Australians are compelled to believe banks that produce super profits are some of the safest banks in the world. But is super profits really a sign of safety or an indication of dangerously high leverage and risk taking?
As we wait for the release of the David Murray Financial System Inquiry final report, strong indications are emerging our big four banks will need to hold more capital after flouting their privilege in calculating their own risk ratings.
Prior to 2004, and in tune with the Basel I accord, banks were allowed to apply a 50 percent risk rating to standard home loans. While every dollar of a business loan, for example, was deemed to be at risk, only 50 percent of a residential mortgage was thought to be at risk. With half the loan risk-free, the bank only had to keep half the Tier 1 capital required.
With the introduction of the Basel II accord published in June 2004, the Basel Committee on Banking Supervision thought it should cut standard home loan risk ratings to 35 percent for loans with a LVR under 80 percent. It also gave ‘Advanced Banks’ the privilege to rate their own assets, after all they were considered to have well developed risk management principals and would never put profit ahead of risk.
In Australia, the ‘Advanced Banks’ are our big four – ANZ, CBA, NAB, WBC and investment bank, Macquarie.
From Pillar 3 disclosures, the Australian Financial Review has calculated current risk-weights for our bank’s home loan portfolios. As required, our smaller non ‘advanced’ banks have risk weightings exceeding the minimum 35 percent. Bendigo is believed to be 39 percent, Suncorp – 40 percent and the Bank of Queensland – 44 percent.
According to the Australian Financial Review, Westpac believes only 15 percent of its standard mortgages are at risk (Perfect time for Gail Kelly to retire), ANZ – 18 percent, CBA – 19 percent and NAB – 23 percent. Macquarie is marginally better at 24.4 percent.
The Australian Banking Regulator, APRA, has just conducted its latest stress test on the Australian Banking System. The tests included 13 of our largest banks, accounting for 90 per cent of total industry assets. While previous stress tests included a slowdown in China and fiscal problems in Europe, this year the banking regulator focused on a collapse of Australia’s housing market.
Two stress scenarios were developed in conjunction with the Reserve Bank of New Zealand:
Scenario A consisted of a housing market double-dip triggered by a sharp slowdown in China. House prices fall by 40 percent and unemployment increases to 13 percent.
Scenario B focused on rising interest rates along with a plunge in commodity prices. Higher unemployment and higher borrowing costs caused a significant drop in Australia’s overvalued housing values.
A footnote in an APRA report noted “regulatory capital for housing held by Standardised banks was (just) sufficient to cover the losses incurred during the stress period.” But this “was not the case” for our Advanced banks.
According to the Australian Financial Review, this finding has been confirmed on Friday by APRA. The Australian Financial Review reports “The text was unclear as to whether the major banks had sufficient or insufficient capital held against their mortgage books to withstand the losses. But an APRA source confirmed to AFR Weekend that it was the latter, and that all residential mortgage capital was wiped out in the stress test.”
» Bank capital at risk from house bust – The Australian Financial Review, 15th November 2014.
» Seeking strength in adversity: Lessons from APRA’s 2014 stress test on Australia’s largest banks – APRA, 7th November 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» Major bank profits on home loans could halve – The Australian Financial Review, 25th July 2014.
Posted in Australian economy, Australian Housing | 24 Comments »
No doubt regulators, today, wish they were not sleeping at the wheel as the challenge on what to do with the world’s second largest residential property bubble start to mount.
The Council of Financial Regulators – comprising of the Reserve Bank of Australia (Chair), the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury – are working diligently on measures aimed to try to bring the unbalanced investor led Melbourne and Sydney property bubbles under control, before it starts to undermine the banking system.
It is understood, slightly less senior members of each council agency are on a working group determining and risk assessing the most appropriate measures and reporting back to the council. The council is expected to brief Treasurer Joe Hockey of their proposal prior to execution.
Earlier this month, Assistant RBA governor Malcolm Edey optimistically said to expect an announcement before the end of the year, however APRA chairman Wayne Byres wasn’t as convincing as he told a Senate Economics committee on Wednesday, it hasn’t reached a point where we have decided anything, going as far to say “it might be nothing.”
One of the challenges of the Macroprudential policy framework is accurately targeting the risky activity without shifting the problem elsewhere. The council has risky loans provided to naive and overconfident property investor’s firmly in its sight. Currently investor loans make up almost half of all lending. It certainly does not want to introduce policy to hinder dwindling first home buyers.
“We’re keeping a close eye on the build up of credit to investors in the housing market, not to owner-occupiers per se and certainly not to first home buyers. They’re not the issue,” said RBA governor Glenn Stevens.
Another challenge for regulators is targeting the specific problem markets. While Australia has a sizeable housing bubble in all states and territories, the current concern is the unsustainable activity in both the Sydney and Melbourne markets. “What the community wants is sustainable competition and sustainable growth, not something that accelerates through the roof and then drops through the floor,” said Wayne Byres.
The most recent data from the Domain Group (formally Australian Property Monitors) suggest house prices are starting to correct in the rest of the country. In the September quarter, Canberra home prices recorded a 1.7 percent fall, followed by Perth with a 1.5 percent decline, Hobart and Brisbane both recorded drops of 1.3 percent and Adelaide fell 1.0 percent.
It is widely expected the regulators will decide to impose capital charges on higher risk investor loans, especially interest only loans. This would require the bank to hold more loss absorbing capital and would likely pass this on to the borrower though higher interest charges. On Wednesday, Wayne Byres said in his opening statement to the Senate standing committee on economics:
First, within our regulatory framework APRA generally seeks to avoid outright prohibitions on activities where possible: instead, our regulatory philosophy is to focus on institutions’ setting their own appetite for risk. We also use the regulatory capital framework to create incentives for prudent lending and ensure that, while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements.
» Banking regulator outlines likely response to housing investor surge – The ABC, 24th October 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» APRA warns bank lending standards are being stretched – The Sydney Morning Herald, 23rd October 2014.
