APRA REPORT 1
U1
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Are Australian banks healthy? Today we're going to look at the latest lending data out by Australian Prudential Regulation Authority, our lending regulator, to determine if Australian banks have been lending appropriately. Welcome to another episode of Australian Property Talk for those that don't know us. I'm Redom Syed and I'm here with my Cohost, Curtis Stewart. How are you? Good, good. Just enjoying my Friday reading opera reports like everyone does, I sense a little bit of sarcasm. No. 1s Okay, so today we're going to go through what APRA have released. So this is a snapshot into Australian lending conditions and how Aussie banks have been lending money for the quarter of December 2022. And it really tracks performance over the 2022 period. And what it shows us is, are banks lending healthy? Where are the risk points and what. 2s May change to Australian lending conditions with the data that's out from this. So that's going to be what we're looking into. The reason why we look into lending data so closely is because we've said this on a lot of our podcasts is property markets are a function of credit markets so understanding how people are getting money presents a lot of information and snapshots as to what is going to happened to the property market and where. So that's what we're going to be talking about and going through courtesy mind explaining to our audience 1s what does this report show and why are we looking at it? Yeah, so it's really a good capture of a lot of data that APRA get directly from the banks that probably isn't really released anywhere else. So this data is really looking at what do the bank's lending books look like? So this is Adis, what do their lending books look like at the moment? How are the non performing loans so loans that are in our ears, how are high LVR loans basically how are their loans looking when you think of what would present risks to banks and so that's kind of a stock question. How do things look at the moment with the stock of loans they have? And then some of the more interesting points are also perhaps looking over the last twelve months and looking at how are they lending, how are they providing credit again? Are they lending with more high LVR loans? Are they doing more risky lending than previously? Less risky lending than previously? How's that tracking? So the combination of how's the big picture looking and then how have banks been acting in the last kind of twelve months gives you the combination nation to kind of form an overall view. Yeah, definitely my overall view reading this is as of today. 1s Things are very healthy perhaps even a little bit too healthy in the sense that perhaps there's not enough risk taking going on in lending with some of the data that's here like what I see reading this is credit growth. It's not that strong, it's not that weak so there's a whole range of metrics to look at but overall very healthy performance let's run through the criteria is that they're looking at so the first benchmark that we just talked about is credit growth. So this is looking at the entire system and being like hey, is the system growing? Is the total number of mortgages year on year growing? You'd expect it to grow because a lot of things happen in the economy and you need credit for a lot of that to happen whenever someone buys a house that's a new loan that originates. So is the system growing? So yeah what are your thoughts on system credit growth? It was at 6%, I believe. Split seven. Yeah, seven for owner Occupiers and 5.3 for investors. So I guess slightly more new owner owner Occupier activity than investor activity, which probably fits with anecdotally what we've seen over the last twelve months. But typically you would normally see credit growth numbers maybe a little bit higher than 6%. So the 6% number, even though the overall pool of credit out there is growing, it's probably a little bit of a 1s subdued number compared to maybe three or four years ago when conditions are a little bit more favorable. Yeah, that's a good summary. It's not strong, definitely not strong but it's not weak either. The RBA would probably want to see this the RBA is, you know, out there increasing interest rates. When you increase interest rates you make the price of credit higher so you expect far fewer people want that and also borrowing capacity to down 30%. So that explains why the total credit growth of the entire system is pretty subdued 6%. Doesn't sound low I guess, but you got to take into the context of what credit growth you need for an economy to perform. So you need credit to be growing, you need the total stock of mortgages to be growing and previously in different conditions you've seen credit growth above 10% which is probably a bit too strong so just balancing it out fairly benign sort of credit environment, nothing too excess sieve but nothing that is all that concerning either. There's enough credit growth to mean that the system is ticking along. That's our summary of that. Yeah, I think that's a good summary. So another data point is the amount of new lending relative to the total stock of lending. So this one's down about 12% compared to say the previous twelve months but it's split it up or APRA have got the data split up between refinancing and kind of new purchase activity and refinancing is kind of at an all time high basically as a percentage of the amount of new lending that's being done. 1s We're seeing that for sure. All the charts sort of suggest that that's just fixed rate expiries, triggering people to look at their loans by and large. And obviously people are more conscious of pricing of their mortgages when the interest rate is much higher as well. So they're filling with cash flow. So they're looking out shopping their mortgages and seeing is there a better deal out there for me? And cash backs as well. Probably incentivizing some of this behavior as well. Yeah it's something we're seeing a lot right? Yeah, exactly. And I think it's this point about refinancing representing a larger percent of new loans being written actually flows through into all these other points that are going to follow because I would say typically the type of debt banks are lending when it's a refinance deal is different to a purchase application. So it tends to be, I would say, lower risk. You tend to be refinancing only when the LVR is under 80%. 