Bank Lending

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<div>EXPERT OBSERVATION</div>
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<div>It's a happy new year, and all that, but not so much for bankers, with lending growth continuing to flounder. </div>
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<div>The Reserve Bank's latest figures showed credit growth slowing to 4.4 per cent, down from 5.2 per cent a year earlier, and broad money growth at fresh quarter-century lows of just 1.86 per cent. </div>
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<div>It was noteworthy to hear last week that the RBA has been watching the gross household debt-to-income ratio as a main point of concern, especially as <a href="http://petewargent.blogspot.com/2018/12/debt-ratio-revised-lower-now-falling" target="_blank">this ratio has already peaked and is now falling</a>. </div>
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<div>The distinction from <em>housing</em> debt-to-income was quite interesting (to me at least) as the lines between housing, small business, and personal credit are blurred at best, with small business loans often secured against a home, and so on. </div>
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<div>As you can see in the chart below, changes in the direction of housing credit growth have tended to lead changes in dwelling price growth. </div>
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<div>You can also see that no such change had occurred by the end of November 2018. </div>
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<div>A simple credit impulse model as favoured by ANZ economists suggests that capital city (i.e. Sydney and Melbourne) dwelling price declines should moderate, although there are several factors unique to this cycle - not least the boom and bust in Chinese investors - that could throw the model a bit off course (this may have already happened to some extent since 2014). </div>
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<div>Investor credit growth was already at the lowest level on record, and it fell to even lower levels last month, allowing APRA to remove another of its now-redundant arbitrary caps, this time on interest-only lending. </div>
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<div>Given the enormous growth in the population aged 25 to 34 in particular, this is now a remarkably low level of growth in investor credit, even if it did follow on from a boom. </div>
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<div>Not surprisingly the growth in owner-occupier credit also declined for a ninth consecutive month.</div>
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<div>CoreLogic will release its latest home value index for the month of December, and this will show significant declines for Sydney and Melbourne in 2018.<br><br><strong><span style="text-decoration: underline;">The wrap</span></strong><br><br>In short, business credit was moderate, personal credit was negative, and housing credit has no pulse - let's hope that doesn't turn into a full-blown coronary.</div>
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<div>Happy New Year! </div>
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<div><em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.</em></div>
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2018 finishes with housing credit having no pulse: Pete Wargent

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<p>RBA governor Philip Lowe has suggested banks were becoming too cautious in their lending, in a speech that signalled he viewed<span> lending as having gone from too easy to too tight</span>.</p>
<p>A percentage of borrowers will always end up in financial strife and be unable to meet their obligations, Lowe said in <span>his speech entitled “Trust and Prosperity</span>”. </p>
<p>“We need banks to be prepared to make loans in the full expectation that some borrowers will not be able to pay them back.”</p>
<p>“Banks need to take risk and manage that risk well. If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer,” he said.</p>
<p>Lowe’s comments were at the Committee for Economic Development of Australia (CEDA).</p>
<p>Lowe’s speech further noted the banking royal commission along with the five years of flat wages had been damaging to trust in Australia. </p>
<p>“Flat real wages are diminishing our sense of shared prosperity,” he said.</p>
<p>“The lack of real wage growth is one of the reasons why some in our community question whether they are benefiting from our economic success.”</p>
<p>“It is clear that the behaviours highlighted by the royal commission have dented the community’s trust in parts of our financial sector,” Mr Lowe said.</p>
<p>“Strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking at.” </p>
<p>Columnist Robert Gottliebsen recently wrote that Australia is going through a credit squeeze without precedent following a period when bank credit standards have been too low.</p>