» APRA ready to act on housing – The Australian, 11th October 2014.
Posted in Australian economy, Australian Housing | 76 Comments »
New lending finance data released by the Australian Bureau of Statistics (ABS) today show the Sydney property bubble is now undeniable as it continues its dangerous acceleration – unchecked.
Investors are starting to feel the strain as they fight each other for tenants in an oversupplied marketplace. With August figures showing 60 percent of all new home loans in NSW is for the purchase of an investment property, the highest ever, rents are starting to fall. According to the Domain Group, apartment rents have dropped below $500 a week to $495. Rents for houses remain static at $510 a week.
Rents are also falling in Perth and Canberra, while rents remain static in all other states – failing to keep up with inflation.
» Change in the wind for Sydney’s rental market – The Domain, 10th October 2014.
Posted in Australian Housing | 84 Comments »
On Sunday, the Bank for International Settlements (BIS) released residential property price statistics for most developed countries around the world – (‘Australians struggle with world’s second largest housing bubble’). The data confirms Australia has the second most overvalued residential property market in the world, second only to Norway. The data, collected at the start of this year, shows on a price to rent metric, Australian residential property prices were 50 percent overvalued. On an income to rent metric, Australian house prices were 40 percent overvalued. House prices have appreciated significantly since the survey was done.
One of our readers, Alex, asked if there were a similar report comparing capital cities of Australia?
Here it is for the June 2014 quarter:
We have indexed the data to 1997, a period of stable house price growth (research shows long term house prices only rise by inflation). Note income is derived from a single wage – the ABS Wage Price Index – total hourly rates of pay excluding bonuses and is not household disposable income.
A price to CPI ratio (real house price) has been included. There is evidence both rents and incomes are inflated. Rents started to rise faster than inflation after the financial crisis, but with the significant influx of investors in the market at present (investors accounted for a record 49.7 per cent of total loans in July), rents are now contracting and will likely further exacerbate over-valuations. The same can be said for wages, with wage growth and household disposable incomes coming under pressure.
The over-valuations assume a healthy, stable market (like in 1997). If the economy were to deteriorate, larger falls could be expected.
Posted in ABS House Price Indices, Australian economy, Australian Housing | 64 Comments »
Treasurer Joe Hockey has once again demonstrated ignorance toward issues effecting everyday Australians, this time denying Australia is amidst the grips of a credit fuelled housing bubble.
His comments come almost a month after he said the fuel excise increase won’t effect the poor. The out of touch Treasurer told ABC radio, “The poorest people either don’t have cars or actually don’t drive very far in many cases.”
Hockey’s argument today is Australia’s housing bubble isn’t debt fuelled, but caused by a lack of supply.
“I’m not so sure it’s credit fuelled,”
“It is just an infinite mantra for international commentators, for analysts based overseas to say ‘well, you know, there’s a bit of a housing bubble emerging in Australia,” commented Hockey after the Bank for International Settlements (BIS) yesterday released a report showing Australia has the second most overvalued property market in the world.
“That is rather a lazy analysis, because fundamentally we don’t have enough supply to meet demand.”
“That doesn’t suggest there’s a bubble; there might be a price increase of some substance, but you’d expect the market to react and produce some more housing.”
Actual data from the Reserve Bank of Australia show Australians have racked up excessive household debt levels, suggesting the bubble is in fact credit fuelled. Australia’s household debt to disposable income is one of the highest in the world.
Despite the official cash rate sitting at levels not seen in over 50 years, Australians are still paying more to service their mortgages today as a percentage of household disposable income, thanks to record debt levels, than in 1989 when interest rates hit 17 percent:
A recent report shows Joe Hockey owns four investment properties.
Hockey said today, “I don’t see at the moment any substantial risk.”
» Joe Hockey denies Australia in a property bubble – The Sydney Morning Herald, 16th September 2014.
» Hockey dismisses any property bubble – The Australian Financial Review, 16th September 2014.
Posted in Australian economy, Australian Housing | 16 Comments »
Australians have enjoyed the second fastest wage growth of any developed economy over the past 13 years according to the OECD. Interest rates are now at record low levels not seen in almost 60 years. You would think the average Australian would be on easy street.
But a survey from National Australia Bank today reveals almost 1 in 5 Australians are living pay day to pay day, struggling to make ends meet. Of those, 70.4 percent are dipping into their savings and 40 percent have been spending on credit cards.
The answer can be found in the Bank for International Settlements (BIS) quarterly review on Residential property price statistics across the globe, released today, that finds Australia has the second most expensive housing market in the world, second only to Norway.
And the National Australia Bank’s answer to all this? Today it has teamed up with Good Shepherd Microfinance to loan people who find themselves in difficult financial circumstances, more money.
» Almost one in five Australians never have any money left over from their regular pay packets, according to a NAB survey. – SBS, 15th September 2014.
» Australia’s house prices second-highest in world: BIS – The Sydney Morning Herald, 15th September 2014.
» BIS figures confirm Australian housing overvalued – The ABC, 15th September 2014.
» Residential property price statistics across the globe – BIS, 14th September 2014.
Posted in Australian economy, Australian Housing | 25 Comments »
In an ominous sign for the global economy, the International Energy Agency (IEA) has said a sudden drop in oil demand for the second quarter of 2014 is “nothing short of remarkable.”
The second quarter saw demand slow to below 0.5 million barrels per day, the lowest level in two and a half years.
The IEA has “revised down sharply” demand forecasts for 2014 and 2015 to 0.9 million barrels per day and 1.2 million barrels per day respectively citing a weaker outlook in both Europe and China. The agency fears Eurozone economies “are getting perilously close to deflation.”
Last week the price for Brent crude fell though $100 USD a barrel, the first time in 16 months. Since the peak in June, prices are down over 14 percent. West Texas Intermediate is trading around $91 per barrel, the lowest level in 7 months and down 12 percent from the peak.