2s The DTIs might be a bit lower because basically people are refinancing in order to get better lending terms and normally better lending terms are associated with a safer loan by those categories. It's true. Healthy borrowers too. You can't actually pass serviceability if you're a mortgage prisoner. This is the term where you're stuck on your mortgage. You have no options to change. 2s You're technically a mortgage prisoner because you can't pass banks hurdle rates, current hurdle rates which have increased dramatically, which means that you're stuck. But if you can pass and that means you're going to feed into this data here because now you have refinanced and if you can pass, then you're likely to have healthier sort of. Exactly, yeah. And we'll go through these in more detail, but basically 1s if you're refinancing you probably and expect that you are going to have high LVR loans. Whereas if it was a set of data that had a whole bunch of purchases and not many refinances, then you might be seeing LVRs much higher typical of purchases. So I think the refinance boom that has happened has definitely impacted the type of loans and the risk profile of the loans that are being written by banks over the last twelve months. That's why banks are so aggressive on chasing refinance business as well. 2s In the mortgage market in Australia at the moment, banks have all these sort of cashbacks offers, even major banks, you get three and a half with a major bank, $4,000 actually. So there's huge cash backs out there. So banks are kind of lost leading a little bit where it's just like, look, I'll lose a little bit of bit of money to begin with to acquire you as a customer, bring you onto our books. That's kind of the bank's mindset at the moment. But it kind of makes a little bit more sense when you present it like that. Whereas they're chasing healthy borrowers because when you refinance someone, you're refinancing a healthy borrower. And on the flip side, there's a lot of this is not in the data set, but something we're experiencing as well. There's a lot of retention efforts being put in by banks as well. So banks putting in, going out all stops to protect and keep their customers. So rebates and things like that are not that uncommon to even keep a customer. So you don't even have to move and you may be able to get access to something like a cookie or a benefit to just simply stay with your bank. A little bit unusual. Like you don't call your electricity provider and they give you a gift to stay. That's very unusual. So it's like unique features of the current lending environment where banks are aggressively chasing these new customers who have healthy borrowings and who are healthy customers serviceability and whatnot low LTV borrowings. So generally healthy sort of lending, they're chasing that business and offering lots of cookies. And on the flip side, 1s that same bank is probably playing defense by keeping their customers as well. 1s It's an interesting scenario where we're in where there's a lot of competition about existing borrowers and existing lending out there and shuffling the deck a little bit between these lenders. Yeah, I think it is a bit lost leading. So you have to question, I guess, some of these bank strategies, but I think. 2s I think, from my perspective, it looks like they're just trying to grow their market share as much as possible during the rate rising cycle. They think that's when the opportunity is there to grow the market share, and then potentially when that cycle ends and it levels out and rates get cut or something like that, they might feel they're able to manage their book and manage retentions a bit better. So they're just kind of going, look, this cycle, while rate are increasing, we'll try grow our market share, take as many refinances, keep as many customers as possible, even if it's a bit loss leading. It is what it is. 2s From the bank's perspective, we'll deal with that when the cycle ends, which, I don't know if that's a great business strategy or not, but they're all smart people and they're all doing it. It's competition 2s as an individual heightened in this, say, last six months than potentially it has been previously. Yeah, that's true. Definitely the defense that the banks are playing, that's been very heightened. There's been cashbacks around for a little bit of time, but it's just competition with each other. I'll beat you, I'll beat you, I'll beat you. And now you have $4,000 plus cash back. Some banks have $5,000 cash back. Some banks are doing it for purchases as well. We've just done a deal for a customer that's buying their house. Very healthy borrower all works out. They're getting $5,000 up front with the bank that they're going to. So there's a lot of. 2s Interest from different banks targeting the smaller pie of borrowers. Credit growth is 6% pretty low. Lots of banks out there hunting this business and APRA been setting the rules pretty tight, so they can't use credit policy or serviceability calculations they can't deviate there. So to win business, they're resorting to their last tool, which is pricing. And the best news here is it's for Aussie borrowers, like the loyalty tax that Aussie borrowers are facing. So this is the listeners of Australian Property talk. The loyalty tax that you pay for being with your bank is eroding because refinancing activity is so high, not so good. You just talked about buying more bank stocks just before. I don't want to talk you out of that. 2s Not so. It for equity holders in these banks when competition levels are so high and there's an erosion of margins for new borrowers and even existing borrowers, if they're offering retentions to