With a smirk on his face, Treasurer Joe Hockey told naive Australians today, the Reserve Bank’s cut to the official cash rate is “good news”. With a continuing deteriorating economy, the Reserve Bank was once again forced to cut the official cash rate, this time to a record low of just 2 per cent.
“I say to the Australian people directly, now is the time to borrow and invest, whether you be a household or business” the delusional Treasurer urged. “Now is the time to have a go. To borrow some money and to invest.”
But with regulators trying to douse asset bubbles created from cheap credit, the Treasurer’s advice is likely to undermine their work and put economic stability at risk. Australia now has a record household debt to household disposable income ratio of 153.8 per cent at a time when jobs are being lost and real wage growth is slowing, if not negative. According to Barclay’s, household debt in Australia is the highest in the developed world. Further household leveraging would not be at all prudent.
Increased productive business investment, on the other hand would be welcomed, but the Treasurer is not going to gain this by blowing bubbles.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, 5th May 2015.
» Interest rate cut: Treasurer Joe Hockey urges Australians to spend – The Sydney Morning Herald, 5th May 2015.
Posted in Australian Economy | 6 Comments »
According to a report in the Australian Financial Review today, the Australian Securities and Investment Commission is readying for a major crackdown on property spruiking to Self Managed Super Funds (SMSFs).
It follows a recent Federal Court ruling that confirmed the commissions’ view that property spruikers who promote or recommend investors to establish a SMSF are carrying on a financial services business and requires a licence.
According to Commissioner Greg Tanzer, property spruiking is the “largest concern” in the sector with unscrupulous spruikers draining superannuation savings into highly leveraged, speculative vehicles. An earlier review by ASIC found only 1 percent (yes, one percent) of SMSFs were getting “good” advice about leveraged property investment.
He concedes the problem has increased remarkably since SMSF were allowed limited recourse borrowing in 2009. This legislation has created quite a headache for regulators at the coal face.
The David Murray Financial System Inquiry report recommends to reinstate restrictions on SMSF’s access to limited recourse borrowing arrangements (LRBA), suggesting it could pose a significant risk to the economy.
» Regulator cracks down on property spruiking to self managed super funds – The Australian Financial Review, 4th May 2015.
» Alarm bells ring as self managed super funds spruiked as vehicle for leveraged property – Who crashed the economy, 15th November 2012.
Posted in Australian Economy | 2 Comments »
Foreign investors who purchase existing residential dwellings illegally, and third parties who knowingly assist, will face increased penalties under a new bill to be introduced into Parliament this Spring.
Coinciding a day after the Foreign Investment Review Board’s (FIRB) annual report showed a 95 per cent increase in applications by foreigners legally purchasing Australian real estate (‘Foreign investment propels Sydney, Melbourne property bubbles‘), Prime Minister Tony Abbott announced the strict new penalties. Foreign individuals breaching the law will face 3 years jail time and fines up to $127,500. Corporations could be fined up to $637,500.
Real estate agents, developers and third parties assisting with the illegal transaction will be hit with civil and criminal penalties up to $42,500 for individuals and $212,500 for companies.
While legal transactions have surged, it is unclear just how many illegal transactions are taking place. Part of the problem, according to the current government, is the Foreign Investment Review Board is under-resourced in the enforcement area with a lack of specialist investigative staff. The result – not one prosecution during the past 6 years.
Consistent with the consultation paper released in February (‘Australia set to tackle Foreign Investment Surge in Residential Real Estate‘), the Foreign Investment Review Board will be relieved of all residential real estate functions. The Australian Taxation Office with strong compliance and enforcement skills, sophisticated data-matching and a proven track record in pursuing court action will get the job.
The taxpayer will no longer foot the bill for screening and compliance operations, with a levy being placed on applications. Residential properties valued up to $1 million will attract a token fee of $5,000, with no further details released for more expensive properties. The February consultation paper suggested properties over $1 million would attract a fee of $10,000, with $10,000 increments for every 1 million dollars thereafter.
The Foreign Investment Review Board may not be entirely at fault, but rather a scapegoat for bad policy. In December 2008, three months after the collapse of Lehman Brothers and with Australia’s house prices down 4.7 percent, the Rudd Labor government ‘streamlined’ the administrative requirements of the Foreign Investment Review Board. With widespread economic panic, you would expect the government would have better things to be doing than streamlining administrative requirements, but as Australian’s would later find out, the legislation was designed to strategically open the flood gates for foreign buyers to purchase property unhindered and put a floor under Australia’s housing bubble. (‘Real Estate Investment by Foreign Residents : Top Secret‘)
Time will tell if the bill makes it into legislation, or if it’s just window dressing. The current government hopes these reforms will commence on the 1st December 2015.
» Government strengthens foreign investment framework – Prime Minister of Australia, 2nd May 2015.
» Australia set to tackle Foreign Investment Surge in Residential Real Estate – Who crashed the economy, 25th February 2015.
» Transparency returns to foreign investment in Real Estate – Who crashed the economy, 21st April 2012.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy, 4th January 2012.
» Australia for sale – who crashed the economy, 27 March 2010.
Posted in Foreign Investment Review Board, Sydney Housing Bubble | 9 Comments »
The International Monetary Fund (IMF) will send an economic team to Australia next month to check up on Australia’s housing bubble and the increasing risk it poses to the economy, according to a report in the Australian Financial Review today.
James Daniel who will lead the team next month told the AFR, “My first impression from 30,000 feet is that house prices have gone up a lot in Australia, so that will be a big part of the discussion.”
Another part of the discussion will be what (if anything) the government is doing to prevent the bubble, “Even if you were to take the view that house prices are frothy or overvalued, what is the policy response?”
The Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and the government has all failed in attempts to get the situation under control. The current government refuses to quarantine tax breaks such as negative gearing and is being passive about foreign investment. The Reserve Bank of Australia tipped fuel on the fire in February, cutting the official cash rate by 25 basis points.
