“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 | 18 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 | 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 »
Before heading out the doors for Christmas, the Reserve Bank of Australia (RBA) board indicated “on present indications, the most prudent course is likely to be a period of stability in interest rates.” The last time the RBA had taken the knife to interest rates was on the 7th August 2013, some 16 months earlier. Australia’s central bank was anticipating on keeping the last remaining and precious 10 official cash rate cuts left in the war chest for the next crisis, at the envy of so many other central banks presiding over failed debt fuelled crises with cash rates sitting at zero.
But in a surprise and sudden move, the Reserve Bank decided yesterday it had no choice but to act against a backdrop of a rapidly deteriorating economy, and in the process, risk putting the icing on the world’s largest housing bubble.
Outside of a brief mention on a strengthening US economy, yesterday’s statement by RBA Governor Glenn Stevens on the monetary policy decision was packed full of doom and gloom.
It indicated the Eurozone economies and Japan were “both weaker than expected” and “China’s growth was in line with policymakers’ objectives” – which is a positive way of saying China’s growth rate came in at 7.4 per cent in 2014, the lowest figure in 24 years and the first time the country missed its growth target in 17 years.
China’s decline after an insatiable appetite for commodities is causing havoc for world commodities prices, a pain almost unbearable for Australia who bet its entire future on China and the triumphant “100 year” resource boom. The Reserve Bank noted “commodity prices have continued to decline, in some cases sharply.” Our largest export, iron ore is down 46 per cent in 12 months. In a post in January (Falling back to earth – Our terms of trade collapse) we showed what affect this is having on our terms of trade and what this will mean for wage growth and jobs – or more precisely lack off – going forward.
One potential positive is the significant decline in world oil prices, with the RBA noting it will “temporarily” lower CPI inflation before the falling dollar erodes any benefit.
Domestically, the RBA suggests growth is “continuing at a below-trend pace” with an emphasis on domestic demand growth being “overall quite weak” causing unemployment to rise over the year.
One possible driver for the surprise decision to cut could be the stubbornly high Aussie dollar. The central bank notes even with the recent 18 per cent plunge in the past 6 months, the Australian dollar still remains above its “fundamental value, particularly given the significant declines in key commodity prices.”
And Australia’s much hyped housing bubble featured predominately with the bank noting credit growth has picked up, with “stronger growth in lending to investors in housing assets” (Sydney investor led housing bubble irrefutable) and noting the surge in dwelling prices in Sydney. Dr Andrew Wilson from the Domain Group recently reported Sydney house prices are in “hyperdrive” after prices surged an unsustainable and very dangerous 29 percent in just two years, out-striping CPI and wage inflation several-fold.
Yesterday’s rate cut is only likely to fuel what the RBA’s “central bank”, the Bank for International Settlements (BIS) last year reported was the world’s second most expensive housing market in the world (Australians struggle with world’s second largest housing bubble), behind oil exporter Norway.
The RBA tries its hardest to allay concern saying it “is working with other regulators to assess and contain economic risks that may arise from the housing market.” We reported last year, (Property bubble a Macroprudential challenge for regulators) that the Council of Financial Regulators, who is chaired by the Reserve Bank of Australia, is working on Macroprudential controls in a bid to contain the bubbling housing market. In December, hot on the release of the Murray report, the watch dogs started to bark – but have yet to bite (Woof – The watchdogs have a bark!)
As we reported then, it is widely expected the regulators will decide to impose capital charges on higher risk investor loans, especially interest only loans. This would require the bank to hold more loss absorbing capital and would likely pass this cost on to the property investor though higher interest charges without effecting owner occupiers, the diminishing first home owner or business. However, recent indications is such framework will be delayed until later this year only exacerbating the current concerns.
The latest statistics from the Reserve Bank, prior to this rate cut, show households are once again starting to leverage up after the period of stability in interest rates when they should be trying to de-leverage and de-risk. Total household debt as a percentage of household disposable income is just 0.4 per cent from the peak during the 2008 GFC. The majority of household debt is locked in residential housing which is at a record high of 139 per cent of household disposable income.