China’s Factory Output Slumps
According to China’s Nation Bureau of Statistics, growth in China’s factory output fell to 6.9 percent in August yoy, the weakest growth since the 2008 recession. Growth is expected to slow further with Xu Gao, chief economist at Everbright Securities in Beijing saying “The August data may point to a hard landing. The extent of the growth slowdown in the third quarter won’t be small,”
» International Energy Agency says sudden drop in the global demand for oil ‘nothing short of remarkable’ – The ABC, 12th September 2014.
» China’s factory growth slows to near six-year low – The Sydney Morning Herald, 13th September 2014.
Posted in China, Eurozone | 5 Comments »
Coca-Cola Amatil has this week closed a pay deal that will see wages frozen for current Victorian warehouse employees and new employees will be paid 38 percent less for carrying out the same job. A spokesperson for Coke said the deal will bring wages closer to market rates and restore the business to a sustainable earnings growth.
Coke is not the only Australian employer straining under our high cost economy. Holden workers had agreed on a three year pay freeze in a futile attempt to keep manufacturing in Australia and many public servants also face the prospect three year wage freezes.
Data from the Australian Bureau of Statistics (ABS) show real wage growth started to fall at the start of this year. Wage growth has been lower than inflation for the first two quarters this calender year – the worst in 17 years – as higher paying jobs are lost and existing employees are fearful of negotiating pay rises.
But falling wages should actually be a welcome relief for Australia, helping to increase our global competitiveness and retain much needed jobs. While trade exposed export markets such as manufacturing steal most of the limelight, many administrative, IT and back office jobs are also being lost offshore as larger corporations try to contain wage pressures and retain sustainable business units.
Earlier this year, Boston Consulting Group published its Global Manufacturing Cost-Competitiveness Index ranking the world’s 25 largest good-exporting nations on wages, productivity growth, energy costs, and currency exchange rates. No prices for guessing – Australia ranked last.
Organisation for Economic Co-operation and Development (OECD) data released last year, showed Australia’s relative unit labour costs had surged 54.1 per cent since 2000, while for comparison, unit labour costs fell in Germany, UK, US and Japan by 14.6, 20.4, 25.9 and 46.2 per cent respectively. The report showed Australia had the second fastest labour cost growth in any developed economy.
In March, the Australian Council of Trade Unions’s (ACTU) called for a rise in the minimum wage to offset our unprecedented housing bubble. The Sydney Morning Herald reported the story :
While the minimum wage was equivalent to 14 per cent of the mean house price in 1993, it is now at less than 7.5 per cent.
ACTU secretary Dave Oliver said a 250 per cent increase in average house prices in the past 20 years had made it impossible for those earning minimum wages to buy a home.
“For those on a low wage, home ownership is a now pipedream,” he said. “Someone on a minimum wage of $622 per week has enough to cover their basic costs and that’s about it. These workers tell us it’s impossible to save up a deposit, let alone afford the weekly repayments.”
Mr Oliver said the minimum wage had increased by 91.2 per cent from 1993 to last year, and would have needed to rise by 254.7 per cent – $1154.42 a week or $60,029.84 a year – to keep up with house prices.
But trying to keep wages in pace with an unsustainable housing bubble is a sure fire bet to shut Australia down.
When businesses shut down or move offshore, getting them back is extremely difficult. Even more so when you lose an entire sector such as Automotive.
While it is disappointing not to hear even a peep from our legislators on this serious structural issue plaguing the economy, the good news is automatic stabilises are rapidly kicking in.
In commenting about Coke’s pay deal and falling wages, HSBC chief economist Paul Bloxham told Fairfax, “There is a disconnect between income growth and house price growth and that needs to be watched very closely. If house prices keep running so far ahead of income growth, there is an increasing risk of a very sharp slow down in property,”
A “very sharp slow down in property” will be disruptive in the short term, but will pay dividends with a sustainable, globally competitive economy in the long term.
» Coca-Cola Amatil slashes wages with new employees to work for less – The Sydney Morning Herald, 11th September 2014.
Posted in Australian economy, Australian Housing, Unemployment | 23 Comments »
After a fruitless attempt to talk down the high Australian dollar, Glenn Stevens has today embarked on a new project – talking down house prices.
The jawboning comes after overwhelming evidence suggests Australia’s property bubble, already one of the biggest bubbles in the world, is accelerating out of control fuelled by record low interest rates.
It has put the central bank in quite a bind, with one hopeless instrument – the official cash rate – to manage inflation, booming housing prices, the excessively high Aussie dollar and surging unemployment. You could easily call it mission impossible.
Increasing interest rates at this point in time to combat the frothing property market, would cause an appreciation in the dollar, exposing trade exposed industries to even more heartache. For much of the past year, Stevens has been trying to talk down the Australian dollar – all in vain.
It would seem sensible for the bank to embark on macro-prudential controls, but the central bank has conveyed its belief it would cause distortions in the market – probably insignificant to the current distortion. The comments sound synonymous with a Q&A session in 2012 when the then Prime Minister Julia Gillard suggested you couldn’t remove negative gearing, as doing so would create distortions in the property market.
Today, Stevens said the bank was unable to further drop interest rates to cushion our faltering economy due to our housing bubble:
In our efforts to stimulate growth in the real economy, we don’t want to foster too much build-up of risk in the financial sector, such that people are over-extended. That could leave the economy exposed to nasty shocks in the future. The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle. It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that.
Stevens is not the only banker ring alarm bells. ANZ chairman David Gonski said yesterday that a correction in Australia’s housing market is inevitable. He said banks “are very aware of history. They know that you can have the growth in prices that we have had and over time and there will be a correction,”
“But the fact is anybody who believes that prices will always go up is a fool,” remarked Gonski.