The team is also concerned with Australia’s record high household debt levels, some of the highest in the world, saying, “House prices and household debt are very related.”
Today, The Sydney Morning Herald reports (‘The creeping danger of Australian households’ love affair with credit‘) on figures from the Wesley Mission suggesting almost 40 per cent of Sydney households are now technically insolvent, despite record low interest rates.
» IMF to probe Australia’s record property and debt levels – The Australian Financial Review, 2nd May 2015.
» The creeping danger of Australian households’ love affair with credit – The Sydney Morning Herald, 2nd May 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation, Sydney Housing Bubble | 8 Comments »
Applications by foreigners to purchase Australian real estate has surged in 2013/14.
Data contained in the Foreign Investment Review Board’s annual report, released yesterday, show there were 23,430 applications to buy Australian real estate last financial year.
This is up 95 per cent from the 12,025 applications received the year earlier.
Of the 23,430 applications, two applications were rejected. This is an “improvement” over the previous year, when the FIRB rubber stamped every application.
» Foreign Investment Review Board Annual Report 2013-2014 – Foreign Investment Review Board, 30th April 2015.
Posted in Australian Housing, Foreign Investment Review Board | 8 Comments »
Concerns are mounting that Australia’s big banks are disregarding risk and may not be capitalised enough to withstand a conceivable property correction.
Today, the Australian Financial Review reported Sydney home prices are growing five-times faster than wages. Such rapid increases in property prices over one’s ability to service the mortgage has caused ratings agency Moody to warn the risks of mortgage defaults in Sydney and Melbourne is increasing.
According to Moody, a single breadwinner household in Sydney would be spending an “unsustainable” 70 per cent of their income on the mortgage. With interest rates at abnormal lows, levels not seen in decades, fear is starting to mount the risk of default and delinquency will multiply when interest rates return to more normal levels.
This view is one shared with the banking regulator, the Australian Prudential Regulatory Authority (APRA), who last year opened its macro-prudential tool kit and provided guidelines to the banks to stress test buyers with a minimum 7 per cent mortgage rate, providing borrowers a buffer for when rates return to normal.
The Australian Financial Review revealed last week (‘How National Australia Bank circumvents rules to stop a property bubble‘), National Australia Bank is not abiding by these guidelines for more risky property investors who currently own one or more investment properties and are seeking new mortgages to expand their portfolios. Rather, a confidential NAB mortgage calculator shows it is applying the current mortgage rate, which can be as low as 4.29 per cent.
This comes on top of earlier reports showing National Australia Bank has increased lending to property investors by 13 percent last year, when APRA said it would not like to see growth exceed 10 per cent – another macro-prudential measure.
The big banks imprudent desire to operate with razor thin capital to enhance super profits could be significantly impacted by Australia losing its coveted AAA credit rating, a result likely with further deterioration of the federal budget and a dysfunctional government. The Financial System Inquiry (FSI) chairman David Murray said today if the government lost its AAA rating, the downgrade would hit our banks who rely on foreign funds underwritten by the federal Treasury. Murray, CEO of the Commonwealth Bank of Australia between 1992 and 2005, holds the view our banks are under-capitalised and a growing risk to the economy as they lend excessively to our “housing casino”.
Robert Mead, PIMCO’s head of portfolio management in Australia has weighed support into the debate saying banks should raise more capital to protect against the potential fallout from over extended households. (‘PIMCO calls on banks to do their bit and raise capital‘)
Mead told Fairfax, “In five months since [the introduction of macro-prudential tools] we’ve seen a continuation of a strong property price rally in certain markets,”
With many of the banks ignoring APRA’s macro-prudential guidelines, Mead commented “These sorts of macro tools are important, but don’t appear to be working.”
“The way to reduce this risk is to have a banking system that is even more robust. Asking banks to raise more equity capital is a way to de-lever the system, and I would argue the long term benefit to the shareholder is that their bank becomes more resilient.”
The Murray FSI report last year published findings of a stress test conducted by APRA showing a mining downturn, rising unemployment and a housing correction “would be sufficient to render Australia’s major banks insolvent in the absence of further capital raising.” (‘Australian banks not the safest in the world – far from it.‘)
» David Murray says banks would be hit by AAA credit downgrade – The SMH, 28th April 2015.
» Risk of mortgage defaults rise in Sydney, Melbourne – Yahoo Finance/AAP, 27th April 2015.
» How National Australia Bank circumvents rules to stop a property bubble – The AFR, 23rd April 2015.
» Sydney home prices are growing five-times faster than wages – The AFR, 28 April 2015.
» PIMCO calls on banks to do their bit and raise capital – The Sydney Morning Herald, 28th April 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation, Sydney Housing Bubble | 16 Comments »
Reserve Bank Governor Glenn Stevens told a New York audience there is too much focus on the ‘exuberant’ Sydney property bubble. Addressing The American Australian Association luncheon, Stevens said: “Then there are dwelling prices, which, at a national level, have already risen considerably from their previous lows, at a time when income growth has been slowing. Popular commentary is, in my opinion, too focused on Sydney prices and pays too little attention to the more disparate trends among the other 80 per cent of Australia. That said, it is hard to escape the conclusion that Sydney prices – up by a third since 2012 – look rather exuberant.”
As we have reported over the past couple of months, the central bank has been unable to cut the official cash rate further after igniting the property bubble in February with a 25 basis point cut. Meanwhile the rest of the “real economy” suffers. Mr Stevens says “A balance has to be found.”
Last night’s comments could be seen as an indication the Reserve Bank will look beyond, or side-step, the Sydney property bubble when it sits in two weeks time to consider the official cash rate setting. But it could also be more jawboning, as the risks in doing so are too high to ignore. The central bank is worried about our record level of household debt, the highest in the Advanced world according to Barclays.
