Credit Crunch

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<div>There were nervous onlookers aplenty as APRA Chairman Wayne Byres prepared to speak in Sydney last week on prudential lending standards and sound lending practices.</div>
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<div>They needn't have been quite so fearful, in the event, as Byres reassured markets that while heightened scrutiny had uncovered some displeasing practices, most of the heavy lifting has already been done with regards to tighter lending standards.</div>
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<div>For subscribers to our market reports, a number of familiar themes raised: tightening standards have been applied incrementally over a period of several years (rather than overnight as often assumed), a new focus on comprehensive credit reporting to better capture pre-existing debt commitments of borrowers, and some very useful analysis of lower loan-to-value ratios and the decline of interest-only loans. </div>
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<div>While much has been made of a potential 'credit crunch' - mainly by interests hoping to see a credit crunch, it must be said - Byres reiterated how in aggregate annual credit growth has continued to track at 'very healthy' levels, especially for owner-occupiers at about 8 per cent.<br><br>Of course, there are many unknowns about how this will all play out from here. Some parts of the housing market will fare well where demand from homebuyers is high, and others will struggle where the opposite holds true.<br><br><em>Caveat emptor.</em>
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<div><strong><span style="text-decoration: underline;">Computer says no credit crunch</span></strong></div>
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<div>As Byres was busy adjusting his tie pre-speech in Sydney, financial markets were digesting the latest housing finance figures for the month of May.</div>
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<div>Supporting what Byres would go on to say in his speech, there was a seasonally adjusted <em>increase </em>in the number of mortgages written across all loan categories, defying market expectations, and a corresponding increase in the total value of lending.</div>
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<div>The 'trend' figures are still shaping lower, but at $31.9 billion the seasonally adjusted housing finance figures were pointing to anything but a credit crunch, especially for the homebuyer cohort.</div>
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<div>The average loan size for both first homebuyers ($344,600) and non-first homebuyers ($412,000) also hit a record high in May - both in monthly and rolling annual terms - so it appears that those borrowers able to commit to a loan have not seen borrowing capacity trimmed as much as feared, at least in aggregate. </div>
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<p><br><strong><span style="text-decoration: underline;">Where to from here?</span></strong><br><br></p>
<div>Clearly no credit crunch in these figures, then, but my sense is that everyone would feel a bit happier with the world if the household debt to disposable income ratio was seen to be no longer rising from its present level of 1.9x. </div>
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<div>APRA has played its part in tightening lending standards for investors, rapidly reducing the stock and flow of interest-only loans (meaning more Aussies paying are now down their debt), and ensuring that new borrowers are stress-tested with what are very significant mortgage rate buffers. </div>
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<div>It's interesting to consider momentarily how so much market commentary has become morbidly fixated on a bad news narrative, almost wilfully overlooking a string of upbeat data over recent months.</div>
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<div>Westpac reported this morning that its consumer confidence index had surged to the highest level since all the way back in 2013, mirroring Aig's index showing the services sector expanding at the fastest pace on record, and jobs vacancies firing to their highest ever level.<br><br>So much for it all being doom and gloom!</div>
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<div>Meanwhile the unemployment rate is easing back towards the lowest level in years, exports are tracking at record highs, and the rolling annual Budget deficit is in the best nick in a decade.</div>
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<div>All sanguine observers are quite clear on the missing piece of the puzzle, though: wages growth!</div>
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pwargent-M4siyDbqQY

