## The difference between median value and median price

Understanding the difference between the median sales price and the median value can provide you with useful insights into exactly what is going on in your local property market.

The traditional metric is the median sales price. This is the median – or middle – price of all the properties that have sold in the suburb over a period. Typically, a median sales price is measured over at least 12 months, with at least 10 sales to determine the median price (the more sales the better).

In any given suburb across Australia, an average of only 7% of properties are usually for sale at any given time. The median sales price is therefore, by its definition, the middle price of what is selling.

Furthermore, the percentage change in the median sales price measures the difference between what is selling now and what was selling during
the previous period, which can make median sales price changes appear more volatile. For instance, in a suburb where housing stock is mainly comprised of three-bedroom homes, a new development of two-bedroom homes being sold may skew the median price to be lower.

Alternatively, a cluster of homes renovated to four-bedroom properties boasting luxury fittings and features may skew the median sales price to be higher.

The second metric is the median value, which is a much more stable metric because of the amount of data used to determine the figure. It is calculated based on the value of every property across a suburb or geography, not just those that are sold. This means thousands of properties, and close to 100% of the housing stock is used to determine the figure.

At CoreLogic, our valuation systems calculate the value of every property across Australia every day. Because our systems power the majority of the banking and valuation industries, which require extraordinary accuracy of data, the median value is the middle value of every individual property in the suburb at a given time.
While the median value may not show as dramatic growth or change as the median sales price, it is largely regarded as a more definitive figure for a bank to use in valuing a property.

If the median value is higher or lower than the median sales price, this could be because your property is different to the types of properties currently selling (which you can check by looking at recent sales online and identifying property features), or it could be due to buyer demand.
If both the median value and the median sales price are significantly lower than what you’d like to get for your home, maybe rethink selling, as it’s an indication that your price expectations are out of alignment with the market.

Remember, the only truth is on auction or sales day as your home is only ever worth what someone is prepared to pay for it.

Originally published as:

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## Were mortgages more affordable 28 years ago?

 The Property Investment Professionals of Australia (PIPA) has just released analysis arguing that mortgages are more affordable now than they were in 1990. Peter Koulizos, chairman of PIPA, said those who say property has grown less affordable with time haven’t studied the numbers properly. “Many commentators use just two indicators to measure housing affordability – income and house prices,” Koulizos said. “This is a good measure to indicate how expensive housing is, but if you want to analyse affordability, you must also consider mortgage repayments.” PIPA examined annual figures from a variety of sources, including the Australian Bureau of Statistics (ABS) and National Australia Bank (NAB). The advisory body looked at the average size of a home loan, the standard variable rate, principal-and-interest repayments, and the average annual wage from 1990 to today. “The key figure to look at is the last column – the percentage of an average person’s income needed to make the mortgage repayments,” Koulizos said. Based on this analysis, home loans are as affordable now as they were in 2010, and are more affordable than they were 28 years ago. “In 2018 figures, you need 40.9 per cent of the average annual salary to pay the mortgage. Compared to 1990 when you needed 48.1 per cent of the average annual salary, property owners are in a better position.” In 1990, when home loan interest rates were 17%, 48.1% of a person’s annual salary was needed to settle the mortgage. Five years later, a homebuyer only needed 35.3% of their average annual salary to make mortgage repayments. Rather than the ability to service a loan, it was the initial deposit that seemed to stump many aspiring first-home buyers. “There is little doubt it can be tough saving for a deposit, although many first timers are using innovative strategies such as rentvesting and buying in more affordable locations, as well as buying with family and friends to get a foot on the real estate ladder.”   This article is from:  Originally published as:
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## Why it’s worth cutting mortgage costs via cheaper loan

Amy Mylius has saved more than \$1000 a month in loan costs on her two investment properties by switching to a new lender after her repayments crept up by more than 100 basis points in 12 months.

Mylius, from the inner Melbourne suburb of Fitzroy, watched her rates slowing rising to more than 5 per cent as ANZ discreetly pushed up costs for interest-only investors in response to rising funding and compliance costs, despite record low cash rates.

She says when monthly costs on investment loans for her town house and apartment rose by \$1300 a month she decided to refinance.

Mylius, who is also paying off her home, says: “The lending environment is changing so quickly. You need to watch rate movements and shop around for the best deal. I review my rates every six months.”

The big four banks, which account for about 70 per cent of loans, have increased their rates on average for interest-only investors by 54 basis points during the past 18 months since regulators imposed caps on lending to cool over-heating markets, says research house and comparison site Canstar. Other lenders have increased rates by between 20 and 27 basis points, its analysis shows.

