Housing Finance Fell In March (SA) – ABS

The ABS released their housing finance data today to March 2014. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions fell 1.1% from February. The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.2%. Investment housing commitments rose 0.4% and owner occupied housing commitments rose 0.1%.

FinanceMar14-1In trend terms, the number of commitments for owner occupied housing finance fell 0.1%, the number of commitments for the purchase of new dwellings fell 1.4% and the number of commitments for the purchase of established dwellings fell 0.3% while the number of commitments for the construction of dwellings rose 1.7%. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 12.6% in March 2014 from 12.5% in February 2014.

FinanceMar14Despite the low interest rates, housing finance is relatively contained, and even the investment sector is slowing, as we discussed recently.   Total loans continue to grow but slowly.

FinanceMar14-3Investment loans are still growing faster than owner-occupied loans.

FinanceMar14-4There is more limited data on the non-bank lenders available, as we have highlighted. Securitisation continues to fall on a net basis, and other lenders make up a small, and reducing element in the mix.


Total Housing Stock Now Valued At $5.1 Trillion

The ABS today published their March 2014 data on house prices. Total housing stock is estimated at $5.1 trillion, rising by $105,348m over the quarter. The number of residential residences is now 9.33 million, up by 37,400 in the March quarter and the mean price across Australia is now $546,500.


Looking at changes in prices, the price index for residential properties for the weighted average of the eight capital cities rose 1.7% in the March quarter 2014. The index rose 10.9% through the year to the March quarter 2014.


The capital city residential property price indexes rose in Sydney (+2.3%), Melbourne (+2.1%), Perth (+1.1%), Brisbane (+0.8%), Adelaide (+0.7%), Hobart (+1.4%), Darwin (+1.1%) and fell in Canberra (-0.1%). Annually, residential property prices rose in Sydney (+15.7%), Melbourne (+10.9%), Perth (+7.3), Brisbane (+6.1%), Adelaide (+4.9%), Hobart (+4.8%), Darwin (+4.1%), and Canberra (+1.1%).


OECD Warns Australia About Housing And Fiscal Tightening

The OECD just released their economic outlook for May. Australia is one among many countries covered in their report. Their summary highlights lowish growth, risks to housing and the risk of fiscal tightening.

“Output is projected to increase by 2½ per cent in 2014 and by nearly 3% in 2015, with a general pick-up in demand offsetting declining investment in the resource sector. Some economic slack will remain and the unemployment rate will not begin to edge down until the second half of 2015. As a result, there will be little inflation pressure, although rapid growth in house prices and mortgage lending requires continued close attention.

Given near-term uncertainties in the re-balancing of the economy away from investment in the natural resource sector, heavy front loading of fiscal consolidation should be avoided. Against the backdrop of the projected recovery, monetary stimulus should start to be withdrawn in the first half of 2015.”


Perth Region Taxable Income Heat Map

Continuing our series on taxable income by post code, today we look at the Perth region using data from the ATO for the 2011-2012 tax year.

PerthTaxIncomeThe highest income postcodes are 6011 (Cottesloe, Peppermint Grive), 6009 (Nedlands, Crawley, Dalkeith) and 6015 (City Beach). The lowest in WA are 6358 (Karlgarin), 6420 (Cramphorne, Muntadgin) and 6321 (Cranbrook). The full top and bottom 10 from the ATO are listed below.


RBA Leaves Cash Rate Unchanged

The RBA decided to leave the cash rate unchanged at 2.5 per cent. They suggest a period of ongoing stability in rates is likely.

“Monetary policy remains accommodative. Interest rates are very low and savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, while dwelling prices have increased significantly over the past year. The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months. The exchange rate remains high by historical standards.

Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”

Update on Bank Margins

The results season so far has shown the banks performing well, will lower levels of impaired loans and margins looking healthy. Much of this margin growth is thanks to the out of cycle movements which were made a couple of years back. So it is interesting to examine whats been going on since. We find that margins have improved, thanks to lower rates, and whilst the banks could afford to reduce their standard variable rates, they are preferring to target larger discounts for new owner occupied and investment mortgage lending, whilst holding standard rates level.

To start, lets compare the banks funding costs – using the 90 day bill rate against the average cost of a mortgage or business overdraft.