Ratings agency Moody’s has warned our banks are writing more risky loans with the proportion of investor loans, interest only loans and subprime loans increasing. An analyst for Moody’s, Robert Baldi, even went as far as saying “Australia is out there at the front of the market” in issuing subprime loans. Moody’s senior credit officer Ilya Serov said “The increase in higher-risk lending is credit negative for Australian banks because it weakens the credit quality of their portfolios,”
Ex Commonwealth Bank of Australia CEO and now chairman of the Financial System Inquiry, David Murray, warns real estate is now the biggest risk to the Australian economy.
Two weeks ago, the United Nations warned the Australian housing asset bubble need to be “closely monitored.”
» RBA’s Glenn Stevens urges action to avoid property ‘bust’ – The Australian Finacial Review, 3rd September 2014.
» RBA governor Stevens: ‘Unwise’ to further boost ‘elevated housing prices’ – The ABC, 3rd September 2014.
» RBA’s Glenn Stevens ramps up warning over property investment – The Australian, 3rd September 2014.
» RBA governor Glenn Stevens warns of housing bubble risk – The Sydney Morning Herald, 3rd September 2014.
» House price correction inevitable, warns David Gonski – The Australian, 2nd September 2014.
» UN report warns of asset bubble in housing – The Age, 19th August 2014.
» Moody’s warns on rising bank home loan risks – The ABC, 2nd September 2014.
» Australia ‘at the front’ of growing subprime mortgage market – The ABC, 26th August 2014.
» Moody’s issues Aust bank warning – Business Spectator, 2nd September 2014.
Posted in Australian economy, Australian Housing | 58 Comments »
Grave fears are mounting for the future stability of the Australian economy as new data released today shows the Reserve Bank of Australia’s housing bubble is surging at records not seen since 2003.
The RP Data statistics confirms reports of investor led irrational exuberance in the Sydney and Melbourne markets. On an annualised quarterly basis, Melbourne surged an unsustainable 21.2 per cent, followed by Sydney at 13.8 per cent. The investor surge is both eroding rental yields and increasing vacancies causing many experts to warn of a bleak future for investors when capital gains slow to more sustainable levels, or worse – starts falling.
The boom stems from emergency record low interest rates set by the Reserve Bank of Australia – the lowest in over 5 decades. This latest data should force the central bank to either increase interest rates or bring in macro-prudential controls, although the bank has been happy to sit on its bum to date, opting to watch the bubble grow more top heavy.
Martin Conlon, Schroders head of Australian equities told Fairfax, “There is ample evidence that lower interest rates are fuelling nothing other than increasing asset prices, suppression of yields and misallocation of capital,”
David Murray, chairman of the Financial System Inquiry warns real estate is now the biggest risk to the Australian economy.
The surge comes at a dangerous time for the Australian economy, a time when jobs losses are mounting and wages are falling. Housing bubbles act as a leach to the economy, sucking the lifeblood from our already weak economy. It causes a misallocation of capital from productive sectors of the economy to unproductive sectors, and sucks household disposable income dry with huge mortgage serviceability requirements stemming from crushing household debt levels.
Official Australian Bureau of Statistics (ABS) unemployment data showed unemployment surged to 6.4 per cent last month, a 12 year high. Private gauge unemployment surveys from Roy Morgan more accurately place unemployment at 12.2 per cent.
The loss of jobs is putting pressure on wages. In the last two quarters, according to the ABS, wage growth has failed to keep up with inflation – i.e. real wage growth is negative. Wage growth is now the worst in 17 years.
But the biggest concern is in the youth unemployment sector. A report from the Brotherhood of St Laurence released today show youth underemployment is now at levels not seen in 36 years and unemployment is at 13 year highs. It has many social ‘scientists’ warning we are creating an entire generation that will be jobless. Housing affordability will be the least of their concerns.
It’s no wonder Tony Abbott wants to cut this cohort loose to save his budget.
» RBA flags housing risks but does nothing – The SMH, 1st September 2014.
» David Murray warns Australia’s financial risks concentrated in real estate – The ABC, 29th August 2014.
» Banks demand bail-out protection – The SMH, 29th August 2014.
» Record housing investment boom accelerates – 1st September 2014.
» Barely Working – Young and underemployed in Australia – Brotherhood of St Laurence, 1st September 2014.
Posted in Australian economy, Australian Housing, Unemployment | 28 Comments »
The latest annual QBE report into mortgage and property market sentiment shows Australian’s perceptions towards the residential property market is deteriorating rapidly amid concerns the market is overvalued.
The survey found only 36 percent of respondents now believe it is a good time to buy property in the next twelve months. This is down significantly from a weak 42 percent in 2013. The reason appears to be the federal budget, with 59 percent intending to hold off and review the impact of the harsh budget.
But perceptions the market is overvalued could be holding just as many back. 59 percent now believe the Australian residential property market is overvalued, with 31% believing the market over-valuation exceeds 10 percent. This has also rapidly increased with only 20% believing the market was more than 10% overvalued last year.
But it is no longer just individuals doubting the fundamentals of Australia’s infallible property market. Billionaire Lang Walker, Executive Chairman and owner of Walker Corporation – one of Australia’s largest property developers, has warned this week house prices in Sydney and Melbourne has surged too much. He is now forced to turn to Malaysia to reduce risk and find growth.
Yesterday, Stockland – one of the largest residential developers in Australia, said double-digit house price growth is unsustainable, and could screech to a halt.
» An annual study of the mortgage market and associated insurance in Australia – QBE, 7th August 2014.
» Billionaire Lang Walker says Sydney, Melbourne house markets ‘too hot’ – The Sydney Morning Herald, 15th August 2014.
» Stockland says double-digit house price growth not sustainable – The Sydney Morning Herald, 18th August 2014.
Posted in Australian economy, Australian Housing | 30 Comments »
The Australian has today reported on an emerging wave of subprime repossessions in Australia as times start to get tough.
On Saturday, we reported how Australia has one of the largest property bubbles in the world, significantly larger than the USA subprime bubble. While evidence is emerging, our politicians are very much behind the bubble, you have to ask yourself, can Australia have such a large property bubble with prudent lending standards?
