Lenders urged to remain cautious
The nation’s banks this week received a shot across their bows warning them that mortgage lending practices are slipping. It came in the form of new draft guidelines for banks and credit unions from the financial services watchdog, the Australian Prudential Regulation Authority.
As prices and investment activity, particularly in Sydney, add to a more buoyant mood in the real estate industry, outgoing APRA chairman John Laker has stepped in to warn that it would be watching closely to ensure a heating market doesn’t lead to any lenders relaxing standards, “particularly in the current environment of strong pricing pressures in some housing markets and very active competition between lenders”.
“In this environment, APRA is seeing increasing evidence of lending with higher-risk characteristics and it does not want this trend to continue,” Dr Laker said during the week. “The draft prudential practice guide reinforces the importance of maintaining prudent lending standards when competitive pressures may tempt otherwise.”
While APRA declined to nominate any specific evidence it had gathered, a paper from the watchdog late last year said a minority of lenders were not doing enough to ensure borrowers could actually service their mortgages. “The mortgage documentation supporting the serviceability assessment was incomplete and there were inaccuracies in the income verification process,” the APRA Insight paper said.
However, APRA’s non-compulsory guidelines have simply been amended, rather than substantially changed, prompting industry insiders to speculate that the announcement was more about reminding boards, and jawboning the smaller banks which tend to attract the riskier applicants, to ensure they remain cautious in assessing would-be home buyers, with the sustained period of record low interest rates expected by most economists to end next year.
Australian households and investors currently owe the banks $1.2 trillion for their mortgages – up 8.2 per cent in the 12 months to March 31. There are five million individual housing loans at an average of $235,000 each and investor activity continues to outpace owner-occupiers –growing at 9 per cent compared with 5 per cent.
Household stress keeps rising
Meanwhile, as APRA was cajoling banks not to drop their standards, in other news on the state of the hip pocket, it seems the consumer blues are continuing.
Despite a long run of low interest and unemployment rates, a pick-up in residential property and surging sharemarkets feeding into Australia’s superannuation holdings, Australian consumers are still finding things difficult. This week’s quarterly Dun & Bradstreet financial stress index shows “stress was heightened during April and is set to worsen in the next three months”.
There has been an increase in people seeking credit who have a poor credit history, and a rise in the number of individuals seeking credit from a number of providers in a short space of time.
So why, with Australian savings rates still high, should more people be feeling the pinch? Steve Brown, D&B director of consumer risk solutions, says: “People are saving more of their income at a macro level but what that suggests is that those who are more credit worthy are not applying for more credit … leaving [a smaller but more financially stressed group] taking out credit to meet payments.”
As wages growth continues to track below inflation and after a severe budget-induced whack to consumer confidence and household incomes, the next D&B index, in July, is expected to reach its second-highest levels in four years, and potentially worsen later in the year.
A toast to the Bordeaux index
And on other matters close to the heart of some readers, it appears red wine may be better for the hip pocket than it is for the heart. The finest Bordeaux had been nearly as lucrative for investors as the British sharemarket over the 20th century, according to professors at Cambridge University, Vanderbilt University and HEC Paris.
“Wine prices outperformed government bonds, art and stamps, and remained consistently on a par with sharemarket returns, throughout the 20th century,” The Price of Wine study found after examining the price of five of the Premiers Crus Bordeaux – Haut-Brion, Lafite Rothschild, Latour, Margaux and Mouton Rothschild.
Based on auction prices between 1899 and 2012, the report says wine investors could have made a real financial return on investment of 4.1 per cent over the period, measured in British pounds. This compares with returns of 2.4 per cent for art, 2.8 per cent for stamps and 5.2 per cent for shares.
Over a shorter time frame (incorporating fewer sharemarket busts), the 30-year return of the Australian sharemarket to the end of last year was 11.1 per cent, according to global fund manager Fidelity.
Selling products to the over-85s
Elsewhere, former prime minister Paul Keating’s recent curve ball suggestion that Australia consider introducing “longevity insurance” attracted much attention in early May, but little ongoing public debate. One superannuation expert, Russell Mason from Deloitte, this week came out in support of the idea.
Speaking to an investment seminar in Sydney, he expressed concern about the current system in which retirees are handed a lump sum “and told, ‘Good luck. Make this last for the rest of your life’ ”, he was reported as saying. “How do I make that money last? For people with small account balances, compulsory annuitisation seems to work. So a percentage of your assets is put into a deferred annuity – and I think there needs to be some sort of government guarantee behind that – that says, if you live to 85, then the deferred annuity kicks in.”
Mason told The Saturday Paper the former prime minister’s comments were “visionary”. While the pension would always be needed, he said there should be new products for those who could – and should – make themselves financially secure if they live past about 85 years. A retiree could calculate how much they needed from their lump sum, and had until 85 when the annuity would kick in.
“The government can’t afford to keep paying the pension [at the projected levels]. It’s about pooling of risk.”
This article was first published in the print edition of The Saturday Paper on May 31, 2014 as "Lenders urged to remain cautious". Subscribe here.