keep. Yeah, exactly. So. They're being hit, 1s margins are being thinned out. Yeah, definitely. And the winner here is Aussie borrowers. This cool thing I did last night with 1s at Connor's Finance. We've got a couple of people completely dedicated to reviewing our existing customer loans. And 1s this is a really cool stat. We haven't really been measuring this. I don't know if anyone measures this, but we had in the month of March, $67,000 per month, saving across about 30 borrowers in just simply repricing. So before anyone stepping that out a little bit, before anyone actually goes and refinances the loan, the first thing you should do is speak to your existing bank and work out, hey, what are you offering me? Let's make it an apples versus apples comparison for that debt. Like, give your bank a chance to come up with an offer to keep you and what are they offering you? So we do that for all of our customers. And that process alone, whether they can refinance or not, is step one. That process alone has saved $67,000 per month. This is just in the month of March. It's been 15 days of the month. We do about two a day. So in the month of March, 67 grand per month. So that's pretty cool. Like the work that we're doing, there's less lending out there, but for the people we're managing, there's a $67,000 per month reduction. I can't even do the math on that. Per year. That's like 800 grand per year in interest costs that people are saving, and it's happening across the board, across the industry. So that's pretty cool. Yeah. And like you say, often the bank you're with doesn't really have the capacity to even test your ability to refinance when you go through this process. So regardless of your situation, as long as you're kind of up to date on your mortgage and you're being a good borrower, basically it's worth going through that process if you haven't already. I assume the people that listen to this probably have, but if you haven't, definitely be ringing your bank up because they don't really have the capacity to test your ability to refinance. So there's often good wins to be had just by asking the question. Yeah. Hot tip. Speak to your bank and we'll keep repeating this one, speak to your bank broker, whoever's managing your lending, and ask them to review your rates. The. For our clients who are listening. We've already communicated with you when we're going to do that. But yes, that is a hot tip to save a lot of money because your mortgage is often your biggest expense, especially when interest rates, starting with five approaching six, there's a lot of savings to be had there, there's a lot of fat to cull very easily. So that's probably the number one saving money tip. But yeah, let's circle back to this is what I wanted to talk about. This is the fun part. This report and what it looks at is how risky is Australian lending and how much risk are we taking on in different parts? So APRA have become more and more sophisticated at measuring risk and now they've got kind of like a little checklist, a checkbox of four items where they look at so the first one that they look at is interest only lending. They look at high loan to value lending. So how much deposit have you provided? Is the equity that you're providing a large amount or a small amount? They look at total investment lending as a share of overall lending and this is the crucial one and the most important one for borrowers in 2023 and the one that's going to change things is the debt to income ratio. So how much buffer do you have in your cash flows to meet your repayments? So these are the four sort of criteria they're examining to assess how much risk are the banks taking on. The first two that we talk about, the new lending mix and credit growth, that's just telling them about the system very macro numbers. These are now drilling into the detail and being like where are the risks in the system here? So let's go through interest only lending. This is pretty benign as well. Yeah. So it's sitting around about 11% of total lending and it hasn't really moved. So this report looks at, I guess, the last twelve months it hasn't really moved over that kind of twelve month window. And historically the 11% figure is fairly, like you say, benign and fairly low. So typically I know, I think we mentioned before this chat, you've seen it up near 40 back in the day when we were economists. Yeah. So it's been quite high, up near 30 kind of plus. And that's where you can present a lot more risks, I guess, because people aren't amortizing their loans when they're making the repayments. But yeah, sitting around that 11% mark and it hasn't really moved. So I don't think there's too much to say there or too much of an increase from a risk perspective. That number hasn't really moved despite rates increasing. So a bit of a non factor there. 1s Yeah, that's the summary of it. Interest only lending a bit of a non factor. The reason for why it's interest only lending in 2017 2018 was 30 40%. It reached a really high level. And the reason why it's a concern was even before that, actually, it was really high in 2014 when the investment boom started happening back then, and then kept rising. It stayed. And then action was taken by App in 2017, where they directly made the price of interest only loans more expensive, and as a result, fewer people wanted them. Because you have to pay a premium when you want an interest only repayment. The reason why it's a little bit of an issue is because an interest only repayment has a trigger point for a higher repayment at some point in the future. So a little bit like this fixed rate cliff that's going on. You can have a potential interest only cliff as well. If you have an interest only loan and it's going to expire onto a PNI loan, you'll find that your payment rises 40 50% from that process. So what that means is it's like a trigger point and when people have increases in repayments that large, it is a little bit of a risk. So that's why interest only lending is measured as a tool. But really such a low risk level when it's only 11% of total mortgages, that's so low. Even 20% is a low figure. 