As predicted...

First HEM increases for 2018. 1 month in. STG and WBC. Called it last year. Naysayers said no... APRA's work is done. I said...not yet it's not. APRA's chairman made it clear he thought some further attention to HEM's would be warranted in 2018.... And here is the start of it.... as predicted.

The changes are very modest, so they wont hurt much, but they are changes nonetheless... and they don't help borrowing capacity get better

Yet another reason why debt reduction is the ticket.

 

Wages have been lagging for years. Another nail in the servicing coffin.

 

Not so much a big nail.... more a small nail.

One day though.. not sure when but one day, the penny will drop for investors that cash flow is more important for building a portfolio than its ever been....

And for maintaining it...... the real challenge

 

Pay rises = rent increases = cashflow.
Yeah, I know, doesn't affect banks' calculations of serviceability. Not yet, anyway.

 

Yes, that is right not good

http://www.abc.net.au/news/2017-08-16/wages-growth-remains-stuck-under-2pc/8812584

 

I think this is already happening, investors hitting the wall

 

Much ado about nothing - lenders update the living expense minimums each year to reflect increased cost of living.

 

Agree with Corey (not much prophecy required here), they've updated their living expense calc, pretty standard stuff that happens year on year and will continue to do so. NAB no longer accepting rent free arrangements is a more significant/noteworthy policy change than minor inflation adjustments to living expenses.

 

The previous regime (HPI) which was used well into late 2015 /early 2016 by multiple lenders before HEM's were introduced, didn't have CPI applied quarterly, half yearly or annually .... HPI ran as the living expenses benchmark for the best part of 30 years without ever really changing - which is why living costs were considered way too low and completely unrealistic by the regulators.... and along with assessment rates have been targeted by the regulators ... so I wouldn't dismiss these things as much ado about nothing, in that context. The amount of the change may be small, but the direction of the change is the key thing to note.

With wages stagnant across the country, anyone receiving less than CPI level pay rises is seeing their borrowing capacity reduced by these changes. Modestly certainly, but reduced nonetheless. So while each quarterly HEM increase may be modest, several years of below CPI wage rises versus several years of CPI HEM increases will start adding up...... Imagine for example 3 years of 2% CPI increases versus 3 years of no wage growth. That's potentially going to result in an effective 6% HEM increase . So again...modest changes yes, but its nevertheless a structural policy change that is very different to the practices of the past 30 years and affects servicing calculators where it didnt previously. I think it's worth explaining it properly to readers of the forum who might appreciate understanding the differences...

Sure, but NAB is but one lender with X% market share, and within that X% market share rent free arrangements affect but X% of borrowers ..... so while it affects NAB borrowers , it's a one off and doesn't have the potential to continually reduce capacity year on year.- unless Mum and Dad apply CPI rental increases to their kids But broadly speaking once that policy setting changes for serviceability- borrowing capacity of X becomes borrowing capacity of Y. That's it. Done. CPI based HEM increases affect all lenders and all borrowers, year after year though ... so the reach of these modest changes is far wider than one policy changing at one lender, as everyone has HEM's applied.

Again, modest when viewed in isolation... very modest even.... no doubt about it - but lots of modest can add up to something a little bit more than modest eventually, especially where lots of people aren't getting CPI level pay rises....



.

 

Under 2% for most.. and yet Sydney Trains employees want 6% per year for the next 4 years..(That's an additional 26.25% the current wage.. in 4 years).
At least the guys at Sydney Trains will be able to afford another IP..

 

Certainly HEM adjustments are now regular, but this was part of APRA's prudential practice guideline changes in 2016 where they noted regular adjustments to living expenses being a necessary component of lending (the further update in 2017 barely changed this part of their guideline).

So it has been common practice for a while now. Yes its worth noting, but has been factored in repeatedly.

Nominal wage growth running at 0% across three years?

That claim and example is ridiculous. Sounds like something Bill Shorten will say when trying to hoodwink Aussies.

Nominal wage growth hasn't been at 0% in Australia and it likely never has since before i was born. Its been running in a bandwidth around 2-3% for the past 5 years, leading to no substantial real wage price growth. Real wage growth has been basically 0% for a little while now, but that maintains the servicing impact to CPI adjustments to living expenses and the above is a claim about nominal wage adjustments relative to CPI.

Perhaps worth 'explaining it properly'?




NAB"s rental treatment change is noteworthy, particularly for younger aussies looking to begin investing and living at home. Noteworthy because its the last (or at least one of) of the mainstream lenders who now include a rent expense. Its sizeable, especially for young aussies living at home and looking to invest, being hit with 100k+ drops in servicing across all mainstream lenders now due to this change (CBA, Westpac, ANZ have all done this relatively recently too).

 

Easy there tiger ... I didn't say there would be 0% wage growth. My "ridiculous" claim /example was designed to highlight the potential for someone receiving less than CPI wage increases to have their borrowing capacity retreat a modest amount.

Is it or is it not the case that someone in that situation would see their borrowing capacity slowly retreat?

Perhaps worth reading my comments properly ...

 

Thats true.

Looking at the last 15 years though (and excluding 01 GST introduction), there haven't been too many periods of real wage declines (and really none that have lasted 3 years). Even now, we have little/no real wage growth (but no material declines). An example of 0% wage growth is a bit misleading. 0% wage growth over a three year period will likely require the countries biggest recession (likely since 1933!).

 

Having inflation targets at 2-3% bandwidths is largely the reason why nominal wage growth have never really hit 0%. Its also, theoretically, one of the reasons to set inflation targets above 0%. Its an adjustment benefit theory to having inflation exist above 0.

Interestingly its taking place right now in Aus or at least has been for the past few years. There's been an adjustment in economic activity, and instead of having things move backwards, having an inflation rate of 2-3% allows for wages to still grow nominally (but be backwards in real terms & hence allow businesses/profits to grow again while the adjustment takes place). Its far easier to tell labor (historically the largest factor of production) that their going to get a 0-2% wage increase than it being red. People's behaviour is more accepting of this.

Wages are stickier on the downside than most indicators, they're quite hard to move. Running a small business, i get that. Its pretty hard to tell employees that their going to get paid 10% lower (people don't like that!). Its also pretty hard & very high transactional costs in firing an employee & rehiring someone else at a lower wage. This makes lowering wages difficult to do (unless you have a massive recession and its unavoidable).