Australia’s investor lead housing bubble could be worst that first thought.
The Reserve Bank deputy governor, Dr Philip Lowe, today revealed the central bank has been concerned about the banks significant upwards revision on investor mortgages.
Reviews over the past 6 months has found $50 billion in investor mortgages incorrectly classified as the banking regulator implements a 10 percent speed limit on growth of investor mortgages.
The ten percent increase revises upwards the portion of investor loans to 40 per cent, from the 35 per cent originally reported.
Dr Lowe said, “As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us,”
The revelations today come as Barclays indicate Australia’s house prices are 22 per cent overvalued and will experience a “long period of broad stagnation.”
» Australian banks understated the value of investor loans by $50 billion: RBA – The ABC, 5th November 2015.
» RBA ‘surprised’ by banks’ $50b home loan error
» House prices set for long period of ‘stagnation’: Barclays – The Sydney Morning Herald, 5th November 2015.
Posted in Australian Housing, Banking Regulation | 83 Comments »
Foreign Chinese buyers may now be priced out of the booming Sydney and Melbourne property markets according to Real Estate agency PRD Nationwide.
In recent weeks, market players have noticed a gradual pull out of Chinese buyers and are racking their brains to understand why. The worrying pull out for property proponents, have led to a cooling market.
The PRD Nationwide Australia Economic and Property Report shoots down the notion that all foreign Chinese buyers are uber wealthy.
Asti Diaswati, PRD Nationwide’s national research manager told the Domain, “There’s this myth that foreign investors are all ultra-net worth, super rich and can afford penthouses, which is not the case,”
“I would say at least half to 60 per cent of foreign investors coming are ‘ordinary’ in the sense that they have a $500,000-to-$600,000 budget.”
The Sydney property market has seen annual double-digit gains in recent years and with a median house price now in-excess of $1 million, it is the world’s third most expensive property market according to investment bank UBS. Only Hong Kong and London now have more expensive property markets.
Real estate agents are now pondering who is left to sell too, with more and more auctions passed in. Australians have long been priced out of the Sydney market, with the Housing Industry of Australia suggesting last week that households now need to earn 1.74 times the average full time adult wage to meet loan repayments, despite interest rates being at record lows.
» Even foreign investors are struggling to afford Sydney prices – The Domain, 2nd November 2015.
» Sydney placed on global housing bubble risk list – Bloomberg, 1st November 2015.
» London, Hong Kong most at risk of housing bubble, UBS says – The Financial Review, 30th October 2015.
» It now costs $4,000 A MONTH to pay the mortgage on an average house in Sydney, and affordability is plunging across the country… – The Daily Mail, Australia, 31st October 2015.
Posted in Australian Housing, Melbourne Property Bubble, Sydney Housing Bubble | 33 Comments »
As expected, the Commonwealth Bank is today the second bank to hike interest rates out of cycle, notching rates up 15 basis points. ANZ and NAB are expected to follow.
As did Westpac, the CBA blamed the rates decision on increased capital and regulatory requirements. (‘Banking regulator announces tighter capital adequacy requirements for residential mortgages’ – 21st July 2015)
On Monday, the government endorsed the banking regulator’s action in making the Australian banking system “unquestionably strong,” a recommendation from the Murray Financial System Inquiry.
Today Wayne Byres, chairman of Australia’s banking regulator – the Australian Prudential Regulation Authority, remarked some lending standards by the big banks were at “horribly low levels” and had lacked “common sense”. He said “With the benefit of hindsight, obviously we wish we got on to this a bit sooner, but we are where we are.”
It is also understood, Westpac has once again written to brokers informing them of a further crack down on loans to foreign property investors, effective next Monday. The bank will scrutinise visa and foreign-currency income, while abolishing low doc loans for immigrant mortgages. In July, the bank had written to brokers who were arranging a high percentage of mortgages to non-residents, informing them that applications must have an Australian residential address.
» Government backs APRA action on banks – The Sydney Morning Herald, 20th October 2015.
» Bank of Melbourne latest to crack down on foreign lending for property”> – The Australian Financial Review, 21st October 2015.
» Westpac tightens lending for foreign property investors – The Australia Financial Review, 26th July 2015.
