The collapse of commodity prices has sent rental vacancies in Perth to levels “almost approaching record numbers” according to the president of the Real Estate Institute of Western Australia (REISWA).
REIWA president told the ABC, “It will not be surprising to see the vacancy rate hit 5 per cent shortly, which means there are a lot of rental properties sitting empty and available for tenants.”
According to the REIWA, some 8,100 rentals are currently vacant and extra stock is flooding the market at a rate of about 150 properties a week.
This has forced rents down by up to 20 percent and Mr Airey says landlords need to adjust to these new market conditions.
» Perth rental vacancies spike as property market continues to struggle – The ABC, 25th June 2015.
Posted in Australian Housing, Perth Property Bubble | 58 Comments »
The International Monetary Fund has warned Australia’s big banks don’t appear to be well capitalised and increasing capital should be a priority.
The warning comes in the concluding statement following the article IV mission to Australia this month. (‘International Monetary Fund team to examine housing bubble – May 2, 2015‘)
It reports Australia’s banking watchdog, APRA, has been taking the appropriate targeted and gradual action towards risks in Australia’s hot housing market for some time (‘Property bubble a Macroprudential challenge for regulators – Oct 27th, 2014‘, ‘Woof – The watchdogs have a bark! – Dec 9th, 2014, APRA to keep banking crackdown secret – March 26, 2015‘).
While the IMF is confident APRA will reap the desired results, it notes the banks have been stubborn and have only recently started to act, hence tangible results to date has been hard to see in even the most recent lending data. (‘Sydney value agnostic investor bubble shows no sign of abatement – June 14, 2015‘)
“We expect APRA’s approach to succeed, but it may need to be intensified, for example, if investor lending and house price growth do not slow appreciably in the second half of the year. Such intensification could include requiring banks with fast-growing investor lending to hold more capital, raising risk weights on investor lending, and restricting the duration of interest-only loans.”
The report notes, Australia’s banking system “is dominated by four large banks with similar business models which rely significantly on wholesale external borrowing, most lending is housing related, and household debt and house prices are elevated. And although capital ratios have risen since the global financial crisis, this largely reflects a shift towards mortgages and a lowering of risk weights.” (‘Australian banks not the safest in the world – far from it – December 8th, 2014‘)
“More tangibly, the recent APRA stress test (‘Have the Big 4 just flunked APRA’s stress test? – November 16th 2014‘) indicates that in a severe adverse scenario, bank capital would have to be substantially higher to ensure a fully-functioning system. Putting a floor of 25-30 percent on mortgage risk weights would help, but capital ratios would also need to rise substantially. Given major banks’ high profitability, such ratios can be achieved at little, if any, macroeconomic cost, especially if done gradually, and will make the financial system, the budget, and the economy stronger.”
In recent weeks there has been heightened awareness of Australia’s currently unprecedented housing bubble.
» Australia: Concluding Statement of the 2015 Article IV Mission – International Monetary Fund, 24th June 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation | 11 Comments »
‘Crazy’ value agnostic investors continue to leverage up in an environment of poor rental growth, according to investor mortgage finance commitments released by the Australian Bureau of Statistics on Friday.
In the year to April, NSW property investors have borrowed $64.2 billion to spurge on the residential property market, another all time record.
This comes as CoreLogic RP Data also released data on Friday showing rents are now rising at their slowest annual growth on record, caused by the surge in property investment. According to the ABC, “Bureau of Statistics figures show it is 20 years since rental growth has been this low nationally.”
» 5671.0 – Lending Finance, Australia, Apr 2015 – Australian Bureau of Statistics, Friday 12th June 2015.
» Rental growth slowest on record says CoreLogic RP Data – The ABC, Friday 12th June 2015.
Posted in Australian Housing, Sydney Housing Bubble | 40 Comments »
An open letter from Mel Wilson, Human Resources professional and mother of two from Wodonga, Victoria to Treasurer Joe Hockey. Please share Mel Wilson’s facebook post here.
I just wanted to touch base with you regarding your comment that young people are able to enter the property market if they just “get a good job that pays good money.”
I just wanted to ask you how one might go about this?
Are you going to be reviewing all the current Awards that are in place to ensure that most jobs pay “good money”?
Are you going to be creating hundreds of thousands of new jobs that, under your Awards, pay over $100,000 per year?
Apologies if I have missed this fantastic news, but as someone working in 2 senior HR roles, I believe I would have known about this so that I could pass the message on to some very tired, over qualified employees who currently fall under various Federal and State awards and are being paid between $18 to $25 per hour.
Are you aware of what the average Australian wage is?
Are you aware of what the average Australian mortgage in Sydney is?
Are you aware of the first-home buying process?
Just in case these facts and figures aren’t available to you, I thought you might be interested.
