Tougher home lending not the answer for WA: REIWA, UDIA WA

From The Real Estate Conversation.

The Real Estate Institute of Western Australia and the Urban Development Institute of Australia WA Division have spoken out strongly against applying tightener home lending conditions across the country.

REIWA President Hayden Groves said any decision to do so would be a knee-jerk reaction to market conditions on the east coast, in particular in Sydney and Melbourne, and would not be taking into account the varied market circumstances of all states and territories.

“Western Australia’s property market has softened considerably over the last couple of years. If lending conditions are made tougher for existing home owners, new home buyers and investors in WA, this will have a detrimental effect on our local housing market,” said Groves.

The Western Australian market is just beginning to show signs of stabilisation, said Groves, so any disruption at this point could have a particularly negative impact.

UDIA WA CEO Allison Hailes said imposing further lending restrictions may be viable on the east coast where the market is heated, but in Western Australia it will do more harm than good.

“Decision makers in the eastern states need to take Western Australia’s delicate economic and property market situation into account before introducing any changes, otherwise we could see the green shoots that are just starting to emerge killed off,” she said.

“Affordability remains a significant issue for West Australians, with the recent slowdown in the mining sector and challenging economic conditions continuing to present difficulties. Tightening lending conditions in Western Australia will have an adverse effect on affordability for West Australian home buyers, owners and investors,” said Groves.

Lending finance for investment represents a substantial proportion of the Western Australian property market, with 35 per cent of all lending in the state attributed to investors.

Even if tightened lending conditions were only applied to investors, increased borrowing costs “would mean investors have no choice but to pass this down to tenants and would also limit the number of investors entering the market,” said Groves.

Hailes said tighter lending conditions would also constrain the housing construction sector, and therefore would mean fewer jobs.

The Rule of Thirds

On average, according to our surveys, one third of households are living in rented accommodation, one third own their property outright, and one third have a mortgage. Actually the trend in recent years has been to take a mortgage later and hold it longer, and given the current insipid income growth trends this will continue to be the case. Essentially, more households than ever are confined to rental property, and more who do own a property will have a larger mortgage for longer.

Now, if we overlay age bands, we see that “peak mortgage” is around 40% from late 30’s onward, until it declines in later age groups. The dotted line is the rental segment, which attracts high numbers of younger households, and then remains relatively static.

But the mix varies though the age bands, and across locations. For example, in the CBD of our major cities, most people rent. Those who do own property will have a mortgage for longer and later in life.

Compare this with households on the urban fringe. Here more are mortgaged, earlier, less renting, and mortgage free ownership is higher in later life.

Different occupations have rather different profile. For example those employed in business and finance reach a peak mortgage 35-39 years, and then it falls away (thanks to relatively large incomes).

Compare this with those working in construction and maintenance.

Finally, across the states, the profiles vary. In the ACT more households get a mortgage between 30-34, thanks to predictable public sector wages.

Renting is much more likely for households in NT.

WA has a high penetration of mortgages among younger households (reflecting the demography there).

Most of the other states follow the trend in NSW, with the rule of thirds clearly visible.

Victoria, for example, has a higher penetration of mortgages, and smaller proportions of those renting.

We find these trends important, because it highlights local variations, as well as the tendency for mortgages to persist further in the journey to retirement. This explains why, as we highlighted yesterday, some older households still have a high loan to income ratio as they approach retirement. To underscore this, here is average mortgage outstanding by age bands.


New Report On Mortgage Industry With JP Morgan Released

The report, released today highlights that property investors will be hit hard as banks re-price their mortgages.

Volume 24 of the mortgage report, a collaboration between J.P. Morgan and Digital Finance Analytics (DFA), explores how to practically define the term ‘materially dependent on property cash flows’ and looks to translate that into potential incremental capital requirements for the Australian major banks. The report also considers different re-pricing strategies and competitive dynamics, particularly around the issue of dynamic Loan-to-Value Ratios (LVR).