Lenders gonna lend: Pete Wargent

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<p>It's well known that most <a href="http://petewargent.com/2019/01/10/being-approximately-right-not-precisely-wrong/" target="_blank">market predictions</a> are a <a href="http://petewargent.com/2018/01/04/forecasting-fails/" target="_blank">waste of time</a>: they usually just project <a href="http://petewargent.com/2019/01/02/the-small-numbers-fallacy/" target="_blank">more of what's been happening</a>, and are rarely much chop at picking turning points. </p>
<div>With almost no housing market activity over the long Easter break, this does feel like a potential <a href="http://petewargent.com/2018/01/07/tipping-point/" target="_blank">inflection point</a> - for better or worse - and certainly it's as a good a time as any for a largely baseless opinion piece. </div>
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<div>It's clear that the speculative heat has been well and truly removed from the housing market by the credit squeeze and a range of other factors. </div>
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<div>In fact, the reverse is now the case, with investor credit growth running at the lowest level in Australia's history.</div>
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<div>The stock of interest-only loans has been spectacularly reduced by regulatory tweaks and is also at the lowest share on record: probably down to about 21 per cent of residential loans by value by the end of this quarter, representing an epic decline from 39 per cent in early 2017.</div>
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<p><span>The share of high LVR lending is also tracking at around the lowest level on recent record.</span></p>
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<p><br><span>Low-doc lending, meanwhile, has been all but eliminated over the past decade. </span></p>
<div>Average paper net rental losses (aka. 'negative gearing') claimed are at the lowest level in almost a decade-and-a-half, with further declines in the post on rising yields, lower mortgage rates, and changes to allowable deductions for plant and equipment depreciation and travel. </div>
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<div><span>With loans being tested for serviceability at 7¼ per cent lending metrics have, if anything, become too conservative, and borrowing capacity has in many cases been reduced by 20 to 40 per cent (or simply eliminated entirely for many portfolio investors).  </span></div>
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<div><span>Almost every way you look at it, credit has rarely been so tough to come by. </span></div>
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<div><strong><span style="text-decoration: underline;">Prices cooled since early 2017</span></strong></div>
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<div>If the housing market downturn was to end here then I reckon most sober commentators and respected international observers would applaud a job well executed. </div>
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<div>In any event, a lot of the 'bubble' talk is way overdone.</div>
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<div>There's a lot of debt on a gross basis; but mortgage serviceability isn't particularly stretched, while there's also been an unprecedented build-up in cash and cash equivalents, mortgage buffers, and balances in offset accounts.</div>
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<div>In Adelaide it's not all that hard to buy a house for the same price as a decade ago, which given where mortgage rates have gone must represent about a 50 per cent improvement in affordability (without backing this statement up with any hard numbers). </div>
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<div>In Brisbane apartment prices are often seen to be lower than they were almost a dozen years ago, so affordability is now stupendously high compared to where it was. </div>
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<div>Housing prices had already declined for years in Perth; and they've been roundly smashed in Darwin.</div>
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<div>The major house price gains since 2012 were seen in Sydney, where median prices have since declined over a period of more than two years by about 13 per cent, representing a real decline versus incomes nudging about 20 per cent from the peak (much more in parts of Western Sydney, according to a piece in the AFR this week). </div>
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<div>It seems that most of the regulatory actions taken to cool the housing market have all but washed through, but despite the lower fixed mortgage rates on offer lately market activity is still awfully gummed up.</div>
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<div>And there's still a non-trivial possibility that the actions taken to promote financial stability, in the end, sink it. </div>
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<div>The economy has been stymied for some time now, with two consecutive quarters of negative GDP growth in per capita terms possibly set to be repeated for a third quarter. Consumption and retail are weak. </div>
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<div>It's difficult to get an accurate real-time reading of housing market turnover but many experienced commentators seem to believe it's at the lowest level on record. </div>
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<br>So, what gives?</div>
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<div><strong><span style="text-decoration: underline;">Responsible lending: level up</span></strong></div>
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<div>A major part of the challenge for activity in the housing market is some of the breathtaking pedantry related to mortgage applications, which I've experienced a bit of, but often only mortgage brokers have a really good feel for. </div>
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<div>There's always a chance that responsible lending morphs into a nanny state mentality, and this is now almost literally becoming so in some cases.</div>
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<div>When lenders are stress-testing for scenarios incorporating up to the equivalent of a dozen or more rate hikes it defies belief that a homebuyer registering for Netflix or using Uber might be grounds for the refusal of a loan, but the banking Royal Commission brought this level of paranoia to the fore. </div>
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<div>These sometimes amusing and apparently trivial examples are merely the tip of the iceberg in what has been at times a truly Titanic pile of administrative poppycock.</div>
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<div>Everyone involved in mortgage lending knows that consumer behaviour and discretionary spend changes post-purchase, so all this rigmarole is largely fruitless and may now be effectively adding to FS risks rather than reducing them. </div>
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<div><strong><span style="text-decoration: underline;">Tipping point</span></strong></div>
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<div>Lower interest rates alone don't fix this; but in truth I don't know what does. </div>
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<div>Maybe it's the simply passage of time.</div>