The average weekly wage according to the Australian Bureau of Statistics on 1st January 2015 was $1,128.70, or $58,692.40 before tax. This means a take home amount of about $904.00 per week.
The median house price in Sydney, according to the Domain Group Housing Price Report, as of March 2015, was $914,056.
Not sure if you know how first home buying works at the moment, but you normally need a deposit of about 20%. This is to pay for the Stamp Duty (which is a State Tax you must pay every time you buy a property), and also to assist in the approval process so that you don’t need to pay Lenders Mortgage Insurance.
So in this instance, the first home buyer would need about $182,811.00 saved to purchase a house that is the average price in Sydney.
So to go out and get one of these “good jobs that pay good money” I assume these young people you speak of would need to go to university first.
On average, it takes about 3 -4 years to get a degree, so if a young person goes to University straight out of school, they can expect to finish their course and be ready for the workforce at about 21, with a HECS-HELP debt of over $20,000. To make this a bit easier for you to understand, let’s say there is a young person named Joe Junior who has done just this.
If Joe Junior is extremely lucky, and is up there with the best of the graduates from that course and that year, he will get a job straight out of University paying usually under the average wage.
However, lets just be extremely generous here and say that Joe Junior got a job and was on the national weekly take home wage of $904 per week.
Joe Junior needs to only save every single dollar worked for about 4 years to save his $182,811 deposit for their first home. Thank you, Mr Hockey, for throwing in that $7,000 first home owner grant too – that meant Joe Junior could get into his first home 8 weeks earlier!
Just a quick side note, this example does not take into consideration the rising house prices, or Joe Junior’s HECS-HELP debt that he obtained from getting his degree to get one of your so-called “good jobs”.
Joe Junior is now 25 (not so junior anymore), has been living at home with his parents this entire time and has not been able to spend a single dollar on any bills, board or holidays or public transportation. He also can’t afford a car or petrol for a car but then again “poor people don’t drive cars”. Oh wait, Joe Junior isn’t a poor person – he has a “good job that pays good money.”
Luckily Joe Junior’s parents have been happy to drive their little Joe Junior to and from work every day and provide free housing, clothing, medical expenses and also provide the food for his breakfast, lunch and dinner each day.
So finally Joe Junior has saved his $182,811 deposit (of which only about half will go towards his mortgage due to the stamp duty cost), and can now purchase his first home, with a mortgage of about $822,650.00.
According to the Commonwealth Bank’s online mortgage estimator, the repayments for a mortgage of this amount are $1,073.00 per week over 30 years.
So hopefully Joe Junior’s average weekly wage of $904.00 has gone up enough to cover the cost of the mortgage.
Joe Junior has been applying for these “good jobs hat pay good money” that you speak of (I assume by “good money” you mean more than the average wage as you have just seen it is not even enough to cover the cost of the average house prices’ mortgage in Sydney), but hasn’t had any luck as yet. He needed to stay in the same job post university to demonstrate to the bank job stability so that he could purchase his first home. So he only has a degree, and experience in the one job, one industry, and there are just not that many jobs out there paying “good money.”
Joe Junior now also can’t wash his clothes, eat food, or get to and from work as he no longer lives with his parents, so getting one of these “good jobs” is even more difficult.
So Joe Senior, are you really aware of all the facts and figures when you says things like buying your first home is “readily affordable” to young people?
Just slightly confused as to what you were thinking when you said these words at the media conference in Sydney.
Looking forward to another one of your politically correct, direct and well thought out responses.
Another baffled Australian
And this skit featuring Treasurer Joe Hockey is also quickly doing the rounds, It’s so easy to buy a house.
» ‘Dear Joe, are you aware what the average Australian wage is?': Young mum’s brilliant letter to Joe Hockey following his ‘get a good job’ comment is shared 20,000 times – The DailyMail, 12th June 2015.
» Wodonga mum’s letter blasting Joe Hockey over first home-owner advice goes viral – The Border Mail, 12th June 2015.
» Working mother Mel Wilson gives Joe Hockey a lesson about house prices – The Sydney Morning Herald, 12th June 2015
Posted in Sydney Housing Bubble | 20 Comments »
A day after out of touch Treasurer, Joe Hockey told first home buyers they needed a “good job” that pays “good money” to break into the Sydney property bubble, Reserve Bank Governor Glenn Stevens has weighed into the debate, saying the Sydney property market is crazy, “Yes I am very concerned about Sydney and some of what is happening is crazy.”
In the Brisbane Economic Society of Australia luncheon today, the central bank Governor added “What is happening in housing in Sydney I find acutely concerning for a host of reasons many of which are not to do with monetary policy,”
His remarks follows that of Treasury secretary John Fraser who told a senate hearing last week, “When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney. Unequivocally,”
Talk of property bubbles has infuriated treasurer Joe Hockey who is trying to sell his $1.5m farm in Queensland. Listed since mid-April, the listing states the “owners are looking for a quick sale.”