Mortgage providers are under intense pressure from regulators and the banking royal commission to ensure borrowers have adequate income to comfortably afford repayments for the term of the loan.

That means they are demanding more details about borrowers’ income and spending, with banks like Westpac more than doubling the detailed categories of questioning from six to 13.

Some lenders, particularly relying on overseas funding to finance their loans, face increased borrowing costs thanks to higher US interest rates.

## Funding pressures

The short-term money market benchmark interest rate, or Bank Bill Swap Rate, has been rising sharply since January, increasing funding pressures despite the Reserve Bank of Australia maintaining cash rates at 1.5 per cent.

For example, ME Bank, owned by 29 industry super funds, recently raised rates for existing property borrowers by up to 16 basis points in response to rising funding and compliance costs.

MyState Bank, the listed finance group, has introduced a \$300 establishment fee for its basic variable residential investment loan.

According to comparison site Mozo, effective rates have increased for more than 40 per cent of borrowers in the past 20 months as lenders raise rates or borrowers fail to switch to cheaper alternatives.

Many borrowers are paying rates above 4 per cent despite benchmark principal and interest rates being under 3.7 per cent, its analysis shows.

Kirsty Lamont, Mozo director, says lenders are offering their best deals for buyers with big deposits and steady incomes and relying on the inertia of existing borrowers not to compare rates and switch.

Westpac Group, which includes St George Bank, Bank of Melbourne and BankSA, is launching a limited offer 3.68 per cent loan for first-time, owner-occupier homebuyers with principal and interest repayments.

## Throttling back

But lenders are “throttling back” on many borrowers seeking refinancing who don’t meet their tough new income standards, or whose rising household expenses might make it more difficult to keep up with repayments.

Martin North, principal of Digital Finance Analytics, says the number of troubled households seeking to refinance has more than doubled from 15 per cent to more than 30 per cent in the past 12 months.

There are estimated to be 550,000 households seeking to refinance over the next three years as fixed loan terms expire or borrowers seek better terms and conditions, DFA’s analysis shows.

But Shane Oliver, head of investment strategy with AMP Capital, does not expect any increase until 2020, adding “the next move being a cut cannot be ruled out”.

The possibility of a rate cut is being raised because house prices are slowing with more weakness likely, tighter lending standards are easing nascent inflationary pressure and growth is likely to remain below RBA expectations.

But investors like Mylius, a buyers’ agent with Cate Bakos Property, says unofficial rate increases make it imperative to review mortgage costs.

Mylius says variable rates on her two ANZ investment properties had “gradually” crept up from below 4 per cent to about 4.9 per cent on one and more than 5 per cent on the other.

“Last month I called my mortgage broker to find out my options,” she says.

She initially switched to an ANZ two-year fixed principal-and-interest loan at 3.88 per cent. This week she refinanced with CBA at 4.29 per cent on a three-year interest-only fixed rate. ANZ did not charge a fixed term break fee.

“The \$1000 savings a month – because no principal is paid – will go into my offset account against my owner-occupier loan, which is more tax effective,” she says.

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## Key retail banking product happenings from the past month

• Both variable and fixed Home Loan rates are trending down as providers continue to chase owner occupier borrowers. Investor rates have also been easing, even before last week’s announcement by APRA that the investor loan growth limit would be lifted for those lenders that meet its prudential requirements.
• American Express now has a Credit Card with a rate that’s below 10% and lower than is available from any ‘big 4’ bank, and a big 4 bank unveiled its new American Express companion card range.
• While there were few Personal Loan changes this month two lenders dropped their fixed rates for car loans below the 6.00% mark, making a total of 16 lenders in the Mozo database below that level.
• At Call Deposit rates continue to slide with only one increase to report this month, along with a handful of rate reductions.

·       April was the second month in a row where the number of Term Deposit rate increases outnumbered decreases, although top rates haven’t improved since last month. There was also the launch of an innovative new option for depositors where the interest is paid up front rather than waiting until the end of the term.

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## Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.

Long-term bond yields have risen over the past six months, but are still low. Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States. Credit spreads have also widened a little, but remain low. Financial conditions generally remain expansionary. Conditions in US dollar short-term money markets have, however, tightened over the past few months, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate. This has flowed through to higher short-term interest rates in a few other countries, including Australia.

The price of oil has increased recently, as have the prices of some base metals. Australia’s terms of trade are expected to decline over the next few years, but remain at a relatively high level.

The Bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3 per cent in 2018 and 2019. This should see some reduction in spare capacity in the economy. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Stronger growth in exports is expected. One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high.

