Fintechs cash in on bank lending limits to curb property boom

From Australian Fintech.

As regulators weigh new limits on bank lending to cool the housing boom, their impact may be muted as tech-savvy borrowers turn to fintechs to access cheaper rates offered by non-bank lenders.

Hashching is raising $6 million of fresh equity on the Neu Capital fundraising platform in a deal valuing the Sydney-based start-up – which gives borrowers access to the best interest rates negotiated by mortgage brokers – at $40 million.

Since it was set up in August 2015, Hashching has received applications for $5 billion of home loans, which has doubled in the last five months. Around 20 per cent of loans are made to property investors.

On the platform, borrowers are increasingly turning to loans from non-bank lenders who are undercutting the big banks on price, said Hashching co-founder Mandeep Sodhi.

Last year, 65 per cent of borrowers were choosing products from one of the big four banks, but over the past six months, the share of the big four has dropped 38 per cent, he said.

Big banks have been been forced to raise interest rates to curb growth in their investor lending portfolios due to APRA’s caps; owner-occupier rates are also moving up due to higher funding costs.

‘There are new deals every week’

Borrowers have access to 60 lenders through Hashching, including non-bank lenders like Liberty Financial, Pepper Group, Resimac and La Trobe Financial, and foreign banks like Citigroup.

“We are seeing that even though the big four have tightened investor lending, smaller banks and non-banks are going more aggressive,” Mr Sodhi said.

“There are new deals every week. They are going hard on rates. They are wanting to increase investor lending. We have been seeing this trend since November where discounts last for two or four weeks then jack back up again. But then when one lender stops their discount, someone else steps right in.

“It’s the non-bank lenders taking the market share.”

Mr Sodhi said that if the Council of Financial Regulators put additional macroprudential limits on the banking sector as expected, this would increase volumes on Hashching because it could make the interest rate differential between banks and non-bank lenders even larger.

Last year, some brokers on Hashching were able to access rates from big banks as low as 3.5 per cent per annum but at present none of the big banks are offering rates below 4.5 per cent. But some brokers have secured prices from foreign banks and non-bank lenders at below 4 per cent.

AFG, the country’s largest mortgage aggregator, has also pointed to growing market share from smaller lenders undercutting the big four.

“AFG’s data today shows flows to the non-majors are increasing quarter on quarter and are up to 35 per cent of our flows,” said AFG interim CEO David Bailey this week.

Pepper said in February it would look to raise at least $1.5 billion in residential mortgage backed securities (RMBS) in 2017 to fund its growth as demand booms, with mortgage applications hitting the highest level in the company’s 15-year history in January and February.

Relative Value At Risk By State

After I posted the summary data on owner occupied mortgages yesterday, including the latest estimated probability of 30-day default, I was asked if I could estimate the relative value-at-risk by state represented by these numbers, with a focus on WA.

Hi Martin, It looks as if WA is in some serious trouble. Do you know if the big banks are very exposed there? Thanks

In today’s post I will try to answer this question. Bear in mind that there is more than $1 trillion owing on owner occupied residential mortgages. We can apply the estimated PD30 (30 Day Default Probability) values to each mortgage pool and so estimate the value of loans at risk by state.

The charts below displays the output from the analysis. Each state is shown separately, together with its relative share of outstanding owner occupied mortgages by value – as a percentage of the total. But we also show the value – in billions – of loans at potential default risk and their relative distribution.

For example, in NSW, whilst around 30% of all households who have a mortgage live there, the total value of those mortgages is worth around $467 billion, which is 44% of the total national OO mortgage pool. From our modelling, $6.5 billion are at PD30 risk, which is 39% of the risk value pool.

But now compare this with WA. Around 12% of all households who have a mortgage live there. The total value of these mortgages is worth around $133 billion, which is also 12% of the total mortgage pool.  But from our modelling, $3.3 billion are at PD30 risk, which is 20% of the risk value pool.

This highlights the relative higher risks in the WA mortgage portfolio, which is why lenders are being more cautious.  Not all lenders are equally exposed, indeed some are targeting NSW and VIC, but WA is clearly a problem area in terms of risk assessment and management.