Posted in Australian Housing, Banking Regulation, China, Melbourne Property Bubble, Sydney Housing Bubble | 56 Comments »
Westpac will hike mortgage rates by 20 basis points on the 20th of November, and in a win for savers, increase term deposit rates by 25 basis points come Friday.
Australia’s other big banks could be expected to follow suit.
Westpac has blamed the rates decision on increased capital and regulatory requirements (‘Banking regulator announces tighter capital adequacy requirements for residential mortgages’ – 21st July 2015), while also announcing it will hit shareholders up for $3.5 billion to further increase CET1 capital. This follows ANZ’s announcement last week, indicating it will sell Esanda for $8.1 billion in a move also designed to bolster capital.
In recent months, most of Australia’s big banks have hiked mortgage rates for investors to appease the banking regulator and its directive to keep investor mortgage growth under 10 per cent.
Housing finance figures for August, released on Friday, showed dubious statistics suggesting a decline in investor mortgages of 0.4 per cent, while approvals to owner occupiers grew 6.1 per cent. The reversal of growth between investors and owner occupiers, coinciding at a time when banks were hiking mortgage rates for investors, suggested many investor loans may have been incorrectly, but intentionally classified as owner-occupier.
Westpac’s move today to equally hike both investor and owner-occupier will remove this potential incentive to reclassify loans.
Westpac was also hit by inflexibility with its computer system in July when trying to classify investor and owner-occupier loans (‘NAB hikes IO loans by 29 basis points, Westpac announces corporate note issue and hiring freeze while they fix computer issues – 27th July 2015.) A Westpac spokesperson at the time said, “Given we haven’t had differential pricing across the mortgage book for a number of years, if this was to be introduced we must ensure a smooth transition for affected customers.” Westpac later announced in August a hike of 27 basis points on investor loans.
A slowing China and plunging commodity prices has caused a spike in credit default swaps spreads for our big banks to the highest level since September 2013, putting upwards pressure on banks wholesale funding costs. Australia’s banking regulator, APRA, has expressed concerns about our banks reliance on volatile overseas credit markets and have been prodding banks to increase the amount of money raised domestically by term deposits. Westpac’s move today to reward term deposit savers could be seen as an early response to the regulator’s pleads.
» Westpac to raise home loan interest rates to protect against future financial crises – The ABC, 14th October 2015.
» Owner-occupiers overtake investors in home loan growth – The ABC, 9th October 2015.
» Bank risk spreads at two-year highs on China fears – The Sydney Morning Herald, 5th October 2015.
Posted in Australian Housing, Banking Regulation | 37 Comments »
Fresh data released today from the China Customs Bureau show imports to China declined 17.7 per cent in the year to September. Exports feared better, falling 1.1 per cent for the same period leading to predictions, GDP numbers to be released next week will be the weakest quarterly growth rate in six years.
Despite Australia’s over-reliance on China, it is actually our property bubble that poses the bigger risk to the economy, according to a Bank of America Merrill Lynch economist.
Economist Alex Joiner from Bank of America Merrill Lynch warns Australia’s dwelling price to income ratios are at levels “never before observed” while household debt to GDP is at a “record high.”
The comments follow ABS figures out Friday showing the average NSW home loan jumped $78,100 in a year due to accelerated price growth in Sydney. The rate of borrowing is outpacing growth in dwelling prices suggesting Sydneysiders are using the ultra low interest rate environment to borrow substantially more.
In boom town Victoria, the trend is same, as average home loans surged $61,700 up almost 20 percent and almost double the 10.6 percent increase in dwelling prices over the same period.
According to CommSec, the average national new owner occupied mortgage grew 15.4 per cent in the year, the fastest annual pace in 12 years. CommSec economist Savanth Sebastian remarked, “Not only is the size of the average home loan holding at a record high, but it is growing at the fastest pace in 12 years,”
Macquarie Bank economists predict Australian house prices will decline 7.5 per cent from March next year, impacting the broader economy. Recent ABS retail sales data has been strong in the housing boom states driven by the wealth effect. Along with banks Commonwealth and NAB, Macquarie expects Harvey Norman, CSR and JB HiFi to be hit from declining home prices.
» Sydney housing prices falling because of greater supply, RBA deputy governor Philip Lowe says – The ABC, 12th October 2015.
» Housing bust now the greatest recession risk, say investment banks – The Sydney Morning Herald, 13th October 2015.
» Average NSW home loan jumps $78,100 in a year – The Sydney Morning Herald, 9th October 2015.
