NSW and VIC Leads Residential Building

The latest edition of the HIA Housing Scorecard was released today. There are significant and important state variations in activity and outcomes and the scorecard nicely highlights some of the contracts. For example, first time buyers in NSW continue to languish, whilst WA has strong construction activity and NT housing finance fell. SA and NT registered the lowest scores.

The Housing Scorecard provides a half yearly review of residential building conditions in each state and territory. Across a range of activity indicators, the most recent performance in each state is benchmarked against the state’s longer term average. This analysis is aggregated in a scoring system which provides a ranking that highlights the relative strength or weakness of residential building activity in each state and territory. The indicators include (using ABS data):

  • Detached house building;
  • Multi-unit dwelling building;
  • Renovations;
  • Construction labour force;
  • Housing finance; and
  • Turnover of established homes


This analysis is aggregated in a scoring system to generate a league table ranking the relative strength/weakness of residential building conditions in each jurisdiction. For each indicator, each state is assigned an indicator score where a state receives a score of eight if they are the strongest relative to their long term average and progressively lower scores assigned for the weaker states. A score of one is assigned to the state with the weakest level of activity relative to their long term average.

The indicator scores assigned for each state are summed together which becomes the state score. The state score provides the basis for the overall ranking of the states. The states are ranked in descending order based on the state score. The highest scoring state is ranked number one and each state is ranked in descending order with the state achieving the lowest score ranking eighth.


New South Wales continued to hold down top spot with a score of 83, taking out the top indicator score in six of the fourteen indicators.

NSW scored strongly in the key leading indicators of new home building activity, and those relating to the housing market more broadly. Relating to new home building, NSW scored most favourably in the indicators tracking detached house construction – taking top spot for approvals of detached houses, as well as
commencements and the number of dwellings currently under construction.

NSW also scored well in the indicators of multi-unit dwelling approvals, with activity in the September 2015
quarter more than double the decade average – and the multi-unit dwellings under construction category. Against the backdrop of such strong leading indicators of multiunit building activity, NSW’s ranking for multi-unit dwelling commencements appears out of step. However, this is consistent with the accumulation of dwellings that have been approved, but have not yet been commenced.

Typically home price growth provides the catalyst for a rise in renovations activity, however this is yet to fully
materialise in in the current cycle. NSW ranks fourth in terms of the value of work approved, and sixth in terms of the aggregate value of renovations investment.

The weakest part of the NSW picture relates to first home buyers. This will come as little surprise given the extent to which the escalation in home prices in the state has outpaced household income growth over the last year or more. The number of loans to first home buyers in the September 2015 quarter was 21.7 per cent below the long term average, which ranks as the second weakest of the eight jurisdictions.


Whereas NSW is the king of new home building at the moment, Victoria is the king of home renovations. Once
again, the strong performance of the renovations market has underpinned Victoria’s high overall ranking.

In terms of private expenditure on home renovations, Victoria continues its run as the top ranked state to four consecutive quarters and has been the top ranked state on this indicator in eleven of the last thirteen quarters.

Victoria is the only jurisdiction in the nation to record a level of expenditure that was higher than its decade
average in the September 2015 quarter, and has been the only one to consistently do so over the last couple of
years. However, other states territories are now showing signs of improving so it will be a challenge for Victoria to hold on to the top ranking in the quarters ahead.

Victoria also continues to record strong performances for indicators tracking multi-unit dwelling construction.

The state ranks as the second strongest state in terms of the number of multi-unit dwellings commenced and the top ranked jurisdiction for multi-unit dwellings under construction. However, for the number of multi-unit
dwellings approved, which is a more forward looking indicator, the state has dropped to fourth in the rankings.

First home buyer lending activity in Victoria provides an interesting contrast to their neighbours to the north. While both Melbourne and Sydney have seen rapid home price growth push some first home buyer to the sidelines, the lending figures suggest the impact has been much smaller in Victoria. With the number of loans in the September 2015 quarter being only 5.4 per cent below the decade average, Victoria ranks as the third strongest market for first home buyers.


