ANZ Suffering with Low Loan Volumes due to Overly Conservative Lending Polices
The Australian Prudential Regulation Authority (APRA) recently reported that one of the country’s largest mortgage lenders, ANZ, has suffered $1.9 billion in losses on its home loan portfolio since the beginning of 2019.
ANZ’s mortgage books experienced a loss of $700 million in January, $400 million in February, and $800 million in March. Reflecting on the data, ANZ Research noted that the annual rate of housing credit growth was the slowest in four years.
Just this week, The Adviser reported that ANZ has announced changes to their home loan rates for owner-occupiers:
- 3-year principal and interest rates have been cut by 30bps to 3.69 per cent (4.94 per cent comparison rate)
- 5-year principal and interest rates have been cut by 20bps to 3.99 per cent (4.89 per cent comparison rate)
- 2-year interest-only rates have been cut by 20bps to 4.29 per cent (5.13 per cent comparison rate)
- 3-year interest-only rates have been cut by 60bps to 3.99 per cent (5.00 per cent comparison rate)
- 5-year interest-only rates have been cut by 59bps to 4.50 per cent (5.07 per cent comparison rate)
New Trend: Households Are Struggling to Pay Mortgage
ANZ’s spokespeople explained the portfolio losses as a market phenomenon, though admitting that news of the falling numbers could cause uneasiness in the bigger marketplace.
Banking Group CEO Shayne Elliott expressed concern that an increasing number of bank clients were unable to make payments on mortgages. Stunted wage growth is the main culprit and may cause more defaults, ANZ reported. Currently, 5% of the bank’s mortgage loans are suffering from negative equity. The majority of these clients reside in Queensland and Western Australia.
It is worthy to note that the bank did meet expectations for profitability over the period in question, reporting a 2% cash profit increase. The company also held its dividend at 80 cents, a result that helped to support the share price. Total provision charges dipped by 4% and new impaired assets fell by 8% year over year, keeping asset quality relatively high.
The Real Numbers
Of the new bank clients going into arrears for this half, the total number of accounts suffering negative equity was anywhere from 500 to 600 families (12% of the full and total number). This number is relatively low when compared to the more than one million total ANZ customers.
The bigger question is whether these 500 families speak to a more significant trend that is causing a problem, stagnant wages. This seems to be a stubborn long-term trend that is not going away anytime soon.
Analysts are pointing out the ANZ 90-plus day mortgage delinquencies chart as proof. Over the past four years, delinquencies have been on a consistently upward trend as well even though wage growth rose to 2.3% in the most recent reporting period. The rate is not high enough to match inflation, even with a heightened chance of the Reserve Bank of Australia cutting the interest rate during its next session in June.
Many of the unfortunate customers reported that they had built their budgets around wage rises that never happened. They were forced to downsize when the payments became too much to bear.
It is important to note that unemployment is considered low along with inflation and interest rates, but this may point to a bigger problem in the future. There are very few analysts who are willing to put their necks on the line to say the economy will retain its current state. Stagnant wages are traditionally a leading indicator of a slowing economy, one that will eventually show itself through increased layoffs and potentially higher inflation.
Despite the silver lining in the unemployment numbers and ANZ beating the market, the Reserve Bank expressed its concern at the growing number of negative equity mortgage accounts in the market.
Breaking the Borrower Buffer
Shayne Elliott lobbied his support for a cut in the Reserve Bank of Australia’s current 1.5% cash rate. He also put pressure on the prudential regulator to reduce the 7.25% interest rate buffer that is now a requirement for new buyers to meet. ANZ, he says, would consider a cut in the buffer as a reasonable alternative to the cash rate cut, a move that would raise demand in the current housing market.
The current cash rate represents a record low for the Reserve Bank. Although there is no talk of raising it until the rest of the economy is more fully stabilised, many experts believe there is no more room for a cash rate hike. This would leave a reduction in the borrower buffer as the only monetary policy that could help the current state of the housing market, according to Elliot and other ANZ executives who have spoken out.
Falling Housing Prices
Along with stagnant and falling wages, an increasing number of homeowners are also experiencing negative equity because of falling home prices. Homeowners who borrowed at their repayment limits (or beyond them) are experiencing the most pain as their loan to valuation ratio (LVR) creeps up. As a buyer’s LVR is increased, his equity in a property is reduced. In turn, this reduces the ability of that borrower to restructure debt or take advantage of any of the leverage that properties usually provide.
ANZ customers are not the only clients experiencing financial hardship. 3% of borrowers from Westpac are now above 80% LVR since housing prices began to fall in the quarter leading up to the final part of last year.
Another 3% of borrowers from NAB’s first-half results were reported to be in the 90% LVR bracket, meaning they have less than 10% equity in the property — and falling.
These statistics can also keep new buyers from entering the market. As the banks exposure to high LVR loans within their current books grow, there appetite on new high LVR lending decreases. They try to mitigate this by lifting rates, tightening policy or in some cases removing the products from the shelves for a certain time.
The Bottom Line
No one wins in a negative equity market. Borrowers are forced to sell before they are ready and may remain in debt. Banks are often unable to profit on short sales and forced sales. There are fewer sellers in the market because of stagnant wages, meaning that homes stay on the market longer — accruing fees and other fixed selling costs.
According to UBS economists, there is no current bottom in sight. Moody’s, a seminal global credit rating agency, has forecasted that housing prices would likely fall another 10% across the nation before levelling out.
If this is the case, there are parts of Sydney and Melbourne that may fall even more. Some homeowners may experience haircuts of up to 15% into next year, with recovery taking a few years to reinstate value fully.