Significant changes are afoot for investor loans defined as being ‘materially dependent on property cash flows’ to repay the loan. Amidst the transition to Basel 4, these mortgages will see the most extreme effects on their capital intensity and pricing – with capital levels somewhere between 3x and 5x current requirements, which could have a significant impact on pricing of investor loans down the track.

The report draws heavily on modelling completed by Digital Finance Analytics from our household surveys, as presented in the recently published The Property Imperative 8, available here. Our survey is based on a rolling sample of 52,000 households and is the largest currently available. It includes data to end February 2017.

“The dispersion of impacts across the portfolio highlights the fact that assessing the mortgage by Probability of Default band or LVR band isn’t necessarily ‘good enough’. Although banks may have access to significant pools of data, the new regulatory regime is forcing them to become ever-more granular in their analysis – top-down portfolio analytics just won’t cut it anymore,” said Martin North, principal, DFA.

“Rather than managing the portfolio with ‘macro-prudential’ drivers, banks need to move to the other end of the analysis spectrum and become ‘micro-prudential’,” Mr North concluded.

Unfortunately because of compliance issues, the JPM report itself is only available direct from them, and not via DFA.

DFA is not authorized nor regulated by ASIC and as such is not providing investment advice. DFA contributors are not research analysts and are neither ASIC nor FINRA regulated. DFA contributors have only contributed their analytic and modeling expertise and insights. DFA has not authored any part of this report.

A Perspective On Investor Loans

Using data from our household surveys, we can look at investor loans by our core master household segments. These segments allow us to explore some of the important differences across groups of borrowers.  We believe granular analysis is required to see what is really going on.

Today we look at the distribution of these segments by loan to value (LVR) and amount borrowed and also compare the footprint of loans via brokers, and by loan type.

Looking at LVR first, there is a consistent peak in the 60-70% LVR range, with portfolio investors (those with multiple investment properties) below the trend above 70%.

However, the plot of loan values shows that portfolio investors are on average borrowing much more, thanks to the multiple leverage across properties. A small number of portfolios are north of $1.4 million.

Investors who borrow with the help of a mortgage broker, on average is more likely to get a larger loan.

But there is very little difference in the relative LVR by channel.

On the other hand, interest only loans will tend to be at a higher LVR.

The average balance of interest only loans is also higher, especially in the $400-600k value range.

Microprudential analysis reveals interesting insights! The loan type and segment are better indicators of relative risk than LVR or origination channel.

ME Bank profit up 34 per cent

Industry super fund-owned bank ME today reported an after-tax underlying net profit of $40.4 million for the six months to 31 December 2016, a rise of 34% on the previous corresponding period.

ME CEO, Jamie McPhee, said it was a strong result in the face of margin pressures that are expected to continue throughout the year.

Home loan settlements hit $3.2 billion for the six months, up 54% compared to the previous corresponding period, while ME’s home loan portfolio grew 9% to $20.6 billion. Total assets grew 6% to $24.6 billion.

ME’s statutory profit after tax, which includes the amortisation of realised losses on hedging instruments, a loss on the sale of the business banking portfolio and transition costs associated with a significant new technology partnership with Capgemini, was $29.3 million (HY16: $34.5 million).

Net interest margin declined 3 basis points to 1.46% relative to the previous corresponding period due to competition for new customers and higher funding costs; however, the impact on earnings was offset by increased home loan sales.

ME’s digital strategy incorporates increasing levels of process automation, including credit assessments and valuations, leading to further improvements in the cost to income ratio.

Customer numbers grew 8% to 393,416 and the bank passed the 400,000-mark in in early March 2017.

Net interest income increased 9% to $162.4 million with total income up by 3% to $187.1 million. Total operating expenses decreased from $118.9 million to $117.2 million.

ME remains very well capitalised at 31 December 2016, with a Common Equity Tier 1 ratio of 10.40% and a Total capital ratio of 14.84%.

McPhee said several strategic initiatives with its industry super fund partners were progressing well including providing customers with a single view of their banking and super accounts through a partnership with Link Group, which is scheduled to be launched with a major industry super fund in the second half of FY17.