<p>"The banks have been told to raise those standards, which effectively cuts at least 20% from what they would loan on a property," he wrote in <em>The Australian</em>.</p>
<p>He then added there were also "the unconventional credit clamps... like a cancer growing below the surface, and no one’s talking about them".</p>
<p>Gottliebsen noted that bank managers were under attack at the same time as a credit squeeze - "so a strange new inner fear had developed among banking people at all levels as regulators are set to walk into banks to check what they are doing".</p>
<p>In July Wayne Byres, who heads up the Australian Prudential and Regulatory Authority (APRA), suggested it was important that the concept of caveat emptor (buyer beware) remains in the system. </p>
<p>“Regulators cannot be everywhere overseeing everything. It is important the community understands that.”</p>
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RBA's Philip Lowe says bank lending has become too cautious

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<p>Banks will start sharing lending data ahead of comprehensive credit reporting from next July covering the entire financial system.</p>
<p>"Suddenly banks will discover when they have been hoodwinked by borrowers using multiple banks,"<em> The Australian</em> columnist Robert Gottliebsen warns.</p>
<p>"The bottom line is that bank lending for housing will fall further and so will prices in vulnerable areas."</p>
<p>His recent column noted the credit squeeze is already reducing dwelling prices and there is more to come.</p>
<p>The tough times in many areas of real estate (but not all) will continue until the squeeze is reversed, he wrote.</p>
<p>"At this stage there is no crash on the horizon.</p>
<p>"But those dwelling price falls will in time reduce consumer confidence and the price of shares in companies affected by consumer confidence."</p>
<p>Gottliebsen noted that Westpac was the most aggressive of lenders to housing investors.</p>
<p>He noted the fastest-growing area of loans was 'interest only' and Westpac led the pack.</p>
<p>"There has been a huge crackdown and these loans are being converted to interest-and-principal repayments."</p>
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Bank lending for housing will fall further after comprehensive credit reporting: Robert Gottliebsen

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<p>The number of houses being passed in at auctions and the easy availability of inner-city apartments is not just the result of regulatory measures, but also a loss of confidence stemming from the extremely tight bank lending rules.</p>
<p>Columnist Robert Gottliebsen labels it as the “tea, coffee and cosmetics” (TCC) approach to home lending in his recent piece in <em>The Australian</em>.</p>
<p>While attempting to explain the confusion among many young real estate agents about the number of houses passed in and the desperation of apartment developers to sell, Gottliebsen says there are many reasons, but “none so powerful and potent in what is happening in the lower management levels of some of the big banks”.</p>
<p>He says it’s conventional to blame the APRA and the regulators for the credit squeeze but the problem is “multiplied by a middle management loss of confidence stemming from the looming retrenchments and the bank scandals”.</p>
<p>This has forced the banks to be more restrictive, especially the ones facing scandals such as the Commonwealth Bank.</p>
<p>TCC has even spread to small business lending, writes Gottliebsen.</p>
<p>He says borrowers are shocked that the new tests by banks had slashed the amount they would lend by a quarter and even a third. </p>
<p>Borrowers are being asked for information about basic living expenses, such as clothing, footwear, cosmetics, dining out, after-hours school care, dining out to name a few.</p>
<p>Gottliebsen states that this banking approach, which he has spoken of earlier, if it continues will see more serious falls in the prices of dwellings, widening the 10% fall in Sydney apartments to other areas of the residential market, including Melbourne.</p>
<p>This is already the case in inner city markets of Sydney, Melbourne and Brisbane now, which also have many unsold houses now.</p>
<p>He says the “crackdown is much wider than TCC and covers restrictions on interest-only loans, higher interest rates for investors, threats of higher interest rates, no money for Chinese borrowers” and so on.</p>
<p>Also, the rising gas and electricity bills further hit confidence.</p>
<p>“The trouble with these uncoordinated attacks is that they start with the aim of stopping a boom, which threatened to turn into a bubble collapse.”</p>
<p>According to Gottliebsen, this activity looks very little on the surface initially and as the squeeze continues, it hurts confidence.</p>