Last week, the Organisation for Economic Cooperation and Development (OECD) warned Australia’s residential property markets are at risk of a “sharp correction”.
In the OECD Economic Outlook, Volume 2015, Issue 1 the Paris-based think tank warned “Domestically, the continuing property market momentum adds to the risk of a sharp correction and there are sizable upside and downside uncertainties in the strength of household spending growth.”
It adds to a raft of warnings in recent weeks on Australia’s property bubbles, including a comment from ASIC Chairman Greg Medcraft warning “History shows that people don’t know when they are in a bubble until it’s over.”
It is also testing times for our banking regulator tasked with the job of getting Australia’s under capitalised banking sector “unquestionably strong” before the bubble bursts. Macro-prudential action started in earnest last year, but the results to date have been questionable. Banks in recent weeks have been raising capital, lifting serviceability requirements, lowering maximum LVR (loan to value ratios) and in some cases, ceasing lending to higher risk segments such as self managed super funds.
Effective today, ING Direct – who is already more prudent than the big four, has reduced the maximum LVR for investment loans for New South Wales properties to 80 per cent in response to the possible bubble and pressures from APRA. Outside of NSW, ING Direct has a maximum 90 per cent LVR for investment properties.
ING has a strong 8 per cent floor for stress testing borrowers serviceability, with regulators concerned what will happen when interest rates inevitably rises. APRA is encouraging banks to test serviceability on a floor of 7 per cent, a level endorsed by ASIC chairman Greg Medcraft who recently told a Senate estimates committee, borrowers need to do their sums on a mortgage rate of 7 percent, not 4 percent as rates won’t stay low for ever.
» Sydney house price boom “crazy” – AAP, 10th June 2015.
» Australian real estate at risk of sharp falls: OECD – The ABC, 4th June 2015.
» Property prices at risk of ‘sharp correction’, says OECD – The Age, 4th June 2015
» Property investment lending jumps in April but APRA crackdown now biting – The ABC, 10th June 2015.
Posted in Australian Economy | 18 Comments »
According to Channel 10 Adelaide, The Reserve Bank of Australia has “denied” the Adelaide property market a much needed boost by leaving rates unchanged.
You could be mistaken for thinking it was 1989 and the official cash rate was 17 per cent. But, no, the report aired yesterday after the Reserve Bank left the official cash rate at just 2 per cent, a record low.
But it is not interest rates that is dragging on the Adelaide housing market, but rather Australians are up to their necks in debt. Household debt as a ratio of household disposable income now sits at 153.8 per cent in Australia, some of the highest levels in the world. At the height of the sub prime crisis in America, household debt peaked around 130 per cent in the USA.
Data from the Australian National Accounts, released today, show in aggregate, households are paying 4.96% of household disposable income on dwelling interest payments, still greater than the 4.18 per cent recorded in 1989 when mortgage rates were in excess of 17 per cent.
First home buyer, Hannah O’sullivan welcomed the central bank’s decision to leave rates at record emergency lows, but said it could have been better. If interest rates went down it would put a little more sense of urgency into buying, she remarked.
But this talk is scaring regulators, with naive first home buyers ignoring what will happen when the official cash rate inevitably rises. Regulators are urging all buyers to think long term as mortgages are 25+ year commitments. Rates won’t stay low for ever.
Australian Securities and Investments Commission chairman Greg Medcraft told a Senate estimates committee, borrowers need to do their sums on a mortgage rate of 7 percent, not 4 percent.
The Ten reporter said despite two cuts to interest rates this year, Adelaide property prices hadn’t spiked like had been the case in Sydney and Melbourne. Hannah O’Sullivan said “it is a little bit frustrating,” an interesting comment from a potential first home buyer.
Property lobbyist, Daniel Gannon added what the market needs right now is “major stimulation” and interest rates do provide one potential opportunity for first home buyers to get into the market.
And as for Hannah’s strange comment, some readers have conducted a Linked In search and believe she could in fact be a Human Resources coordinator for real estate agency Toop & Toop. Apparently the photo’s a good match too. It’s been a couple of years since we have seen real estate professionals double as first home buyers and potential investors without disclosure, a potential sign of desperation in a cooling market. (‘The Real Estate industry is increasingly misleading the public‘)
As we wrote in 2009, The next time you see an article in the media about someone buying a first house or investment property, be sure to run the potential owner through Goggle to see if they are an agent or associate. It’s a good chance they are.
» SA housing market lagging – Channel 10, 2nd June 2015.
» ASIC warns new borrowers on rates – Yahoo, 3rd June 2015.
