable exception of land and residential development exposures (Chart 5).

These have grown strongly as the banking industry has funded the significant new construction activity that has been occurring, particularly in the capital cities of Australia’s eastern seaboard. At the end of 2015, these exposures were growing extremely rapidly at just on 30 per cent per annum, but have since slowed significantly as newer projects are now being funded at little more than the rate at which existing projects roll off (Chart 6).

(As an aside, this is one reason why we opted not to reduce the 10 per cent investor lending benchmark for residential lending recently. There is a fairly large pipeline of residential construction to be absorbed over the course of 2017, and there is little to be gained from unduly constricting that at this point in time.)

In response to the generally low interest rate environment, coupled with relatively high price growth in some parts of the commercial market, low capitalisation rates and indications that underwriting standards were under competitive pressure, we undertook a thematic review of commercial property lending over 2016. We looked at the portfolio controls and underwriting standards of a number of larger domestic banks, as well as foreign bank branches which have been picking up market share and growing their commercial real estate lending well above system growth rates.

The review found that major lenders were well aware of the need to monitor commercial property lending closely, and the need to stay attuned to current and prospective market conditions. But the review also found clear evidence of an erosion of standards due to competitive pressures – for example, of lenders justifying a particular underwriting decision not on their own risk appetite and policies, but based on what they understood to be the criteria being applied by a competitor. We were also keen to see genuine scrutiny and challenge that aspirations of growth in commercial property lending were achievable, given the position in the credit cycle, without compromising the quality of lending. This was often being hampered by inadequate data, poor monitoring and incomplete portfolio controls. Lenders have been tasked to improve their capabilities in this regard.

Given the more heterogeneous nature of commercial property lending, it is more difficult to implement the sorts of benchmarks that we have applied to residential lending. But that should not be read to imply we have any less interest in the quality of commercial property lending. Our workplan certainly has further investigation of commercial property lending standards in 2017, and we will keep the need for additional guidance material under consideration.

Concluding remarks

So to sum up, property exposures – both residential and commercial – will remain a key area of focus for APRA for the foreseeable future. Sound lending standards are vital for the stability and safety of the Australian banking system, and given the high proportion of both residential mortgage and commercial property lending in loan portfolios, there will be no let up in the intensity of APRA’s scrutiny in the foreseeable future. But despite the fact the merit of our actions are often assessed based on their expected impact on prices, that is not our goal. Prudence (not prices) is our catch cry: our objective is to make ensure that, whatever the next stage of the property cycle may bring, the balance sheet of the banking system is resilient to it.

ANZ Hikes Investor Loans (Again)

From news.com.au.

ONE of the nation’s largest banks ANZ has lifted interest rates on home loan deals.

The bank has followed in the footsteps of rivals the Commonwealth Bank and Westpac, moving interest rates on both owner occupier and investor loans.

Some of the moves also include decreases and are effective immediately.

The moves come ahead of the Reserve Bank of Australia board meeting on Tuesday where it’s expected they will keep the cash rate on hold at 1.5 per cent.

Owner occupiers and investors signing up to interest-only fixed rate deals will be the worst hit with some hikes as high as 0.4 per cent.

On 2, 4, and 5 year fixed owner occupier interest-only loans the rates will rise by 0.4 per cent on the bank’s Breakfree products (this is one of the bank’s most popular products).

On one of the most popular fixed loans terms, three-year owner occupier interest-only loans will rise by 0.3 per cent to 4.49 per cent increasing repayments on a $300,000 30-year loan by $75 per month to $1123.

For investors on a three-year fixed-rate interest-only Breakfree deal the rate will rise 0.3 per cent 4.69 per cent, pushing up repayments by $75 per month to $1173.

For both owner occupiers and investors on principal and interest fixed rate deals rates on nearly all these products will fall.
Borrowers have been hit by fixed rates increases in recent weeks.

Borrowers have been hit by fixed rates increases in recent weeks.Source:Supplied

The three-year fixed rate owner occupier principal and interest deal will fall by 0.2 per cent to 3.99 per cent saving customers $34 per month and making repayments $1431.

On a three-year fixed rate investor principal and interest deal the rate will fall by 0.1 per cent to 4.44 per cent.

An ANZ spokesman said the “reflect our need to closely manage our regulatory obligations, portfolio risk and the competitive environment.”

Mozo spokeswoman Kirsty Lamont said the increases by ANZ are a result of the financial regulator, the Australian Prudential and Regulation Authority limiting their interest-only lending.

Mozo spokeswoman Kirsty Lamont said there’s increasing pressure on financial institutions to limit interest-only lending.Source:News Corp Australia

“It’s now more important than ever for interest only borrowers to do their homework on where to find the best rates in this current climate of tighter regulation,’’ she said.

“With the Federal Reserve jacking up rates in the US and inflation just scraping within the Reserve Bank target, we expect a cash rate increase in the next 12 months which means these fixed rates are unlikely to be around for a long time.”

Investor Loan Growth Outpaces Owner Occupied In March

The latest data from the RBA, the credit aggregates, shows that loan growth was strongest for investment home loans, at an annualised rate of 7.1% compared with owner occupied loans at 6.2%. Business lending fell again, and personal credit continues to fall.

The proportion of lending to business fell to 32.8% (a record low) and the proportion of home lending for investors sat at 34.9%

Total credit grew $9.7 billion (up 0.4%), owner occupied lending rose $6.7 billion (up 0.6%), investment loans rose $2.5 billion (up 0.4%) and lending to business up $1 billion (up 0.1%).

However, the RBA adjusts these numbers to take account of $1.2 billion restatement between owner occupied and investment loans. Overall housing rose 6.5% in the past 12 months, way above income growth, so higher household debt once again.

Comparing the RBA and APRA data, it looks like the share of non-bank investor home lending is rising, and of course these lenders are not under the APRA regulatory control, but fall under ASIC (and they are not required to hold capital, as they are not ADIs). This is a loophole.

The RBA notes:

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 $51 billion over the period of July 2015 to March 2017, of which $1.2 billion occurred in March 2017. 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.