» CBA and NAB to cop the brunt of falling house prices, says Macquarie – The Sydney Morning Herald, 13th October 2015.
Posted in Australian Economy, Australian Housing, China, Melbourne Property Bubble, Sydney Housing Bubble | 5 Comments »
An oversupply of rental properties and slow population growth has caused September rental growth to slow to an all time record low, according to CoreLogic RP Data.
At a national level, September recorded zero rental growth, failing to keep up with inflation.
Melbourne and Hobart posted slight gains of 0.3 per cent and 0.1 per cent.
Sydney was flat, while rents in Adelaide, Brisbane and Canberra all fell 0.2 per cent. Struggling commodities hubs, Perth and Darwin saw rents plunge 0.8 and 1.4 per cent respectively.
The fall in rents follow data from the Australian Bureau of Statistics (ABS) of a marked slow down in population growth for the March quarter. According to the ABS, population growth is now running at the slowest rate in a decade, following a 16 per cent fall in immigration rates over the year to March. Western Australia recorded a 71 per cent fall in net overseas migration in the past two years to March as job opportunities in the once booming resource sector dry up.
Slowing population growth is expected to be a challenge to the housing market as we build more homes than are actually needed.
» Rents fall across most cities in September – The ABC, 8th October 2015.
» Australian rents just grew at the slowest pace on record – Business Insider, 8th October 2015.
» Slowing population growth presents economic, housing market challenge – The ABC, 24th September 2015.
Posted in Australian Housing | 27 Comments »
NAB has started to restrict lending to portions of the Sydney property bubble that are exhibiting characteristics that may indicate future deterioration in credit risk. It has decided to cap the maximum loan to value ratio (LVR) in these higher risk suburbs (shown below) to 80 per cent.
2000 Sydney CBD
2008 Chippendale, Darlington
2017 Waterloo, Zetland
2019 Banksmeadow, Botany
2037 Forest Lodge, Glebe
2067 Chatswood, Chatswood West
2112 Denistone East, Putney, Ryde
2113 East Ryde, Macquarie Park, North Ryde
2127 Newington, Sydney Olympic Park, Wentworth Point
2140 Homebush, Homebush West
2141 Barala, Lidcombe, Rockwood
2142 Camellia, Clyde, Granville, Holroyd, Rosehill, South Granville
2146 Toongabbie, Old Toongabbie
2150 Harris Park, Parramatta
2151 North Rocks, North Parramatta
2153 Baulkham Hills, Bella Vista, Winston Hills
2166 Cabramatta, Cabramatta West, Canley Vale/Heights, Lansvale
2168 Ashcroft, Busby, Cartwright, Green Valley
2195 Lakemba, Wiley Park
2205 Arncliffe, Turrella, Wolli Creek
2209 Beverly Hills, Narwee
2210 Lagarno, Peakhurst, Peakhurst Heights, Riverwood
2211 Padstow, Padstow Heights
2220 Hurstville, Hurstville Grove
2566 Varroville, Bow Bowing, Minto, Raby, St Andrews
2767 Bungarribee, Doonside, Woodcroft
2768 Glenwood, Parklea, Stanhope Gardens
2769 The Ponds
The cap has been applied to all new loans written since the 18th September 2015.
» ‘Restricted postcodes’: NAB names suburbs where credit risk getting worse – The Sydney Morning Herald, 28th September 2015.
» NAB puts 40 postcodes on credit watchlist – The Sydney Morning Herald, 18th August 2015
Posted in Sydney Housing Bubble | 58 Comments »
Young foreign students on visas, with no income and who have purchased $5 million properties are just some of the 500 potentially illegal foreign real estate transactions currently under investigation by the Australian government. Federal Treasurer, Joe Hockey, today provided an update of the operations from the 50 strong task-force, flanked by ATO commissioner Chris Jordan. Mr Jordan indicated many of the investigations surround student owners.
As we have previously reported (Illegal foreign buyers on notice, 6 homes purchased illegally to be sold, a further 462 under investigation), a new task force has been set up to investigate and prosecute those undertaking and assisting with illegal residential property transactions.
In Australia, it is illegal for foreigners to purchase existing property. They can, however, purchase new property in a move designed to increase housing stock.
Hockey said the “The purchase prices of the properties range in value from $265,000 to $8.1 million.”