<p>“We are not there yet but once it happens — and the illogical approach of TCC lending will bring it on — confidence will take a long while to restore.</p>
<p>“And it spreads to small business.”</p>
<p>But the banks’ reluctance has opened up opportunity for non-bank lenders, which are seizing the opportunity.</p>
<p>The “regulators’ response is to clamp down on filling the bank-created void, so damaging the nation”.</p>
<p>In conclusion, Gottliebsen suggests that a banking royal commission is not a “good idea at this time”, but if there is one, it should cover regulators too.</p>
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Borrowers face shock when banks slash home loan approvals by at least a quarter: Gottliebsen 

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<p>Westpac has begun an audit of all new and current building projects it is funding to make sure they comply with the building code amid concerns over flammable cladding used in construction.</p>
<p>Recently, a <a href="https://www.urban.com.au/news/75567-senate-panel-wants-total-ban-on-combustible-cladding-in-buildings" target="_blank">Senate report said flammable cladding</a> on buildings should be banned and an ABC’s Four Corners investigation showed thousands of buildings across Australia have used such material that led to the deadly Grenfell Tower fire in London. </p>
<p>In what it said was an initial step, Westpac has asked the developers of all its residential and commercial projects that are under way and planned to confirm the compliance of all external wall cladding products with the National Construction Code.</p>
<p>The move does not seek to confirm the compliance of buildings that are already completed – Westpac said it was too early to comment on past projects.</p>
<p>Westpac’s move reveals the concerns of financiers about the risks of combustible cladding on buildings, such as the fire at Melbourne's Lacrosse tower in 2014.</p>
<p>Recent concerns about non-compliant cladding had led the bank to introduce "additional processes", a Westpac spokesman was quoted as saying by The Australian Financial Review.</p>
<p>"In the first instance we are undertaking an audit by asking developers of new and current projects to provide confirmation of compliance on external wall cladding products that are either designed [to be installed], being installed or are already installed," he said.</p>
<p>Among the details sought are the manufacturer and type of product, how the product was to be used and whether the particular product complied with the building code for its intended installation and use.</p>
<p>"Where required, we will be seeking further confirmation from the relevant project consultants, including a statement from the building certifier, that the appropriate certification is in place or that appropriate measures are being sought," he said.</p>
<p>While concerns about combustible cladding are most immediate in residential buildings – where people sleep – audits by authorities across the country have revealed panels containing flammable filling such as polyethylene, in possible breach of the building code and fire safety regulations, on public buildings including Melbourne's AAMI Park stadium and the New Royal Adelaide Hospital.</p>
<p>Insurers are already warning that they may refuse cover on buildings with problematic cladding, or price it too high for strata corporations to afford.</p>
<p>This means lenders too will want to limit their exposure to buildings such as residential towers that do not comply.</p>
<p>For banks right now, cladding is similar to the risks of the Y2K bug that threatened to paralyse computer systems worldwide ahead of the date change to 2000 and they will be taking similar steps to reduce those risks, said Graham Montgomery, the executive chairman of mortgage broker Custom Equity Group.</p>
<p>"At that stage, every lending application had to include a questionnaire on the business side about details of their software, what programs they sued, were they backed up – a whole mirror to addressing an issue that never became an issue," Montgomery said.</p>
<p>"The banks were proactive and I can see that moving forward that's going to be that type of thing that starts to happen."</p>
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Cladding issue: Westpac auditing projects for compliance with safe building practices

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<p>For every one dollar earned, on average, Australians have nearly two dollars of debt. Australia has a household-debt-to-income ratio of 190 percent.</p>
<p>Much of this stems from a national obsession with buying real estate, according to the latest episode of ABC’s Four Corners, which discussed the forces driving the debt-fuelled housing boom and the risks it poses for the country.</p>
<p>Reported by Michael Brissenden and presented by Sarah Ferguson, the show brought together experts to map the danger zones in the housing market and lending practices that have driven the boom in residential lending and was critical of banks in the event of potential hard landing.</p>