Stevens remarked last night, “The extent to which further increases in leverage should be encouraged is not easily answered, but nor can it be conveniently side-stepped. Even if we chose to ignore it, monetary policy’s ability to support demand by inducing households to bring forward spending that would otherwise be done in future might well turn out to be weaker than it used to be. For a start, households already did a lot of that in the past and, in any event, future income growth itself looks lower than it did a few years ago.”
And then there is the strong message for our dysfunctional government. The RBA can’t do all the heavy lifting via monetary policy:
“Across much of the world, too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high. Monetary policy alone won’t deliver that.”
Will the central bank cut next month? – or is the bank out of ammo and crying out to our government for some intervention?
Posted in Australian Economy, Australian Housing, Sydney Housing Bubble | 26 Comments »
The last instalment of the ABC’s property bubble special aired tonight, focused on the “biggest headache in decades” for regulators trying to breath life into the economy, while the housing bubble accelerates on cheap credit.
You can watch tonight’s segment here – Getting hammered by overheated housing
In recent months, the property bubble has prevented the Reserve Bank of Australia from cutting the official cash rate. (‘RBA holds off playing with fire‘)
» Getting hammered by overheated housing – The ABC, 16th April 2015.
» Property bubble a Macroprudential challenge for regulators – Who crashed the economy, 22nd October 2014.
Posted in Australian Housing, Banking Regulation, Monetary Policy | 17 Comments »
The ABC has tonight delivered its second instalment on Australia’s housing bubble, the brewing banking crisis and tomorrow night – what the regulators are doing to try to limit the catastrophic damage.
You can watch tonight’s segment here – Is 1.6 trillion dollars in housing loans too hot too handle?
The ABC says there is good reasons to be wary of our banks $1.6 trillion exposure to Australia’s hot property sector with the banks borrowing a lot of money from foreigners with the backing of their mortgage portfolios.
As we reported back in November last year, (‘Have the Big 4 just flunked APRA’s stress test?‘) Australia’s banks are super profitable, but it comes about from flouting their privilege in calculating their own risk ratings. (‘Australian banks not the safest in the world – far from it‘)
Brian Johnson, a Banking analyst with CLSA told the ABC tonight, any sort of self assessment is fought with danger, “I’ve been a bank analyst for a long time and I’ve never ever seen a bank accurately forecast that there would ever be a problem anywhere.”
We reported in November last year, Westpac only believes 15 percent of its residential mortgages are at risk, the lowest risk rating of any of the banks. The big 4 banks have been cutting their risk ratings so fine to reduce the amount of loss adsorbing capital they need to hold, all in a bid to increase super profits and out do each other.
The ABC reported tonight, the OECD is recommending regulators, such as Australia’s banking regulator APRA, should no longer accept the banks own risk assessments of their own mortgage portfolios. Australian banks are now holding less capital than before the GFC hit, due to their watered down risk ratings.
A lack of capital underpinning the banking system could raise its ugly head if our over-extended property market begins to level off.
Both Martin North of Digital Finance Analytics & Brian Johnson is concerned with the behaviour of the irrational negative gearing investor with interest only loans. Currently they lose money, week after week, though poor rental returns but with the hope of big capital gains when they sell. If the unsustainable and overheated property market were to level off, or start falling, all these investors could head too the exits at the same time.
Australia is only one of three countries with negative gearing on residential property and a housing correction of the size we now face has never been tested before.
Tomorrow night the ABC will examine what (little) regulators are doing in trying to contain the situation.
» Australian banks not the safest in the world – far from it – Who Crash the Economy?, 8th December 2015.
» Have the Big 4 just flunked APRA’s stress test? – Who Crashed the Economy?, 16th November 2014.
» Too big to fail – Who Crashed the Economy?, 18th November 2012.
» Is 1.6 trillion dollars in housing loans too hot too handle? – The ABC, 14th April 2015.
» Australian banks’ mortgage concentration worries analysts – The ABC, 14th April 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation, Monetary Policy | 22 Comments »
Plunging prices for Australia’s largest export, iron ore, has forced Atlas Iron to announce on Friday, it was suspending operations and shutting down production over the next couple of weeks. The announcement will see the loss of 500 jobs at its Pilbara mines and another 75 redundancies at its head office in Perth. The mines will be put on care and maintenance with the hope prices will one day improve.
With four weeks until the Federal Budget, Treasurer Joe Hockey is now modelling the budget around an iron ore price of just $35 USD a tonne, telling Fairfax, “There seems to be no floor.”
According to UBS analysts, the $35 target price is only $1 over the break-even price for Australia’s largest miners, BHP Billiton and Rio Tinto.
The shutdown of Atlas comes at a bad time for the Pilbara region and Port Hedland. According to SQM Research, asking prices for houses in the town has collapsed 22.6 per cent in the last year, down 33.4 percent over the past three years.
Average rents for houses have fallen 34.2 per cent over the year and 51.5 per cent over the past three years.
In February 2015, the ABC reported on a 1965 fibro and iron three bedroom home brought four years ago for $1.3 million, being passed in at $360,000. The hopeful owners’ currently have it listed on RealEstate.com for $590,000. The closure of Atlas will be another blow for the owner.
According to an article published yesterday (‘We travelled across China and returned terrified for the economy’), a Bloomberg metals analyst, Kenneth Hoffman, believes China’s metal markets are “a lot worse than you think.” He commented, “China’s metals demand is plummeting.”
The World Bank has indicated a slowdown of China will have a “significant negative impact” on Australia (‘China slowdown ‘will hit Australia’)
Data released today by the China Customs Bureau show exports slumped sharply in March, down 14.6 per cent for the year. Exports to Europe and Japan was down just short of 20 per cent. Imports were also extremely weak, down 12.3 per cent.
The plunge in iron ore comes about from mass overbuilding in China, something we detailed back in June 2013, (“GFC2 – Will it be made in China?‘)
» Atlas Iron’s decision to suspend production highlights pressure in sector, analysts say – The ABC, 11th April 2015.