He has issued another five divestment orders, bringing the total to twelve.
“They now have 12 months to sell the properties, rather than the normal three month period, and will not be referred for criminal prosecution.” remarked Hockey. Illegal buyers have an amnesty until the end of November.
Illegal transactions are thought to be driving a surge in house prices in Sydney and Melbourne – area’s preferred by the Chinese while potentially undermining the banking sector and economic stability. Both Sydney and Melbourne residential property markets are widely considered to be in a bubble.
APRA Chairman Wayne Byres, in a speech today indicated he was happy with the big bank’s progress on recapitalising and strengthening their balance sheets saying, “risk-based capital ratios are as high as they have ever been.”
Last year, the banking regulator found Australia’s big banks would be rather vulnerable from a housing crash (‘Have the Big 4 just flunked APRA’s stress test?‘) and ordered them to increase capital.
Commonwealth Bank has been the latest bank to finish a capital raising. It has successfully raised $5.1 billion despite last Friday announcing its retail entitlement offer fell short $1.5 billion as investors start to turn their backs on the banks.
» STUDENTS IN $5 MILLION PADS: The probe on foreign home owners is now a billion-dollar project – Business Insider, 16th September 2015.
» Foreign buyers’ probe nets 500 properties worth $1b – The Australian Financial Review, 16th September 2015.
» APRA satisfied by multi-billion-dollar bank capital raisings – The ABC, 16th September 2015.
» Commonwealth Bank retail offer falls short by half – The Australian, 11th September 2015.
Posted in Australian Housing, Banking Regulation, Foreign Investment Review Board, Melbourne Property Bubble, Sydney Housing Bubble | 33 Comments »
Illegal foreign buyers on notice, 6 homes purchased illegally to be sold, a further 462 under investigationWritten by admin on August 9, 2015 – 7:21 pm
Six homes brought illegally by foreigners will be sold and a further 462 sales are under investigation with the Treasurer, Joe Hockey, telling Australians more will be forced to sell soon.
In May, we reported the enforcement of legislation surrounding real estate sales to foreigners would be transferred to the Australian Tax Office and harsher penalties be introduced for both foreigners who flout the laws and real estate agents, developers and third parties assisting in the transaction. (“Passive foreign investment watchdog relieved of enforcement duties“)
Foreign buyers are free to purchase new homes that increase housing stock in Australia, but are banned from purchasing existing homes. In recent years, a flood of foreigners have been breaking the laws with little repercussions from the overwhelmed and under resourced, Foreign Investment Review Board.
Under the new legislation suggested to be introduced on the 1st of November 2015, owners who have illegally purchased property in Australia will be given an government amnesty and will not be prosecuted, if they voluntarily come forward prior to the 1st November. The announcement of the 6 homes to be sold over the weekend fall under this amnesty.
In just three months, the Australian Tax Office, The Foreign Investment Review Board, the Department of Immigration and AUSTRAC (The Australian Transaction Reports and Analysis Center with regulatory responsibility for anti-money laundering and counter-terrorism financing) have been busy uncovering some 462 illegal transactions.
Fears are growing that the army of foreigner buyers are destabilising the Australian economy, creating troubling housing bubbles in Sydney and Melbourne. Those who are buying existing stock, are pushing up prices at break neck speed and pricing Australian’s out of the market.
Foreigners, predominately Chinese, like the Sydney and Melbourne property markets with apartments and high-rise living akin to their home country. The latest CoreLogic RP-Data revealed Melbourne home prices shot up 4.9 per cent in just the single month of July. Just as dangerous, Sydney home prices surged 3.3 percent for the month.
The Sydney and Melbourne property bubbles have regulators struggling to gain control. The banking regulator has forced banks to slow down their residential investor lending, re-weight their mortgage books and increase loss absorbing capital to help protect the banks in the downturn.
ANZ was the last bank forced to increase capital, announcing on Thursday its intention to raise 2.5 billion from institutional shareholders and a further $500 million from retail shareholders. The bank’s share price was smashed on Friday, when it resumed trading, plunging 8.5 percent in morning trade to finish the day 7.1 per cent down.
While the capital raising won’t be a surprise for our readers (‘Banking regulator announces tighter capital adequacy requirements for residential mortgages), the move by ANZ appeared to catch investors off-guard sending the Australian Bourse down 2.4 per cent on Friday, the biggest fall since May 2012.