Any changes to the lending standards or capital rules needs to take account of the different characteristics in the various local markets.  Lenders need to calibrate their risk models accordingly.

Global House Prices—Where is the Boom?

From iMFdirect.

While house prices around the world have rebounded over the last four years, a closer look reveals that this uptick is dependent on three things: location, location, location.

The IMF’s Global House Price Index—an average of real house prices across countries—has been rising for the past four years. However, house prices are not rising in every country. As noted in our November 2016 Quarterly Update, house price developments in the countries that make up the index fall into three clusters: gloom, bust and boom, and boom.

The first cluster—gloom—consists of countries in which house prices fell substantially at the onset of the Great Recession, and have remained on a downward path.

The second cluster—bust and boom—consists of countries in which housing markets have rebounded since 2013 after falling sharply during 2007–12.

The third cluster—boom—consists of countries in which the drop in house prices in 2007–12 was quite modest, and was followed by a quick rebound.

This chart shows that house prices varies within a cluster and within a country. Recent IMF assessments provide a more nuanced view of the within-country house price developments.

For example, in Australia, the strongest house price increases continue to be recorded in Sydney and Melbourne, where underlying demand for housing remains strong.

In Austria, the cumulative increase in the house price index over 2007–2015 was nearly 40 percent. To a large extent, this increase was driven by price dynamics in Vienna.

Looking at Turkey, the housing market exhibits significant variations across cities. Regional variations have been further accentuated by the presence of almost 3 million Syrian refugees since March 2011. Cities near the Syrian border, which have absorbed larger masses of Syrian refugees, have seen significant rises in local housing prices since 2011, though they have moderated in recent years.

 

Country/region and city clusters

Gloom = Brazil (Rio de Janeiro); China (Shanghai); Croatia (Zagreb); Cyprus (Nicosia); Finland (Helsinki); France (Paris); Greece (Athens); Macedonia (Skopje); Netherlands (Amsterdam); Russia (Moscow); Singapore (Singapore); Slovenia (Ljubljana); and Spain (Madrid).

Bust and Boom = Denmark (Copenhagen); Estonia (Tallinn); Hungary (Budapest); Iceland (Reykjavik); Indonesia (Jakarta); Ireland (Dublin); Japan (Tokyo); Latvia (Riga); New Zealand (Auckland); Portugal (Lisbon); South Africa (Johannesburg); United Kingdom (London); and United States (San Francisco).

Boom = Australia (Melbourne); Austria (Vienna); Belgium (Brussels); Canada (Toronto); Chile (Santiago); Colombia (Bogota); Hong Kong, SAR (Hong Kong); India (New Delhi); Israel (Tel Aviv); Korea (Seoul); Malaysia (Kuala Lumpur); Mexico (Mexico City); Norway (Oslo); Slovakia (Bratislava); Sweden (Stockholm); Switzerland (Zurich); and Taiwan, Province of China (Taipei City).

Read more on IMF global house price studies and check out the Global Housing Watch site.

Houses aren’t more unaffordable for first home buyers, but they are riskier

From The Conversation.

Climbing house prices seem to scare people but houses are relatively more affordable today than they were in 1990, it’s actually interest-rate risk that’s the bigger problem for first home buyers.

If you look at latest numbers on house prices, as a measure of affordability, they use a “median measure” – that is, the ratio of median house price to median salary. According to the latest Demographia survey, the price of the median Sydney house is 12.2 times the median salary, and it is 9.5 in Melbourne.

But it’s simply misleading to compare median-based measures of housing across different time periods in the same location. These simple median measures do not take into account differences in interest rates in different time periods.

A house in 2017 that costs nine times the median salary, when mortgage interest rates are less than 4%, is arguably more affordable than a house in 1990 that costs six times the median salary. Interest rates in 1990 were 17%.

Consider this simple example. In 1990 a first home buyer purchases an average house in Sydney priced at A$194,000. With mortgage interest rates at 17%, the monthly mortgage repayments were A$2,765 for a 30-year mortgage. But in 1990 the average full-time total earnings was only A$30,000 per annum, so the buyer’s mortgage repayments represented over 111% of before-tax earnings. In 2017 a first home buyer purchasing a Sydney house for A$1,000,000, with interest rates at 4%, is only required to pay A$4,774 every month, or 69% of their before-tax average full-time total earnings.