This unprecedented and significant run up in debt over the past 25 years is why the Australian economy is in the doldrums now – and why so many economies collapsed in 2008. Despite having a larger housing bubble than the US in 2007, Australia masked and delayed the devastating effects though an unprecedented mining bubble flooding the country and households with excess money – through middle class welfare, high wage growth and monumental investment returns. Worst still, Australian’s became complacent as the ‘miracle economy’ was tossed around. The recent collapse of the mining bubble, now leaves Australia’s household debt greatly exposed and potentially the next domino to fall as jobs are lost and loans become unserviceable. Only today, Bloomberg reported to the world, “This is what an economic hangover looks like. More offices lie empty in Perth, Australia, than at any time since 1996, while the number of homeowners seeking to offload properties has surged 45 percent from a year ago.”
This is not the time for the average Australian to be complacent on interest rates at levels not seen since the 1950s. To illustrate the significance of the household debt bubble, figures from our National Accounts (ABS) show households still allocate more of their household disposable income to interest on dwellings today, than in 1989 when interest rates peaked at 17 per cent. Low rates have been offset by astronomical household debt levels.
It also goes a long way to explain why domestic demand growth is “overall quite weak” according to the RBA. With so much capital misallocated to housing/shelter and the high cost of living, there is little disposable income left to underpin consumer spending and create jobs to fill the void from the mining boom.
While the Reserve Bank would like you to be out spending, the best thing Australians can do now is to start paying down that white elephant – household debt – and as fast as they can. According to interviews of the indebted, conducted by one of the television news services tonight, that is exactly what people intend to do.
And to finish with some light comical relief, shortly after the announcement of the rate cut, Treasurer Joe Hockey said the rate cut, caused by a rapidly slowing economy, was “good news” – While the decision was solely a matter for the RBA, his government contributed to the cut by keeping inflation low, even going as far to confidently state there will be further cuts to come. While, I suspect he didn’t bother reading the governor’s gloomy statement following the decision, and I know for sure Hockey doesn’t control world oil prices, you wonder if there is an ounce of truth about his contribution. Is the current political circus etching away at consumer & business confidence? I have no doubt it has some role to play.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 3rd February 2015.
» Mining Bust in Perth Shows Damage That Led Australia to Cut Cash Rate – Bloomberg, 3rd February 2015.
Posted in Australian economy | 29 Comments »
Australia is now in the grip of the largest terms of trade collapse since records started in 1959, unleashing havoc on Federal budgets that will ultimately flow through to wages and household balance sheets.
The terms of trade is an index calculated by the Australian Bureau of Statistics (ABS) showing the relative ratio between export to import prices. A fall in the terms of trade indicate Australia needs to export more to maintain the same level of imports – making Australia economically worse off.
The price for Australia’s number one export, iron ore continues to fall with prices down 46 percent in the 12 months to November. Since the peak in February 2011, prices have collapsed just over 60 percent. The fall in the iron ore price is due to a slowing in China’s fixed asset investment due to over building.
Australia’s other major exports such as coal and wheat has also experienced significant falls.
Our commodities boom has seen Australians enjoy the second fastest wage growth of any developed economy over the past 13 years, according to the OECD. Data from the International Labour Organisation show Australian wages grew the most of any G20 nation between 2007 and 2013.
But times are changing.
The latest ABS wage price index (WPI) shows total hourly rates of pay excluding bonuses remains subdue, rising just 2.57 percent in the past year. This is the lowest growth since the series started in 1997.
» Falling wages to upset household debt dynamics – Who Crashed the Economy, 30th May 2014.
» Beijing housing sales falls 35% – Iron Ore falls through $90 – Who Crashed the economy, 17th June 2014.
» Real wages start to fall – Who Crashed the Economy, 19th February 2014.
» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.
Posted in Australian economy, China | 49 Comments »
Hot on the release of the Murray report, the Australian banking regulator (APRA) and the Australian investment and security regulator (ASIC) has today exposed teeth as they start growling and barking at our reckless banks.
Both regulators have launched an attack on prevalent risky residential mortgage lending practices, targeting in particular, loans to the overheated investor market.
According to reports, APRA has written to the banks today, telling them growth in loans to property investors should not exceed 10 per cent. APRA warns it stands ready to raise capital requirements early next year if banks do not take a more prudent approach to mortgage lending.
ASIC has today announced surveillance operations into interest only loans. In the September quarter, more risky interest-only loans reached a record high of 42.5 per cent of all loans issued. More property investors than ever before are betting prices will only go up, raising alarm bells among regulators.
» APRA launches crackdown on loans to property investors – The Age, 9th December 2014.
» Financial regulators united in attack on risky loans – The Sydney Morning Herald, 9th December 2014.
» APRA, ASIC increase surveillance of risky home lending – The ABC, 9th December 2014.