As reported in Australian Broker,

Over half of the bank’s home loan settlements came through the broker channel, Lino Pelaccia, ME’s general manager of broker, told Australian Broker.

“The contribution from brokers is slightly up on the same time as last year due mainly to our continued expansion into the broker market,” he said.

“Increasing numbers of brokers are considering ME home loans, we continue to improve our broker services and service levels have remained very consistent over the last 12 months with new technology, and we continue to offer very competitive prices compared to other banks.”

Looking at the breakdown of settlements between owner-occupier buyers and investors, Pelaccia said the ratio will not change much given APRA’s current cap on growth in investment lending.

“We also note ME is well below that cap at the moment and so have some room to win more investor business before the end of the financial year,” he said.


Investors Boom, First Time Buyers Crash

The ABS released their Housing Finance data today, showing the flows of loans in January 2017. Those following the blog will not be surprised to see investor loans growing strongly, whilst first time buyers fell away. The trajectory has been so clear for several months now, and the regulator – APRA – has just not been effective in cooling things down.  Investor demand remains strong, based on our surveys. Half of loans were for investment purposes, net of refinance, and the total book grew 0.4%.

In January, $33.3 billion in home loans were written up 1.1%, of which $6.4 billion were refinancing of existing loans, $13.6 billion owner occupied loans and $13.5 billion investor loans, up 1.9%.  These are trend readings which iron out the worst of the monthly swings.

Looking at individual movements, momentum was strong, very strong across the investor categories, whilst the only category in owner occupied lending land was new dwellings.  Construction for investment purposes was up around 5% on the previous month.

Stripping out refinance, half of new lending was for investment purposes.

First time buyers fell 20% in the month, whilst using the DFA surveys, we detected a further rise in first time buyers going to the investment sector, up 5% in the month.

Total first time buyer activity fell, highlighting the affordability issues.

In original terms, total loan stock was higher, up 0.4% to $1.54 trillion.

Looking at the movements across lender types, we see a bigger upswing from credit unions and building societies, compared with the banks, across both owner occupied and investment loans. Perhaps as banks tighten their lending criteria, some borrowers are going to smaller lenders, as well as non-banks.

We think APRA should immediately impose a lower speed limit on investor loans but also apply other macro-prudential measures.  At very least they should be imposing a counter-cyclical buffer charge on investment lending, relative to owner occupied loans, as the relative risks are significantly higher in a down turn.

The budget has to address investment housing with a focus on trimming capital gain and negative gearing perks.  The current settings will drive household debt and home prices significantly higher again.

LMI Genwoth Confirms Loss Of Exclusive Contract

Genworth has confirmed the exclusive contract with their second largest customer, which was due to expire in February 2017, will be terminated on 8th April 2017.

The LMI business underwritten under this contract represented 14% of gross written premium in 2016. The termination of this contract has not changed the forward guidance that GWP would be down 10 to 15 percent in 2017.

The company remains in discussions with the customer about managing default risk in the context of other insurance alternatives.

We think that as banks reduce the proportion of high-lvr loans they are writing, and insure more of the lower risk business within their captive internal insurers at lower net costs, the role of stand-alone LMI’s in the Australian market will need to evolve.

Tracker mortgages ‘commercially unattractive’: ANZ chief

From The Advisor

ANZ CEO Shayne Elliott has explained how the group “looked hard” at launching tracker mortgages before it realised they would not be popular among borrowers.

In his opening statement to the House of Representatives economics standing committee in Canberra yesterday, Mr Elliott explained that the bank had taken action on a number of issues since it last met with the committee, including lowering credit card rates and potentially introducing rate ‘tracker’ mortgages.

We looked hard at launching tracker mortgages, but our research showed that only 10 per cent of variable rate customers today would think about switching to a tracker. In part, that reflects price; we cannot fund that bank with tracker deposits, and this risk needs to be priced for,” he said.