All eyes are now on the Commonwealth Bank of Australia who is set to report this week. Analysts suggest the bank is falling behind its peers in terms of capital buffers and could be forced this week to raise $5 billion, some suggesting as much as $7 billion.
» Investigations into foreign investors allegedly illegally buying Australian homes more than doubles – The ABC, 8th August 2015.
» Six foreign-owned properties to sell with more to come: Hockey – The Australian Financial Review, 9th August 2015.
» CBA tipped to raise capital amid $9.1b full-year profit forecast – The Sydney Morning Herald, 9th August 2015.
» Home prices surge, Melbourne and Sydney lead gains again – The ABC, 3rd August 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation, Foreign Investment Review Board, Melbourne Property Bubble, Sydney Housing Bubble | 82 Comments »
Westpac had slashed the maximum loan to value ratio (LVR) for residential property loans taken out by self managed super funds (SMSF) to 70 per cent.
Earlier last month, Westpac lowered the maximum LVR for all property investors to just 80 per cent. On Friday, Westpac also announced it will increase investor mortgage rates by 27 basis points to appease the banking regulator.
In May, NAB quietly exited residential mortgage lending to the SMSF market, choosing no longer to lend to this higher risk limited recourse segment.
Chris Foster-Ramsay, managing director of Capital Home Loans told the Australian Financial Review, “Doors are being shut on SMSF lending for the immediate future. Clearly, someone can foresee a problem.”
The problem the banks foresee is irrational investors who have paid too much for properties in a heated market and many who may not be able to service the loan due to plunging rents. As SMSF loans are limited recourse, there is little to no collateral for the bank.
The Australian Financial Review suggests some off the plan buyers are finding out at settlement their properties are valued at 20 per cent less than what they paid, and rents are 20 per cent less than what agents had spruiked. The paper cited one example, Scott Thornton who was forced to sell one of his apartments for a $150,000 loss after two years because he couldn’t find a tenant required to service his loan.
A surge in property investors to record levels has seen an increase in the supply of rentals, leading to falling rents and vacant investment properties. Yields are also being eroded as many investors simply paid too much for the property in the surging market.
» Westpac slashes loan ratios on SMSF investment properties – 31st July 2015.
Posted in Australian Housing, Banking Regulation, Melbourne Property Bubble, Sydney Housing Bubble | 17 Comments »
Professor Vernon Smith, an expert on housing bubbles and recipient of a Nobel prize for Economics for his work, told the Australian Financial Review earlier this week, “You have a pretty good [property] bubble in Sydney and Melbourne.”
“It is hard to believe it is very sustainable.”
On Thursday, Professor Smith addressed a Macquarie Graduate School of Management dinner on global house prices.
Data to be released on Monday by CoreLogic RP Data will confirm Smith’s views. The Australian reports CoreLogic RP Data will show Melbourne house prices surged 4.8 per cent in July, up from 2.9 percent recorded in June. If the 4.8 per cent result were annualised, it would top 57 per cent!
Sydney house prices are expected to rise 3.2 percent for the month.
“It is amazing how people get carried away in the bubble,” Professor Smith told the AFR. “Then all of a sudden it’s over and they are petrified.”
The out of control house price growth in Australia has the banking regulator concerned about the inevitable crash. Fearing possible bank collapses when the bubble bursts, APRA has instructed our big banks must bolster capital.
In recent weeks the regulator has forced banks to increase mortgage rates for investors getting carried away in the bubble, in a bid to slow the dangerous market. The ANZ and CBA were the first to announce rate increases of 27 basis points for investor mortgages. NAB has increased rates on interest only loans by 29 basis points, while Westpac – plagued by IT problems, only today announced investor interest rates will increase by 27 basis points.
For AMP, irrational property investors are just too risky. It has decided the cease lending to property investors altogether, effective immediately while it hikes rates for existing investors by 47 basis points on the 7th September.
» Housing bubble could burn investors, warns Nobel Prize-winning economist – The ABC, 30th July 2015.
» ‘You have a pretty good bubble in Sydney and Melbourne’: Nobel-winning economist warns property buyers not to get ‘carried away’ as AMP Bank cracks down on investment loans – The Daily Mail, 30th July 2015.