Employment has grown strongly over the past year, although growth has slowed over recent months. The strong growth in employment has been accompanied by a significant rise in labour force participation, particularly by women and older Australians. The unemployment rate has declined over the past year, but has been steady at around 5½ per cent for some months. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation remains low. The recent inflation data were in line with the Bank’s expectations, with both CPI and underlying inflation running marginally below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

The Australian dollar has depreciated a little recently, but on a trade-weighted basis remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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## How Commonwealth Bank got itself into such a mess

The banking royal commission has been full of horror stories. To some extent this is not surprising. Banks undertake millions of transactions per year so it is hardly surprising that there are some shockers in the mix. The Catholic Church and the Returned Services League have provided similar front page news stories over the last year. It is hard to tell from the Commission however just how systemic the issues are.

But the Australian Prudential Regulation Authority’s review of the Commonwealth Bank of Australia has provided a case study of some of the deep sources of the problems. It has found three core concerns:

The board and its audit and risk committees failed to provide appropriate governance, to ask appropriate questions and to seek appropriate information. Leadership was deficient at the highest level.

The second issue was that management did not pay sufficient attention to risk, compliance and internal audit issues, the priorities were too low and the information flows excessively massaged. Management approaches were excessively legalistic and defensive. There was a failure to take non-financial risk sufficiently seriously.

The third concern was that the executive committee was poorly focussed. Under the divisional structure of the organisation, senior executives took responsibility for ‘their’ businesses and did not ask difficult questions of one another. The culture was too accommodating.

There are lessons here for most corporations. As the federal Treasurer has pointed out boards must take their responsibilities seriously; risk, audit and compliance functions provide important organisational defences and should be seen in that way; and companies much find ways for executives to query one another without it being seen as undermining each other.

## Risk

The question of how CBA got itself into this mess is important. For most banks financial risks are normally the most dangerous. Institutions which fail almost always do so because they were unable to obtain funding of their book, or they lent money to people and could not get it back.

Funding and credit risk are existential issues for banks. So, especially after the financial crisis, it is hardly surprising that the CBA board should have been deeply focused on financial risk.

Getting a strong voice for risk, compliance and audit at the table is hard in all banks and most institutions. We would all like for focus on the revenue raisers rather than the cost centres.

In football we focus much more attention on the goal scorer and much less on the fullback. In CBA the main concern about customers was around the eternally-measured customer satisfaction metric and much less on customer complaints. Most of the staff got bonuses on the Group performance on customer satisfaction. This was important for improving the overall customer service but clearly missed out on the early warning signals which come from complaints.

CBA moved to leadership amongst the major banks on the thing it measured, but clearly it distorted perceptions and practice.

The strong independence of the divisions, coupled with an unwillingness to challenge the heads of other divisions, also has a history.

Under David Murray there had been a lot of ill-will and uncooperative behaviour between the divisions of the bank. Ralph Norris changed that. He installed “trust and team spirit” as one of his core values. This had many positive ramifications for the institutions and divisions and service areas cooperated much more openly in achieving collective objectives. The bank’s performance improved markedly.

It seems however that this cultural value gradually morphed into one where it was seen as inappropriate to openly challenge one another around the executive table.

Trying to get this balance right is hard. The people sitting around the executive committee table inevitably see each other as competitors for the top job. Engaging them in constructive criticism will always be difficult. It seems as if CBA switched from an excessively critical executive culture to an excessively cooperative one.

Overall the review committee has done Australia a service. It has used CBA as a case study in how boards of directors should operate and provided lessons about how some important problems might be avoided. It also provides some guidance to the royal commission about how to address some of the concerns it has raised.

The new chair of the CBA board can take some comfort from the general view of the review panel that structures and practices have already improved under her stewardship. The report also provides a lot of specific guidance to the new CEO as to what needs to change and how it should be done.

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## The many moving parts influencing house prices

Before I dive into where housing is heading, the banking regulator’s analysis of CBA’s vulnerabilities was spot on. In 2010 I posited that while the four oligarchs’ much-lauded diversification into non-core businesses might smooth their return distributions during the good times, it lifted the probability of adverse fat-tail events of the kind NAB experienced in the UK, ANZ discovered in Asia, and CBA  suffered with the Storm, CommInsure and Austrac sagas. (To say nothing of overpaid prop traders manipulating markets!)

On Thursday we heard a major bank boss acknowledge this for the first time, with NAB’s Andrew Thorburn conceding that “complexity in the bank is just killing us“. One of APRA’s recurring theses is that CBA was, paradoxically, a victim of its own success and, more specifically, its outstanding financial risk management.