So, relatively, houses are substantially more affordable today than they were in 1990. The lower interest rate means the costs of servicing a mortgage is lower today than it was 25 years ago, or even 50 years ago.

However, those lower interest rates also mean today’s first home buyers face greater perils than their parents or grandparents.

Interest-rate risk

Interest rate risk is the potential impact that a small rise in mortgage interest rates can have on the standard of living of homeowners. This does not consider the likely direction of interest rates, rather how a 1% change in interest rates affects the repayments required on a variable rate mortgage.

When interest rates rise so do mortgage repayments. But the proportional increase in repayments is higher when interest rates are lower. For example, if mortgage interest rates were 1%, then increasing interest rates by another 1% will double the interest costs to the borrower. When interest rates are higher, a 1% increase in interest rates will have a lower proportional affect on their repayments.

If we go back to the example from before, the interest rate risk of the first home buyer from 1990 is much lower than that of the 2017 buyer. If mortgage interest rates rose by 1% in 1990, repayments would rise by only 5.7% to $2,923. For the 2017 buyer on the other hand, a 1% increase in interest rates would see their repayments rise by over 12% to $5,368 per month.

This has the potential to financially destroy first home buyers and, due to the high reliance of the retail banking industry on residential real estate markets, potentially create a systemic financial crisis.

Interest rate risk has an inverse relationship to interest rates – when interest rates fall, interest rate risk rises. As a result, interest rate risk has been steadily increasing as mortgage interest rates have fallen. Given that we have record low interest rates at the moment, interest rate risk has never been higher.

Putting it all together

Compounding all of this is the general trend of interest rates.

In 1990 mortgage interest rates were at a record high and so our first home buyer could reasonably expect their repayments to decrease in the coming years. They could also reasonably expect that, as mortgage interest rates fell, demand for housing would increase (all else being equal) and so would house prices, generating a positive return on their investment.

But our 2017 first home buyer is buying when interest rates are at record lows. They cannot reasonably expect interest rates will fall or for their repayments to go down in future years. It’s also unlikely that house prices will increase as they have for previous generations.

So while the current generation of first home buyers find housing much more affordable than their parents, they face substantially higher interest-rate risk and a worse outlook for returns on their investment. If we wish to address the concerns of first home buyers we should look into these issues rather than exploiting misrepresentative median-based measures of house affordability.

Apart from addressing issues with the supply of housing, governments need to investigate ways to reduce interest rate risk over the longer term.

Author: Jamie Alcock, Associate Professor, University of Sydney

——————————————————-

We would make the point that income growth is static or falling, prices relative to income are higher in many urban centres, and the banks are dialing back their mortgage underwriting criteria (especially lower LVR’s, reductions in their income assessment models and higher interest rate buffers). All of which work against lower interest rates, which are now on their way up, so this article seems myopic to us!

However, we agree the interest rate risk is substantial, and more than 20% of households are in mortgage stress AT CURRENT LOW Rates. We also think the risks are understated in most banking underwriting models, because they are based on long term trends when interest rates were higher.

A disconnect between the growth objectives and asset allocation of SMSF trustees

Self-managed superannuation fund (SMSF) trustees have high growth expectations for the next 12 months yet as many as 55 per cent have moved to a more defensive asset allocation amid continuing market volatility, according to AMP Capital.

Statistics from AMP Capital’s latest Black Sky Report show that while SMSF trustees expect a 10.9 per cent return on their portfolio this year (6 per cent capital and 4.9 per cent income), only 18 per cent of trustees have made changes to position their portfolio for growth.  This is, however, an increase of five percentage points from 2015.

Further to this, nearly half of SMSF trustees surveyed for the report say their aim is to have a fully diversified portfolio yet more than 50 per cent of their portfolio is invested in just one investment type outside of managed funds.

AMP Capital Head of Self-Directed Wealth and SMSF Tim Keegan said: “If trustees continue to be exposed to significant portfolio concentration risk and remain in more defensive assets without seeking financial advice, they may struggle to achieve their retirement goals.”