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<div>Perhaps lenders need some assurance that they aren't going to be hauled over the coals even more than has already been the case. </div>
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<div>By the same token prospective homebuyers would doubtless like to see more certainty given the recent shifting of goalposts (with further changes to market dynamics now proposed by the Labor Party). </div>
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<div>Whatever's the case, something needs to get mortgages flowing dependably again, or else there's a risk that the measures to shore up risks in the housing market will no longer be hailed as a success, but instead blamed for capsizing it.</div>
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<em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em><span> </span>
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Speculative heat removed from the housing market by the credit squeeze: Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>Australian household debt levels have increased substantially over the past thirty years, with the ratio of household debt to annual disposable income rising from 68% in June 1990 to a recent peak of 188.5% in June 2019. Since June last year, the ratio has reduced slightly to 185.0%. Most of the debt held by households is housing debt, which comprises around 76% of overall household debt. Thirty years ago housing debt comprised a much smaller 46% of overall household debt.</p>
<p>The skew towards housing debt can also be seen in the latest Household Income and Wealth survey from the Australian Bureau of Statistics, which showed the median value of debt held against owner occupied dwellings was $102,600, compared with a median debt level of $5,000 for student loans, $3,000 on credit cards and $3,700 on car loans. Most of Australia’s household debt accrual occurred between 1990 and 2010.</p>
<p>The ratio of household debt to income increased by 45.7 percentage points between 1990 and 2000, and by another 49.3 percentage points between 2000 and 2010. The past decade has seen growth in the ratio more than half to 21.5 percentage points, with most of that growth aligned with the property boom between late 2012 and 2017.</p>
<p>Importantly, the value of assets held against the debt has recorded a more significant increase, pushing household net worth to new record highs at the end of 2019. Residential dwellings comprise by far the largest component of household assets, totaling $6.8 trillion, or 53% of household wealth. Household debt levels are important for two reasons.</p>
<p>Heavily indebted households are generally more vulnerable to a ‘shock’ such as job loss, illness or a sharp rise in the cost of debt, which in turn has implications for financial stability. The other key area of concern relates to household spending; heavily indebted households may be more likely to save rather than spend during periods of uncertainty or economic hardship. With around 60% of Australia’s economy dependent on household consumption, a sustained drop in spending activity would have a negative impact on economic growth.</p>
<p>These risks were recently covered in detail by the RBA in a discussion paper released in May this year. The outcomes of the paper noted the risk to financial stability was likely to be relatively low due moderate loan-to-valuation ratios on residential mortgages. In separate analysis from the latest Financial Stability Review, the RBA notes that only 3% of Australian mortgages are thought to be in negative equity. The risks associated with high household debt levels weighing on consumption are more substantial, especially under a scenario where housing prices fell.</p>
<p>While household debt is high, and potentially a concern for consumption, servicing debt is at its most affordable since 1999 due to record low interest rates. The ratio of housing interest payments to household disposable income has more than halved since 2008, from a high of 13.3% to 6.4% in June 2020. With interest rates moving lower since June, it is likely the ratio has fallen even further. Another factor helping to minimise risk is the fact that asset values are substantially higher than the debt held against them.</p>
<p>The ratio of household debt to household assets was 19.4% and the ratio of housing debt to housing assets was 28.2% in June 2020, implying a remarkably large amount of equity is held within the household sector. Other factors helping to alleviate risk associated with high household debt, and potentially support a reduction in debt levels are credit policy and less consumer appetite for credit. Lending standards have improved over the past five to ten years, with a trend towards fewer loans originating with a high loan to valuation ratio and substantially fewer interest only loans.</p>
<p>9.2% of home loans were originated with a deposit of 10% or less in June this year, down from a recent peak of 22% in 2009. Similarly, interest only loans comprised almost 46% of new home loans in mid2015, but have averaged only 17% of new lending since mid-2017. Additionally, loans with a high loan to income ratio have remained low, with June data showing only 5.8% of new home loans were originated with a loan to income ratio of 6% or higher.</p>
<p>It is clear that households became more risk averse through the worst of the COVID period. National accounts data showed the household saving ratio skyrocketed to almost 20% through the June quarter, up from 2.5% in the June quarter of 2019. Given that the virus curve has flattened and consumer sentiment surged in recent months, it is likely the saving ratio will drop. Additionally, the trend in personal credit, which has been in negative monthly growth territory since late 2019, has plummeted since March.</p>
<p>Although the risks around high household debt are manageable at the moment, interest rates will eventually rise down the track.</p>
<p>As debt servicing costs move higher, a heavily indebted household sector would need to devote more of their income towards servicing debt and less to spending, which implies a medium-to-long term risk to household spending. This implies high debt levels may also stagger and slow an economic recovery. If increases in housing debt servicing costs result from higher interest rates, the exacerbated drag on spending could slow economic growth.</p>
<p>Additionally, with household debt remaining high, the sector is more exposed to unforeseen events such as job loss and illness, as well as black swan events like a pandemic or financial crisis. It is likely policy makers and regulators will be keeping watch for any signs of rising household debt or slippage in lending standards that could lead to higher household debt.</p>
<p>Higher LVR lending or higher loan to income ratios could be the trigger for a new round of macro-prudential style intervention. Recent macro-prudential interventions targeted interest only lending and growth in lending for investment housing through 2014 and 2019. Future interventions may be aimed at keeping a lid on household debt levels, and minimizing longer term risk, via firm limits on loan to valuation ratios, loan to income ratios or debt to income ratios.</p>
<p><strong>TIM LAWLESS </strong><em>is the research director Asia Pacific at CoreLogic</em></p>
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tlawless-5VLUrbAk9s

