Category: Economics and Banking

Not All Post Codes Are Created Equal In Mortgage Applications

DFA has developed a risk scoring system, which combines information from lenders, and households to provide an indicator of the relative likelihood of an applicant successfully obtaining a mortgage, within a specific post code, and the relative weighting in terms of loan-to-value (LVR) and other factors which will be taken into account.

Additional factors will also include the mix between high-rise and low-rise development (some banks have blacklisted certain development types in some suburbs), and recent home price moves.

On the DFA Blacklist scale, the higher the score, the greater the difficulty in obtaining finance. In practice, this also reflects the relative risks of mortgage stress and default, and is also subject to an economic overlay in terms of relative economic performance and household finances. This was featured in an ABC piece last week. It is not predicative, rather it reflects current behaviour and past risk.

While individual household scores will vary, an average post code score above 15 represent higher than normal risk, meaning many lenders will require a larger deposit, or may prefer not to lend at all. The higher the score, the greater the difficulty in getting finance.

Since I have received many requests for more information, today we are releasing more complete mapping, which is up to the end of April 2019.

The maps are presented in native high resolution. The blue shades are low scoring post codes. Red shows highest scores.

Western Australia, as represented by the area around Perth is by far the most blacklisted region.

In comparison Sydney scores are lower, though with some hot spots.

Melbourne also shows a few hot spots.

Adelaide has some risk areas.

Brisbane and the Gold Coast are fairing quite well (but again, with some hot spots).

The Sunshine Coast is more problematical.

The ACT scored pretty low.

While Darwin was more problematic, reflecting the significant falls in values in recent years, and the economic conditions there.

To emphasise the point, individual lenders and borrowers circumstances will vary, but our analysis does highlight that not all post codes are born equally when it comes to mortgage applications.

Credit Impulse Dies Some More

The value of new lending commitments to households fell 3.7 per cent in March 2019, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) figures on new lending to households and businesses.

The fall in lending to households in March follows a 2.2 per cent rise in February 2019.

ABS Chief Economist, Bruce Hockman said: “All components of new lending to households were weaker in March, more than offsetting a bounce in lending activity seen in February.”

“There were large falls in the value of lending for owner occupier dwellings in seasonally adjusted terms in both New South Wales (-5.7 per cent) and Queensland (-5.3 per cent) in March, after rises in both states the previous month” he said.

Nationally, lending for investment dwellings also contracted further in March, with the series down 25.9 per cent (seasonally adjusted) compared to March 2018. The level of new lending for investment dwellings is at its lowest level since March 2011.

While nationally there was a fall in the number of loans to owner occupier first home buyers (-0.5 per cent) in March, in a similar pattern to recent months this fall was again much less than the drop in the number of loans to owner occupier non-first home buyers (-3.3 per cent).

After rises in January and February, lending to households for personal finance excluding refinancing fell 11.2 per cent in March, seasonally adjusted.

In trend terms, the value of new lending commitments to businesses fell 2.0 per cent in March. All components of business lending remained subdued.

More detailed analysis to follow. Home prices will fall further.

CBA Ups Provisions And Reports Margin Squeeze

CBA released their quarter update to 31 March 2019. Its an unaudited summary. Its weak, and confirms the trends we saw elsewhere. Customer remediation is costing them dear. CBA shares dropped.

They announced an unaudited statutory net profit of $1.75 billion and a cash net profit of $1.70 billion. Headline profit was impacted by $714 million in pre-tax additional customer remediation which translates to $500 million post-tax.

Customer remediation on a cumulative basis now stands at $2.17 billion, an astonishing amount.

They provided a breakout. Fee for no service and costs of the remediation programmes were the largest items. $374m is included for customer refunds – including $123 million of interest and assumes a refund rate of 24% excluding interest of the ongoing service fee costs from FY09-FY18.

Operating income was 4% lower, thanks to a range of factors, including seasonal factors, “temporary headwinds” including unfavorable derivative valuation adjustments and weather events), and re-based fee income.

Net interest income was down 3% (due to fewer days in the quarter). The Group’s net interest margin fell “slightly”. Non-interest income was 10% lower, thanks to some “Better Customer Outcomes” initiatives. Income foregone is $415 million, of which $275 million will be recognised in 2019.

Operating expenses rose 1% excluding notable items, of 24% including the additional customer remediation.

Loan impairment expenses was $314 million in the quarter or 17 basis points of Gross Loans And Acceptances, compared with 15 basis points in 1H19. This includes higher levels of consumer arrears and corporate impaired assets.