AMP Capital’s Black Sky Report is developed each year to provide a snapshot of trustee investment trends.  It also helps to arm financial advisers with insight and knowledge of where SMSF trustees are looking for specific advice.

The 2017 report has identified the biggest investment challenges for SMSF trustees as market volatility (according to 18 per cent of trustees surveyed), investment selection (11 per cent) and regulatory changes (10 per cent).

Mr Keegan said: “It’s clear that many SMSF trustees need help especially around portfolio construction and understanding the regulatory changes that are coming into play.  With nearly 60 per cent of SMSF trustees remaining open to using the expertise of a financial adviser, it’s clear this is a huge opportunity for advisers to tap into.”

The research also revealed that SMSF trustees continue to find managed funds attractive, with 47 per cent each investing approximately $280,000 in them.  Thirty per cent of SMSF trustees made their most recent managed fund investment after receiving advice from their financial planner.

Mr Keegan said: “There is an increasing appetite among SMSF trustees to invest in Australian equity funds, both active and passive.  Advisers can be proactive in recommending high-quality unlisted managed funds as well as introducing trustees to the increasing range of active exchange traded funds that are now available on the market.”

Active ETFs replicate managed fund strategies but are able to be bought and sold during the trading day like any share on the Australian Securities Exchange.  AMP Capital, in alliance with BetaShares, launched three active ETFs during 2016: the AMP Capital Dynamic Markets Fund, the AMP Capital Global Property Securities Fund and the AMP Capital Global Infrastructure Securities Fund.

According to Mr Keegan: “With expectations for growth at an all-time high, regulatory uncertainty at its peak and new products such as active ETFs becoming increasingly popular, there is more need than ever for SMSF investors to turn to financial advisers for support.”

For the third year in a row, AMP Capital has released the Black Sky Report, which uses research and data from leading research house Investment Trends to uncover the latest SMSF investor trends and insights.

The research is based on a quantitative online survey of nearly 800 AMP Capital SMSF investors conducted by Investment Trends.  The 2017 Black Sky Report can be downloaded here.

You’ve got to fight! For your right! … to fair banking

From The UK Conversation.

British governments have been trying to improve financial inclusion for the best part of 20 years. The goal is to make it easier for people on lower incomes to get banking services, but this simple-sounding target brings with it a host of problems.

A House of Lords committee will shortly publish the latest report on this issue, but the genesis of financial inclusion policy can be traced back to the late 1990s as part of the Labour government’s social exclusion agenda. The scope and reach of this strategy has since expanded beyond a focus on access to products and now seeks to improve people’s financial literacy to help them make their own responsible decisions around financial services.

The goal of increasing the availability of basic banking has become a tool for tackling poverty and deprivation worldwide, among governments in the global north and global south and among key institutions. In 2014, the World Bank produced what it described as the world’s most comprehensive financial exclusion database based on interviews with 150,000 people in more than 140 countries.

Retaliation? mobiledisco/Flickr, CC BY-NC-ND

Muddy waters

However, broad and enthusiastic acceptance of such policy efforts has prompted doubts about the simplistic narrative of inclusion and exclusion. This way of thinking does not capture the complexities of the links between the use of financial services and poverty, life chances and socio-economic mobility. It also ignores the sliding scale of financial inclusion, from the marginally included – who rely on basic bank accounts – through to the super-included with access to a full array of affordable financial services.

You can see the complexity and contradictions clearly in innovations such as subprime products and high-cost payday lenders. They have made it increasingly difficult to draw a clear distinction between the included and the excluded. Mis-selling scandals and concerns over high charges have also shown us that financial inclusion is no guarantee of protection from exploitative practices.

Even the pursuit of better financial education offers a mixed picture. Critics have raised concerns that this shifts the focus away from structural discrimination and towards the individual failings of “irresponsible and irrational” consumers. There is a grave risk that we will fail to tackle the root causes of financial exclusion, around insecure income and work, if policy follows this route.

In the midst of this focus on customers, the government’s role has been reduced to supporting those education programmes and cajoling mainstream banks, building societies and insurers into being more inclusive.