Posted in Australian Economy, Australian Housing, Monetary Policy | 36 Comments »
Treasury secretary John Fraser told a senate hearing today he has no doubt there is a property bubble in Sydney.
“When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney. Unequivocally,” he told the hearing.
He warns bubbles have also formed in many parts of Melbourne, “Certainly I think that’s the case in the higher priced areas of Melbourne, and I base that on my own observation as well as the data,”
The warning follows a recent comment from ASIC Chairman Greg Medcraft, “History shows that people don’t know when they are in a bubble until it’s over”
Financial regulators have been working behind the scenes in recent months to implement macro prudential controls aimed at cooling the housing bubble and reducing the impact of a pursuing banking crisis. To their disappointment, little has been working. It is expected the RBA will hold off cutting the official cash rate when they meet tomorrow, waiting for any tangible evidence the first round of macro prudential controls is having an effect.
Posted in Australian Housing, Banking Regulation, Monetary Policy, Sydney Housing Bubble | 24 Comments »
Sydney and Melbourne residential property markets could already be in a bubble according to the chief of Australia’s Investment and Securities regulator. Talking to the Australian Financial Review this week, ASIC Chairman Greg Medcraft said “History shows that people don’t know when they are in a bubble until it’s over” warning, in particular, that many Self-Managed Super Funds (SMSFs) could be exposed to a conceivable correction.
For most economists examining housing finance figures, this comes as no surprise. Recent data from the Australian Bureau of Statistics (ABS) show value agnostic investors have been piling into the Sydney and Melbourne market like no tomorrow, and as rents continue to fall.
Medcraft’s warning for SMSFs won’t come as a surprise to the National Australia Bank (NAB) either. The NAB quietly exited lending to self-managed superannuation funds early this month. With limited recourse borrowing, the risks were just too great. According to a report in the Australian, a NAB spokesperson declined to comment, outside of a statement saying the bank is “constantly assessing its product offering through our risk appetite and the broader regulatory environment.”
ANZ has indicated it has no exposure to SMSFs.
Activity below the radar
Fears of a housing correction impacting the stability of Australia’s banking system has forced the banking regulator to secretly act. As we reported in March (‘APRA to keep banking crackdown secret‘) 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. He told the house economic’s 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.
The Reserve Bank of Australia (chair of the council of financial regulators) had been waiting on the many proposed macro-prudential controls to be implemented before it further slashed the cash rate, at the risk of fuelling the credit fuelled asset bubbles. On the eve of the rate cut this month, Westpac announced conformance with APRA requests. The bank said it would apply stricter loan serviceability tests to new property investor loans and tighten lending to foreign investors.
While the industry is tight lipped and potentially overwhelmed about all the new lending restrictions, brokers have indicated the National Bank, Commonwealth and Westpac have all removed package discounts to investors and tightened serviceability requirements. Negative gearing tax flows have been removed from serviceability requirements. Assumptions on rental incomes have been slashed.
Brokers also report two of the major banks have slashed maximum loan value ratios (LVR) for loans to non-residents from 80 to 70 per cent.
Bank recapitalisation begins in earnest
We reported last year (‘Have the Big 4 just flunked APRA’s stress test?‘) and (‘Australian banks not the safest in the world – far from it.‘) that there has been growing concern about the lack of loss absorbing capital our big 4 “advanced” banks hold.
Two weeks ago, NAB went to the market, cap in hand, to raise $5.5 billion, one of the largest capital raising in history. $3.4 billion will be sunk into the troubled Clydesale Bank in the United Kingdom, leaving a spare $1.5 billion left over to bolster the balance sheet back home.
Westpac on the other hand has announced plans to raise an additional $2 billion capital through a dividend reinvestment scheme.
CLSA’s bank analyst Brian Johnson has suggested the big four require an injection of more than $41 billion in additional capital over the next coming years. According to his estimates, CBA will need $13 billion, ANZ $11.9 billion, Westpac $11 billion and NAB $5.1 billion.
Banking stocks officially in correction
News that our banks will need extra capital injections, and with the outlook of further super profits diminishing among a challenging regulatory environment and potential property bubble, has caused a plunge in the bank’s share prices.
Since the peak only weeks ago, ANZ’s share price is now down 14.1 per cent, CBA down 14.3 per cent, WBC down 19.4 per cent and NAB down 14.0 percent.
» NAB exits property loans for SMSFs – The Australia, 6th May 2015.
» Investor home loans tighten as regulator APRA clamps down – The ABC, 18th May 2015.
» Big four banks hit iceberg after APRA’s Wayne Byres talks mortgage risk weights – The AFR, 1st May 2015.
» Westpac dividend reinvestment to boost tier 1 capital ratio – The Sydney Morning Herald, 4th May 2015.
Posted in Australian Housing, Banking Regulation, Sydney Housing Bubble | 51 Comments »
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 | 72 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 »