After the state score dropped to a lowly 22 back when Queensland was the lowest ranking jurisdiction for a spell during 2011, the state has made steady incremental improvements and now ranks fifth with a score of 59.

Furthermore, there is now daylight between QLD and the lower ranked states, and fourth placed the ACT is within striking distance.

The indicators of multi-unit activity have been a source of strength for QLD. In terms of multi-unit approvals, with 6,130 approvals during the September 2015 quarter providing a level 88.4 per cent higher than the decade average, the state ranks second amongst the states and territories. In addition, the state’s rankings for multi-unit commencements and the number of multi-unit dwellings under construction both increased two places to rank third overall in each indicator.

One of the key weak points in QLD’s overall position is indicative of a broader economic challenge the state is
facing. In terms of the number of people employed in construction and the aggregate hours worked by the
construction workforce, the state ranks stone cold last. The number of workers employed in the construction
industry is 13.6 per cent down on the decade average, while the aggregate number of hours was down by 15.0
per cent.

It is important to note that these labour market indicators track the entire construction workforce (not just those in residential building) and this is being influenced by the conclusion of a number of major resource projects. A recovery in non-residential building and a continuation of the recovery in residential activity will be essential if the state is to see a much needed revival of its non-resource industries.


While South Australia’s state score lifted by three points over the last six months, the state’s ranking held steady at number seven which makes it equal last (alongside the NT) in this edition of the HIA Housing Scorecard.

Consistent with the last edition of this report, the turnover of established dwellings was a strong point for SA. The state ranks as the second strongest for turnover of established houses (bettered only by NSW), while the
state ranks as the top ranked state for turnover of attached dwellings. While this is a positive sign for the
real estate industry, it hasn’t correlated with positive signs for residential building.

The state’s detached house segment is a weak point. In terms of detached house commencements, the number of new housing starts in the latest quarter (June 2015) was 24.5 per cent below the decade average – ranking it is the weakest jurisdiction nationally. In addition, the state ranked second weakest in terms of approvals for detached houses and for the number detached houses under construction.

Again, there were mixed readings for indicators of renovations activity. The value of large renovation jobs
approved in the September 2015 quarter was relatively weak and ranked as the second weakest jurisdiction
nationally. However, SA ranked fourth in terms of the total value of private investment in alterations and


While Western Australia’s place on the national league table has slipped again, third place is still a good result,
indicating that overall conditions in the state’s housing sector remain healthy. Most elements of the sector are
still outperforming their respective decade averages. The details highlight that WA is still benefitting from what appears to be quite a ‘long tail’ to the state’s new home building boom.

Of the 14 housing market indicators, WA achieved the second strongest score rankings in six: total expenditure of alterations and additions, lending to first home buyers; number of detached dwellings under construction; number of attached dwelling transfers; size of the construction work force, and; total hours worked by the construction workforce.

Where WA is starting to feel the effects of the emerging downturn, is in housing finance. Latest figures on lending to non-first home buyers show activity was 10.4 per cent lower than the state’s decade average.

While multi-unit dwelling commencements in WA were 14.3 per cent higher than the decade average in WA,
these kinds of starts in other states and territories are outperforming their respective decade averages by a
much greater magnitude


Following eleven consecutive quarters entrenched in last place, Tasmania finally climbed two places to reach sixth on the housing league table. As suggested in the previous edition of Housing Scorecard, a slow grinding
recovery in Tasmania’s overall ranking is slowly taking place. In this edition, it’s sixth-place ranking due to the state increasing its overall state score by 10 points to reach 51.

Tasmania has finally relinquished the wooden spoon to South Australia and the Northern Territory.

The strong improvement in the Apple Isle was due largely to the strong results for both detached and multi-unit dwelling commencements. The latest level of these commencements outstripped the state’s decade average by 27.7 per cent and 145.9 per cent, respectively. This meant that Tasmania was the strongest state for multiunit dwelling commencements and the second strongest for detached dwelling commencements.

Conversely, the latest level of total private expenditure on alterations and additions – worth $155 million – was 18.0 per cent lower than the state’s decade average, representing the worst performance among the states and territories. While a last-place ranking isn’t ideal, at least it has been limited to this one indicator. In the previous edition of Housing Scorecard, Tasmania ranked the weakest state in five indicators.