Consumer arrears are conveniently attributed to “seasonal factors”, as well as a rising trend, thanks to subdued levels of income growth and cost of living challenges, most evident in the outer metro areas of Perth, Melbourne and Sydney.

Accounts in negative equity are more than 3% of total accounts, based on 31 March 2019 (so higher now). Around three quarters of the negative equity relates to WA and QLD.

Troublesome and impaired assets rose to $7.2 billion. There are emerging signs of weakness in discretionary retail and drought-affected farmers and communities, including some named corporates, and home loan customers experiencing hardship.

Total provisions were increased by $96 million to around $4.8 billion dollar, and collective provisions were also lifted.

The banks ratios were pretty strong.

But the CET1 ratio fell from 10.8% to 10.3%., after the impact of dividend payments.

We expect to see more pressure on the sector ahead.

Tassie First Home Builders Grant Extended

The Tasmanian Government announced yesterday that they have extended their first home builders grant.

The Hodgman Liberal Government is a strong supporter of our building and construction industry, and we want to boost dwelling construction so more Tasmanians can be in a position to own their own home.

The Hodgman Liberal Government will extend the first home builders grant in the upcoming budget so more young Tasmanians can realise the dream of building their first home.

The extension comes after we doubled the first home builders grant to $20,000 in the 2016-17 Budget.

We understand that there is high demand for new housing, and the first home builders grant is one part of our multi-pronged approach to address housing stress in Tasmania.

According to the latest ABS figures, Tasmania continues to lead the nation in the annual growth in building approvals.

The number of dwelling approvals grew 24.1 per cent in March 2019 compared to March 2018, with Tasmania one of only two jurisdictions to record growth. This is in stark contrast to the sharp fall in National approvals, which was down by 22.4 per cent over the same period.

This initiative will give Tasmanians a greater opportunity to build and own their own home, adding to supply, and complementing the action the Government is taking through our Affordable Housing Strategy.

The extension of the grant will have positive flow-on effects for Tasmania’s booming building and construction industry, creating more work, and more jobs.

Tasmanian prices are still rising, as MyStateBank media release from 9th May reveals.

Median house prices are falling across most parts of the country, yet Hobart is bucking the national trend. Dwelling values in Hobart grew by 3.8% in the year ending April 2019, the highest of all other capital cities and one of only three capital cities to experience growth. Nationally, house price growth fell 7.2% over the same period.

“Australian homeowners see the appeal of selling up in markets like Sydney and Melbourne and buying in Tasmania, where it is more likely they’ll be able to afford a bigger property for a much cheaper price. The state’s strong economic conditions and attractiveness as a lifestyle choice are also big drawcards for residents on mainland Australia, fuelling housing demand,”

“A tightening in credit supply is also driving prospective buyers out of larger property markets like Melbourne and Sydney where demand from investors and owner occupiers has dampened.”

In fact, Tasmania is the only state to have experienced an increase in mortgage applications (+1.5%) over the year to December 2018. Mortgage applications in Victoria and New South Wales fell over the
same period by 15.4% and 19.1% respectively.

Pressure on Tasmanian rental market unlikely to continue in the long term.

“Population growth and lack of new housing supply is putting considerable pressure on the Tasmanian rental market.”

MyState’s analysis shows Hobart’s strong rental yield position has increased to 5.2% in the year to April, the highest in the country. The median weekly house rent is $450 – now $10 more than Melbourne.

However, the issue of a lack of housing supply is unlikely to be a long-term one, with the state recording nation leading growth in the number of residential building approvals at 24% from March 2018 to March 2019.

More Rate Cuts For New Mortgages

From The Adviser.

ANZ and Macquarie Bank have reduced their home loan rates by up to 60bps, with changes across both lenders effective from 10 May.

For its Breakfree discount package, ANZ has announced the following rate changes for owner-occupiers:

  • three-year owner-occupied principal and interest rates have been cut by 30bps to 3.69 per cent (4.94 per cent comparison rate)
  • five-year owner-occupied principal and interest rates have been cut by 20bps to 3.99 per cent (4.89 per cent comparison rate)
  • two-year owner-occupied interest-only rates have been cut by 20bps to 4.29 per cent (5.13 per cent comparison rate)
  • three-year owner-occupied interest-only rates have been cut by 60bps to 3.99 per cent (5.00 per cent comparison rate)
  • five-year owner-occupied interest-only rates have been cut by 59bps to 4.50 per cent (5.07 per cent comparison rate)

ANZ has also made the following changes for Breakfree investment loans:

  • two-year investment principal and interest rates have been cut by 6bps to 3.89 per cent (5.54 per cent comparison rate)
  • three-year investment principal and interest rates have been cut by 20bps to 3.99 per cent (5.44 per cent comparison rate)
  • five-year investment principal and interest rates have been cut by 26bps to 4.19 per cent (5.31 per cent comparison rate)
  • three-year investment interest-only rates have been cut by 30bps to 4.19 per cent (5.48 per cent comparison rate)
  • five-year investment interest-only rates have been cut by 4bps to 4.95 per cent (5.60 per cent comparison rate)

Meanwhile, Macquarie Bank has reduced variable and fixed mortgage rates by up to 51bps across its Basic and Offset packages.