» Port Hedland house passed in at auction in million-dollar dive, sign mining boom over – The ABC, 9th Feb 2015.
» We travelled across China and returned terrified for the economy – Yahoo7 Finance / Bloomber, 10th April 2015.
» China slowdown ‘will hit Australia’ – Yahoo7 Finance / AAP, 13th April 2015.
» Budget 2015: Treasurer Joe Hockey manages expectations with forecasts of $US35/t iron ore – The ABC, 13th April 2015.
» Falling iron ore price means BHP Billiton, Rio Tinto might clear only $US1 a tonne – The Financial Review, 13th April 2014.
» Exports slump suggests China’s economy further losing steam, say analysts – South China Morning Port, 13th April 2015.
Posted in Australian Economy, Commodities, Iron Ore | 11 Comments »
This week, the ABC’s The Business will air three special reports on “Property, banking and how the government and regulators are handling bubble risk.”
Tonight’s special report can be watched online at Plenty of froth over housing, but is it a bubble?.
Lindsay David, author of Australia Boom to Bust has no doubts we are in a credit fuelled housing bubble showing the ABC reporter, a 65 year old weatherboard home, 45 minutes from Sydney that recently sold for $1.38 million, $300,000 over reserve. The reporter compared the price to other homes overseas and presented data showing over the past 40 years, Australia had the strongest house price growth of any country except Norway. Lindsay also dismissed any notion we had a housing shortage.
SQM Research’s Louis Christopher said at this point the Sydney property market was 25 per cent over valued and would likely to be 40 per cent overvalued by the end of the year. Louis indicated other markets were already correcting, like Perth where rents are down 8 per cent and prices are being held up only by cheap credit. “Darwin was clearly in correction territory.”
The reporter touched on Australia’s record level of household debt, recently hitting 153.8% of household disposable income. Lindsay said this level of debt leaves the whole property market vulnerable to potential prices falls of up to 50 per cent. “What history tells us, is that when bubbles burst, we move back to the long term medians, in the event of deleveraging”
Emeritus Prof. Mike Berry says property bubbles need a trigger to pop, suggesting rising interest rates or moves to limit house lending could trigger the pop. Another external shock, he suggests, could be the Chinese economy “suddenly hitting the wall” that would quickly see unemployment rise and demand for housing “fall quite significantly, quite quickly.”
The ABC reporter concludes, “But it is also possible that the property market could ultimately collapse simply under the weight of its own debt”
The Business airs on ABC News 24 at 8:30pm AEDT.
» Plenty of froth over housing, but is it a bubble? – The ABC, The Business, 13th April 2015.
Posted in Australian Housing | 1 Comment »
Today’s decision by the Reserve Bank of Australia (RBA) to leave interest rates unchanged is likely to indicate APRA’s crackdown on the banks (‘APRA to keep banking crackdown secret‘) has not been fully executed. Without these crucial measures in place, the central bank can’t take the risk of further fueling the Sydney and Melbourne property bubbles.
Last month, Reserve Bank statistics indicated household debt in Australia has reached a record high of 153.8 per cent of household disposable income. Barclay’s research shows Australian households now have the highest level of household debt in the Advanced world. Further leveraging at a time when the rest of the Australian economy is slowing, leaves households particularity vulnerable.
Today’s statement on the monetary policy decision included the common paragraph with a few minor changes:
Credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present. [RBA ought to be happy] Lending to businesses, on the other hand, has been strengthening recently. [Another positive..] Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.
The last sentence could indicate the RBA is sensitive to creating bubbles in other markets from an abnormally low cash setting. Cutting interest rates could/has force some savers to seek out higher yields in the share market, creating new asset bubbles. Equity markets are already fully priced. The RBA raised concern about the commercial property market in last month’s Financial Stability Report (‘Risks increase in Australian commercial property‘.)
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 7th April 2015.
» Housing bubble compels RBA to hold – Australian Financial Review, 7th April 2015.
Posted in Australian Economy, Australian Housing, Monetary Policy | 17 Comments »
The Oireachtas banking inquiry, underway in Ireland, has heard of expert accounts on the vital role the Irish media played in hyping one of the world’s largest property bubbles.
University College Dublin academic Dr Julien Mercille told the inquiry, “A number of journalists simply acted as cheerleaders for the property sector.” He said the Irish Times and Irish Independent both had investments in property related websites and made money from property advertising that impacted editorial standards.
It’s a claim refuted by former editor of the Irish Times, Geraldine Kennedy who said Editorial standards where not compromised by revenue from property advertising. “There was no trade-off between editorial and advertising. Advertising features were clearly signposted. Advertisers did not write editorial copy,” she told the inquiry.
In Australia, Fairfax Media owns the Domain Group, while News Limited has a majority 61.6 per cent stake in ASX listed REA Group Ltd that operates RealEstate.com.au. Both news outlets print property lift-outs. In 2006, Fairfax Media acquired property data provider Australia Property Monitors who makes money providing research reports and property price information to “banks, real estate agents, property developers, government agencies, media organisations and consumers,” and employs the regularly interviewed Senior Economist, Dr Andrew Wilson.
Dr Mercille told the inquiry, the media’s ineffectiveness in predicting an impending crash was contributed by three factors – close ties with corporate and government interests, reliance on advertising, and the sourcing of stories. Quoting independent Irish politician and former business editor of the Sunday Independent, Shane Ross, Dr Mercille said “advertising would go elsewhere” if any media outlet gave unfavourable coverage.
On the 12th September 2011, the ABC’s Media Watch reported (‘Biting the hand that feeds, Episode 31‘) on an email sent from Jason Scott, Managing Director of News Limited’s The Sunday Times in Western Australia, apologising to “our valued real estate clients”. The paper had published an unfavourable article suggesting it can cost as much as $20,000 to sell through a real estate agent and reported on two vendors who did it alone. Media watch noted it was the Managing Director and not the Editor in Chief – normally responsible for editorial content, that wrote the apologetic email.