However, there is still room for further improvement, with the performance of the majority of Tasmania’s housing indicators (nine out of fourteen) placed the state as the third weakest state among the eight state and territories, summarised in the table below.


Conditions in the Northern Territory’s housing sector continue to deteriorate, evidenced by the territory’s
sliding ranking – down three places to rock bottom – in this edition of Housing Scorecard. The NT’s overall state score declined by 12 points to reach 49, which saw the territory share the wooden spoon with South Australia.

This weak score was due to bottom-place rankings (and thereby a score of only 1) in six of the fourteen indicators. Specifically, these indicators were: value of alterations and additions work approved; housing finance (among both first home and non-first home buyers); multi-unit dwelling approvals; multi-unit dwelling commencements, and; established house transfers. The latest performance of these indicators was at a level well below their respective decade averages.

Nevertheless, the NT’s construction labour market is still outperforming, with the latest size of, and hours worked by the construction labour force, more than 50 per cent above the decade average, the strongest performance among all the states and territories. Furthermore, while all signs are pointing towards a
substantial deterioration in the multi-unit segment of the new home building market, the detached segment of new home building is the bright spot for the NT’s overall housing sector. The latest number of detached houses that are under construction, having recently commenced construction, and also approved for construction are still well above decade averages, thereby rating the NT strongly compared with other jurisdictions on these measures


The Australian Capital Territory retained its mid-table ranking of fourth place in this Summer edition of Housing Scorecard, despite its score increasing by 2 points since the previous edition, to reach 63. Driving the increased score was the multi-unit segment of new home building – the latest levels of multi-unit
approvals as well as multi-unit commencements were 84.1 per cent and 60.3 per cent above their respective
decade averages. This represents a sharp turn-around from the performance in the previous edition, where
levels were tracking below their decade averages.

Fortunes can obviously change very quickly in the multiunit segment of the market – which could well be evident in coming editions of Housing Scorecard. Furthermore, not all multi-unit indicators outperformed in this update.

The latest level of multi-unit dwellings under construction was just shy of the ACT’s decade average (down by 0.4 per cent), while the level of attached dwelling transfers was down by 35.7 per cent.

While the multi-unit segment of the market looks to be set for a bumpy ride, the renovations market is looking brighter. The latest level of major alterations and additions work approved was 12.6 per cent above the decade average. While the value of total renovations expenditure was actually down from the decade average by 2.5 per cent, this is no comparison to the malaise in total renovations expenditure in most of the other states and territories.

Another bright spot is the reinvigorated first home buyer market, where the ACT ranks as the strongest jurisdiction for lending to first home buyers. The latest level of lending is some 6.7 per cent higher than the decade average.

Securitised Loan Pools Tells Us Something

Guy Debelle Assistant Governor (Financial Markets), spoke at the 28th Australasian Finance and Banking Conference – “Some Effects of the New Liquidity Regime“. During his speech he revealed some significant data drawn from Australian securitised mortgages. With the caveat that securitised loans are somewhat cherry-picked, and may not represent the entire market profile, there are some interesting observations. Of note is the higher level of default in WA, and the proportion of loans above 80% and 90% LVR.

To enhance the information available to us, since the middle of 2015, mandatory reporting requirements came into effect for asset-backed securities to be repo eligible with the Reserve Bank and also to be eligible collateral for the CLF.

The required information includes key transactional level data, detailed tranche information, and the relationships between trusts and service providers including who is providing various facilities such as a fixed to floating swap. At the loan level, required data for RMBS include: 62 loan fields such as loan balances, interest rates, arrears measures; 18 borrower fields such as borrower income, employment type, whether they are an investor or owner-occupier, whether they are a first home-buyer; and 13 collateral fields (that is, detail on the collateral underpinning the mortgage) including postcode and property valuation.

These requirements include data that are commonly used by ratings agencies and RMBS investors, but the data go beyond that to also include some useful information that has not been commonly compiled before, such as offset balances and borrower income at origination. This allows us, along with other investors in asset-backed securities, to undertake a richer analysis of such securities and more accurately assess their risk and pricing than may have been possible before. In our case, it allows us to undertake our own risk assessment and not be dependent on rating agencies.