<p>Banks have at least 60 per cent of their loans in the housing market, and concerns grow that a housing downturn could be disastrous for the Australian economy.</p>
<p>All the Big Four banks have defended their lending practices following the episode on ABC.</p>
<p>ANZ CEO Shayne Elliott, who was on the show, said ANZ's market share was a bit lower than the average but “I think that's not a healthy, that's a, it is a healthy mix at about 60%”.</p>
<p>He said the reality was that housing loans are pretty good because they're quite diverse in terms of lots of reality small loans across  the country.</p>
<p>Ferguson said while the regulators have recently forced banks to tighten up on lending - “experts in tonight's program say the legacy of loose, irresponsible lending has many years to run”.</p>
<p>Brissenden said a big part of the story was the role of brokers lenders and developers who encouraged people to borrow more than they could afford.</p>
<p>Citing the case of Carlene Stafford, who was convinced to borrow $445,000 to buy an investment property in Queensland.</p>
<p>Stafford said she received an unsolicited phone call one night and the first question was “did I own my own home? I said yes. Was I working? Yes”.</p>
<p>“And I had a call from a developer and he told me that he could help be get into an investment property that would assist me financially when I retired.”</p>
<p>To do that she used the equity in her almost paid off home.</p>
<p>Stafford, however, didn't know at the time was that even the banks own estimates on her financial commitments left her with $9.17 at the end of each month.</p>
<p>She said while the developer told her it was a risk-free investment, “the only person and only people that it was risk-free for was for the banks, for the bank, the ANZ Bank.”</p>
<p>“They've got nothing to lose. They've got the house up there. They've got my house here if necessary.”</p>
<p>Or they've got a couple 100,000 to be paid back once I sell this or die.</p>
<p>“So that goes out of my kids' inheritance.”</p>
<p>ANZ CEO Shayne Elliott travelled to Armadale, WA last week to meet and hear directly from Stafford.</p>
<p>ANZ said in a statement that Stafford agreed she was responsible for declaring her estimated expenses and advising ANZ about her financial position and the bank was not responsible for introducing her to either the developer or the broker.</p>
<p>Elliott did concede that Stafford had been targeted by aggressive sales tactics by both the developer and broker and the bank has agreed to a revised settlement with Stafford.</p>
<p>ANZ said it has hardship programs in place for customers who find themselves in unfortunate circumstances.</p>
<p>Both the Commonwealth Bank and NAB cited their commitment to the remuneration reform recommendations of independent expert, Stephen Sedgwick. </p>
<p>CBA said it will implement the recommendations to ensure remuneration structures are aligned to appropriate customer outcomes.</p>
<p>“Our employees, including lenders and managers, are measured on a balanced scorecard which includes customer-based and business performance measures,” it said in a statement.</p>
<p>Meanwhile, NAB said its staff have a balanced scorecard across both financial and non-financial objectives, including “delivering the right outcomes for customers”.</p>
<p>It said a vast majority of staff incentives have no direct link to product sales.</p>
<p>NAB said it had recently announced changes to its incentives program, effective 1 October, for its most senior branch and contact centre managers, which will see “greater emphasis placed on customer outcomes, actions and behaviours for staff incentives”.</p>
<p>Second-biggest mortgage lender Westpac said it was addressing the community’s feedback about product referral incentives.</p>
<p>“We were the first of the major banks to remove product-based incentives for our 3,300 tellers in our branch network, so they are now rewarded solely for providing quality customer service,” it said in a statement.</p>
<p>“We have also removed product-specific targets for personal bankers and will reward them equally for customer service and financial measures. These changes apply to all brands across the Westpac Group.”</p>
<p>It said Westpac Group home lenders are rewarded based on a number of factors including customer satisfaction and mortgage drawdowns, and subject to meeting risk and compliance measures.</p>
<p>While they provided a written repose, Brissenden added that “most bank CEOs were reluctant to speak to Four Corners”.</p>
<p>American economist Jonathan Tepper, who called out the Spanish housing crisis, said "bubbles really depend on loose credit, that's one of the things that's really fuelled the Australian housing market".</p>
<p>"Anyone with a pulse could essentially get a mortgage," he added.</p>