Growing household debt could cause a credit squeeze: Tim Lawless

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<p>Home loan credit conditions tightened more than was probably required, the RBA governor Philip Lowe said today. </p>
<p>"Overall, the evidence is that a tightening in credit supply has contributed to the slowdown in credit growth," he told the <span>AFR Business Summit.</span></p>
<p>"The main story, though, is one of reduced demand for credit, rather than reduced supply.</p>
<p>"Even though the slowing in credit growth is largely a demand story, we are watching credit availability closely.</p>
<p>"It is perhaps stating the obvious to say that we want lenders who are both prudent and who are prepared to take risk.</p>
<p>"As lenders recalibrated their risk controls last year, the balance may have moved too far in some cases.</p>
<p>"This meant that credit conditions tightened more than was probably required.</p>
<p>"Now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk.</p>
<p>"And it's important that they have the capacity to manage that risk well.</p>
<p>"If they can't do this, then the economy will suffer," Dr Lowe said.</p>
<p>"It has also been apparent through our liaison that some lenders became more cautious last year."<br><br>"No discussion of housing prices is complete without touching on interest rates and the availability of finance. The low interest rates over the past decade did increase people's capacity to borrow and made it more attractive to borrow to buy an asset whose price was appreciating. But the increase in housing prices is not just about low interest rates."</p>
<p>Dr Lowe noted that recently there had been much attention paid to the availability of credit.</p>
<p>"This attention has coincided with a noticeable slowing in housing credit growth, especially to investors (Graph 10).</p>
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<img src="https://www.rba.gov.au/speeches/2019/images/sp-gov-2019-03-06-graph10.gif" alt="Graph 10: Housing credit growth">
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<p>"It is clear there has been a progressive tightening in lending standards over recent years.</p>
<p>"The RBA's liaison suggests that, on average, the maximum loan size offered to new borrowers has fallen by around 20 per cent since 2015.</p>
<p>"This reflects a combination of factors, including more accurate reporting of expenses, larger discounts applied to certain types of income and more comprehensive reporting of other liabilities.</p>
<p>"Even so, only around 10 per cent of people borrow the maximum they are offered.</p>
<p>"Sensibly, most people borrow less than what they are offered, so the effect of this reduction in borrowing capacity has not been particularly large."</p>
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jchancellor-FAypfDUnLy