In addition to these data fields, issuers are also required to provide a working cash flow waterfall model of the security which can provide useful information about structural aspects of ABS in some cases only previously obtainable through a detailed reading of legal documentation. This innovation has been very useful in standardising information across securities, allowing us to verify structural features of deals and provide more granular haircuts and pricing than was the case previously.

These reporting requirements are standardised for all repo-eligible asset-backed securities, meaning that the same information is required for all securities. As a result, going forward, it will be easier to compare securities. We see this as being of great benefit to the industry as a whole, as does the industry itself, as evidenced by the support of the Australian Securitisation Forum (ASF) through the whole process of introducing these new standards.

The repo-eligibility requirements also direct issuers to make the information available to investors and other permitted users, not just to the Reserve Bank. By and large, the information provided to these groups is the same as that provided to the Reserve Bank; however, there have been some fields where the information provided posed a potential risk to privacy. Hence issuers may redact some particular fields and provide aggregated de-individualised data about these fields instead.

Since the middle of this year, we have received into our securitisation system around 1 600 submissions, covering around $400 billion in assets, including around two million individual housing loans. The information is updated on a monthly frequency so we are gaining not only a much richer view of the ABS market at any point in time, but also a rich time series. With this very large panel data set we can examine how the market, and the underlying collateral, evolves through time.

With the caveat that the data reporting is still in its infancy, it’s already apparent that there are many potential benefits of the data. Let me illustrate some of the summary information that we can glean from the first few months of reporting. As noted earlier, these data cover around 2 million housing loans of the total of the approximately 6 million such loans on issue currently.

Graph 4 shows the loan to value ratio (LVR) at origination and currently. The largest share of loans had an LVR at origination of between 70 and 80 per cent. While that is still the case in terms of the current LVR, the share is noticeably lower. Similarly, there are almost no loans with an LVR greater than 90 per cent, even though around nearly 10 per cent had an LVR greater than 90 at origination. That said, it should be borne in mind that securitised loans tend to be more seasoned than non-securitised loans and are therefore amortising more quickly. The seasoning (time since loan origination) of the securitised loans is shown in Graph 5. It shows that 95 per cent of the value of loans is more than one year old, and nearly 75 per cent is more than three years old.

Graph 4


Graph 5

sp-ag-2015-12-16-graph5One issue which is of some interest currently is the extent of the repayment buffer that has been built up by borrowers. This is shown in Graph 6 which shows that two-thirds of borrowing is covered by a repayment buffer of at least one month’s worth of required mortgage payments, and for half of this, that buffer is more than one year. As the time series on this loan feature accumulates it has the potential to be useful information for monetary policy as well as financial stability considerations. Graph 7 shows the level of documentation for loans securitised by different types of lender. It shows that the major banks have a minimal share of low doc loans in their pools, whereas for the non-bank issuers the share is considerably larger.

Graph 6

sp-ag-2015-12-16-graph6Graph 7

sp-ag-2015-12-16-graph7Finally, in terms of credit risks, Graph 8 shows arrears rates by states and shows that the current distribution of arrears are consistent with the variation in economic conditions across the states, though at the same time all arrears rates are relatively low.

Graph 8

sp-ag-2015-12-16-graph8Of course, credit risk is not so much about the averages but the distributions. Having the loan level data enables an insight into the characteristics of the loans in the various tails of the distribution that warrant closer attention. It will also allow an assessment of the correlations between the various drivers of risk that may lead to credit deterioration.

In sum, there is very rich potential in these data for many purposes for the RBA and other market participants. From our point of view, the data provide us with a great deal of insight into the contingent risk that might at some point reside on our balance sheet. But clearly, the data are also very useful for financial stability and monetary policy considerations too.

ANZ teams up with Google to bring Android Pay to Australia

ANZ today confirmed it will offer Google’s Android Pay to its customers allowing them to make contactless payments with their Android phone, after being named an Australian launch partner for the mobile payment platform.