“Launching trackers would therefore be commercially unattractive in our view and make us even more complex. That said, we will continue to assess demand.”

The committee tabled its first report of the major banks in November, where it labelled the big four an “oligopoly” and highlighted the “surprising” lack of regulation that has allowed the majors to harness significant pricing power in the residential mortgage market.

The report noted that the majors increased their oligopolistic powers after the GFC when they purchased a number of their smaller competitors.

The committee recommends that the ACCC, or the proposed Australian Council for Competition Policy, establish a small team to make recommendations to the treasurer every six months to improve competition in the banking sector.

Mr Elliott said ANZ is happy with this recommendation. However, in his opening statement he did stress that Australia’s banking industry is already “highly competitive”.

“We believe the market is already highly competitive and serving customers well. For example, small banks are growing their share of the market faster than large banks,” he said.

“Banking is a low margin business because of competition, and that is good for customers. For example, competitive discounts on mortgages mean we make only 67 cents for every $100 that we lend.”

The Property Market, By The Numbers

In our latest video blog we walk though some of the most important numbers in the mortgage and property market, including the latest findings from our household surveys.

Some of the questions we answer are:

  • How big is the mortgage market?
  • How many borrowing households are there?
  • What is the average mortgage size?
  • How many households are excluded from the market?
  • What will happen if mortgage rates rise by 3%?
  • Where is mortgage stress worst?
  • How does the Bank of Mum and Dad in Australia compare with the UK?



We see no room for complacency – APRA

Wayne Byres opening remarks to the Senate Economics Legislation Committee in Canberra includes comments on household debt and the mortgage industry. Further evidence this is now on the supervisory agenda following recent RBA comments.  Some might say, better late than never!

I will just start with a short statement of a few key issues currently on APRA’s plate.

Before I do, however, it’s important to note that Australia continues to benefit from a financial system that is fundamentally sound. That is not to say there are not challenges and problems to be addressed. However, as I’ve said elsewhere, to the extent we’re grappling with current issues and policy questions, they don’t reflect an impaired system that needs urgent remedial attention, but rather a desire to make the system stronger and more resilient while it is in good shape to do so.

The main policy item we have on our agenda in 2017 is the first recommendation of the Financial System Inquiry (FSI): that we should set capital standards so that the capital ratios of our deposit-takers are ‘unquestionably strong.’ We had held off taking action on this until the work by the Basel Committee on the international bank capital regime had been completed. But delays to the work in Basel mean we don’t think we should wait any longer.

Our goal in implementing the FSI’s recommendation is to enhance the capital framework for deposit-takers to achieve not only greater resilience, but also increased flexibility and transparency. And in doing all this, we will also be working to enable affected institutions to adjust to any policy changes in an orderly manner. If we achieve our goals, we will not only deliver improved safety and stability within the financial system, we will also aid other important considerations such as competition and efficiency.

We have many supervisory challenges at present, but there is no doubt that monitoring conditions in the Australian housing market remains high on our priority list. We have lifted our supervisory intensity in a number of ways, including reinforcing stronger lending standards and seeking in particular to moderate the rapid growth in lending to investors. These efforts have had the desired impact: we can be more confident in the conservatism of mortgage lending decisions today relative to a few years ago, and lending to investors was running at double digit rates of growth but has since come back into single figures.

However, strong competitive pressures are producing higher rates of lending growth again. This is occurring at a time when household debt levels are already high and household income growth is subdued. The cost of housing finance is also more likely to rise than fall. We therefore see no room for complacency, and mortgage lending will inevitably remain a very important issue for us for the foreseeable future.

The final issue I wanted to mention is our work on superannuation governance. This is an area where we remain keen to lift the bar. There are some excellent examples of good practice governance in the superannuation sector, but equally there are examples where we think more can be done to make sure members’ interests are paramount. Late last year, we finalised some changes to our prudential requirements to strengthen governance frameworks. The changes we implemented were relatively uncontroversial at the time, and have largely been included within the principles for sound governance that have subsequently been generated by the industry itself.