1s I think the benchmark that they want is like the cap that they had was around 30% back then. This a while ago, so I can't remember it, but I think the cap that they had was that 30%? 30%? Yeah. Yeah. We're at a third of that changes. Yeah, we're a third of that cap now. So, you know, perhaps they can get rid of loading on interest only lending if, if we're only at 11% now and, you know, make life a little bit cheaper for everyone. Yeah. So potentially, yeah. So what about high lvrs? Because that's, that's the other one and I think this is probably another fairly benign one, looking at the data. Yeah, high LTV lending pretty weak as well, so people are providing large enough deposits, so there's nothing there that suggests concern as well. This is partly skewed by all that refinancing that you've just 1s do you mind just going through the data for the audience? Who wants to know that? Do you have it in front of you, Curtis? Not really, no. So it essentially hasn't changed. They don't have the actual percentage figures here for the total amount of loans that are on higher Lvrs. If I had the spreadsheet that underpin this, it would be helpful. 90 to 95 is like nothing, nothing. But basically it hasn't changed. So there hasn't been an increase in the amount of high LVR lending. It's remained fairly stable across the last twelve months. 1s Despite that, with the rate rising cycle and a little bit like I mentioned because there is so much refinance activity, I guess you would kind of expect this banks aren't doing a huge amount of high LVR lending or a higher amount of that lending than they would normally do. So it's kind of business as usual on that front. Small, it's only like 1215 percent of loans above 80% LTV, and at 90% it's like less than 5% of total loans. So this one is actually a little bit important from a contextual perspective. So a lot of people, when they think about lending and they think about how to slow the housing market, be like make people pay a 30% deposit, or make people pay a 20% deposit if people aren't going to buy a house. You did that in Australia, right? Now, if you made people pay a 20% deposit and you force that on everyone, that's only taking away 15% of lending. Like 85% of the market isn't even seeking lending above 80%. So it's not. One of the things that this report shows is if you want to influence lending, where do you go and what decisions do you make and what do you attack? So New Zealand and other countries in Asia, they have specific prudential policies that target high LTV lending whenever they see risk. In Australia, we've never used this as a tool because we've never needed to. The reason why our regulator hasn't targeted this in the past, they've targeted investment lending, they've targeted interest only lending, they've targeted DTI and high service abilities, but they've never targeted ltvs the reason why is because the data tells you that it's healthy. So our borrowers are putting in large deposits when they're purchasing. Which is really interesting because we talk about Australia as, like, a high. A very expensive area and we can't afford it. So it's very interesting that people are providing such healthy deposits when they're purchasing. 1s There's something in this data as well about the consumer. Yeah, and I guess the incentive structure does back that up. So if you are able to put in the 20% deposit, the lending products incentivize you to do that to avoid lmi you access better like rates, you get a better deal as a customer if you do it. So yeah, the incentive structure is probably set up in a way which I'm not too familiar with all the other markets, but it's set up in a way that if you do have the 20% deposit, you're pretty much incentivized to put that in rather than hold it back. Potentially. Some of those overseas markets, maybe the incentives aren't as clear cut, 1s haven't really researched that. So it's off the top of my head. But I would say it kind of means that incentive structure is working fairly well if you have the capacity to you're really incentivized to do it. Yeah, that's true. The next thing that they look at, which really doesn't matter in this sort of environment, is the total percentage of investment lending. That 30%. 30.7%. It was 31% before. There's not much to talk about here, so probably just skip over it. But they look at our investors dominating the market. This was a problem in 2015. 1s I think they came out in May. Yeah, we started the business in 2015 and I remember starting out being like investors invest coming after you. Here's a whole range of things they're about to do. 1s Then investment lending was just flying and it was closer to 50. Now it makes up the right share. APRA want investment lending. They want a portion of it to be investment lending because investors provide rental accommodation, but they just don't want investors to make up the majority of the market because they're more flighty versus an owner occupier. I think this one would be this will be an interesting one to track, say in the next when the next report comes out a year from now to see if it's fallen because investors have had their borrowing powers hit more so than owner occupiers or people who hold large amounts of debt. So I would say that's maybe one that would be interesting to track on the downward side over time. But as of the December to December period that they're looking at, it basically has moved. Yeah, this is a cool start as well. They've got the total stock of investment and owner occupied debt and the total new investment and owner occupied debt. It's like mirroring each other. 