“We have been in denial for years as a nation that we don’t have a subprime problem, but we do,” Ms Brailey, President of the Banking and Finance Consumers Support Association said.
The Australian reports on a Perth disability pensioner who was enticed to take out a $370,000 investment loan with a mortgage broker five years ago. After last year halting her payments, the loan has ballooned out to more than $1 million. Now the subprime lender has launched Supreme Court action to recover the property and the $1 million debt owing.
At 8:30am, ABC radio in Brisbane started a talkback show on Australia’s subprime mortgage crisis. The segment discussed how it is our major banks, who are writing[falsifying] most of these loans. As times start to get tough and the property market turns, people defaulting on their subprime loans has surged to three times normal levels. You can listen to the 15 minute segment, here.
And Tonight, the ABC’s 7:30 report has reported on alleged loan fraud by The Investor’s Club, now known as the Property Club. Mr McNally and Ms Mathews were enticed into buying four properties through the “free” club, and are now struggling to keep the family home after being forced to sell their business. They are suing The Investor’s Club after it was found the club’s broker has allegedly falsified loan application forms, grossly overstating income and providing loans they could not service.
The ABC said there are now four other TIC investors who have evidence of falsified loan application forms suggesting the practice is wide spread within the club. No doubt, many others could emerge tonight after the story has gone to air. Other TIC investors have also lost significant portions of their wealth investing in TIC properties such as Kirribilli Heights and now feel The Investors Club has mislead them. The ABC claims some properties have dramatically lost value and the projections of rental incomes have not been achieved.
» Pensioner represents tip of $100bn sub-prime iceberg: advocate – The Australian, 12th August 2014.
» Australia’s subprime mortgage crisis – The ABC, 12th August 2014.
» The banks and the battlers’ bad loans – A Current Affair (Channel 9), 14th August 2014
Posted in Australian economy, Australian Housing | 38 Comments »
The International Monetary Fund (IMF) recently reported Australia has, based on price to income ratio, the third most overvalued property market in quarter 4, 2013. Since then, according to the Australian Financial Review, we have leap frogged Canada to take second place honours, behind Belgium who has honours as the most expensive property market.
While economic reports both within Australia and abroad continue to ring warnings that housing is becoming a significant source of systemic risk for Australia (Think of what happened in the United States, Spain, Ireland, Greece etc), our politicians are quickly devising ways to make our bubble even bigger and far more dangerous. This had caused speculation that it is actually our politicians driving this bubble for their own personal greed.
Monday week, during a Senate Economics References Committee hearing in Adelaide, Senator Nick Xenophon said rules should be changed to allow first home buyers to dip into their super to help pay for a home. He said such a scheme was operating in Canada (remember they had the 2nd largest housing bubble, until we took that rank) allowing access up to $25,000 and it has lead to improved housing affordability.
“With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” Xenophon said.
Everyone knows if you introduce – say a $7k First Home Buyers Grant, prices rapidly increase by $7k and any benefit of the grant is quickly eroded (until the next grant is announced…). Allowing Australian first home buyers to access $25k from their Superannuation accounts to fund a leveraged purchase into our property bubble will only help thrust property prices up another $25k. So why would you suggest such a ludicrous idea, let alone announce he will submit a bill into a spring session of Federal Parliament?
Australia’s property bubble is now quite a bit larger than the one the United States experienced at the height of 2008. One of the reasons for this has been the multiple government incentives the government comes out with when the market exhibits signs of collapse (50% capital gains discounts, First Home Buyers’ Grants (FHOG), First Home Buyers’ Boosts (FHOB), allowing practically unrestricted foreign investment etc – and that is on top of negative gearing and other tax distortions.) For example, Treasury executive minutes stated the FHOB was “short-term stimulus [..] designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.” – You can’t get more honest than that!
One of the most recent changes, in September 2007, has been allowing Self Managed Super Funds (SMSFs) the ability to leverage up into our property bubble, throwing good retirement funds after bad into speculative markets seasoned with quite a bit of gearing.
From a politicians point of view, this legislation has been extremely successfully. There is currently no shortage of potentially naive property investors jumping head first into the market and keeping a floor under property prices. From the view of the regulator, there is significant cause for concern. A review by the Australian Securities and Investments Commission (ASIC) found only 1 percent (yes, one percent) of SMSFs were getting “good” advice about leveraged property investment. It’s no wonder when most of this information is spruiked during high pressure property seminars. For an increasing number of Super Fund’s investing in property, it has been an unmitigated disaster with some funds losing 75% in less than two years.
Superannuation savings is seen by politicians as a good source of funds to keep the bubble inflated and staving off collapse. But one has to question the long term effects? Not only could individuals lose a significant portion of wealth stored in homes and investment properties, they could also see reduced retirement savings.
Senator Nick Xenophon’s suggestion to improve housing affordability (or make it worse depending on where you stand) has been ridiculed by thousands of Australians over the past two weeks. But it is also drawing International attention – all the way from Canada. Garth Turner from The Greater Fool even suggests Nick needs a “better research assistant.” Turner goes on to write:
Now, Nick, we’re reaping the bitter harvest sown when that dumbass legislation passed. Allowing first-time buyers to remove tax-free money to buy a modest home they could not otherwise afford, then restore it to their long-term retirement savings makes perfect sense in theory. In practice and experience, just the opposite.
To date the HBP [Home Buyers’ Plan] has been used about 2.5 million times, with roughly $30 billion removed from savings and investments and plowed into real estate. When combined with dirt-cheap mortgage rates (I notice Aussie banks just slashed five-year rates to an all-time low) and voracious, carnivorous bankers, it’s helped push home prices into the clouds. The cost of an average detached house in two of our major cities now exceeds $1 million. (I see median home prices in Sydney rocketed 17% in the past year, to $812,000. So you know what I mean.)