By mid next year, ANZ debit and credit cardholders in Australia will be able to use Android Pay to make quick and secure purchases wherever contactless payments are accepted. Android Pay also allows for in-app payments as well as storing gift cards, loyalty cards and special offers.

ANZ Managing Director Products and Marketing Matt Boss said: “This is an important milestone in the evolution of the mobile payments landscape and Google’s decision to make Australia one of the first markets after the United States to implement Android Pay demonstrates how quick Australians adopt new technologies.

“Australians are already the highest users of contactless payments in the world and given the dominance of Android in the local smartphone market, it made sense for us to partner with Google on the introduction of Android Pay into Australia.

“Android Pay will provide our customers with a quick and secure way to make payments with their smart phone and we think it will have strong uptake given the ability to incorporate additional features such as gift and loyalty cards,” Mr Boss said.

ANZ also confirmed that it will be launching its own mobile wallet for Android in the first quarter of 2016, offering customers a choice of solutions.

More than 60% of all card transactions in Australia are now contactless and accepted across a network in excess of 70% contactless merchant payment terminals. For more information on Android Pay visit www.android.com/pay

What low interest rates have done for the world

From The Conversation.

With the US Federal Reserve seemingly set on raising interest rates, it’s time to take stock of what low rates have done for the world. And what the prospects are when this era of low interest rates comes to an end.

Since the financial crisis, short-term interest rates have been close to zero in most major economies. The US Federal Reserve has held interests around 0.25% for the last seven years. Meanwhile, the UK’s bank rate remains at 0.5% and in Sweden the central bank has set a negative nominal rate.

Interest-Rates-ConversationThe reasons are straightforward. Interest rates reflect the cost of borrowing so low rates make it cheaper to borrow to invest. This investment should increase growth, create jobs and ease the economy out of recession. Here’s what seven years of rock bottom interest rates have done in reality.


So low interest rates should have been great for investment. This has not exactly been the case, however. Investment as a share of GDP fell after the financial crash in the US, UK and eurozone, but has taken a long time to recover, and hasn’t yet regained pre-crash levels.

This is because the fall in real wages after the financial crash means labour has been relatively cheap, decreasing the incentive for firms to undertake capital investment. Plus there are ongoing concerns about weak demand both in the UK, the eurozone and the wider global economy, which also inhibit investment despite low interest rates. Fears of this weak demand may explain why rate rises in the relatively open economies of the UK and the eurozone have been delayed compared to the US, which has experienced buoyant domestic demand in recent months.


One effect that may come back to bite us is the effect of low interest rates on consumption. Some commentators fear that the UK’s recent recovery, for example, is fuelled by consumption based on household debt. Any rise in interest rates may choke off that channel of recovery, and may mean some borrowers cannot repay their loans.

Laden with shopping … and debt? EPA/Andy Rain

Global economy

Capital flows between nations are affected by differences in their interest rates. As interest rates fell after the financial crisis, it freed up huge amounts of capital, which was then invested in countries where returns were more favourable. These capital outflows worsen the balance of payments deficit. In turn this leads to depreciation of exchange rates making imports relatively more expensive and thus improving the trade balance.

As rates rise we therefore expect to see exchange rate appreciation – a “strengthening” of the dollar is expected to follow on the back of the Fed’s rate rise – and a deteriorating trade account. Great news for cheap holidays in far flung lands, but bad news for exporting firms, and financial distress for emerging economies with dollar denominated debt.


A further sting in the tail is the potential effect on the housing market. British homeowners in particular have enjoyed many years of cheap variable-rate mortgages and perhaps haven’t realised how even very small rises in interest rates can have quite dramatic effects on monthly repayments.

This could have dire consequences for people’s ability to afford their mortgage repayments if rates rise. Some would say that such rises would help correct an overheated housing market. But, while this may be true in some regions (such as the UK’s south-east), it is not true everywhere. Interest rate rises may therefore increase regional inequality.

So, we’ve seen that low interest rates have “good” effects in promoting investment and increasing household consumption, though there may be a cold turkey effect when cheap borrowing comes to an end.