The apology was prompted by Mark Hay, an Investment property specialist who sent an email to almost every real estate agent in the state, suggesting to take their advertising elsewhere, “Can I encourage you to boycott the paper in light of this, or better still this is a perfect reason why we as agents should build our own web site to challenge realestate.com.au [part owned by News Limited] and the others who keep putting the squeeze on us. Anyone interested?”
Dr Mercille responded with a yes to the question if journalists could have predicted the size of the Irish property bubble and the crash when asked by the inquiry, saying analysts working for the papers “invariably [provided] upbeat analysis” and always said it would be a soft landing.
Dublin Institute of Technology media lecturer and former Irish Times journalist, Harry Browne said consumer behaviour was fuelled by “property porn” produced by the media, both print and television. Prior to the economic collapse the media would deny there was a bubble, “Before 2008, the media tended to largely ignore it and it is only months after it had started deflating that reality had to be faced.”
» Biting the hand that feeds – Episode 31 – Media Watch, 12th September 2011.
» Academic points to media coverage as stoking boom – The Irish Times, 26th March 2015.
» Banking Inquiry: ‘property porn’ in media fed economic bubble – The Irish Times, 25th March 2015
Posted in Australian Housing, Sydney Housing Bubble | 39 Comments »
Businesses forced to close, downsize and offshore has caused vacancy rates to surge around the country, and rents to fall, yet commercial property prices continue to rise. This divergence has the central bank concerned the “risk of a large repricing” in commercial property is increasing.
The Reserve Bank of Australia wrote in its March 2015 Financial Stability Report, “The divergence between rising prices and falling rents in office and industrial, and to a lesser extent retail, property has widened further since the previous Review, with an associated fall in yields. As a result of these developments, the risk of a large repricing and associated market dislocation in the commercial property sector has increased.”
According to the central bank, the correction of commercial property prices has “been responsible for a number of episodes of stress in the banking sector.”
The central bank reports conditions in Perth and Brisbane are particularly weak with the plunge of commodity prices forcing drastic downsizing among the resource companies. Compounding the problem is a significant amount of new office space will come on line in the next couple of years, causing further pressure on the market.
Adelaide and Canberra are not far behind. In Adelaide, Property Council SA executive director Daniel Gannon says empty CBD office towers should be converted into residential apartments to arrest the spiralling commercial vacancy rate.
The central banks says a correction could be triggered by a number of factors, such as increased supply “that prompts a reassessment of valuations”, or a sharp fall in foreign investor demand caused due to rising global interest rates or adverse conditions in the investors’ home country.
» Financial Stability Review – The Reserve Bank of Australia, 25th March 2015.
» ‘How we’ll turn CBD offices into residential spaces’ – Adelaide Now, 26th March 2015.
Posted in Australian Economy, Commercial Property | 4 Comments »
According to the ABC, Kevin Nixon, Former Managing Director of Regulatory Affairs at the Institute of International Finance (IIF) says foreigners are puzzled about the entire Australian housing market. Now a partner (risk) with Deloitte in Sydney, Nixon is a respected voice globally on regulation and governance of the financial system.
In a Deloitte round-table on the Australian mortgage industry, he remarked about his experience at a meeting of central bankers, “One of the central bankers present asked: ‘What’s going on in Australia?’ to which the research economist replied: ‘We’ve given up thinking about Australia. There is no economic rationale for it”
But while research economists and central bankers around the world can simply give up trying to understand the psyche of the irrational Australian property investor, the challenge mounts for local regulators trying to make “behavioural adjustments” to keep the market from that fateful correction and limit irreparable damage to our banking system.
On Friday in a House of Representatives Standing Committee on Economics, the Chairman of the Australian Prudential Regulation Authority, Mr Wayne Byres said the regulator was unlikely to ever disclose what capital controls it will impose on individual banks who do not exercise prudence.
Last year, the watchdog wrote to banks indicating it would not like to see loan growth to risk taking property investors exceed 10 per cent. Earlier this month, it was revealed the limit was breached by three of our major banks. (‘Investor loan growth limit breached by three major banks‘)
Macquarie Bank lead the pack with investor loan growth up an astronomical 73.1 per cent over the year.
Investor loan growth for the NAB grew at 13 per cent, followed by Westpac 10.4 per cent, ANZ 10.3 per cent and the Commonwealth Bank at 9.2 per cent.
The Australian Prudential Regulation Authority has the authority under the banking act to apply different prudential capital ratios to authorised deposit taking institutions (ADIs). It is widely believed the regulator will increase the ratios of banks it believes is imposing greater risk to the Australian banking system, requiring the bank to hold more loss-absorbing capital and as a side effect, reduce profitability. However, these ratios will remain confidential.
Mr Byres told the house economics committee:
Prudential regulators are traditionally the people who try to operate behind the scenes—below the surface, below the radar. Financial institutions survive and thrive because they have confidence and the community has confidence in them, and you are happy to put your money into the bank, you are happy to take out your insurance policy and you are happy to invest your superannuation money because you have confidence that, when the time comes, you will get your deposit back, your policy will be paid and your super money will be there.
Unfortunately no institution is perfect, and sometimes issues arise. Prudential regulators tend to try to operate behind the scenes to get issues fixed and to avoid them becoming a source of concern to the community. If we can do that well and head off problems before they become serious problems, that is actually reinforcing of financial stability, because it is preserving the confidence that exists in the system.
But it could be too late for the regulator still scared from the collapse of Australia’s second largest insurer, HIH.
Barclay’s warned last week, Australian households are the most indebted in the world.
Today, head of fixed income for BT Investment Management Vimal Gor echoed the same concerns saying homeowners in Sydney and Melbourne have so much debt that any drop in house prices would be a disaster. (‘Drop in house prices would be a disaster: analyst‘)
The Reserve Bank of Australia was unable to drop interest rates last month due to the housing bubble entering hyperdrive in both Sydney and Melbourne. With APRA’s crackdown remaining top secret and with the Reserve Bank as chair of the Council of Financial Regulators, the next cut in the official cash rate could signal APRA has confidently put these much needed controls in place. Until then, it would be imprudent for the central bank to cut.