Posted in Australian economy, Australian Housing | 39 Comments »
Contrary to popular belief, Australian Banks are not the safest in the world and should hold more capital to protect against future shocks.
David Murray, chair of the Financial System Inquiry who released their final report yesterday, said Australian banks should be in the top 25 per cent of global banks, but they are currently around middle ground.
The first two of the forty four recommendations is to increase the resilience of the Australian banking system though increased capital levels and the raising of risk weightings for internal ratings-based (IRB) banks to narrow the different risk weights used between the Big 4 including Macquarie and the standardised banks.
As we reported three weeks ago (‘Have the Big 4 just flunked APRA’s stress test?’‘) Australia’s Big 4 banks – ANZ, CBA, NAB and WBC have been 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. This has lead to a deterioration of mortgage risk ratings applied by the Big 4 and Macquarie.
A recent stress test conducted by the Australian banking regulator shows this is a real possibility. The Big 4 have cut their risk ratings and Tier 1 common equity so fine, that in a simulated collapse of the world’s second largest housing bubble – namely Australia’s – and the collapse of commodity prices (already well under way), all four required extra capital. If they were unable to access the extra capital required, all four of our big banks would effectively be insolvent. The non-advanced banks – all the banks except the Big 4 and Macquarie – who have regulated risk weightings, scraped though the stress test, distressed but generally fine.
It is a fact not lost in the Murray report. The report says Australia should not underestimate the risks of financial crises:
For example, the major banks currently have a leverage ratio of around 4–4½ per cent based on the ratio of Tier 1 capital to exposures, including off-balance sheet. An overall asset value shock of this size, which was within the range of shocks experienced overseas during the GFC, would be sufficient to render Australia’s major banks insolvent in the absence of further capital raising. In reality, a bank is non-viable well before insolvency, so even a smaller shock could pose a significant threat. Following its recent stress-test of the industry, APRA concluded, “… there remains more to do to confidently deliver strength in adversity”
The Murray report also highlights the many tax distortions driving Australia’s significant housing asset bubble and ultimately placing the Australian banking system and entire economy at significant risk. This includes the “relatively heavily” taxed income from bank deposits and fixed income securities, negative gearing and the 50 percent capital gains tax discount.
Another one of the many sensible outcomes from the report is the recommendation to reinstate restrictions on Self Managed Super Fund’s (SMSF) access to limited recourse borrowing suggesting it could pose a significant risk to the economy. Property spruikers have been pressuring people to set up SMSFs and to leverage their retirement savings into the property bubble.
But with so many sensible recommendations, the real test is now what, if any, recommendations the government will adopt. Very few of the Ken Henry Tax Review recommendations including above mentioned tax distortions have been implemented after the release of the 2009 report. Various watchdogs over the years have set up task forces, (e.g. ASIC set up up task force on SMSF leveraging into property in 2012 (‘Alarm bells ring as self managed super funds spruiked as vehicle for leveraged property‘) with no tangible outcomes. We have had the House Standing Committee on Economics to investigate foreign investment in residential real estate (‘Report into foreign investment in residential real estate could come too late‘). The Council of Financial Regulators is said to be exploring macroprudential controls (‘Property bubble a Macroprudential challenge for regulators’), but we are now not expected to see any outcome this side of Christmas, if at all.
It appears all to hard. Maybe the bubble is too big?
» Financial System Inquiry – The Commonwealth of Australia, 7th December 2014.
Posted in Australian economy, Australian Housing | 7 Comments »
Brent crude plunged 6.7 per cent last night after the OPEC oil cartel decided against intervening in the market to quell steady price declines. The cartel agreed to keep their output ceiling at 30 million barrels a day, sending the futures price to a four year low of $71.12.
This is a chart, Shane Oliver tweeted today:
Some of the fall is believed to be attributable to the United States gaining oil independence through local shale oil production. But this production is extremely expensive and could be one of the reasons why the cartel decided to do nothing, hoping to price U.S. shale oil out of the market.
Another cause is thought to be falling global demand for oil, especially from regions such as China and Europe. Two months ago, the International Energy Agency (IEA) said a sudden drop in oil demand for the second quarter of 2014 was “nothing short of remarkable.”
It has some wondering if the fall in oil prices is a leading indicator of falling world demand and the onset of the GEC – The Global Economic Crisis? (Note the 78% decline during the heights of the GFC)
The lack of intervention is said to be an indicator that world oil prices will continue to decline for now.