Rate1We see that that bill rate has moved lower faster than the lending rates. We can show this more clearly by displaying the effective net funding margin (90-day bill rate against the lending rate). We calculate this for both standard mortgages and business overdrafts.

Rate2Compared with 2011, average margins have improved by more than 20 basis points for mortgages, and 50 basis points for business overdrafts. Turning to mortgage discounts, we see that it is possible to drive a significant discount off the standard rate, if you negotiate hard. Some are getting more than 90 basis points off their new loan. The banks are discounting selectively, depending on the profile of the customer.

Rate3What this means in practice is that for people who do not switch loans they are likely paying more than they need. It is unlikely the banks will drop their standard rates for all customers, preferring to direct discounts to new business, and pocking the difference. Competition is not creating sufficient pressure to drop rates, and they are all behaving in the same way.

Building Approvals Fell In March 2014 – ABS

The Australian Bureau of Statistics just released their building approvals data to March 2014. In the past year 188,070 houses of units were approved. DFA estimates we need 900,000 in the next three years to meet current and predicted demand. The seasonally adjusted estimate for all dwellings approved fell 3.5% in March, the second month it has fallen. Houses fell 0.7% in March, the second month it fell. Other types of dwellings fell 7.0% in March, the second month it has fallen. Turning to the value of approvals, the value of residential buildings fell 3.2%, after a rise last month. The value of non-residential building fell 23.3% and has fallen for three months. The value of total building approved fell 11.0% in March and has fallen for three months.

Building-Approvals-Mar14The state-by-state story highlights some important differences and offsets. In NSW, both house and unit approvals rose in March (in seasonally adjusted terms).

Building-Approvals-Mar14NSWIn VIC, both house and unit approvals fell.

Building-Approvals-Mar14VICIn QLD we saw a similar drop.


In WA, house approvals rose, whilst units fell. In the west, a smaller proportion of units has consistently been built, compared with houses.

Building-Approvals-Mar14WAThe net falls in VIC, QLD and WA explains the overall drop. NSW appears to be still in growth mode. “Dwelling approvals increased trend terms in Tasmania (6.2 per cent), the Australian Capital Territory (0.8 per cent) and New South Wales (0.6 per cent). Dwelling approvals decreased in March in Queensland (3.4 per cent), South Australia (1.5 per cent), Victoria (0.6 per cent) and Western Australia (0.1 per cent) in trend terms.”

Brisbane Region Taxable Income Heat Map

Today we continue our series on taxable income by post code by looking at the Brisbane region, using data from the ATO for the 2011-2012 tax year.

Brisbane-TaxableThe post codes in QLD with the highest incomes are 4007 (Ascot, Hamilton, Hamilton Central), 4709 (Tieri) and 4155 (Chandler). The lowest income post codes are 4467 (Mingallala, Redford, Tyrconnel, Beeron etc), 4626 (Hayman Island), 4488 (Bollon, Nebine) and 4381 (Glen Aplin). The full list of top and bottom 10 are presented below, using the ATO tables.


Exploring The Derivatives Market – Part 2 – The Australian Scene

We continue our series on the derivatives market by looking at the Australian Market. According to the Australian Financial Markets Association (AFMA), the market turnover in 2013 was AU$135 billion. The OTC market is bigger than the exchange traded market and we have seen growth in both market segments since 2008. We also see that annual turnover has more than recovered the drop associated with the GFC. Quoting the AFMA 2013 report, “OTC and exchange traded markets grew by 4% and 7% respectively in 2012-13, with the 6% increase in foreign activity largely responsible for the OTC market’s expansion. At 62% of volumes of the Australian financial marketplace, the OTC market maintained its relative standing against the exchange traded markets as compared to the prior two years.”

AUDerivatives1We can drill into the data to explore the different markets and instruments. Looking at the OTC market, we see that foreign exchange is now about half the market, as other derivative types grow relative to fx.

AUDerivatives2Looking at the exchange traded market, we see futures is by far the largest element being traded.