The non-major’s variable rate changes are as follows:

  • cuts of between 7-21bps for variable home loans for owner-occupiers paying principal and interest and interest only, excluding loans with an LVR of less than 95 per cent
  • cuts of between 11-51bps for variable home loans for investors paying principal and interest and interest only, excluding loans with an LVR of less than 90 per cent

Macquarie’s fixed rate changes include:

  • cuts of between 10-20bps for one, two and three-year fixed rates for owner-occupiers paying principal and interest
  • a cut of 10bps for one-year fixed home loans for owner-occupiers paying interest only
  • a cut of 10bps for one-year fixed home loans for investors paying principal and interest
  • cuts of between 10-15bps for one, two and three-year fixed home loans for investors paying interest only

ANZ and Macquarie are among several lenders that have reduced rates across their fixed rate home loans over the past few months.  

Reflecting on the changes, comparison website Canstar’s finance analyst, Steve Mickenbecker, said lenders are preempting an expected cut to the official cash rate from the Reserve Bank of Australia (RBA).  

“Rate changes are running rife this week,” he said. “Macquarie and ANZ are joining the group of lenders reducing home loan rates ahead of the Reserve Bank curve.”

Mr Mickenbecker added: “The banks are anticipating an official cut to the cash rate in the coming months and are not waiting on the Reserve Bank to move.

“They are instead using this period to sharpen the pricing pencil to attract new business.”

However, the analyst noted that existing borrowers would need to wait for a cash rate adjustment before they too receive lower mortgage rates.

The RBA was expected to drop the official cash rate for the first time since August 2016 when its monetary policy board meeting was held last week.

However, the central bank opted to hold the cash rate at 1.5 per cent, with some analysts, including AMP Capital chief economist Shane Oliver, attributing the RBA’s decision to the current political environment, with the federal election looming.

Mr Oliver added that AMP has “pencilled in” a rate cut in June to offset the continued weakness in the housing market, flat inflation and slow economic growth.

Unnatural Acts As Advertised

We discuss the Coalition plans for first time buyers. As expected. Sound of can being kicked down the road! Remember such incentives lift prices, and will “bribe” people into a falling market.

One of the new announcements in today’s launch was the Coalition’s commitment to helping first home buyers save for a deposit sooner by lowering the required deposit from about 20 per cent to 5 per cent.

At the moment above 70% or 80% borrowers at the moment would need to purchase expensive Lenders Mortgage Insurance.

Today the Coalition announced a scheme, where eligible first home buyers would not have to pay mortgage insurance and instead, the Government would guarantee the difference between that lower deposit (down to 5 per cent) and the industry standard (about 20 per cent).

The First Home Loan Deposit Scheme, will be available from January 1 for those who have saved at least 5 per cent of the value of the home, but it will also be subject to limits for each market

The full details of the scheme have not yet been released, but Mr Morrison said it was aimed at allowing people to get onto the property ladder sooner.

The Labor Party has responded by promising to match the Coalition proposal.

“We back genuine support for first home buyers — that’s why we are also reforming negative gearing for future purchases, so young Australians don’t have to keeping losing out to wealthy property speculators,” Shadow Treasurer Chris Bowen said.

After six years of failure, and six days before an election, the Liberals are desperately trying to tell young Australians they understand their struggles to buy their first home,”

The government proposal is a significant departure from previous attempts to help younger people trying to get into the housing market, requiring $500 million in guarantees and possibly more over time.

But it will not be open-ended. The government intends to borrow $500 million so it can invest the money in the National Housing Finance and Investment Corporation, which would offer the guarantees to aspiring home-owners.

The $500 million cost of the policy does not deepen the budget deficit or weaken future surplus for either major party. As an investment, it will be treated as a capital item rather than expenditure.

The scheme would be capped at 10,000 loans every year, about one tenth of the market given estimates that there were about 100,000 loans to first-home buyers last year.

The scheme will be available to first home buyers with an income of up to $125,000 or a couple with $200,000 where they are both first-home buyers.

So, lets encourage first time buyers to come into a falling market, and loose their equity some more.