In other words, if you think letting people steal money from their financial futures in order to buy houses today which they really can’t afford is going to make real estate more affordable, you’ve been spending too many evenings with the goat. The opposite is probable. In Canada, it’s fact.
So maybe Xenophon just made an honest mistake and didn’t do thorough homework before proposing this idea?
Aussie Politicians and their $300 Million Property Portfolio
Earlier this week, research surfaced on our politicians and their sizeable investment portfolios. In an article titled The Propertied Federal Political Class, the authors write:
The public should ask “Are the property holdings of our federal politicians negatively influencing policy and causing them to ignore evidence?”
It’s a very good question.
Their comprehensive research show 226 members in both houses of parliament with an ownership stake in a total of 563 properties – an average of 2.5 properties per member.
The news spread like a virus, with Fairfax later picking up the story, The many houses of Parliament: property-rich pollies ‘have vested interest’ in high prices
Oh and Xenophon I hear you ask? He owns just eight….
» Nick Xenophon Wants The Rules Changed So Young Home Buyers Can Use Retirement Savings – Business Insider, 28th July 2014.
» Nick Xenophon’s Idea To Let First Home Onwers Access Super To Buy A House Is Misguided Helpfulness – Business Insider, 29th July 2014.
» Nick Xenophon’s dangerous idea on housing – Herald Sun, 9th August 2014.
» No kidding – The Greater Fool (Garth Turner), 6th August 2014.
» The many houses of Parliament: property-rich pollies ‘have vested interest’ in high prices – The Sydney Morning Herald, 6th August 2014.
» Garth Turner hammers Nick Xenophon – Macrobusiness, 7th August 2014.
» Aussie politicians’ $300m property portfolio – Macrobusiness, 6th August 2014.
» Investors face big losses when the honeymoon is over – The Sydney Morning Herald, 18th July 2014.
Posted in Australian economy, Australian Housing | 29 Comments »
Australia’s official cash rate has remained at record emergency lows for twelve months now, a setting not seen in over five decades. But signs are now emerging a hike in interest rates is imminent to quell the dangerous and unsustainable Sydney property bubble.
Former RBA board member Warwick McKibbin, now a member of the CAMA RBA Shadow Board designed to mimic the actual RBA board spoke to the ABC’s Peter Ryan.
McKibbin believes the RBA has cut the official interest rate too low and cheap money is creating a dangerous housing bubble in Sydney. “It is pretty clear that as interest rates rise back to what is considered normal, that there will be some adjustment in the housing market” remarked McKibbin.
Inflation is now at 3 per cent, the top of the RBA’s comfort zone. He believes the RBA will have to start increasing interest rates within the next 6 months, to more normal levels.
The Bank for International Settlements (BIS) warned in its 84th Annual Report that record low interest rates were likely to fuel a new global financial crisis, as low interest rates fuelled rampant asset price speculation.
» RBA shadow board warns of housing bubble risks – ABC AM, 4th August 2014.
Posted in Australian economy, Australian Housing | 28 Comments »
The Financial System Inquiry’s Interim Report released yesterday confirms what we already know – Australia’s tax system is broken as it encourages risky leveraged and speculative investment that will one day come back to bite Australia hard and “compromise the speed of a subsequent recovery in economic activity”.
The report takes aim at negative gearing and the fifty percent capital gains discount that when combined has seen Australian households take on significant unsustainable leverage since 1999.
“Certain tax and regulatory settings distort households’ saving decisions towards housing, for both owner-occupiers and investors. Tax incentives also encourage investors to use more leverage than otherwise might be the case. Since the Wallis Inquiry, the increase in housing debt and banks’ more concentrated exposure to mortgages mean that housing has become a significant source of systemic risk”
The report indicates that increased finance to the unproductive housing sector may crowd out funding for other more productive sectors such as business at the detriment of the Australian economy.
It also goes some way to model and explain the possible consequences:
Housing is also a potential source of systemic risk for the financial system and the economy. Since the Wallis Inquiry, the increase in households’ mortgage indebtedness has been accompanied by banks allocating a greater proportion of their loan book to mortgages; the share of loans for housing has increased from 47 per cent in 1997 to its current share of 66 per cent. A large enough disruption to the housing market could have significant implications for household balance sheets, financial stability, economic growth, and the speed of recovery in household spending and broader economic activity following a shock.
As discussed in the Stability chapter, the FSI Secretariat conducted an analysis of a number of scenarios (Box 5.3). One of the scenarios considered the effect of a shock that resulted in a sharp and prolonged fall in house prices. In this scenario, household wealth would contract and there would be broader and, potentially, long-lasting effects on the economy and financial system. A sharp fall in house prices could push some households into negative equity and would amplify financial distress associated with any broader economic downturn. Deleveraging, combined with lower consumer confidence, would weigh on household consumption and broader economic growth. The extent of the damage to households’ balance sheets would determine, to a large degree, the speed of recovery of household consumption.
An extreme shock of this nature would also affect the quality of banks’ balance sheets and their capacity to extend new credit. This would include business lending, particularly for small businesses — which tend to use housing as collateral. Offshore wholesale funding would be likely to become more expensive and some banks might find it more difficult to raise funds, which would exacerbate pressures on the cost and availability of bank credit. Overall, the deterioration in bank balance sheets would compromise the speed of a subsequent recovery in economic activity.
Posted in Australian economy, Australian Housing | 53 Comments »
It’s the age old question that’s bound to attract heated debate from those with vested interests. Is it cheaper to rent or buy?
The bulk of comparisons have, to date, been flawed – deliberately – to swing the outcome in the way the author so chooses. A cursory glance normally detects gaping omissions.
Today, Australia’s independent central bank has released a research discussion paper titled “Is Housing Overvalued?”
The paper is written by Ryan Fox from the bank’s Financial Stability Department and Peter Tulip from the bank’s Economic Research Department. Full housing disclosure was given – Tulip brought a house during the preparation of the paper, while Fox continues to rent.