» RBA says too early to judge APRA’s home loan restrictions – The ABC, 25th March 2015.
» Banking regulator APRA says individual banks targeted in crackdown on investor loans – The ABC, 21st March 2015.
» APRA keeps macroprudential strictures on bank lending secret – The Sydney Morning Herald, 20th March 2015.
» RBA sounds alarm about bursting of housing bubble inflated by cheap credit – The Sydney Morning Herald, 25th March 2015.
» Hot property: lenders push back on rate cuts – The Australian, 26th March 2015.
» Investor loan growth limit breached by three major banks – The ABC, 10th March 2015.
» Numbers add up for constraints on bank loans for residential property investors – Australian Financial Review, 15th March 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation, Monetary Policy | 29 Comments »
New research from Barclays warns Australian households have record debt levels, some of the highest in the world, greatly exposing them to heightened risk in the event of another financial crisis.
The report shows household debt in Australia is at 130 per cent of GDP, significantly more than the global average of 78 per cent. The global average has declined from a record high of 81 per cent in 2010, showing the majority of the world is deleveraging while Australia continues to binge. Household debt in Australia held steady at 116 per cent of GDP from 2008 until 2013 when Australia’s property market went into hyper drive, pushing debt unsustainably higher.
The extreme household debt levels groups Australia in with many Eurozone countries, with Denmark at 129 per cent, Switzerland 120 per cent and the Netherlands 115 per cent.
Melbourne Land Boom
News Limited, who described the alarming debt levels today as a “ticking time bomb,” said “The level of household debt is higher now than at any other time in Australia’s history, with records going back to the 1850s.”
In 1880, there was a speculative land boom in Melbourne fuelled by wealth that had been created during earlier gold rushes (mining). There was strong population growth, with the population of greater Melbourne rising by more than 70 per cent over 10 years from 1881. The land speculation engulfed most members of society and was helped by a surge in lending. The Federal Bank was founded in 1882 by James Munro and the funds used to speculate on suburban real estate.
A certificate of shares in the Federal Bank of Australia, Ltd. Issued in Victoria in 1887. Source : Museum Victoria
The crash began in 1891 with land prices plunging to around half of their perceived value at the peak of the boom. For example, average property prices peaked at around £950 in Brighton in 1888 and then fell to around £400 in 1893 and £300 in 1898. Property in Collins Street that was selling for £2000 a foot at the top of the bubble, had an asking price of £600 and still was unable to attract buyers.
While the trigger is not 100 per cent clear, it’s believed the crash started when banks started restricting their lending for land at the end of 1887. (No wonder APRA is too scared to do anything). Another observation was the large amounts of land brought onto the market resulted in poor rental yields. Coupled with high levels of leverage, more and more speculators experienced cash flow issues. (I guess they didn’t have negative gearing then!)
Mortgage defaults and bank runs started a period in history known as the Australian Banking Crisis. The peak of the crisis was signalled by the Federal Bank failing on the 30th January 1893. Five months later, 11 commercial banks had gone under and suspended trading.
It was the biggest housing bubble in Australia’s history, until now.
Australia’s household debt may be unsustainable – McKinsey Global Institute
Barclays is not the only one ringing alarm bells on Australia’s expanding household debt problem. In a report released in February 2015 by the McKinsey Global Institute, titled “Debt and (not much) Deleveraging“, it found seven countries had “household debt levels that may be unsustainable:” – the Netherlands, South Korea, Canada, Sweden, Australia, Malaysia, and Thailand.
“Unsustainable levels of household debt in the United States and a handful of other advanced economies were at the core of the 2008 financial crisis. Between 2000 and 2007, the ratio of household debt relative to income rose by one-third or more in the United States, the United Kingdom, Spain, Ireland, and Portugal. This was accompanied by, and contributed to, rising housing prices. When housing prices started to decline and the financial crisis occurred, the struggle to keep up with this debt led to a sharp contraction in consumption and a deep recession.”
McKinsey reported since the 2008 financial crisis, “a great deal of research has been conducted to establish the link between household debt, financial crises, and the severity of recessions.” (We reported on IMF findings in 2012 – Housing busts preceded by high leverage more severe and protracted: IMF“)
“The rise and fall of household debt affect the magnitude of a recession. In the years prior to the crisis, when credit was flowing and asset prices were rising, economic growth appeared robust, but it was artificially inflated by debt-fueled consumption. Then, after the crisis hit and credit dried up, the decline in consumption was especially sharp as households could no longer borrow and had to make payments on previous debts, often for homes in which their equity has been wiped out.”
“Just as rising house prices and larger mortgages can create an upward spiral, falling prices trigger a dangerous downward spiral. Compared with other households, highly leveraged ones are more sensitive to income shocks as a result of job losses, costly health problems, or increases in debt servicing costs. When highly indebted households run into trouble, they cut back on consumption, which contributes to the severity of the recession.”
The report concluded “reduced consumption after a financial crisis causes especially severe and prolonged recessions.”
» Australian households awash with debt: Barclays – The Sydney Morning Herald, 16th March 2015.
» Mortgaging our children’s future: Aussie ticking time bomb sparks fears should new GFC hit – News Limited, 16th March 2015.
Posted in Australian Economy, Australian Housing | 31 Comments »
Treasurer Joe Hockey has suggested first home buyers should be able to dip into their superannuation to purchase a first home. It comes after Senator Nick Xenophon was ridiculed in August 2014 (‘Why Australia has one of the world’s largest housing bubbles’) proposing the same idea to a Senate Economics References Committee hearing in Adelaide. Multiple experts came forward suggesting Xenophon’s idea would only increase house prices and further exasperate the problem.