Home loan credit conditions tightened more than was probably required: RBA

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<p>Robert Gottliebsen has said 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>He forecast huge payments set to be made to customers who were wrongly charged.</p>
<p>"As property falls in the light of the credit squeeze, many of those who borrowed from the banks will sue because lending to them was 'irresponsible'.</p>
<p>"It’s true that sometimes high-pressure, commission-driven bank sales people did cajole customers into taking too much debt.</p>
<p>"But the customers accepted risks for big gains. Nevertheless, litigation lawyers are preparing for a picnic.</p>
<p>"Bankers who are confident enough to exercise sensible discretion are hard to find."</p>
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j.ballantyne1990-6AQqhLzZaK

Litigation lawyers are preparing for a picnic against home loan bankers: Robert Gottliebsen

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<p>There's still debate among economists over just whether there's a deepening credit crunch that could further adversely impact on housing markets.</p>
<p>We are now well into attempts begun in late 2014 by the regulator, the Australian Prudential Regulation Authority, to curb over zealous lending, along with house price escalation and ballooning household debt.</p>
<p>Last August, I wrote that one of the key reasons that spring 2017 would see easing price growth was that the banks wouldn't lend as much.</p>
<p>It has extended right through the 2018 autumn market too, yet Macquarie’s latest survey of bank lending for property loans has found credit availability actually hadn’t changed too much over the past year.</p>
<p>Maybe the bank's bark is worse than their bite. If correct that's a relief, but that doesn't mean home loans will get any easier to obtain or that house price growth will return.</p>
<p>Macquarie undertakes its annual mortgage “mystery shopping” exercise where Macquarie analysts pose as potential customers at ANZ, Commonwealth Bank, NAB, Westpac, Bankwest, Bendigo and Adelaide Bank, Bank of Queensland, Suncorp and St George.</p>
<p>They found that banks had tightened their credit standards by a further 5% over the past year as a result of policy changes.</p>
<p>From the peak of mortgage activity in 2015, borrower capacity has fallen by 13% for owner-occupiers and 22% for investors.</p>
<p>The survey found some banks were willing to lend up to $1 million to a property investor earning $105,000 a year, but typically less than $600,000 to an owner-occupier on the same income.</p>
<p>The average loan capacity for owner-occupiers fell from $700,000 in 2015 to $600,000 presently, while average loan capacity for investors has fallen from $1 million to $800,000.</p>
<p>The anonymous mortgage shopping study conducted by Macquarie analyst Victor German tell the bank officers they were earning $105,000, had general living expenses of $1200 a month, were spending $1300 a month on rent, and had no dependents and a clear credit history with an $11,000 credit card limit.</p>
<p>UBS have an alternative view which is that the credit tightening process was only going to get tighter.</p>
<p>It argues regulatory pressure to tighten lending standards has so far primarily hit the investor market.</p>
<p>UBS banking analyst Jonathan Mott says owner-occupiers have only been hit with a higher household living expenditure benchmark.</p>
<p>“We estimate owner-occupier maximum borrowing capacity has been reduced 7-10% since 2015 and investor maximum borrowing capacity has reduced by 10-30% depending on the borrower’s existing debts,” Mott said in a research note.</p>
<p>Interestingly the boss of Australia's banking regulator, Wayne Byres, recently claimed "the heavy lifting on lending standards has largely been done".</p>
<p>Byres added that "any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments".</p>
<p>Of course since 2014 APRA has also required banks to assess borrowers' repayment capacity using a minimum 7% interest rate, which is well above prevailing home loan interest rates.</p>
<p><em>This article first appeared in </em>The Daily Telegraph. </p>
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Australia's housing credit crunch impact remains the big unknown