<p>"I go back to the analogy that I always use, which is insiders versus outsiders, right? If you're the insider, you're like the frog in the frying pan. The temperatures been turned up very slowly on you."</p>
<p>"If you're an outsider you might say, "Do you know what? That looks a bit too hot."</p>
<p>"I'm just the outsider sitting there telling people that the temperatures been turned up."</p>
<p>Brissenden said banks' exposure to mortgage risk has already caused some reassessments. In June, Moodys downgraded Australia's banks.</p>
<p>Frank Mirenzi of Moody's said "our concern is around the fact that you've got households holding more debt. That potentially makes them more vulnerable to a change in their circumstances, and if there's a shock to the economy, that potentially leads to a rise in sensitivity to the banking sector."</p>
<p>"The banks could in fact experience higher losses because households are more indebted."</p>
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Big Four Banks defend lending practices against Four Corners claims

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<p>GUEST OBSERVER</p>
<p>Non-bank lending has become a phenomenon in the Australian property market. Although official statistics are hard to come by, anecdotal evidence suggests that private groups are lending Aussie companies and individuals billions of dollars each week<em>.  </em></p>
<p>What created this amazing trend in private lending, what does the non-bank lending landscape look like and where will the market go next?  Delving into these questions will give you a good idea about the state of the Australian real estate market today.</p>
<p><strong>How Did It All Start?</strong></p>
<p>Non-bank lending has been going on in Australia for many years. Companies like Pepper and Resimac have taken over a huge chunk of the home mortgage market and Aussie Home Loans’ CEO John Symonds has for years been assuring Australians that “At Aussie, we’ll save you.”</p>
<p>In the commercial lending space, Development Finance Partners, MaxCap, Qualitas and Balmain Group have been underwriting property developments for a long time.</p>
<p>Things accelerated sharply, however, in July 2015 when the Australian Prudential Regulation Authority (APRA), aided by BIS Shrapnel and egged on by the RBA, significantly increased the capital requirements for Australian banks.</p>
<p>This, along with the Labor Party’s aggressive stance on negative gearing, and a scandal involving falsified loan documents at ANZ and Westpac, has resulted in a significant slowdown in property lending by Australia’s Big 4 banks:</p>
<p><a href="/images/2016/09/05/big-4-lending-book.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/05/big-4-lending-book.png" alt=""></p>
<p>Had the Big 4 continued to grow their investment housing lending book at the same average rate as they did the 12 months ended June 30, 2015, they would have lent an additional $68.4 billion into the market.</p>
<p>At the same time, the Big 4 have also begun to pull back on corporate lending, and while this trend is still emerging, it has added to the challenges faced by property buyers:</p>
<p><a href="/images/2016/09/05/big-4-lending-book.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/05/big-4-lending-book.png" alt=""></p>
<p>Faced with dramatically tougher lending requirements, Australian property developers, investors and buyers have been scrambling to fill this $68 billion gap.</p>
<p><strong>Old Problems</strong></p>
<p>The lending drought has given new urgency to the age-old financing problems faced by every property developer.  Land banking, the first step in most property developments projects, has mostly been subjected to lower loan value ratios (LVRs), shorter loan terms and higher interest rates.  Development and mezzanine funding have also seen a toughening of terms, as well as the imposition of higher requirements for presales and decreased limits on the portion of offshore sales allowed.</p>
<p>Perhaps the problem that’s proven most urgent, dangerous and difficult to solve has been settlement pipeline financing.  Although final settlements often only account for 20% of the total sales price, many borrowers, especially foreign investors, have found it impossible to obtain financing of any kind for this portion of the acquisition.</p>
<p>This has created a great deal of nervousness around settlement pipelines, and the possibility that large numbers of buyers would fail to settle their purchases.</p>
<p>While this has not happened and, in fact, groups like Lendlease have announced <em>higher</em> than anticipated, settlement risk remains a concern in many corners.</p>
<p><strong>New Solutions</strong></p>
<p>The challenges of property developers and investors have attracted the attention of private lenders looking to charge premium rates and fill the gap left by the banks. In addition to established players like Wingate, Balmain and a host of existing property funds, three new groups have stepped into the market.</p>