» Westpac jacks up interest rates for housing investors – Sydney Morning Herald, 31st July 2015.
» AMP slaps ban on loans to property investors as expert sees end to housing bubble – The ABC, 29th July 2015.
Posted in Banking Regulation, Melbourne Property Bubble, Sydney Housing Bubble | 24 Comments »
AMP has today announced a freeze on lending to property investors while existing property investors can expect a 47 basis point increase in mortgage rates from the 7th September 2015.
AMP Limited acknowledges the changes are in response to APRA’s crackdown on investor housing loan growth and will review the ban at the end of this year.
» AMP slaps ban on loans to property investors as expert sees end to housing bubble – The ABC, 29th July 2015.
» AMP Bank stops lending to housing investors, jacks up rates – The Sydney Morning Herald, 29th July 2015.
Posted in Australian Housing, Banking Regulation | 5 Comments »
NAB hikes IO loans by 29 basis points, Westpac announces corporate note issue and hiring freeze while they fix computer issuesWritten by admin on July 27, 2015 – 9:04 pm
Following moves last week by the ANZ and CBA to hike mortgage rates on investor loans by 27 basis points, the NAB has today announced it will hike rates on interest-only loans by 29 basis points, a move also designed to slow down investor housing lending growth.
Significant growth in investor-only loans has been raising concern among financial regulators as investors pile into interest-only loans to take advantage of ever rising home prices. APRA statistics for the March 2015 quarter found interest-only loans made up 42.3 per cent of all new loans issued.
While the move by NAB will target both owner occupiers and investors using interest-only loans, NAB said interest-only loans were “predominant structure for investors.”
Westpac has today announced a $750 million corporate note issue to help bolster capital reserves as news spread that Westpac had last week put in place a hiring freeze for all non-critical roles, initially said to last three months.
According to a Herald Sun article, Westpac was unable to follow ANZ and CBA, jacking up investor only loans due to a deficiency in its computer systems. It is understood Westpac technical staff are checking back-office systems to ensure owner-occupier and investor customer information is correct.
A Westpac spokesperson told News Limited, “Given we haven’t had differential pricing across the mortgage book for a number of years, if this was to be introduced we must ensure a smooth transition for affected customers,”
This could suggest a rate hike is still coming for property investors financed through Westpac.
» Will Westpac follow the pack and hike investment home loan rates? Computer says ‘not yet’ – The Herald Sun, 27th July 2015.
» Westpac confirms three-month hiring freeze – Business Insider Australia, 27th July 2015.
» NAB raises rates on interest-only home loans – Sydney Morning Herald, 27th July 2015.
Posted in Australian Housing, Banking Regulation | 12 Comments »
ANZ is the first bank to move, increasing mortgage rates for investor loans by 27 basis points effective from August 10. The bank says it is following instructions from the banking regulator, the Australian Prudential Regulation Authority (APRA).
On Monday APRA announced increases to average risk rates for Australian residential mortgage exposures by Internal Rating Based (IRB) banks. (‘Banking regulator announces tighter capital adequacy requirements for residential mortgages‘)
» ANZ raises property investor interest rates to cool demand – The ABC, 23rd July 2015.
Posted in Australian Housing, Banking Regulation, Sydney Housing Bubble | 21 Comments »
According to figures from the Domain group, Sydney house prices surged 22.9 per cent in the last year, the fastest pace since the 1980’s.
The surge, surpassing growth recorded in the 2001 and 2002 booms according to the Domain’s Dr Andrew Wilson, takes the Sydney median house price past the $1 million mark, making it more expensive than London.
The bubble continues to create an increasing challenge for regulators. Reserve Bank Governor Glenn Stevens stressed yesterday in an address to the Anika Foundation Luncheon titled “Issues In Economic Policy”, that we need to take a longer term view of momentary policy and the implications of record low interest rates. Stevens remarked:
The risk, however, is that this process can lead to a mindset in which policymakers end up responding to quite short-term phenomena, using instruments that take quite some time to have their full effect, including effects that might actually turn out to be adverse.
Stevens is warning any benefit in dropping interest rates now to support jobs and growth is likely to be outweighed by fueling the housing bubble, that could collapse with far more devastating and adverse results.