Vested interests. The Square Mile in London. Michael Garnett/Flickr, CC BY-NC

Given the central role that financial services play in shaping everyday lives, a hands-off approach from the state is inadequate. It fails to address the injustices produced by a grossly inequitable financial system. Our recent research examined how the idea of financial citizenship might offer a route to improvements. In particular, we looked at the idea of basic financial citizenship rights and the role that might be played by UK credit unions, the organisations which, supported by government, seek to bring financial services to those on low incomes.

The idea of establishing rights was put forward by geographers Andrew Leyshon and Nigel Thrift in response to the growing lack of access to mainstream financial services. The goal would be to recognise the significance of the financial system to everyday life and set in stone the right and ability of people to participate fully in the economy.

That sounds like a laudable aspiration, but what could a politics of financial citizenship entail in practice?

Drawing on the work of political economist Craig Berry and researcher Chris Arthur, we argue that the policy debate should move on to establish a set of universal financial rights, to which the citizens of a highly financialised society such as the UK are entitled regardless of their personal or economic situation.

  1. The right to participate fully in political decision-making regarding the role and regulation of the financial system. This would entail, for example, the democratisation of money supply and of the work of regulators. Ordinary people would have to be able to meaningfully engage in debates about the social usefulness of the financial system.
  2. The right to a critical financial citizenship education. Financial education needs to go beyond the simple provision of knowledge and skills to understand how the financial system is currently configured. It should provide citizens with the tools to be able to think critically about money and debt, as well as the capability to effect meaningful change of the financial system.
  3. The right to essential financial services that are appropriate and affordable such as a transactional bank account, savings and insurance.
  4. The right to a comprehensive state safety net of financial welfare provision. This could include a real living wage to prevent a reliance on debt to meet basic needs and could go all the way through to the provision of guarantees on the returns that can be expected from private pension schemes.

Establishing this set of rights would be a major step towards enhancing the financial security and life chances of households and communities. The weight of responsibility would shift from individuals and back on to financial institutions, regulators, government and employers to provide basic financial needs. As one example, just as people in the UK are given a national insurance number when they turn 16, so the government and the banks could automatically provide a basic bank account to everyone at the age of 18.

The UK credit union movement does make efforts towards these goals, but it cannot fully mobilise financial citizenship rights largely due to its limited scale and regulatory and operational limitations. For the rights to work, they will need the support of the state, of financial institutions, regulators and employers. That would enable the country to build something less flimsy than the loose structure we have right now, which piles blame onto the consumer and relies on voluntary industry measures to pick up the slack.

Property prices continue to soar in an already hot market

From The NewDaily.

Latest property price figures have given home owners reason to celebrate and first home buyers even more reason for despair.

Latest data from CoreLogic Home shows prices in Australia’s main cities have leapt 3.7 per cent since the start of the year, with Sydney and Melbourne predictably higher than the national average.

Residential prices in the already-hot Sydney market jumped 5.3 per cent since January 1, with the median price hitting $950,000, and the median price for units now $740,000.

Melbourne property prices have risen 4.4 per cent this year, with the median house price at $710,000 and the unit price at $525,000.

Perth was the only capital where prices have fallen, down 1.1 per cent.

Meanwhile, Hobart remains the cheapest market with median house prices at $365,000 and unit prices at $306,500.

The news comes a week after former Liberal leader John Hewson declared Australia was experiencing a property bubble and also follows a Reserve Bank statement noting there had been “a build-up of risks associated with the housing market”.

The bank referred to rising property prices in Melbourne and Sydney, the “considerable” number of apartments coming onto the market over the next few years, resurgent growth in investor lending, and household debt rising faster than household income.

CoreLogic also reported that the proportion of settled auctions — a key benchmark of demand — was also up.

The national auction clearance rate jumped to 77.1 per cent in the week to March 26, from 74.1 per cent the previous week and well up from the 70.9 per cent in the same week in 2016.

But home buyers could soon find themselves squeezed from two sides, as interest rates rise for both owner-occupiers and investors.