AUDerivatives3We can look across the markets by category, first the debt market (physical market turnover). Repo’s are growing the fastest. “Government and semi government bond turnover fell slightly (-3%), with an increase in Commonwealth Government turnover being fully offset by a decrease in semi government and foreign government bond turnover. Non-government bond turnover increased 33% reflecting an improvement in investor sentiment and risk appetite from previous years. Short term debt securities volumes fell 11%, primarily as banks’ funding strategies and market conditions favoured term issuance. Repurchase agreement activity grew by 4.5%, the greater majority of activity being supported by Commonwealth and semigovernment debt.”

AUDerivatives10 We see considerable growth of the derivative market relative to the physical market.

AUDerivatives9Looking at the equities market, we see the physical shares turnover has remained static since 2008, whilst there has been growth in equity options and futures. Again, the derivatives have grown in volume relative to the physical.

AUDerivatives7Finally, we look at currency, the physical (spot currency) has declined, whilst derivatives have grown slightly. “Aggregate FX volumes increased 6% over the year, with daily turnover in FX spot and forwards markets picking up sharply in the period November 2012 to April 2013. AUD spot turnover fell 13% while the major policy changes in Japan led to an increase in non-AUD spot volumes, up 15%, mainly the result of a surge in USD/JPY activity. Non-AUD FX swap volumes increased by 19%.”

AUDerivatives8So, we can look at the ratio of physical to derivatives by type. The most significant multiplier is in the debt derivatives market – now at more than five times the underlying.

AUDerivatives4The AFMA comment “Derivatives is ASX’s largest business, accounting for 32.0% of Group revenues in FY13. Average daily trading volumes decreased 3.6%, to 624,179 contracts, in ASX Derivatives (exchange-traded options and index options) and increased 12.2%, to 453,365 contracts, in ASX 24 Derivatives (futures and options on futures). In June 2013 a record 14.3 million futures and options contracts were traded in the ASX 24 market, a new monthly record. ASX’s interest rate derivatives market is the fourth largest in the world.”

The local regulatory environment has been tightened in recent years. AFMA states that “For Australia, the crucial development was the passing of framework legislation in December 2012, that is, the Corporations Legislation Amendment (Derivatives Transactions) Act 2012, which took effect in January 2013. This legislation inserted a new Part 7.5A into the Corporations Act 2001, establishing a regime for the imposition of mandatory requirements in respect of trade reporting, central clearing and platform trading of OTC derivatives. Under this regime, the responsible Minister can issue determinations that mandate obligations with respect to trade reporting, central clearing or platform trading for a specified class or classes of derivatives. Following on from this, determinations and regulations were made under the new law to allow ASIC to make rules around trade reporting. This gave certainty to market participants to start planning for implementation of the new regime.”

With regards to the Financial Transaction Tax (FTT), perhaps not surprisingly, AFMA do not give it a vote of support. “Pursuant to a directive issued by the European Commission, eleven members of the European Union resolved to implement a Financial Transactions Tax (FTT) on all transactions in financial instruments, including debt and equity securities. For participants in the Australian financial markets, there are concerns that, as proposed, the FTT will have significant extra-territorial impacts; insofar as it may apply to transactions where the parties to the transaction have no nexus to the FTT zone but the underlying instrument was issued within the FTT zone or where one party that has entered into a transaction is dealing with an FTT zone counterparty. Many parties have objected to the design of the proposed FTT on the basis that it will severely restrict funding markets and promote behaviours that are contrary to recent regulatory reforms, such as central clearing and appropriate hedging of risk. The broad reach of the tax has been another source of objection. Based on AFMA’s current understanding, the FTT is to commence on 1 July 2014. However, there are legislative hurdles that will need to be overcome before the FTT can commence in its current form.”

Some questions to consider. Should we be concerned about the growth in derivatives compared with the underlying? The ratios are lower in Australia than in US or Europe. Is more trading through necessarily good? With regards to the FTT, is there a compelling case to consider? An FTT may trim excessive growth in derivatives trading, a good thing perhaps, and generate a revenue flow for government. We will return to these issues in a later discussion.

Exploring The Derivatives Market – Part 1 – It’s Big!

Today we commence a series on the derivatives market. This sector of financial services has grown significantly in recent years, and the amounts involved are large. This review is timely given the recent announcements in Europe of the potential introduction of a financial transaction tax (FTT). We start with a basic set of definitions, and start to explore the size of the market.