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<div class="cq-article-content-paras section">
<p>House price falls in Sydney and Melbourne "will get worse before they get better", Deloitte Access Economics says.</p>
<p>The increasingly higher cost and lower availability of credit will generate a "mini-credit crunch."</p>
<p>"The nation's immigration intake will be cut – perhaps severely – thereby undercutting many of the 'most likely' forecasts underpinning the growth of domestic markets," the report says.</p>
<p data-gtm-vis-first-on-screen-7770372_137="3096" data-gtm-vis-total-visible-time-7770372_137="4000" data-gtm-vis-has-fired-7770372_137="1">There would also be a "fear-of-fear-itself" momentum, the report adds.</p>
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<div class="cq-article-content-media section">"Lending is down, it's amidst its longest dry spell since the global financial crisis, and investor loans have dropped to a six-year low," the Deloitte report, reported in The Australian Financial Review, says.</div>
<div class="cq-article-content-media section"> </div>
<div class="cq-article-content-media section">"That says housing price falls – now infecting Melbourne – will get worse before they get better," said Deloitte adding they still expect a pretty benign construction cycle.</div>
<div class="cq-article-content-paras section">
<p>"That benign nature owes much to what we don't see in the next couple of years.</p>
<p>"We don't see China falling over and Australian unemployment jumping. And we don't see global and local interest rates rising fast.</p>
<p data-gtm-vis-first-on-screen-7770372_137="3970" data-gtm-vis-total-visible-time-7770372_137="1900">"That still sees the current downswing bottoming out in late 2019 but, thanks to continuing population gains, bottoming at levels that are solid compared with the depths plumbed in past cycles."</p>
<p data-gtm-vis-first-on-screen-7770372_137="3970" data-gtm-vis-total-visible-time-7770372_137="1900"><span>Deloitte’s latest Business Outlook report projects that state and federal budgets will be hit hard by falling house prices and commodity prices.</span></p>
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<p data-gtm-vis-first-on-screen-7770372_137="198635" data-gtm-vis-total-visible-time-7770372_137="900">NSW will bear the brunt of the housing downturn because it has had the biggest rise in house prices among capital cities.</p>
<p>Expensive homes will struggle to sell but there will be "less damage at the lower end", which benefits from first home buyer concessions, the report says.</p>
<p><span>“House prices are essentially a function of how much people can borrow,” Deloitte economists led by Chris Richardson wrote in their 155-page quarterly report released today.</span></p>
<p>“Big banks are now running scared,” it suggests.</p>
<p>“Their sudden surge of caution means borrowers with the same characteristics would now get a smaller loan than they would have 18 months ago.”</p>
<p>They predict the current house price falls in Australia will “keep on keeping on”.</p>
<p><span> </span></p>
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<p data-gtm-vis-first-on-screen-7770372_137="194634" data-gtm-vis-total-visible-time-7770372_137="4000" data-gtm-vis-has-fired-7770372_137="1"> </p>
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House price falls in Sydney and Melbourne "will get worse before they get better"

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<p>The ARCO fund manager George Colman is warning of a "slow-motion property market crash" as credit gets harder to secure.</p>
<p>"Broadly speaking, we think that the game has changed in terms of consumer behaviour," he told The Australian Financial Review.</p>
<p>"Bank credit is creating a steep change."</p>
<p>Property borrowers moving from interest-only to the more expensive fixed-rate mortgages was another source of market stress, Colman suggests.</p>
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<p>Colman believes the economy now suffers from declining breadth after a years-long narrowing of focus on housing and related sectors.</p>
<p>"We might limp along," he says.</p>
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<p>Arco was formed in 2008 at the height of the global financial crisis by Mr Colman and Peter Whiting and the Melbourne-based investment management firm had $147 million of assets under management in its long-short Absolute Trust at the end of June.</p>
<p data-gtm-vis-first-on-screen-7770372_137="63642" data-gtm-vis-total-visible-time-7770372_137="1800">The fund returned 6.5 per cent over the 2018 financial year.</p>
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