1s There's a lot like this is if you think about that, it's like all the mortgages written that are outstanding at the moment, that makes up like 30% of all of those are investment loans. And Tada, in the last quarter, 30% of all loans were written by investors. So the problem in that 2015 period was you had a 30% sort of ratio of investment of. 2s Activity in the marketplace in Australia, but investment lending for the quarter was like 50% something astronomical at the time, being like, wow, what's going on here? Investors supposed to make up 30% of the market, but they're doubling it like something's not right here. That's why they look into it. It's just a sense test. We onto the key one. Yes, we are. This is the one that I really want to talk about, the debt to income ratio. You this we've talked about it in other podcasts. I said that it was going to nose dive. I said that. Trying to get debt to income ratio above six. So this is measuring someone's serviceability. It's a serviceability check. So it's checking how much debt is someone taking on relative to their income? That's the official sort of measurement. But the way serviceability calculators work is when you dial up interest rates as much as you have, people can't take on as much debt to their income. It just doesn't work. Banks give them less money, so that means that even if they wanted to get high debt to income ratios, the bank caps them off at below six. Now, so this data is measuring high debt to income lending, and it's the most topical one because it's the latest intervention that APRA took. In October 2021, they increased the buffer rate to reduce high DTI lending. They increased it from 250 basis points to 300 basis points. So that 3% buffer was implemented then because DTI lending. And the reason that they explained then was and in their latest review last month, the reason that they put there was DTI lending is our key measurement for this, and it's high. It hit a quarter of all loans, or very close to a quarter of all loans. We're above six now. It's at like ten or 11% in this data set. The next data set, I think it's going to be two. I'm like, who's getting DTI above six? Have we done any deal like that over the last few weeks? Last quarter, no, but it's a pretty dramatic fall. So it peaked at 24.3%. That was December 2021, and now it's at 11%. So that's a really big drop of the amount of loans that are being written over a DTI of six. And like you say, that's just a function of interest rates. As you dial the rates up, it becomes basically impossible to get an approval over a DTI of six. The lowest has been like we're looking at a chart over a number of years. The lowest DTI lending above six in the last three, four years is the last quarter APRA. Why do you have a 3% assessment buffer? If this is your measurement tool, why do you have a 3% assessment buffer? You were smart enough to say, and it's the correct thing to say at the time, is when the facts change, we will change. The facts have changed. That was always going to happen. And the facts that they have when they're assessing the data of lending, they have changed. 1s Give it one more quarter, they will change even further and the charts will just show a complete nosedive in this sort of lending. Now, the economic environment may not want to promote more credit growth, but at the same time, and Lonsdale, the Chair of Apparat, also noted this is if you tighten the screws too much, it's actually counterintuitive to financial stability. It creates a dangerous situation because credit growth can go backward, it can fall below what an acceptable level is and that damages the economy. And when you damage the economy, you could create more habit to financial stability as a result. This is the number one driver that's causing more and more mortgage prisoners and things like that that do not need to be that can easily afford their repayments. They do not need to be buffered at 3% like an investor. Today they're being assessed at 9%. They don't need that. That's probably a little bit too far. And now they've got the data that they need to make the change. Whether they make the change now because they're sitting they're going to sit there and they're probably going to the RBA being like, can I make this change now? This data is there, but the decision will be more it won't be made in a silo. So there's probably a little bit more of a delay coming. But this data does suggest that they no longer need to have a temporary buffer rate that's high. And that's their words, temporary. When they increase the 3%, they no longer need that because the data has changed and markedly. You could. Show this chart looking like a nosedive from when they implemented it. It's half. Yeah, it's half from when they implemented it. And it's the lowest levels that they've had in a number of years. So there's a lot of info there for them to make this adjustment. That was really the point of this podcast. That's what I wanted to get to. 1s I think it'll be in combination with the overall credit growth numbers. So we had that about 6%. We said that's low. 2s Not really of that much concern. But I suspect over the coming quarters, as this gets updated, there will be lower, like, the percentage of loans over six, it'll be lower again. DTIs are going to get lower and lower, and credit growth might start getting lower and lower. And I think it will be the combination of those two that will give the impetus for APRA to start making had really high credit growth numbers. And then I think then they would be like, well, we don't really care, but I think it'll be those two moving together, both moving backwards at the same time, that will prompt them to be like, okay, in order to keep credit flowing at the rate we want it to. Like you said, I think they've got both of them. I think credit growth at 6%, we probably haven't looked into it enough, but that's weak. How weak, I don't know, because that's context, I think they've got that data set. But if you have it moving backwards, I guess, over coming quarters, I think 1s that'll put the pressure on a change. Like, at the moment, I don't think it's really there, but these two key data metrics are only going backwards. I would say so, as that kind of gets the data continues to support that position. Yeah. You know, and that's why I'd probably say it's more maybe mid year back, end of the year. Yep. But yeah, it's really those two things moving together and just adding one more thing as well. The only reason why we have 11% DTIs above eleven, sorry. We have 11% of all loans in that December quarter of 2022 being. 