Over the last three decades there has not been a better performing retail bank in the world. APRA contends that CBA’s focus on minimising credit losses, and its demonstrated multi-cycle ability to do so, engendered hubris that resulted in it taking its eye off the ball on new compliance laws and non-operating risk requirements.

So while CBA has consistently produced remarkable returns accompanied by tiny arrears, and avoided the bank-killing losses of peers in the 1991 recession and the global financial crisis, it has latterly been plagued by problems in non-core areas like financial advice, insurance and anti-money laundering compliance.

In response to APRA’s findings, CBA’s share price jumped 1.9 per cent while Standard & Poor’s concluded that there was no adverse credit rating impact. Under conservative new CEO Matt Comyn, CBA will galvanise its position as one of the strongest banks in the world, trading off a modest compression in returns on equity against even lower probabilities of loss.

## Many moving parts

On the subject of losses, there are many moving parts influencing the \$6.9 trillion housing market.

This column forecast strong house price growth between 2013 and 2017, and called an end to the boom in April 2018.  Sydney prices started falling in September and have since corrected 4.4 per cent according to CoreLogic. Home values in Melbourne began melting in December, and are off 1.1 per cent. Across the five largest cities, the turning point was October: the value of bricks and mortar has since shrunk 2 per cent.

It is instructive to compare this correction with the two preceding episodes between March 2008 and January 2009 and June 2010 and April 2012. During the GFC, Australian capital city prices fell 8.3 per cent on a peak-to-trough basis. Yet the contemporary house price trajectory is more closely tracking the path of the 2010 to 2012 downturn in which prices dropped 6.3 per cent, with both notably being triggered by a tightening of lending conditions.

My base case had been a minimum drawdown of around 5 per cent in the absence of aggressive Reserve Bank of Australia interest rate hikes. If we were ultimately hit with, say, two to four hikes (noting that the RBA’s “neutral” cash rate is eight hikes away), my view has been that national prices will correct 10 per cent to 20 per cent, which would be manageable payback for the 50 per cent explosion in values since the last cyclical trough in April 2012.

In 2018 there have been several new developments. First, we have had a 25 basis point jump in short-term interest rates, as measured by the bank bill rate which, all other things being equal, should be passed on by lenders via out-of-cycle rate hikes. Some like ME Bank have already started this process. If this occurs, it would be tantamount to an early RBA rate increase, which was not expected until later, and is clearly negative.

A counterargument is that the royal commission atmospherics will make it hard for banks to pass on rising funding costs to borrowers. They could, alternatively, shift the burden to depositors through lower savings rates and/or continue to crush their operating costs which remain bloated.

Another negative is undoubtedly the more stringent lending standards APRA is imposing on banks, which are being reinforced by the royal commission’s findings. It is not widely understood that most of the tightening in credit assessment processes has already happened. APRA has been hammering the banks on serviceability since December 2014 when it introduced the 10 per cent annual speed limit on investment loan growth and its minimum 7 per cent interest rate repayment test, which is more than 3 percentage points above current discounted rates.

More recently APRA has ramped up its focus on lenders verifying the income and expense data that borrowers attest is accurate in their loan application forms. This may result in longer approval times and, at the margin, crimp borrowing capacity to the extent any borrowers have, heaven forbid, been lying. (APRA is also introducing new limits on maximum debt-to-income ratios.)

Last week this column explained that one of the points overlooked by UBS banking analyst Jon Mott is that if borrowers have been telling fibs by inflating incomes and/or understating expenses on their application forms, they have defrauded their bank. This puts lenders in a tremendous position of legal power should they choose to exercise it, and arguably neutralises the economic consequences of falling foul of responsible lending laws, which our research suggests is extremely unlikely to have occurred on any systematic basis.

There is frankly scant empirical evidence that the major banks’ home loan books are anything other than extremely high quality in arrears and equity coverage terms. That includes, ironically, the billions of dollars worth of real “liar loans”, which in May 2016 we revealed had been fraudulently obtained by Chinese borrowers using fake pay slips. They have outperformed ANZ and Westpac’s average customer on a pure servicing basis.

## Negative gearing

A final negative is Labor’s move to remove negative gearing and increase capital gains tax on investment properties, if it gets elected next year.

These headwinds have to be balanced against several tailwinds. The first is that APRA is removing its 10 per cent cap on investment loan growth, which is a big plus for credit creation and prices more generally. The quid pro quo is that banks will have to meet a range of new regulatory tests regarding the integrity of their credit processes.