The comprehensive analysis examines the costs associated with home ownership such as council rates, repair/maintenance and expenditure, but excludes expenses paid by investors such as property agent fees and land tax. Significant one off fees are incurred when one buys and sells their home – stamp duty, conveyancing costs etc. The report estimates these can add as much as 7.25 per cent to the cost of ownership and it determines the median length of tenure is 10 years. These costs are amortised over the 10 year period.
The interest rate used in the calculations is the fixed 10-year mortgage rate and it assumes the opportunity cost of the owner’s equity is close to the mortgage rate.
It also discusses more subjective factors such as risk of capital loss, flexibility of moving, security of tenure, freedom to renovate etc and indicates “although these considerations are important at an individual level, at an aggregate level they seem to cancel out.”
While the paper indicates there is no signs of a bubble in Australia, it does come to the conclusion that it will probably be cheaper to rent than own. The uncertainly surrounds the future growth of Australia’s house prices. If real prices continue to grow by 2.4 per cent a year, the average rate of increase since 1955, then renting will be approximately the same price than buying. However, if real prices appreciate slower than the 2.4 per cent historical average, then renting will be cheaper than buying.
The report doesn’t provide much analysis on the future direction of house prices, but it does report on predictions from some forecasters that growth will moderate. The paper notes real price appreciation in the past ten years since 2004 is 1.7 per cent.
Above is real house prices in Australia (and the USA) dating back 134 years from 1880. You can see a upward trend since 1955 before house prices rapidly accelerated into bubble territory around the turn of the century.
Nobel prize winning economist, Robert Shiller is responsible for the U.S.A. real house price dataset. He found, historically, house prices do not increase much more than inflation, i.e real house price growth is close to zero. In 1880, Shiller’s index was 100. Just prior to the United States sub-prime bubble, the index was barely over 100 and after the bubble burst, the market made a trajectory back to mean. The concept is simple – if house prices rise more than inflation, each generation will find it harder and harder to purchase a home until a point where everyone is priced out of the market. While it is evident the current generation has been priced out by something the reserve bank refuses to call a bubble, historic growth of 2.4 per cent is not long term. Your parents paid roughly the same for housing than your grandparents and great grandparents.
If 120 years of history is not conclusive enough, Dutch economist, Piet Eichholtz created a Herengracht Real Location Value Index for homes on Amsterdam’s Herengracht Canal dating back 350 years. It also has the same outcomes. Prices do not rise much faster than inflation (if at all) and while the Herengracht Canal has seen many bubbles in the past 350 years, they have all corrected back to norm.
Expecting long term sustainable real growth of even 1.7 per cent might be a bit optimistic. Subjective factors such as risk aversion to capital loss (and being able to sleep at night) could be undervalued.
» Is Housing Overvalued? – Ryan Fox and Peter Tulip; Reserve Bank of Australia, 14th July 2014.
» The RBA says you’re probably better off renting – The Sydney Morning Herald, 14th June 2014.
» Reserve Bank paper states 2.9 per cent is the magic number for deciding whether to buy or rent – News Limited, 14th July 2014.
» Dutch history pointing to real estate fall – The ABC, 28th January 2008.
Posted in Australian economy, Australian Housing | 16 Comments »
A crackdown of money laundering in China is expected after the predominant state owned CCTV (China Central Television) aired undercover footage showing the Bank of China offers these services for a fee during a 20 minute bulletin.
A Business Spectator article republished in The Australian reports:
“We don’t care where your money is from or how you earn it, we can help you get it out of the country,” a Bank of China employee told CCTV. “We don’t care how black your money is or how dirty it is, we will find ways to launder it and shift it overseas for you,” according to a detailed CCTV investigative report.
China allows a maximum of $US50,000 to be sent off shore per year – simply not enough to snap up a bargain in Australia’s residential property bubble. Therefore investors need to go to a branch of the Bank of China who will help these citizens launder their money out of China. The scheme is marketed as ‘You Huitong’ translated as You Uncapped. According to the story, Bank of China staff colludes with Chinese immigration staff to disguise the origin of the funds.
According to the Business Spectator:
A senior manager with one of the big four Australian banks told the CCTV reporters that the Bank of China was crucial to the bank’s migration business.
“The money is very safe and will leave the country in a very grey channel. The Bank of China is the same as an underground bank [a Chinese term for black market operators that launder money],” he told CCTV.
He said the Bank of China has a huge business network abroad and only the Bank of China could carry out operations on such a large scale.
According to the CCTV bulletin, one sub-branch of the Bank of China in Guangdong – alone – has sent $970 million USD abroad this year.
But some Chinese do it alone, without the help of the Bank of China. The Sydney Morning Herald reports today that Brisbane Customs have intercepted two Chinese women arriving from mainland China with a suitcase full of $155,000 in US and Chinese currency.
A NAB survey released today shows the share of foreign buyers purchasing established Australian property fell to 10.2 per cent in the June quarter down from 13.9 per cent in the March quarter and the weakest in two years. Any imminent crack down by the Chinese government could have significant effects to foreign demand for Australian property in the months coming.
» CCTV Accuses BOC of Money Laundering – CRIEnglish, 9th July 2014.
» Australia’s SIV scheme a target for money laundering – The Australian, 9th July 2014.
» Chinese ‘washing cash’ in Australia – The Australian, 10th July 2014.
» Bank of China denies money laundering allegations – The Australian, 10th July 2014.
» Brisbane customs officials uncover $155k in luggage – The Sydney Morning Herald, 10th July 2014.
» Foreign demand for property easing, NAB survey shows – The Australian, 10th July 2014.
Posted in Australian economy, Australian Housing | 20 Comments »
The negative gearing debate is back in the media.
On Monday, the ABC’s Michael Janda warned everyone will lose in the long run when our investor lead property bubble bursts. (‘Few positives to be found in negative gearing‘)
Today, The Business Spectator’s Callam Pickering is singing the same tunes (‘Why negative gearing is Australia’s biggest policy failure‘) saying “Unfortunately the government, through inaction, is supporting speculation and rising indebtedness, and in the process has left households increasingly vulnerable to economic shocks.