1s Above a dtr six. The only reason why that actually exists is because their pre approvals from September, August, maybe even July when the cash rate was 1s 0.5% or 1% or something like that, or some refinances that settled in 120 days or something, because there's a bit of a lead time between the application being approved and settlement occurring. So it can be purchases, refinances, whatever it is. Those that went to a bank in December 2022, we're not getting a DTF of six. So those that are going to the bank today and the data for this quarter is going to come out in three months, or roughly three months. That's why we know that this data is kind of like nosedive completely apron too. They're obviously not going to say it because their job isn't to forecast what's going to happen next, it's to assess the data that's coming in at them. This data is really, really weak. It's like high DTI lending is half in the space of six months. So that's a lot of information, but then they're going to see that it's not only half, it's all gone away. Magic CPI is over. Five. Yeah, exactly. So that's probably a little bit of a signal to them that, hey, do we really need things to be this tight? The upside is you're only allowing people who can really afford it money. So from a stability perspective, it's just like, oh, you're adding resilience to it at the moment. But the problem is you've given money. You've given a lot of money. 25% of all loans for pretty much the year of 2021. You've already given all that money out to people who took out Btis above six. So that's a quarter of all mortgages. That's a lot of mortgages in the strongest year of lending in our country's history, a quarter of those mortgage were given to people above Dtf six. So you've already set a standard that's up here, you know. Dropping, increasing the benchmark so high on people so quickly really kind of traps all these borrowers who you've set a rule for, and now you're setting a new rule for. So if they want to refinance, post a fixed rate expiry, they're being punished. Hard for them to go and do that. 1s And a lot of these borrowers have perfect repayment history over a long period of time that's the last thing we're going to touch on is repayment histories. They suggest something very healthy as well. Like our arrears rates are very low. There's nothing in this data. Like, usually we don't even look at it, but people are more concerned by are our banks healthy? Going to the starting point? Are people paying their mortgages? Yeah, the answer to that is yes. The 30 to 90 day arrear rate. So this is people who are behind on their mortgages. It's at .4%. So 99.6% of people are not behind on their mortgage by up to 90 days. Yeah. And that's barely changed since twelve months ago. So it was a point, it has increased. It was a zero point 34% twelve months ago. Now it's at 00:42, but it's an extraordinarily low percentage of loans. And it's not. 1s It's not really much of an increase. So, for example, the biggest one they saw was 00:37, which was in just after COVID hit. They saw it jump up to 00:37 for the June 2020 quarter, which is like a big jump. But ever since then 2s 81. Sorry. Yeah, that was during COVID Yeah. Zero 80 was the June 20 1s that quarter just after COVID hit, where they saw a spike in non performing loans, people not paying their loans, which kind of makes sense, given the circumstances, but since then it's reverted back to an extremely safe level. So the only thing to note here is I guess that will change. Yeah. The impact of rates is cumulative and takes time, so people don't necessarily default because the RBA increased rates yesterday. It's a cumulative effect, eroding people's savings and their ability to pay. So that might track up, but for the time being, there's no real indication. I think it will track up. Like interest rates are going up. Much, much higher. We've got a 3.6% cash rate at the moment. A lot of fixed rate expiries are going to occur through the year. Nearly 400 billion is it this year, and 400 billion next year. There's a lot of mortgages that are rolling over and these people are going to be facing huge repayment rises. This is a trigger for Arrears to go up. Arrears will go up, that's true. And if you're in that situation, if you're listening and wondering, what do I do? I can't pay my mortgage. The best action and the best tool that you can kind of do is get in front of it, speak to your bank early, communicate with them and see what they can do. This won't be through a broker or anything like that. It's just a direct conversation with your bank and let them know that you're struggling to meet your repayments. Our banks will go out of their way to help you through this period. So that could be swapping your loans interest only, maybe reducing your interest rates a little bit, maybe having a bit of a pause if you're ahead on your mortgages. 1s Extending a loan term out, like this is what they did in Covert. Just pretend six months didn't even exist. Allowed six month extensions, loan terms being like, let's hit pause on time. You can do that too, so maybe they can do that. I don't know what levers they have to pull, but I do know that they are looking to help borrowers who are in a little bit of a difficult circumstance. We had adding to these stories, we had that unemployment data release come out yesterday and boy, was I off that. This super strong. It was so strong. Which makes me so happy. I've never been so happy to be wrong. I'm wrong a lot. But this one made me happy because seeing people, seeing our nation, seeing so many jobs created, 66,000 jobs created, or people in employment, a 3.5% unemployment rate, this is the best it's been in 50 years. Youth unemployment is so low. Participation rates are still strong for them a little bit, but still strong. It's the best labor market we've ever had, basically, in 50 years. I don't even know what it was like in the 70s. I'm