Moody’s analyst Daniel Yu comments that “although removal of this cap will likely spur growth in investor lending…APRA’s increased oversight to ensure that bank underwriting continues to strengthen contains the risk [and is] a credit positive”.

Moody’s believes that APRA’s relaxation of the restriction “reflects its recognition that since…December 2014, banks’ loan underwriting and lending practices have improved, as reflected by the decline in investor interest-only and high loan-to-value lending”.

Here the hard data undermines the hyperbole. The share of new borrowers approved with loan-to-value ratios (LVRs) over 90 per cent has slumped from a peak of 22 per cent in 2009 to 13 per cent in 2014 and 7 per cent today. The share with LVRs between 80 per cent and 90 per cent has likewise shrunk from 21 per cent in 2011 to just 14 per cent today.

A second positive for housing is the revitalisation of the securitisation market, which has massively boosted the quantum of cheap funding available to non-banks.

In early 2016 we predicted the return of the non-banks that proliferated before the GFC. Issuance of residential mortgage-backed securities (RMBS) has leapt from around \$10 billion annually since 2008 to over \$40 billion in 2017. Notwithstanding falling house prices, rising arrears and a decade-low in prepayment speeds, the former sub-prime lender and now near-prime non-bank Liberty Financial managed to sell \$1.5 billion of its loans this week via a huge RMBS deal. This money represents a tremendous injection of liquidity for non-banks that can offer loans to borrowers completely outside APRA’s tough serviceability rules.

A final plus is, of course, employment growth and the economy more generally, which is powering along on the back of a synchronised upturn in global growth.

It’s difficult to discern what transpires from these cross-currents. My expectation remains that we are on track for a soft landing similar to between 2010 and 2012, although it will be a lot worse if the RBA musters the gumption to normalise its cash rate back to its “neutral” 3.5 per cent level.

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## 8 Financial New Year’s Resolutions For 2018

The beginning of a new year is the most popular time to set goals and make plans, and everyone’s resolution list should include a few financial resolutions.

Resolutions, like goals, are best when they’re specific. When you set a resolution or a goal, think of it as picking destinations on a road trip: If you just say you want to head west, you’re probably going to waste a lot of time and fuel getting there; however, if you say you want to go to San Diego, CA, you’re going to get there faster and more efficiently.

If getting your financial life in order is a resolution for you this year, here are eight very specific things you can do to help you get there faster:

1) Save 15% of your gross income.

Most people say they want to save more, but don’t know how much they should save or where they should save it. At the Financial Gym, the first goal our client’s get is a savings goal and we start with 15% of their gross monthly income. If you make \$60,000 a year or \$5,000 a month, your savings goal is \$750 per month. Many of our clients panic when they see their savings goals, but it’s just because it’s not something they’ve tried to do before.

The best way to stay successful and continuously achieve this goal is to set up an automatic transfer from your checking account to your savings account for this amount every month. If you need the money to pay bills, you can always transfer it back, but challenge yourself to live off of what’s left after your automatic transfers happen. It’s a sneaky way to save, and works for 90% of our clients.

2) Monitor your credit score quarterly.

The recent Equifax information leak should keep everyone on their toes about monitoring their credit. You can freeze your credit or try other monitoring services, or you can easily and cheaply monitor it yourself. I tell clients to set a calendar reminder for every two to three months to review their credit score for any changes of activity.

If you have credit cards with American Express, Discover, Bank of America and others, you can check your FICO score for free at any point. There are also great sites like Credit Sesame or Credit Karmathat allow you to check your credit scores for free whenever you’d like. The sooner you uncover any problems with your credit, the easier they are to fix, so it’s important to make this a regular part of your financial health routine.

3) Invest monthly.

Just like you should save regularly, you should set up a regular process by which you invest your money. Money sitting in a bank account is earning less than 1% and inflation is 2-3% which means that every day your money sits in a bank account, it loses 1-2% of it’s value. You don’t need a lot of money to start investing as there are apps that will let you invest with just five dollars or less; and they make it easy for you to automate. If you want to start investing outside of your retirement account, there are apps like AcornsStash Invest and Betterment that help you automate your investing and set up a regular schedule.

If you’ve funded your emergency savings and you feel prepared for your near term goals, then you should take advantage of retirement savings options you may have through your work like 401ks or 403bs or on your own like IRAs or Roth IRAs. If it’s through your company, you can automate your investing easily through payroll deductions or you can also automate through investment sites like Betterment or Wealthfront for individual retirement accounts.