In the weeks following, Finance Minister Mathias Cormann ruled the ludicrous idea out. (‘Mathias Cormann warns super not the key to housing’)
In response to Hockey’s imprudent plan, announced yesterday, shadow Treasurer Chris Bowen said “His [Hockey’s] plan would have the likely effect of not only undermining retirement incomes but also driving housing prices up further and making it harder for first home buyers.”
This view is shared by John Daley from the Grattan Institute, “It won’t improve the problem around supply. If supply remains constant and you effectively increase the amount that people can pay then prices will go up. This is economics 101.”
Chief economist of Bank of America Merrill Lynch, Saul Eslake said “Anything that allows people to spend more on housing than they otherwise would in a supply constrained market will result in more expensive housing and nothing else.”
“It’s exactly the same principle as first home owner grants and stamp duty concessions”
If Mr Hockey is genuinely serious about addressing housing affordability, he should be concentrating on removing current market distortions such as negative gearing and limited recourse borrowing by SMSFs, rather than trying to create new distortions.
Please spare a thought for the council of financial regulators – The Reserve Bank of Australia (RBA), The Australian Prudential Regulation Authority (APRA), The Australian Securities and Investments Commission (ASIC) and The Treasury who are trying to control the overheated market at a time when Hockey wants to throw petrol on it. Ludicrous.
» Joe Hockey raises prospect of first home buyers using super to enter property market – The Age, 6th March 2015.
» Joe Hockey flags opening up super funds for houses, job training – The Sydney Morning Herald, 7th March 2015.
» Mathias Cormann warns super ‘not the key to housing’ – The Australian, 30th September 2014.
» Nick Xenophon internationally ridiculed for plan to buy first homes with superannuation – Who crashed the economy, 9th August 2014.
Posted in Australian Economy, Australian Housing | 49 Comments »
“Australia is vastly uncompetitive, I don’t think they want to openly say it, which is why they put a lot of fudge and nonsense in the minutes today” commented Michael Every, head of Asia-Pacific markets research at Rabobank after last month’s cut to the official cash rate.
Michael Every is, of course, referring to the stubborn Aussie dollar making Australia uncompetitive in the international market place and resulting in the loss of jobs from manufacturing to back office.
Stephen Walters, an Australian economist with JP Morgan summed up the severity of problem earlier last month with just two graphs:
According to the data, the average Australian wage is 70 per cent above the global mean, the minimum wage is 100 per cent the global average, electricity is 50 per more and gas is 150 per cent more than the global average.
Only today, Dr Bob Baur, chief global economist at Principal Global Investors said the Australian economy is struggling because “wages are too high”, Australians get too much annual leave and are too hard to fire. “In the US, we get two weeks’ vacation, so three or four weeks at one time (as in Australia) is not something that’s natural, at least in the US — it is in Europe, but then, Europe is not growing terribly fast either.”
According to the OECD, Australian wages grew the second fastest of any developed economy over the past 13 years, but times are now changing. Last Wednesday, the Australian Bureau of Statistics reported wages are now growing at the slowest pace on record.
The other reason why our labour rates are considered high globally is due to our strong dollar. The mining boom has seen a bad bout of dutch disease creep in as the dollar surged above parity with the USD. Today, a currency war and an internationally high official cash rate have seen a flight of money heading into Australia. Sending the dollar lower is considered one way of increasing Australia’s competitiveness and this is likely to be easier than getting all Australians to take a 38 per cent pay cut (New employees at Coca-Cola Amatil to earn 38 percent less).
The statement from the Reserve Bank of Australia on today’s monetary policy decision indicated:
The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.
The Australian economy is now in worst shape that this time last month. Unemployment hit 13 year highs last month, according to figures from the ABS. Capital expenditure is falling faster than expected and a slowing China, forced its central bank to cut rates on Saturday.
But the Reserve Bank was unable to act today due to increased risks posed by the housing bubble. After cutting the official cash rate last week, irrational property spruikers have been drumming up insatiable appetite for housing, especially in the overheated Sydney market. One commentator, ex RBA, said the market was racing away like an “out-of-control freight train.” Needless to say, this has serious consequences for Australia’s banking system.
The RBA reiterated its joint effort with other regulators to control the dangerous bubble in its monetary policy decision statement:
The Bank is working with other regulators to assess and contain risks that may arise from the housing market.
But until this framework is in place, the RBA might have to sit and wait tight.
Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, 3rd March 2015.
» ‘No economic benefit’ in further surge in house prices, economists warn RBA – The Age, 2nd March 2014.
» The boom is about to go bust – The Sydney Morning Herald, 2nd March 2015.
» Australia central bank acting like it ‘just woke up’ – CNBC, 5th February 2015.
Posted in Australian Economy, Australian Housing, Monetary Policy, Sydney Housing Bubble | 25 Comments »
Following the release of the Report on Foreign Investment in Residential Real Estate from the House of Representatives Standing Committee on Economics in November 2014, the Australian Government has today released a consultation paper on proposed reforms.
According to Foreign Investment Review Board (FIRB) statistics, The House of Representatives Standing Committee on Economics’ report indicated that “approved” foreign investment in Australian residential property has been surging in recent years. It cited in the first 9 months of last year, prior to the release of the report, foreign investment surged 44 per cent compared to all of 2012-2013 with “much of this investment [..] concentrated in the Melbourne and Sydney markets.” Fairfax tabloids in Sydney and Melbourne have been littered with articles of Chinese buyers outbidding locals with prices exceeding reserves in the hundreds of thousands.
Leading property experts say the Sydney property bubble has been in “hyperdrive” with prices surging almost 30 per cent in just two years, creating a challenge for the Reserve Bank of Australia who is keen to slash the official cash rate to stem rapidly rising unemployment. With house prices at ten times income, Sydney is the third most expensive city in the world for housing following Hong Kong and Vancouver, according to the most recent Demographia survey. Melbourne is not far behind as the fifth most expensive city in the world for shelter.