It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved. Monetary policy works partly by prompting risk-taking behaviour. In some ways that is good: in some respects, there has not been enough risk-taking behaviour. But the risk-taking behaviour most responsive to monetary policy is of the financial type. To a point, that is probably a pre-requisite for the ‘real economy’ risk-taking that we most want. But beyond a certain point, it can be dangerous.
Reading between the lines, while the housing market bubble in Sydney and Melbourne, two of Australia’s largest markets remains out of control, we can expect to see any changes to the official cash rate on hold as the economy slows and unemployment ticks up. Stevens also remarked, growth of less than three per cent will be the new normal for Australia.
» Median house price in Sydney tops $1 million for first time – The Australian Financial Review, 23rd July 2015.
» Issues In Economic Policy, Address to the Anika Foundation Luncheon – The Reserve Bank of Australia, 22nd July 2015.
Posted in Australian Housing, Sydney Housing Bubble | 5 Comments »
As widely expected, the Australian Prudential Regulation Authority (APRA) has announced our big banks will need to raise their average risk weights on Australian residential mortgage exposures from approximately 16 per cent to at least 25 per cent, but still shy of the 35 per cent required by our smaller banks. The affected banks have until the 1st July 2016 to get their ‘houses’ in order.
This will require our banks to raise billions in new capital. ANZ told AAP they would need to raise $2.3 billion, Westpac would need another $3 billion.
The Financial System Inquiry had recommended average risk rates for IRB banks be increased to between 25 and 30 per cent.
The move to strengthen our banking system comes as our internal ratings-based (IRB) institutions, Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), Macquarie Bank, National Australia Bank (NAB) and Westpac Banking Corporation (WBC) were found flouting their privilege in calculating their own risk ratings, putting super profits ahead of stability with the knowledge that naive taxpayers will be on hand to bail out these “too big to fail” banks. (‘Australian banks not the safest in the world – far from it.‘)
APRA indicates this is an “interim measure” and further tightening of risk ratings and enhanced capital adequacy requirements can be expected once the Basel Committee releases a review of it’s international framework towards the end of the year.
» APRA increases capital adequacy requirements for residential mortgage exposures under the internal ratings-based approach – 20th July 2015
» APRA’s home loan rule changes could push up rates by 0.65pc: analyst – The ABC, 21st July 2015.
» Have the Big 4 just flunked APRA’s stress test? – Who crashed the economy?, 16th November 2014.
Posted in Australian Housing, Banking Regulation | 6 Comments »
The number of new mortgages to owner-occupiers tumbled a seasonally adjusted 6.1 per cent in May, the biggest fall in 5 years according to Australian Bureau of Statistics (ABS) data released on Friday.
The value of loans written to investors fell 3.2 per cent, while owner occupiers slumped 5.3 percent. Regulators had been targeting the overheated investor segment, forcing banks to tighten lending to limit further damage from Australia’s housing bubble.
Economists were surprised to see such a large fall, the same month the Reserve Bank slashed the official cash rate from 2.25 per cent to just 2 per cent, a new record low. Many were also surprised to see a larger fall in the owner occupier segment, a segment not being targeted by macroprudential regulation. Following the Reserve Bank announcement in May, Treasurer Joe Hockey pleaded, “I say to the Australian people directly, now is the time to borrow and invest, whether you be a household or business.” It’s possible many Australians saw through the Treasurer’s plea, fearing a deteriorating economy and have decided to suspend purchases instead. (Treasurer Joe Hockey delusional as RBA cuts to record emergency lows‘)
The figures reported on Friday correspond to the month before Treasury secretary John Fraser told a Senate enquiry Sydney and some parts of Melbourne are “unequivocally” in a housing bubble. (Treasury secretary John Fraser says Sydney ‘unequivocally’ in a housing bubble‘) According to Google Trends, concerned Australian’s conducted a record number of searches on the property bubble during the month of June. (June 2015: The month Australia learned it had a housing bubble‘)
This week, Westpac and ANZ reduced maximum LVRs for new loans to property investors to further cool the market. (‘Banks continue to curb investor lending‘)
Hence, it is expected to see a further deterioration in lending data in the next coming months.
» Home loan slide an early sign that APRA limits may be working – The ABC, 10th July 2015.
» New mortgage lending falls 6.1pc as banks toughen policies – The Age, 10th July 2015.