4) Create a debt plan.

If debt has been a constant problem for you, make 2018 the year that you start to tackle it head on. Paying down debt is like climbing a mountain, it’s going to take time and strategy and the only way to get to the top is to start climbing. The first step of your plan is figuring out the total debt you have, the type of debt you have and what the interest rates are on your debts. I suggest putting all of this in a spreadsheet, and I’ll warn you that this is a scary activity for many of our clients. It’s like stepping on the scale when you know you’ve had too much to eat; however, it’s critical in creating your plan to get rid of it. I suggest drinking a glass or two of wine before you discover your grand debt total.

After you’ve figured out your interest rates, look for ways to consolidate your debt or lower your interest rates either through 0% balance transfer credit cards, personal loans or student loan refinance options. Once you have all of the debt and interest rates set, then pick the best repayment strategy for you. Some people like using the debt snowball method where you pay the smallest debts off first while others like the debt avalanche where you pay the highest interest rate debt first. I prefer the debt avalanche; however, I really prefer whatever is going to motivate my client the most in their debt repayment journey, so pick what’s best for you.

5) Track expenses daily.

I used to weigh over 200 pounds and I finally started to lose weight when I began the Weight Watchers program. For me, the best part of the program was that it forced me to track the food I was eating. The process of tracking everything made me mindful of my eating and led me to start making more changes. You can do the same thing with your money. There are a number of free apps like Expenses OK or Spending Tracker that can help you with expense tracking or I have clients who simply put it all in an excel spreadsheet everyday. The best part about expense tracking is that it will make you more mindful of your money and force you to start to think about how you spend it.

6) Try a monthly savings challenge.

I truly believe that anyone can do anything for a month, so I suggest that you try one of the numerous monthly financial savings challenges that are out there for at least January or maybe try another one in February. My good friend runs an Uber Frugal Challenge every January that has changed lives, or you can just search for savings challenges and find your options on Pinterest or personal finance blogs.

7) Go on a cash diet.

I don’t know about you, but after the holidays, I need to eat more salads and less junk food and drink more water and less alcohol. If you spent a bunch of money on your friends and family this holiday season and you’re credit cards have a little extra meat on them, then I suggest you try a cash diet for the next few weeks or months. Limit yourself to a certain amount of money every week, (typically around \$50-\$100) and see if you can live off of just that amount every week. Mindfulness of your money is a large component to getting financially healthy, and nothing will make you more mindful of your money than cash.

I advise clients to go on cash diets all the time as there is neurological research that has proven that when we swipe debit and credit cards, we literally shut our brains down and we don’t process what’s happening. When you use cash, you’re forced to keep your brain engaged whether it’s counting the money to pay it out or realizing that you’re about to run out of it and have to change your plans. Cash diets are great ways to keep your spending under control and increase your money mindfulness.

8) Schedule Weekly Financial Exercises

This time of year, most of the regular gyms will be filled with people exercising to get back into shape after the holidays, and just like there’s physical exercises for our bodies, there are financial exercises for our balance sheets. I’ve shared some of my favorite’s here, and just like you’d schedule time in your calendar to exercise your body, schedule time in your calendar to exercise your financial health as well. For the best results, I suggest trying a financial exercise two to three times a week on a regular basis.

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## Westpac shares crumble after poor lending practices conceded in internal documents

Westpac’s share price has nosedived after the release of explosive documents detailing widespread failings in not only the quality and riskiness of its home loans, but the way they are processed.

## Key points:

• Westpac shares tumble 4pc after APRA finds it has the worst record of the big banks in the integrity of its home loans
• APRA “Targeted Reviews” find that around 30pc of Westpac and CBA loans did not meet usual verification processes
• Westpac has paid \$38m in compensation, while another 64,000 borrowers may require compensation

An internal memo tabled at the banking royal commission showed Westpac had performed very poorly in a Targeted Review of home loans demanded by the Australian Prudential Regulation Authority.

“Westpac’s performance in the APRA Targeted Review was poor, both absolutely and relatively to our peers,” head of portfolio integrity David Watts wrote to his boss George Frazis, the chief executive officer of the consumer banking arm, in a memo last July.

The review of the home lending practices by accounting giant PwC was commissioned by APRA following consultation meetings with all the banks in early 2017.

“APRA chairman Mr Wayne Byres noted that Westpac was a significant outlier in our proportion of high LVR [loan-to-value] and IO [interest only] lending,” Mr Watts wrote.

“APRA also questioned the availability of robust data and the effectiveness of analytics and monitoring to appropriately understand the risk profile of all exposures.”