It is unclear what contribution Foreign investment is making to surging home prices. The Australian Bureau of Statistics (ABS) told the House of Representatives Standing Committee on Economics 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.
Treasurer Joe Hockey said today, “At the moment we simply do not have enough data and that’s because no-one has taken foreign investment regimes seriously in the past.”
Currently flouted legislation do require all foreign persons to gain approval prior to purchasing residential real estate in Australia. To encourage the supply of new homes, non-residents can only apply to purchase newly constructed dwellings or vacant land for development. Given that temporary residents residing in Australia need a place to live, temporary residents may purchase one established dwelling to live in, but must sell the property when they leave Australia.
Today’s consultation paper recommends the introduction of fees for foreign buyers of Australia’s residential real estate. A token application fee of $5,000 would apply for properties under $1 million dollars. Properties over $1 million would attract a fee of $10,000, with $10,000 increments for every 1 million dollars thereafter. The report notes the FIRB and Treasury (who provides secretariat support to the FIRB) is currently funded through consolidated revenue and suggests the Australian Taxpayer should not bear the costs of foreign audit, compliance and enforcement operations – sensible budget savings.
The report on Foreign Investment in Residential Real Estate released last year also recommended a user pay model but with a modest fee of only $1,500 to fund “enhanced audit, compliance and enforcement capacity within FIRB.” On the other extreme, Today’s report notes countries such as Singapore and Hong Kong levy an additional buyer’s “stamp duty” of 15 per cent of the purchase price. (Maybe we could do the same with proceeds to help fund the Committed Liquidity Facility?)
Just as laughable as the ABS scanning magazines to ascertain foreign investment is the FIRB’s track record on enforcement. It’s a point not lost on Prime Minister Tony Abbott who said in a National Press Club speech last fortnight, there had not been a single prosecution in six years.
The consultation paper highlights, “while the Foreign Investment Review Board and Treasury were well placed to continue undertaking the upfront screening of residential real estate applications, its internal processes and lack of specialist investigative and enforcement staff have weakened the enforcement of the foreign investment rules.”
A recommendation is to create a new “specialist, dedicated compliance and enforcement” unit within the Australian Taxation Office to enforce foreign investment legislation for residential real estate. It suggests the tax office is better suited as it has staff with compliance and enforcement skills, sophisticated data-matching and “experience in pursuing court action”, i.e. a proven track record of getting results!
While this may be a consultation paper, it is understood from an interview two weeks ago that Prime Minister Tony Abbott has taken immediate action, directing Treasury to start issuing divestment orders for immediate sales of illegal purchases.
The next target for the Abbott government is expected to be limited recourse borrowing arrangements by superannuation funds.
» Strengthening Australia’s Foreign Investment Framework – The Treasury, Australian Government – 25th February 2015.
» Report on Foreign Investment in Residential Real Estate – House of Representatives Standing Committee on Economics, November 2014.
» PM Tony Abbott orders Treasury squad to force immediate sales on foreign property investors – The Daily Telegraph, 13th February 2015.
» Australian housing overheating and could eventually face a correction: Moody’s – Who crashed the economy?, 29th June 2014.
» Report into foreign investment in residential real estate could come too late – Who crashed the economy?, 19th March 2014.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy?, 4th January 2012.
Posted in Australian Economy, Australian Housing, Foreign Investment Review Board, Sydney Housing Bubble | 32 Comments »
The South Australian Government has today launched a discussion paper on the state’s taxation system, calling for interested parties to make submissions.
While the discussion paper makes no recommendations, one tax reform idea put forward is to abolish stamp duty on property transactions (conveyance duty) and replace it with a broad-based property tax of around $1,200 per annum for a median valued home of $410,000.
Conveyance duty (stamp duty on the transfer of real property) is currently levied during property transactions. For a $410,000 dwelling, the purchaser would pay $11,330 plus 5.00% on the excess making a total of $16,830. The Reserve Bank of Australia indicates the median length of tenure is 10 years, hence stamp duty equates roughly to $1,700 a year ignoring compounding, inflation and borrowing costs. For shorter term tenures, a broad-based land tax is favourable, but it could negatively impact longer term owners.
The South Australian Government indicates its objectives for tax reform is to provide enough revenue to deliver high quality services, to encourage entrepreneurship, investment and job creation, to collect revenue as efficiently as possible and to be as stable and predictable as possible.
Conveyance duty is considered a relatively inefficient tax in that effects the decision to buy and sell property, be it trade up or down size. It makes up a significant portion of the transaction costs on a property. Land tax, on the other hand, is considered an efficient tax base as the tax cannot be avoided and will broadly apply to all land including the principal place of residence.
From the South Australian State Government’s view point, conveyance duty makes up a significant 22 per cent of total tax revenue “but it is also highly volatile (annual growth has ranged from negative 20 per cent to positive 42 per cent)” dependant upon the currently irrational property market. As it is a tax on property transactions as well as values, a slow market can significantly impact revenues. This is best illustrated in 2008-09 during the Global Financial Crisis (GFC) as the state’s property market tried to correct before the Federal government intervened with the first home owners’ boost that Treasury reports was designed to bring forward demand and prevent the collapse of the housing market. The report notes conveyance duty collapsed 20% at the time and I’m sure the government is keen to avoid it this time around.
Outside of getting the reforms implemented in time, the real problem at hand is transition mechanisms and time-frames. As recent purchasers have forked out a small fortune on stamp duty, it would be unfair to overnight abolish stamp duty and bring in a broad-based land tax. Proposals under current consideration is to make the broad-based land tax effective from the purchase date of a new property transaction – potentially delaying a wide introduction or to provide credits for recent buyers. The latter makes the most sense if the government is striving for a stable and predictable tax revenue stream.
» Tax Review in South Australia – Government of South Australia, 11th February 2015.
Posted in Australian Economy, Australian Housing | 53 Comments »