The derivatives market is where products like futures and options, and a wide range of other products are traded. They will be derived from a range of assets, including commodities, interest rates, currencies, shares or bonds. They are the essential tools of financial engineers. Derivatives may be directly linked to an underlying asset, for example a futures contract to deliver corn at a price agreed today, in three months time; or may be leveraged; for example, buying an option to allow you to deliver corn at an agreed price in three months time. We will look in more detail at the products later.

Derivatives can either traded on an established exchange, or over the counter (OTC).

Exchange traded derivatives are traded on an exchange like the Chicago Mercantile Exchange and are traded in standard derivative contracts. These may be futures, or options contracts on a wide range of underlying products. Participants on the exchange will take positions in these contracts, trading via the exchange which is a central counter-party. Traders will take positions, either buying a contract (said to be long) or selling a contract (said to go short). There will also be a net sum of zero, but market movement risk is transferred from one party to another.

Over the counter derivatives are built and sold by investment banks. They make markets in these derivatives and their clients will include corporations, hedge funds, commercial banks and government. This is more complex process, because whilst end customers will normally contract with the derivative provider, how the investment bank chooses to hedge the contract is down to the traders. Often they will use complex “black box” systems to match and net exposures and hold positions depending on rate expectations. They may well hold large open positions, although these days, positions within the banks are monitored more closely than they use to be. Products sold via OTC include swaps, forward rate agreements, forward contracts and a range of other credit derivatives.

So, lets look at the size of the market. According to the latest available data from the BIS, there was about US$70 trillion futures and options contracts (based on the principal) in play in December 2013. Note the significant growth from 2000 onwards, and the slight fall in options after the GFC in 2007.

DerivativesExchangeTotalAnother way to look at the contracts is based on turnover. Again, according to BIS, in December 2013 this totalled US$500 trillion. We see that turnover in futures contracts was higher than options (because option premiums are a fraction of the cost of taking a position in the underlying).

DerivativesExchangeTurnoverFinally, we look at the number of contracts on the exchanges. BIS reports that there were 300 million contracts in December 2013. Note they reached an all time high, and the spike in options, reflecting the expectation that US tapering will start, and creating a need (or opportunity) to hedge.

DerivativesExchangeContractsTurning to the OTC market, again the BIS provides us with some good data. “The latest BIS statistics on OTC derivatives markets show that notional amounts outstanding totalled US$693 trillion at end-June 2013. Of this total, $668 trillion was reported by dealers in the 13 countries that participate in the BIS’s semiannual survey, and US$25 trillion by dealers in the 34 countries that participate only in the Triennial Survey. The gross market value of all contracts – that is, the cost of replacing all outstanding contracts at current market prices – stood at $20 trillion at end-June 2013.”

OTCDerivativesSummaryWe can drill into the data by product type. Interest rate contracts make up the bulk of the transactions. “Interest rate contracts are the largest segment in the global OTC derivatives market, with notional amounts totalling $577 trillion at end-June 2013. However, the global figures mask diversity among reporting dealers. The Triennial Survey indicates that derivatives activity by dealers based in emerging markets tends to focus on the management of foreign exchange risk. Interest rate derivatives account for a much smaller share of contracts reported by these dealers than those based in the largest derivatives markets (ie than those headquartered in the 13 countries that participate in the semiannual survey)”.

OTCDerivativesProductsThese are big numbers. By way of contrast global GDP was US$72 trillion in 2012. Another way to look at it is the total derivatives market equates to more than $100,000 per person on the planet!. So, whilst this growth in derivatives trading makes bankers richer, is it good for economies? According to a recent US report, 95% of all U.S. derivatives are monopolised by just five large players. There seems to be a prima facie case to add a small tax to every speculative transaction. This could raise significant revenue for governments who are seeking new sources. Of course some argue this would make a particular market less attractive (this is why the UK resisted the EU initiate to bring in an FTT). Of the 27 EU member states, the 11 going ahead with the FTT are Germany, France, Italy, Spain, Belgium, Austria, Portugal, Greece, Slovenia, Slovakia and Estonia.

In later posts we will look further at the derivatives market, including examining some of the products in more detail; examine how capital controls are being strengthened, and also look at the derivatives market in Australia. This whole area is one which needs to be better understood. Some believe it could become the cause of the next great crash.