A Top 5 weekend including 30-year mortgages, Banksy and a New Zealand trust and the Prime Minister of the United Kingdom

This Top 5 comes from Gareth Vaughan of interest.co.nz.

As always, we welcome your additions in the comments below or via email at [email protected] And if you’re interested in occasionally contributing to the Top 5 yourself, contact [email protected].

See all previous Top 5 here.

Facebook had a bad day…

Source: Bloomberg.

1) Mortgages designed for bank shareholders rather than customers?

write for The conversation, Richard Holden explains why Australian banks don’t offer 30-year fixed interest rate mortgages like their US counterparts. Here in New Zealand, the longest mortgage currently offered by banks is five years. TSB offered a 10-year rate for some time and BNZ a seven-year rate.

In Australia, most borrowers take variable-rate mortgages, although Holden, professor of economics at UNSW Australia Business School, cites a growing trend towards fixed-term mortgages, which are more popular than fixed-rate mortgages. variable rate here in New Zealand. Holden notes that there is an active Australian government bond market with maturities of one to 30 years, providing a benchmark for mortgage pricing. New Zealand has swap rates up to 10 years, and there are 30-year government bonds in issue that will mature in 2051.

Holden argues that Australia’s mortgage metrics effectively benefit bank shareholders at the expense of bank customers.

Longer fixed rate loans would protect Australian borrowers from large interest rate swings. In the United States, you can refinance a 30-year fixed mortgage if long-term rates drop. So you benefit if rates go down, but you are protected if they go up.

Another idea to improve the terms of loan contracts for borrowers – long advocated by University of Melbourne economist Kevin Davis – is the so-called ‘trailer mortgage’. These contracts limit borrowers to pay a certain “spread” over a benchmark interest rate.

These offers largely depend on competition in the banking sector. The United States has a lot of competition in the banking sector. Australia has very few.

When costs rise, two groups can bear that cost: customers or shareholders.

In Australia, when banks’ funding costs rise, customers bear almost all the costs and shareholders zero. This is the best proof that you will ever have real market power.

2) Westpac’s lost decade.

Behind his paywall The Australian Financial Review examines how Westpac went from being larger than ASB’s parent Commonwealth Bank of Australia, in terms of market capitalization, to less than half the size in just over a decade. The story examines Westpac’s problems and mistakes, and the things the ABC did right.

IT setbacks, mismanagement, compliance issues (hello AUSTRAC, APRA and ASICs), and Westpac’s costly regional banking strategy, are all issues being examined by the AFR. Westpac also had its problems in New Zealand, offside with the Reserve Bank.

Here is the AFR;

Westpac overtook the CBA in market value in 2008 after buying St George Bank in a $12 billion certificate merger. It had a market capitalization of $42 billion, about $2 billion more than the ABC.

Both banks had quite similar franchises and almost the same key financial ratios. Westpac and CBA controlled about half of the residential mortgage market with $265 billion each in mortgages.

Both banks were trading at twice their book value, had cost-income ratios – a measure of efficiency – of 46% and total capital ratios of around 10.5%.

Westpac’s return on equity of 22% in 2008 was higher than CBA’s 19% and the market was willing to pay more for Westpac’s management expertise, as evidenced by the fact that Westpac had a higher market value. high even though its assets of $590 billion were lower than the CBA’s $620 billion.

Today, the gap between the two banks is $86 billion, with Westpac’s market capitalization at $75.6 billion and the CBA’s at $162 billion. The market’s misvaluation of Westpac’s prospects boils down to the fact that its stock price is equal to book value while CBA is trading at twice book value.

3) The increase and increase in the average size of home loans.

A report of BankingDay in Australia this week, saying that the average home loan size for Australian homeowners reached A$602,035 in December got us thinking about New Zealand.

David Chaston’s chart below, using Reserve Bank data, shows that the average size of new mortgages for first-time home buyers in New Zealand has risen steadily over the past few years. In December, it reached NZ$660,927 for small capital loans and just under $600,000 for all property loans. High loan-to-value loans, based on house prices and income, suggest many debt-to-income ratios for borrowers north of six times.

4) Banksy and a New Zealand trust.

Write for the International Consortium of Investigative Journalists (ICIJ), Scilla Alecci – with the help of Pandora’s papers – exposes how thousands of works of art were secretly traded through front companies in tax havens.

Alecci details how London financial broker Maurizio Fabris used a New Zealand trust to buy more than a dozen works of art from British street artist Banksy, noting that when a trust becomes the legal owner of the assets , the collector may be able to avoid or defer wealth, estate and capital gains taxes.

Fabris, a British-born former racing driver and now a partner in a classic car investment fund, co-founded Enigma Securities in 2004 in London. Enigma, an investment brokerage firm, had outposts in Milan, Malta and Dubai.

In 2008, Fabris set up the Heritage International Trust in New Zealand with the help of Asiaciti, a Singapore-based financial services provider whose internal documents are among those in the Pandora Papers leak. Trusts are commonly used to protect assets or reduce taxes by transferring legal ownership of assets ー stocks, cash, real estate ー to another party, often a professional firm such as Asiaciti.

At the time, New Zealand offered anonymity and tax exemptions to foreigners setting up trusts there. It did not require trust managers like Asiaciti to disclose the beneficial owners of a trust or what it held.

A chart of Fabris’ offshore holdings and other leaked documents reveal he used the New Zealand trust to buy two luxury cars ー a Ferrari and an Alfa Romeo ー, invest in an Italian company that patented automotive technologies and hold shares in front companies registered in the British Virgin Islands, the Marshall Islands and Switzerland.

Fabris, who described himself in a recent newspaper interview as “an entrepreneur with a passion for architecture and design”, used the shell companies to buy assets and hold shares in the Maltese branch of his brokerage firm Enigma .

In 2009, Fabris’ trust paid around $750,000 for 12 works by Banksy, including a brass rendition of “Girl with Balloon”.

The ICIJ reports that in 2017, a court in Milan found Fabris and two co-founders of Enigma guilty of Italian tax evasion of approximately $6.6 million and collaborating with an international criminal network, and the sentenced to more than three years in prison. A year later, an appeals court threw out the international collaboration conviction and overturned the verdict, saying the tax crime occurred outside the statute of limitations.

5) The partying British Prime Minister.

Someone with some spare time had fun on TikTok with UK lockdown party Prime Minister Boris Johnson. The result is below.

For those who want something more serious, this podcast from Tortoise Media, The ministry of untruths, probes Johnson’s relationship to the truth in the context of the Covid-19 pandemic.

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