just going to say ever. It's the best labor market we've ever had as a country. That is something to celebrate like. I don't know. We should we should celebrate this. We celebrate all these trivial things that happen across Thai. But this, as a country, is an amazing scorecard. If people are in jobs, like, that just sets them up. So, so well. You know, I know that personally. I know that experience where, you know, my parents struggled to find a job and it led to a home being lost. If if an economy is performing so well and people are in jobs, then arrears rates won't go up as much because people will find a way to pay that mortgage. They'll take on a second job. They'll go drive an Uber. They'll go do whatever it takes right. To keep their home. The work's there. Yeah. The potential incomes there. The work is there. So that is just such an amazing story. I love seeing jobs data that shows that our country is doing really well. Bad news for interest rates. Sorry. Yeah. That's the flip side to this, is it would have pushed up market pricing a little bit for interest rates. We've talked about that in the last two pods. But market I looked at it last night, it could probably change today. Guess what? The market is predicting interest rates. When I last looked at it, it was like 3.56 or something. So it was like the December 2023 1s cash rate. So they were expecting it to even come down from where it is now. That was before the job started, was released, though. That was just on the back of the bank failures. Let me see if I can pull it up while we're doing this. 2s Think, as of what I saw. Let's just look at it. Yes, it's still there. So, as at market close on the 16 March 2023, after the jobs data gets announced, the market has priced in a small possibility of one more rate rise. A small possibility. Roughly 25% chance of one more rate rise occurring. Yeah. Is a bit of a change from earlier in the week. I think that was basically a zero. Like, everyone was like, no chance of a rate rise. But then the jobs data came out and was so strong, a small chance of a rate rise coming in. We did a podcast, like last week or two weeks ago and we said, yeah, rate rises almost certain, right? 1s Yeah, middle. It was on the other side of the earth, but it's true, jobs data came out really strong. Data has been good there, but the chance of further rate rises has come down because of this. The ECB did, the European Central Bank did increase interest rates 50 basis points. So I suspect if I look at this tomorrow, it's going to show an upward revision to market expectations. But that's not only what this shows, because look at what it shows for next month and the month after. It has a rate cut baked in within 60 days and he has two rate cuts baked in within 90 days or 120 days. Basically, by August, the market is predicting a cash rate below 3.2%. We're at 3.6 now. 40 basis point reduction in interest rates in three or four months. Now, putting this together, the reason why this is important, if this happens, which is a giant if, and right now, as of today, we're doing podcasting day by day this week. So I'm not sure what the answer is here, but I don't think this can happen. But if it did happen. 1s And unemployment in New South Wales remained at 3.2%. And we maintain this extremely strong labor market. God knows what happens to inflation in this circumstance. So let's not think about inflation for now. Hopefully it just keeps coming down, tracks down. But if you have this potent combination, you'll see a big shift in the property market itself. You will see buyers if they feel safe because they're in Mobs and they're just reading about Switzerland and America. You will find buyers come back in droves. You'll find that borrowing capacities go back up. And all of the brokers that we're speaking to, I'm connected with a lot of Sydney's biggest brokers, they're all saying the same thing. There's a lot of people getting ready, waiting on the sidelines. It's our most common conversation. Our pre approval list is bigger than it's ever been before. It's a lot of people who are ready to buy now, and that's a conversation we're having a lot. You're going to find that all of them just jump straight back in at exactly the same time and Sydney is going to do what Sydney does. Interest rates fall and Sydney house prices rise. If there's confidence locally, domestically. Then you will notice that. So house prices in Sydney are already running at 0.5% to begin the first 17 days so 1% month to month already before any of this. So if this does happen, then in my opinion you can say the housing downturn is over. There isn't going to be no backward change that pushes prices back down. Fixed rate expiries may occur, that's going to be are an issue. Financial conditions are tight, that's going to be an issue. But that already exists. And Sydney house prices are already running at 1% month on month. There's more buyers out there every broker in this city that is worth their salt has a huge pre approval list at the moment it's everything that we're feeling and the market is pricing in rate cuts. I don't know what market is thinking about inflation because since I forgot that there's an inflation problem in the country I think everyone's just seeing headwinds this week freaking out, inflation doesn't matter. Yeah, but we'll see when that becomes clear but yeah, I think once rates, if rates start falling then yes, that is the bottom. They're too highly correlated for it to mean anything else yes, and there's no time like the time for damage. If you keep interest rates at this level where you dial it up one or two more times and then you keep it on it for two years yeah, even if you sit on it for six months you are allowing time for damage to occur. Now, the world has front run this like the US have been increasing interest rates much before Australia their cash rates much higher because they started earlier. The world has front run the tightening cycle and Australia has been a little bit delayed there. Philip Lowe's cops on heat for being a bit slow