A recent International Monetary Fund (IMF) report shows the three countries with such favourable negative gearing schemes, Australia, Canada and New Zealand were ranked in the four top most overvalued property markets it surveyed, leaving these countries extremely vulnerable to significant financial crises when their property bubbles burst. So concerned of a bigger property lead crash than the GFC, the IMF has set up a website to monitor housing bubble activity – Global Housing Watch.
Losing money hand over fist with negative gearing in the pursuit of speculative capital gains is regularly spruiked to naive property investors through free property seminars. According to the ABC, the consumer affairs departments of the Western Australia, New South Wales and Victoria state governments have launched a crackdown property spruikers writing to them and “warning them they must abide by Australian Consumer Law or could be hit with penalties of up to $1.1 million.” The fear is vulnerable investors, many of whom lost a small fortune in the GFC are being lured into the “risk free” but unprecedented property bubble.
» Property spruikers put on notice by states The ABC, – 8th July 2014.
» Few positives to be found in negative gearing – The Drum, ABC, 7th July 2014.
» Why negative gearing is Australia’s biggest policy failure – The Business Spectator, 9th July 2014.
Posted in Australian economy, Australian Housing | 9 Comments »
The Bank for International Settlements (BIS) has warned record low interest rates could fuel a new global financial crisis, one much more severe and prolonged than experienced in 2008.
In the bank’s 84th Annual report, released on Saturday, it raises the phenomenon it calls the debt trap. When debt bubbles started bursting in 2008, central banks were supposedly forced to dramatically reduce interest rates to stimulate and cushion the economy. These low interest rates are now fuelling significantly larger asset bubbles that will also eventually burst. Global private debt outside of the banking sector is now 30 per cent larger than prior to the GFC.
“More generally, countries could at some point find themselves in a debt trap: seeking to stimulate the economy through low interest rates encourages even more debt, ultimately adding to the problem it is meant to solve,” the BIS report said.
Ironically, it was low interest rates after the bursting of the Tech Bubble in 2000 that ultimately lead to the GFC in the first place.
This phenomenon is clearly evident in Australia with our 50 year low interest rates causing property speculators to leverage up into the property bubble like never before. Data released today by the Reserve Bank of Australia show loans for housing hitting a record high of 60.6 percent in May, at the detriment of more productive lending to business now representing only 33.2 percent – an all time low.
» 84th Annual Report – 1 April 2013–31 March 2014 – Bank of International Settlement, 29 June 2014.
Posted in Australian economy, Australian Housing | 43 Comments »
On Thursday night, Moody‘s Investors Service warned Australia’s real estate market may be overheating and it “appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction.”
Echoing warnings from the International Monetary Fund (IMF) last week, Moody’s indicate “both price-to-income and price-to-rent ratios [are] reaching levels well above historical averages. Housing prices continued to rise in Q1 2014 as average year-over-year growth in the eight largest cities inched up to 8.3%, marking the highest growth rate in nearly four years.”
Moody’s indicated our 50 year low interest rates were “playing a dominant role in fuelling the housing market”, but also warned on the role of foreign investors pushing up prices.
The third public hearing into foreign investment in residential real estate was held last week.
Consistent with the Moody’s report, Reserve Bank assistant governor Christopher Kent, told the inquiry its low interest rate setting was more responsible for driving housing prices than foreign investors.
The Australian Bureau of Statistics told the inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment.
“We do scan press reports and real estate specialist magazines to try to identify purchases of real estate, and [to] record those and record valuation changes from those. But I have to say, that’s a bit hit and miss,” assistant statistician Paul Mahoney said.
Foreign Investment Review Board (FIRB) statistics for the three quarters to March show approvals surged 93 per cent representing some 13 per cent of Australian real estate turnover. While it was noted the 93 per cent surge represents approvals and not all approvals are likely to lead to a sale, it also noted many foreigners were flouting the rules and this is likely to cancel each other out. On Friday, the inquiry heard from property industry experts suggesting the latest FIRB are in fact representative of the current market.
Committee chair Kelly O’Dwyer said she believes the rules are being bent, but is unclear how significant the issue is given the lack of data, “I am not prepared to put a figure on it.”
“Suffice to say, it is a very real concern. Evidence has been presented to the committee that would give us cause for that concern.”
One concern is the lack of compliance and enforcement. Some foreign investors considered the $85,000 fines for buying existing dwellings, not new ones, as the cost of doing business in Australia.
It is believed the committee is considering a special tax or stamp duty for foreign buyers to help prevent the Australian property market from further overheating that could lead to even more severe economic stability risks.
Canada faced the same issues Australia now faces. Citizenship and Immigration Canada (CIC) said its foreign investment scheme was “abused” and contributed little to the Canadian economy. It suspended its Immigrant Investor Program (IIP) in July 2012 while undertaking an inquiry into the scheme. In February 2014, it axed the program effective immediately. This action is though to be leading to more demand for Australian real estate.
» Moody’s Warns on Australia House Prices – The Wall Street Journal, 26th June 2014.
» Moody’s sounds alarm bell on housing prices – The Australian Financial Review, 27th June 2014.
» Moody’s warns on Aust house prices – Business Spectator, 27th June 2014.
» Is the bubble about to burst? Australian property market ‘in danger of overheating’ – The Daily Mail, 27th June 2014.
» ABS has ‘patchy’ figures on foreign investment in homes – The Sydney Morning Herald, 26th June 2014.
» Cashed-up foreign real estate investors view $85k fines as cost of doing business, parliamentary committee told – The ABC, 27th June 2014.
» Special taxes considered by parliamentary inquiry into foreign real estate investors – The ABC, 28th June 2014.
Posted in Australian economy, Australian Housing | 24 Comments »