Savings and pensions

Low interest rates and low inflation have reduced the reward for saving to pitiful levels. Households have effectively been encouraged not to save, but to spend. This means many do not have contingency plans for a “rainy day”. And more importantly many people have woefully inadequate pension provision for their old age.

Low interest rates also feed through to annuity rates which convert pension pots on retirement into a stream of income throughout retirement years. Annuity rates have collapsed, and so pensions are not as generous as people had anticipated. In turn this discourages people from making pension contributions, which is exactly what is not needed as the population lives longer.

Author: W David McCausland, Professor of Economics, University of Aberdeen

Residential Real Estate Valued At Nearly $6 trillion

The latest ABS data on capital city property prices was released today.  The total value of residential dwellings in Australia was $5,859,824.6m at the end of September quarter 2015, rising $137,125.0m over the quarter. The mean price of residential dwellings rose $11,900 to $612,200 and the number of residential dwellings rose by 38,600 to 9,572,400 in the September quarter 2015.

The price index for residential properties for the weighted average of the eight capital cities rose 2.0% in the September quarter 2015. The index rose 10.7% through the year to the September quarter 2015.

The capital city residential property price indexes rose in Sydney (+3.1%), Melbourne (+2.9%), Brisbane (+1.3%), Adelaide (+1.2%), Canberra (+1.3%) and Hobart (+0.5) and fell in Perth (-2.4%) and Darwin (-0.4%).

Annually, residential property prices rose in Sydney (+19.9%), Melbourne (+9.9%), Canberra (+4.0%), Brisbane (+3.8%), Adelaide (+3.5%) and Hobart (+1.7%) and fell in Perth (-3.3%) and Darwin (-2.0%).


RBA Minutes From December Signals Little

The latest minutes suggest no early change to the cash rate is likely, given on one hand spare capacity in the economy, slowing investment housing lending, some slippage in house prices, and yet also some momentum in the non-mining business sector.

The available data suggested that dwelling investment had increased in the September quarter. Building approvals remained at high levels, despite having eased somewhat since the start of the year. This was consistent with the expectation of further increases in dwelling investment in coming quarters, albeit at a gradually declining rate.

In the established housing market, auction clearance rates and housing price growth had declined over recent months in Sydney and to a lesser extent in Melbourne. Prices were declining in Perth and rising moderately in much of the rest of the country. Members observed that the growth of total housing credit had been little changed. The easing in housing price growth in Sydney and Melbourne and apparently lower growth in lending for the purpose of investor housing had followed an earlier tightening in lending terms, partly in response to supervisory measures announced by the Australian Prudential Regulation Authority. It was still too early to assess the effect of the modest increase in lenders’ mortgage rates in November (for both investors and owner-occupiers) on the housing market.

Mining investment was estimated to have fallen in the September quarter and further declines were expected in the period ahead, with the largest subtraction from growth expected to occur in the current financial year. Non-mining investment was estimated to have been little changed over the year to the September quarter. Investment intentions reported in the ABS capital expenditure survey – which covers only around half of non-mining investment – continued to point to a decline in non-mining investment in 2015/16, and non-residential building approvals had remained at relatively low levels. In contrast, survey measures of business conditions continued to improve and were clearly above average, in particular for the household services and business services sectors, whose output was generally less capital intensive than other sectors. Business credit had increased further in October.

In considering the stance of monetary policy, members noted that the available data suggested that the global economy continued to record moderate growth. Continued softness in demand growth in Asia had been associated with a further fall in commodity prices. At the same time, there had been further growth in the United States and a continued recovery in Europe. Monetary policy was accommodative in most economies, which, combined with the low level of oil prices, was expected to support growth in Australia’s major trading partners over the next couple of years. Core inflation rates remained stable, but generally below central banks’ targets.

Members noted that recent domestic data had generally been positive. There continued to be evidence that very low interest rates were supporting growth in household consumption and dwelling investment, and the exchange rate was adjusting to the significant declines in key commodity prices and boosting demand for domestic production. This had translated into stronger employment growth and was consistent with surveys suggesting that business conditions were above average. Resource exports had continued to make a significant contribution to growth.