The review from PwC was a dismal outcome for Westpac.

“The PwC report has disturbed APRA and there is no easy answer to rebuilding trust with them in this area,” Mr Watts said.

APRA has already used the findings of its review to ditch its 10 per cent “speed limit” for investor credit growth in favour of more targeted controls on lending, focusing on the quality of loans and overall household debt.

## UBS slaps a ‘sell’ on Westpac

Lindsay David@linzcom
You can’t make this stuff up. From Westpac’s mortgage book sample in the  . Lying about borrowers costs of living to make the mortgage book look more creditworthy is a criminal offence for fooling investors and those that fund the bank

UBS bank analyst Jonathan Mott has crunched the PwC’s Westpac report numbers and found:

• 29 per cent of minimum income verifications (eg payslip checks) were not completed
• 66 per cent had not itemised living expenses collected
• The median assessed household living expenses represented just 23 per cent of household income
• 30 per cent of the sample the borrower’s financial position was suggested to have been misrepresented
• 9 per cent of the sample the loan would not have been approved if the “true financial information” was used in serviceability assessment.

Mr Mott said the data raised questions regarding the quality of Westpac’s \$400 billion mortgage book.

“While Westpac has undertaken significant work to improve its mortgage underwriting standards over the last 12 months, we expect it and the other majors to further sharpen underwriting standards given the royal commission’s concerns with responsible lending,” he said.

“Boards and management [are] likely to be much more risk adverse, further tightening of underwriting standards are highly likely across the industry.”

Tighter credit and weaker asset quality left UBS with a very cautious view of Australian banking as investment.

Westpac’s failings in the APRA Targeted Review were enough for UBS to slap a “sell” rating on the bank and scythe its target price from \$31 per share to just \$26.50.

Investors took the hint and Westpac shares tumbled almost 4 per cent to a two-year low of \$28.13 at 3pm (AEST).

## Contrasting views

The Westpac memo pointed to contrasting views between the banks and APRA over responsible lending standards.

## Liar loans explained

“Poor performance by lenders there may not be showing up in losses now, but, APRA hypothesises, that could change in a material cyclical downturn,” Mr Watts wrote.

“To date most industry thinking about the consequences of responsible lending failures has been centred on the potential for fines, reputation damage and the costs of any remediation necessitated by a breach.

“It is now clear that thinking needs to broaden.”

Mr Watts warned Mr Frazis of the dangers of not acting quickly to resolve APRA’s concerns.

“APRA is expecting to see improvements made as a matter of urgency and advised they will be working with ASIC [Australian Securities and Investments Commission] on next steps and responses to the industry,” he said.

Failure to respond appropriately could lead a more formal investigation, appointing a third party to manage the bank’s affairs and banning executives from senior roles in banking.

## Westpac’s exposure unclear

Mr Watts said the bank’s exposure to customers is not clear.

## New home buyers’ credit crunch

“If management is correct in its reasoning and there have been few instances of loans having been made to customers who can’t afford them, and assuming securities are sound, there should be limited potential for remediation program costs and the underlying principal of loans should be safe,” he said.

“But what if customers who are not stressed now later do become so, not because repayments were always unaffordable, but because they are victims of a general economic downturn, and what if responsible lending breaches at the time of origination in some way impact the integrity of the bank’s security from those customers?”

Mr Watts said in that case, the bank’s exposure would be less benign.

So far the bank has reimbursed customers \$38 million to the end of the 2016 financial year, which Mr Watts said was the first time Westpac has been able to track the real costs given the absence of a remediation framework.

In Westpac’s pipeline there are another 22,000 owner-occupier and 42,000 investor loans that may require compensation, the PWC report found.

## CBA has problems too

A separate APRA Targeted Review of the Commonwealth Bank, also conducted by PwC, found more than a third of the sample — 94 of 271 loans checked — did not meet the bank’s verification procedures, mainly due to inadequate documentation.

Among the adverse findings, the PwC report found borrowers are not required to confirm the details, completeness or accuracy of the information used in their serviceability agreements.

The report also questioned the CBA’s use of the income-adjusted Household Expenditure Measure (HEM) in serviceability assessments.

“The living expense declarations provided by borrowers are not subject to verification or assessment beyond comparison to HEM,” PwC found.

“This approach does not encourage borrowers to focus efforts on ensuring the completeness and accuracy of their expense estimates.”

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## The untouchables: How the dodgy financial planners kept their jobs

Charging dead people fees, impersonating clients, falsifying signatures. It’s all apparently in a day’s work for unscrupulous members of the \$4.6 billion financial planning industry.