» Home loan approvals at two-year low – News Limited, 10th July 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation, Monetary Policy | 36 Comments »
Rents are falling in every state except Melbourne, according to CoreLogic RP Data rental data for the month to June 30. As more investors pile into the market, rents have risen just 1.1 percent this year, the worst result since records started in December 1995. In real terms, rents have failed to keep up with inflation and are now falling.
Rents fell the most in Darwin, collapsing 2.5 per cent in the month. Perth rents tumbled 1.1 per cent, Canberra 0.70 per cent, Hobart 0.60 per cent, Brisbane 0.5 per cent, with Sydney and Adelaide both falling 0.2 per cent. Melbourne bucked the trend rising 0.6 per cent.
The report indicated, “Sluggish rental growth is most likely due to surging investment demand, record high levels of new housing construction and a slowing rate of population growth nationally.”
» Tenants rejoice: Rents growing at slowest pace since 1995 – The ABC, 10th July 2015.
Posted in Australian Housing | 15 Comments »
Australia’s record low interest rate environment has been a challenge for financial regulators trying to cool asset bubbles such as residential housing. Fear of buyers taking on too much cheap debt when interest rates are at record lows is thought to be keeping some regulator’s awake at night, as household debt to household disposable income metrics balloon to record levels.
Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft has told a Senate estimates committee, borrowers need to do their sums on a mortgage rate of 7 percent, not 4 percent as interest rates won’t stay low forever.
The banking watchdog, the Australian Prudential Regulation Authority (APRA), has been instructing banks to perform loan serviceability stress tests at an interest rate floor of 7 per cent, a buffer for when rates eventually rise. Banks such as ING Direct have been stress testing their borrowers’ at an 8 per cent interest rate floor.
So you can imagine the surprise today when Reserve Bank of Australia senior research manager Peter Tulip delivered preliminary results of his research showing Australian house prices are undervalued by 30 percent, simply because interest rates have plunged in recent times as the economy slows and jobs are lost. Dr Tulip makes this assessment on the assumption house prices were “fairly valued” last year.
As Sydney and Melbourne house prices rocketed in the last twelve months, notching up double digit gains multiple times that of inflation, interest rates have fallen from 2.5 per cent to just 2 per cent, a twenty percent fall.
Tulip said, “We find that owning a house costs 30 per cent less than renting,” with little consideration on what happens when interest rates rise from the depths of a 60 year record low during the 20-25 year term of a mortgage.
» House prices 30% undervalued. Buy, don’t rent, says Reserve Bank official – The Sydney Morning Herald, 8th July 2015.
Posted in Australian Housing, Sydney Housing Bubble | 26 Comments »
As widely expected, Australia’s central bank decided today to leave the official cash rate unchanged at 2.0 per cent. In the statement following the policy decision, the Reserve Bank, as it has done over the past couple of months, reiterated “The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”
Effective tomorrow, Westpac will require all new property investors to put down a deposit of at least 20 per cent, while ANZ will require a minimum 10 per cent deposit.
The moves by Westpac and ANZ follow NAB’s decision last month to cap maximum loan to value (LVR) ratios for property investors at 90 per cent. Early last month, ING Direct capped LVRs to the more exuberant NSW property investor at 80 per cent, leaving property investment loans to the rest of the country capped at 90 per cent. Commonwealth Bank subsidiary, BankWest was one of the first banks to move, capping Australia wide property investor LVRs at 80 percent in May.
The banking regulator’s statistics for May, published this time last week, showed ANZ, CBA, NAB and Westpac grew property investor loans by 10.6 per cent, 9.9 per cent, 14.1 per cent and 10 percent respectively year on year, some exceeding the 10 percent speed limit imposed by the regulator. The other “advanced” bank, Macquarie should have received a handful of demerit points companying its 86.8 per cent speeding ticket.
It is understood the banking regulator, APRA, wrote to banks (again) last week with a please explain on their investor mortgage book growth.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 7th July 2015
» Westpac caps LVRs on investor mortgages at 80pc – The Sydney Morning Herald, 7th July 2015.
» House prices: bank lending practices face more APRA scrutiny – The Australian, 2nd July 2015.
» Property investor loans keep growing above APRA’s 10pc limit – The ABC, 30th June 2015
» Four Banks and an out of control mortgage market – Australia: Boom to Bust Blog, 2nd July 2015.
Posted in Australian Housing, Banking Regulation, Monetary Policy, Sydney Housing Bubble | 14 Comments »