“There’s only one way for interest rates to go in my reading, and that’s up,” Martin North, analyst with Digital Finance Analytics, told The New Daily.

“I’ve believed for some time that by the end of the year interest rates on owner occupied housing loans will rise by 25 to 50 basis points and for investor housing it will be between 75 to 100 basis points. That is irrespective on any moves the Reserve Bank might make on rates.”

The escalation that has seen mainland capital house prices rise 13.1 per cent in a year and as much as 19.8 per cent in Sydney is putting pressure on buyers despite low rates.

“Around 20 per cent of all owner-occupiers are suffering mortgage stress, and if rates were to rise one percentage point that would rise to 24 per cent, Mr North said.

CoreLogic’s data also showed that there were 3147 auctions last week— the second highest so far in 2017, and up from 2916 the previous week.

 – with AAP

AMP Bank Lifts Mortgage Rates

AMP Bank has announced changes to its mortgage lending rates for both owner occupiers and investors.

Effective 3 April 2017, variable interest rates for interest-only loans for existing customers will increase by 15 basis points for owner-occupied loans and 28 basis points for investment loans.

In addition, effective 31 March 2017 for new customers and 3 April 2017 for existing customers, owner occupied principal and interest variable rate loans will increase by 7 basis points. As a result, the AMP Bank Professional Pack owner occupied variable rate loan will increase to 3.92% p.a. for new customers for loans of $750,000 and above.

AMP Bank is encouraging customers with interest-only loans to switch to principal and interest repayments where appropriate. Until 30 June 2017, AMP Bank will waive the switch fee for customers moving to principal and interest repayments.

Sally Bruce, Group Executive AMP Bank commented: “We are managing our portfolio in a very active market but are committed to providing competitive rates to our customers to help them achieve their property goals.

“We also want to encourage customers to move to principal and interest repayments where it’s appropriate, as there is a great opportunity to access lower interest rates and repay your loan faster.

“Our decisions on rates are not taken lightly and reflect wholesale funding costs, the need to maintain a balanced portfolio and the market environment,” she said.

Mortgaged Households, Vital Statistics

We have pulled out the latest data on residential mortgaged households, incorporating the latest mortgage increases and market valuations. So today we run over the top-level vital statistics.

To explain, our market model replicates the industry, across all lenders banks and non-banks and looks beyond the performance of just the securitised mortgage pools (as some of the ratings agencies report). It is looking from a “household in” perspective, not a “lender out” point of view.

To start, we look at the average home price, and average mortgage outstanding across the states, plotted against the relative number of households borrowing.  NSW has the largest values, and thus mortgages, on average. But note that WA runs ahead of VIC though in the west prices are falling.

Next we look at average loan to value (LVR) marking the market value to market, and the latest loan outstanding data. NSW has the highest LVR on average, at ~75%. We also plot the average loan to income (LTI) and again NSW has the highest – at more than 6x income.

Then we look at debt servicing ratios, where again NSW leads the way on average at more than 23% of income, even at these low rates. VIC and WA are a little lower but still extended. Finally, we look at estimated probability of 30-day default, projecting forward to take account of expected economic conditions, interest rates and employment. WA has the highest score, followed by SA. NSW is a little lower, thanks to relatively buoyant economic conditions. That could all change quite quickly, and as highlighted the high leverage in NSW suggests that risks could become more elevated here.

We will update the market model again next month, and track movements across the states. Be warned, averages of course tell us something, but the relative spreads across segments and locations are more important. But that, as they say, is another story!

Auction Clearances Higher

CoreLogic says the amount of auction activity across the capital cities increased this week, up from 2,916 last week to 3,147 this week; the largest number of auctions since the last week of February 2017 when 3,301 auctions were held. This time last year was the Easter long weekend, so auction volumes were substantially lower, with 554 homes taken to auction across the combined capital cities. This week’s preliminary weighted average clearance rate across the combined capitals was 77.1 per cent, increasing from 74.1 per cent over the previous week and up from 70.9 per cent one year ago. Sydney saw the highest preliminary clearance rate across the cities at 81.1 per cent, while across the remaining cities; clearance rates increased week-on week with the exception of Brisbane and Perth where clearance rates fell.