in raising interest rates but the world has front run this and what the world is seeing is things are starting to break. Their banks are beginning to break the default cycle in the corporate world. So banks and businesses has begun. And because of that, because of the concept of things breaking around the world, and we're seeing that that's partly why the market is viewing this and being like, look, even if the financial system doesn't break, the RBA is going to be cognizant of raising interest rates, breaking things, and maybe we need to see which is kind of where they're at anyway. Maybe we need to see how much stuff is going to break in Australia. But if there's rate cuts before any of this stuff gets to the breaking point, then you could be in a cycle here where there's just like a complete backflip, same bolt black backflip that occurs to the housing market and residential assets because of these changes. So it's been a monumentally big week. 2s I don't believe this is going to happen. Yeah, me too. To be honest, 2s I don't think there's a may rate cut on the horizon, but I mean, it's possible depending on what happens. But I think markets are still digesting the week that we've seen it looks like overseas, even the chart looks like it the chart of market pricing. Looks like I have no idea. It's just like one or two rate cuts and then it's just going to stay. But if there's actually global catastrophe that does occur, I don't think it'll look, I don't think a reality. Yeah. No, I think it's going to be great. Exactly. It'd be like the rising cycle. Yes. I don't know that the headwinds are that strong, but I guess that's to play out over the coming months. Generally, banks don't fail in isolation, so we'll see what happens, but we'll see if it's more of an isolated problem or a relatively small problem. And the central banks and the regulators around the world are able to assure markets that they've got it under control. In which case, I can't see cuts happening on such a short time frame increase. Yeah, maybe it gets a bit scary out there. In which case, I think if there were cuts to response to a catastrophe, isn't you cut by 25 pips and then sit still for six months, it's kind of a bit more of an extreme response. Yeah, for sure. I think the concept of pausing now I understand why the market is suggesting Darbia will likely pause. That makes a lot of sense. The context of this is they've increased interest rates by 350 basis points inside ten months. They have given no time for that data to come out. And on Wednesday, the day after they did the speech, they said with the word pause in the same sentence as saying, we need some time to collect some data, but we think we need to increase interest rates some more. A week later, three banks, I lost count, a lot of banks have just fallen over. 1s One of the biggest banks in the world needs some sort of bailout. Haven't looked into the detail, but the global economy and the financial system around the world, there's a lot of uncertainty that's occurred domestically. Job data is really strong, but we've already done a lot of our heavy lifting. So it makes sense a little bit to be like, should we just see how much harm does this cause? So that's probably what the market expectation of what the RBA are thinking. I think that might be correct. Yeah, we'll see. I think the job starter was just too strong. I was kind of thinking it would go that way, but I wasn't expecting the jobs data to be, I would say yeah, so strong. Yeah, I would have thought that. But the only pre context is on that Wednesday in that speech, the RBA knew that job starter, the job starter in the past was incorrect. Like, they had that information. They're like, this one's going to be really strong because of 100,000 people who are already in jobs that were not employed sorry, that already had job offers that were not in the labor market being picked up in the data. So that's why all the January data looks so bad. The RBA were cognizant, so they basically set the benchmark for this report really, really high. It met that benchmark, or was close to that benchmark. I don't really know what their benchmark was because they had 100,000 people in jobs and 66,000 people were in jobs. So I don't know what that gap means. But, yeah, on balance, it's much more of a live call. Yes, I think the chance of a rate rise coming up in April is yeah, here or there, I'd probably say it's 50 50, even if the market say it's 75 75, but chance of break cuts. I think the market has probably, you know, freaked out yeah. This week. And we'll unfreek out next week and then just show that they expect the market rates to stabilize in and around where we are at the moment. So, yeah, that's our summary. 1s Just the simple line. Are Aussie banks healthy? Yes, they're very healthy. Yes. They lend very, very well. Some risks to how they've lent in the past, but unlikely to play out 1s in too much damage. All the lending data is really, really strong for late 2022, maybe too strong. And it does give APRA the green light that they need to drop that assessment buffer and improve borrowing powers by roughly 10%. They've got that information. It's just a case of when now. Yeah. I think that the leading indicator, I guess, from this APA report, isn't that banks are at risk or anything like that. If anything, I think it shows that the likely problem over the next six months isn't that banks are doing lending that's too risky, it's that banks aren't doing enough risky lending, or they're not lending enough and they're not taking on risk. And that, like you say, if Afra is going to make some adjustments, the correction they're likely to make is to encourage banks to take on a little bit more risk. Because going forward, that seems to be where the data is trending. That banks, because of the rules, essentially are going to do less lending, because they're restricted on who they can lend to, and on WhatsApp, of course. There you have it, the last line from Curtis. It's a pleasure doing this and, yeah, we'll see you all next week. Cheers.