For the best part of the past week, the Hayne royal commission explored the misdeeds of advisers employed by the big banks and AMP. The testimony was disturbing, and portrayed the financial services giants as cumbersome organisations unable to keep tabs on an army of advisers.

Where misbehaviour was discovered, they were slow to act and even slower to sack people. And even if an adviser was dismissed, there was always the prospect they’d be picked up by another group such as Dover Financial, which employed a number of planners who had been cited for misconduct in their last job, the commission heard.

On Tuesday counsel assisting the commission turned to Sam Henderson’s Henderson Maxwell, which according to its website is “proudly privately owned” and not “in cahoots with the big banks”.

Even so, Mr Henderson’s time in the witness box was dramatic, eclipsed perhaps only by the collapse of Dover Financial’s Terry McMaster.

The commission was played a telephone recording of one of Mr Henderson’s employees impersonating a client, Donna McKenna. Similar calls occurred on half a dozen or so occasions, the commission heard, and yet the unnamed staff member was not disciplined, let alone sacked. The purpose for playing the recording was not only to demonstrate impersonation. It also revealed that Mr Henderson’s office was told on at least two occasions that moving Ms McKenna’s superannuation out of her existing account would immediately wipe \$500,000 from the value of her benefits.

Mr Henderson claimed the information was never conveyed to him.

Ms McKenna, a Fair Work commissioner, complained to Henderson Maxwell and was offered a refund. She also took her complaint to the Financial Planning Association, of which Mr Henderson was a member at the time.

According to senior counsel assisting Rowena Orr, QC, Mr Henderson sought to influence the FPA complaints process and very nearly struck a deal to keep his name out of the public arena despite admitting to breaches of the FPA’s code of conduct and agreeing to sanctions.

Mr Henderson had built a high media profile, including a television show on Sky News and contributing general superannuation advice in AFR Weekend (both arrangements have been cancelled). When the FPA’s conduct review commission suggested a further sanction, which was to refrain from media appearances for a year, Mr Henderson resiled from his earlier admissions of wrongdoing, the commission heard. More than a year on from Ms McKenna’s complaint, no resolution has been reached.

The storm over conflicted financial advice has been brewing for some time.

In 2009, a parliamentary committee headed by former Labor MP Bernie Ripoll was given the task of examining the root causes of the collapse of financial services firms including Storm Financial and Opes. The committee estimated that 85 per cent of advisers were associated with a product manufacturer (that is, a bank or other financial services company).

A briefing paper prepared by the royal commission says 44 per cent of advisers operate under a licence controlled by the largest 10 financial institutions.

The Ripoll inquiry gave rise to the Future of Financial Advice reforms, which banned certain types of commissions and introduced a legal requirement that advisers act in the best interests of clients (rather than maximising their own pay packets).

Yet problems persisted and late last year the Turnbull government bowed to pressure and called the royal commission.

Mr Henderson is not the only person whose conduct was probed by the commission; nor is his behaviour necessarily the most egregious. Moreover, he has openly admitted to making mistakes and has apologised for them.

But what Mr Henderson’s case demonstrates is that the problem is not confined to advisers employed by, or aligned with, banks.

And if, as the commission heard, the chief disciplinary “stick” available for punishing poor behaviour is action by employers, what happens when somebody does not have a boss and cannot be threatened with dismissal?

The commission heard that in other segments of the workforce, industry bodies play a significant disciplinary role.

There are 25,000-odd financial advisers operating in Australia, many of whom belong to one of two peak bodies, the Financial Planning Association of Australia and the Association of Financial Advisers.

The FPA has expelled six members since January 1, 2016.

Either the overwhelming majority of members are impeccably behaved or somebody is asleep at the wheel.

The AFA appears to be even more timid when it comes to expulsions, with the commission hearing it declined to expel one member even though the Australian Securities and Investments Commission (ASIC) had banned him from providing financial advice.

So if the industry bodies can’t – or won’t – act as decisive disciplinarians, surely the corporate regulator has been pulling rogue advisers into line? Not necessarily, the commission heard. ASIC has banned 229 financial advisers since 2008, including 10 so far this year. But it has brought no civil penalty proceedings against financial advisers in the past five years.

On Friday, Ms Orr asked ASIC financial advisers team senior executive leader Louise Macauley whether the regulator had “used its banning powers enough to deal with misconduct in the financial advice industry”.

Ms Macauley responded: “No, I don’t think we have. I think we have used them to the best of our ability given our resources.”

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