Overall, the forecasts for the Australian economy were for output growth to strengthen gradually over the next two years as the drag on GDP growth from falling mining investment gradually diminished and activity progressively shifted to non-mining sectors of the economy. Business surveys suggested that there had been an improvement in conditions in non-mining sectors over the past year, which had been accompanied by stronger growth in employment and a steady rate of unemployment. Even so, members recognised that there was still evidence of spare capacity in the economy, including in the labour market. Wage growth remained low and underlying inflation was expected to be consistent with the target over the next one to two years.

Credit growth had increased a little over recent months, as a result of business credit growth increasing. Growth in lending to investors in the housing market appeared to have eased, with a moderation in the pace of growth in housing prices in Sydney and Melbourne over recent months. Housing price growth had mostly remained subdued in other cities. While the recent changes to some lending rates for housing would reduce demand slightly, overall conditions remained quite accommodative. Members observed that supervisory measures had been helping to contain risks that may arise from the housing market.

Based on the available data and the forecasts, the Board decided that leaving the cash rate unchanged at this meeting was appropriate. Members judged that the outlook for inflation may afford some scope for a further easing of monetary policy should that be appropriate to lend support to demand. The Board would continue to assess the outlook, and hence whether the current stance of policy would most effectively foster sustainable growth and inflation consistent with the target.

Suncorp Says Insurance Margins Impacted

Suncorp today reported that the increased cost of settling claims following last year’s record run of natural hazard events, combined with the lower Australian dollar, would impact the General Insurance margin for the half year to 31 December 2015.

Suncorp Group Chief Executive Officer (CEO) Michael Cameron said the Group had implemented a range of claims and pricing initiatives to take account of the increased volume and cost of claims. “While the industry remains very competitive, costs have been increasing as a result of the lower Australian dollar and the impact of the $4 billion of weather events during 2015. These increased costs will have a significant impact on the underlying margin in our Personal Insurance business,” he said. Personal Insurance CEO Gary Dransfield said a comprehensive program of work is underway to further improve claims processes.

“We are also working closely with our building panel and other suppliers to better manage costs,” he said.

In addition to the impact of working claims cost inflation in Personal Insurance, the underlying Insurance Trading Ratio (ITR) has also been impacted by:
• the $75 million increase in the natural hazards allowance which the Group had previously announced;
• higher than anticipated large loss experience in Commercial Insurance;
• increased claims frequency in Compulsory Third Party (CTP) insurance in NSW; and
• lower investment yields.

As a result, the underlying ITR is expected to be around 10% for the half year to 31 December 2015. The underlying ITR for the full year would be supported by increased claims management and pricing initiatives, as well as the Group’s Optimisation program which is on track to deliver $170 million of benefits in the 2018 financial year.

Commenting on the outlook for premium revenue, Mr Cameron said the Group was continuing to see the stabilisation of the Australian General Insurance pricing environment and increasing premiums had, to date, not had any material impact on retention rates.

As a result, the Group expects to report positive Gross Written Premium (GWP) growth for the six months to 31 December 2015. This compares to flat GWP growth and premium reductions across most portfolios during the 2015 financial year.

Mr Cameron said the Group’s reported profits would continue to benefit from releases from long-tail portfolios, which remain well above long-run expectations.

The continued absence of superimposed inflation and improvements in long-tail claims management are expected to result in prior year net reserve releases of between $120 million and $140 million or approximately 3% to 3.5% of Net Earned Premium for the six months to 31 December 2015. Mr Cameron said he had spent the first 10 weeks as CEO working with the team to gain a deeper understanding of all facets of the business, and meeting with employees, regulators, investors and others.

“The Group is in good shape other than the short-term operational challenges in General Insurance that we are highlighting today,” he said.

“I’m confident we can address these challenges and continue to drive changes that improve outcomes for our customers, shareholders and other key stakeholders.”

Suncorp’s detailed financial results for the six months to 31 December 2015 will be released on Thursday 11 February 2016. The Group’s interim dividend, based on the target payout ratio of 60% to 80% of cash earnings, will be announced on 11 February with an ex-dividend date of 18 February 2016 and a payment date of 1 April 2016.