<p>The first of these new entrants are cashed-up Australian property developers. These players are usually large property companies that are flush from the recent completion of a project.</p>
<p>They tend to be highly localized, only lending into a particular type of development (e.g. only high-rise apartments) and only in one geographic area (e.g. Melbourne CBD).  These lenders are often looking for ways to get into the projects they’re funding, with an eye to taking over the development if the borrower is unable to repay the loan.</p>
<p>A more opportunistic group includes purpose-created special investment vehicles, family offices and high-net worth investors. This group is attracted to the high interest rates and strong security positions on offer. These players are more transactional, less strategic and much less established than cashed up developers.</p>
<p>The final group consists of foreign banks, investment funds and high-net worth investors, particularly from the US, China, Singapore and Malaysia. These entities are often connected to property investors from their home country, who have some knowledge of the Australian market and who see an opportunity to further their investment goals by jumping in where the large Australian banks have moved out.</p>
<p>Taken together, these new sources of non-bank lending are beginning to make a substantial impact on Australia’s property lending deficit.</p>
<p><em>David Chin is managing director, Basis Point, and can be contacted <a href="https://basispoint.com.au/" target="_blank">here</a>.</em></p>
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jchancellor-FAypfDUnLy

The surprising rise of non-bank lending in the Australian property market

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<p>Citi and ING Direct are both tightening the amount they will lend to property investors and owner-occupiers.</p>
<p>Citi has a confidential list of nearly 260 postcodes nationally that its 'high density unit policy' will apply.</p>
<p>The Australian Financial Review suggested high density is any unit development containing more than 30 units.</p>
<p>The bulk of the postcodes are in Melbourne, Sydney, surrounding inner suburbs and up to 15 kilometres from the central business districts.</p>
</div>
<div>It is more than double the number of postcodes that were revealed as being held on Macquarie Bank's similiar constraint list.</div>
<div>recently tightened lending requirements for.</div>
<div>
<p>Loan-to-value ratios will be reduced from 80 to 70 per cent.</p>
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<div>ING Direct has new guidelines on apartment and units with an internal floor space of less than 60 square meters.</div>
<div> </div>
<div>Those with an internal floor space of less than 60 square metres – excluding balconies car spaces – and less than five years old will have a maximum loan-to-value ratio of 70 per cent.</div>
<div> </div>
<div>Apartments with an internal floor space between 50 and 60 square metres – excluding balconies and car spaces  - and older than five years will limit the maximum loan-to-value to 80 per cent.</div>
<div>
<p>Both lenders use broker networks to recommend their products.</p>
<p>Firstmac, a non-bank lender with about $8 billion under management, tightened lending for apartments in developments with more than six floors. It has excluded rental income as a source for servicing the mortgage.</p>
</div>
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ING Direct and Citi tighten lending policies on apartments

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<p>Westpac has decided to stop lending to offshore customers who are not citizens or residents of Australia with an eligible visa.</p>
<p>“It continues to be Westpac's priority to support Australian citizens and permanent residents (including applicable visa classes) living outside of Australia on their journey to own a home or investment property in Australia,” the bank said.</p>
<p>Effective immediately, changes to applicants earning foreign income policy will also occur.</p>
<p>For non-residents, no lending is permitted even if the applicant income is not relied on to meet serviceability, a letter to brokers obtained by Mortgage Business advised.</p>
<p>Local applications that include foreign income will be given a lower loan-to-value ratio of 70 per cent, down from 80 per cent. </p>
<div>
<p>The new policy from April 26 will apply to all loans that were pre-approved but have not been issued. </p>
</div>
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<p>Last week developers said any withdrawal of bank lending could lead to a possible self-fulfilling fear of "apartment collapse". </p>
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<p>"The problem is they [Chinese buyers] don't know how much the banks will give till the end," the Meriton boss Harry Triguboff said. </p>
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