DFA Household Finance Security Index Lifts – For Some

The latest edition of the DFA Household Finance Confidence Index (FCI) is released today, using data from our household surveys up to the end of November 2015.  The index moved up a little, from 90.73 to 91.46, but still below the neutral setting of 100. So overall households remain cautious about their financial state in the run up to Christmas.

FCI-Nov-2015The results are derived from our household surveys, averaged across Australia. We have 26,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. We discuss the findings in the video below.

To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

One of the more interesting aspects of the research highlights that households who are property investors continue to have their overall confidence eroded, driven by the higher costs of finance and doubts about the prospect of future capital growth. This echoes the fall-off in investment lending we have been tracking in recent weeks. The downturn in investor confidence is most marked in NSW. On the other hand, owner occupied property owners have become relatively more confident, thanks to continued low interest rates. Those households who are property inactive (renting, or seeking to buy) remain the least confident sector.

FCI-Nov-2015-SegmentedLooking at the elements which drive the index,  we find that 35.5% of households say their costs have increased in the past year, up by 0.6% from last month, whilst 5% say their costs have fallen. 59% say there has been no net change, thanks to lower mortgage interest costs over the year, helping to offset other rising costs.  Low inflation levels are helping.

FCI-Nov-2015-Cost-of-LivingIncome growth remains under pressure, with 5% saying their income has rising in the part year (after inflation), and 37% saying their real incomes have fallen, whilst 57% said there was no change. Many have not received any rise in pay over the past year, and are relying on more overtime to lift take-home wages. One respondent said ” we are simply running harder, just to stand still”.

FCi-Nov-2015-IncomeLooking at debt levels, 61% said they had more debt than last year, 23% said there was no change, and just 15% said their debt was lower (up by 1.6% last month). Mortgages continue to be the main burden, and some households (those generally more affluent) are continuing to reduce their credit card and loan debt. We did also note a continued rise in small loans, from households under financial stress.

FCI-Nov-2015-DebtMany households have little money in the bank for a rainy day, but of those who are saving, 14% said they were more comfortable with their savings than a year ago which is down 1.5%, and linked directly to continued low rates of return available on many bank deposit accounts. Around 30% were less comfortable, because they had to dip into their savings to pay the bills, and in the run up to Christmas, down a little from last month. Several commented on recent stock market falls, and the risks to their investments running into 2016.

FCi-Nov-2015-SavingsJob security was quite varied, depending on region and industry. Those employment in (lower paid) service industry jobs – for example in healthcare in NSW, were the most confident, whilst those in mining, agribusiness and construction, especially in WA and SA were more concerned. 17% felt more secure than a year ago, 62% felt about the same, and 20% felt less secure.  Younger households felt less secure than  more mature households.

FCI-Nov-2015---JobsFinally, 60% of households said their net worth was higher than a year ago, down a little from last month, thanks to recent stock market adjustments, and property coming off in several locations. 15% said their net worth was lower (a rise of 1.6% compared with last month), and 23% said there was no change.

FCI-Nov-2015-Net-WorthWe think it quite likely we will see continued improvement in coming months, although if house prices start to tumble, or interest rates were to rise, this would have an immediate negative impact. We would also observe that households remain cautious, and whilst we expect something of a spending boom over Christmas, it looks like it will be tempered by limited increases in personal credit, and lack of available savings.

ANZ Launches Australia’s first Home Loan Centre

ANZ today continued its expansion in NSW opening Australia’s first dedicated Home Loan Centre. Located at Westfield in Parramatta, the centre will provide customers with a specialist service to improve the process of obtaining a home loan.

ANZ Managing Director Retail Distribution Australia Catriona Noble said: “We understand that buying a house is usually the single biggest investment people make and we want to remove some of the stress associated with organising a home loan.

“By creating a dedicated space for home loans, customers will have access to a team of specialists in an environment not usually associated with a bank. We’ve designed this to look and feel like a typical home and we’re confident this will resonate strongly with our customers.

“Our two Home Loan Centres in New Zealand have been incredibly successful helping thousands of New Zealanders into a new home since late 2014. We expect our centre in Western Sydney to be equally well received,” Ms Noble said.