» Oil price collapses after OPEC nations decide against cutting production – The ABC, 28th November 2014.
» Oil rout threatens to spoil Australia’s gas bonanza – The Age, 28th November 2014.
» Drop in global oil demand ‘nothing short of remarkable’ – Who crashed the economy, 14th September 2014.
Posted in Australian economy | 40 Comments »
Australians are compelled to believe banks that produce super profits are some of the safest banks in the world. But is super profits really a sign of safety or an indication of dangerously high leverage and risk taking?
As we wait for the release of the David Murray Financial System Inquiry final report, strong indications are emerging our big four banks will need to hold more capital after flouting their privilege in calculating their own risk ratings.
Prior to 2004, and in tune with the Basel I accord, banks were allowed to apply a 50 percent risk rating to standard home loans. While every dollar of a business loan, for example, was deemed to be at risk, only 50 percent of a residential mortgage was thought to be at risk. With half the loan risk-free, the bank only had to keep half the Tier 1 capital required.
With the introduction of the Basel II accord published in June 2004, the Basel Committee on Banking Supervision thought it should cut standard home loan risk ratings to 35 percent for loans with a LVR under 80 percent. It also gave ‘Advanced Banks’ the privilege to rate their own assets, after all they were considered to have well developed risk management principals and would never put profit ahead of risk.
In Australia, the ‘Advanced Banks’ are our big four – ANZ, CBA, NAB, WBC and investment bank, Macquarie.
From Pillar 3 disclosures, the Australian Financial Review has calculated current risk-weights for our bank’s home loan portfolios. As required, our smaller non ‘advanced’ banks have risk weightings exceeding the minimum 35 percent. Bendigo is believed to be 39 percent, Suncorp – 40 percent and the Bank of Queensland – 44 percent.
But, according to the Australian Financial Review, Westpac believes only 15 percent of its standard mortgages are at risk (Perfect time for Gail Kelly to retire), ANZ – 18 percent, CBA – 19 percent and NAB – 23 percent. Macquarie is marginally better at 24.4 percent.
The Australian Banking Regulator, APRA, has just conducted its latest stress test on the Australian Banking System. The tests included 13 of our largest banks, accounting for 90 per cent of total industry assets. While previous stress tests included a slowdown in China and fiscal problems in Europe, this year the banking regulator focused on a collapse of Australia’s bubbling housing market.
Two stress scenarios were developed in conjunction with the Reserve Bank of New Zealand:
Scenario A consisted of a housing market double-dip triggered by a sharp slowdown in China. House prices fall by 40 percent and unemployment increases to 13 percent.
Scenario B focused on rising interest rates along with a plunge in commodity prices. Higher unemployment and higher borrowing costs caused a significant drop in Australia’s overvalued housing values.
A footnote in an APRA report noted “regulatory capital for housing held by Standardised banks was (just) sufficient to cover the losses incurred during the stress period.” But this “was not the case” for our Advanced banks.
According to the Australian Financial Review, this finding has been confirmed on Friday by APRA. The Australian Financial Review reports “The text was unclear as to whether the major banks had sufficient or insufficient capital held against their mortgage books to withstand the losses. But an APRA source confirmed to AFR Weekend that it was the latter, and that all residential mortgage capital was wiped out in the stress test.”
» Bank capital at risk from house bust – The Australian Financial Review, 15th November 2014.
» Seeking strength in adversity: Lessons from APRA’s 2014 stress test on Australia’s largest banks – APRA, 7th November 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» Major bank profits on home loans could halve – The Australian Financial Review, 25th July 2014.
Posted in Australian economy, Australian Housing | 38 Comments »
No doubt regulators, today, wish they were not sleeping at the wheel as the challenge on what to do with the world’s second largest residential property bubble start to mount.
The Council of Financial Regulators – comprising of the Reserve Bank of Australia (Chair), the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury – are working diligently on measures aimed to try to bring the unbalanced investor led Melbourne and Sydney property bubbles under control, before it starts to undermine the banking system.
It is understood, slightly less senior members of each council agency are on a working group determining and risk assessing the most appropriate measures and reporting back to the council. The council is expected to brief Treasurer Joe Hockey of their proposal prior to execution.
Earlier this month, Assistant RBA governor Malcolm Edey optimistically said to expect an announcement before the end of the year, however APRA chairman Wayne Byres wasn’t as convincing as he told a Senate Economics committee on Wednesday, it hasn’t reached a point where we have decided anything, going as far to say “it might be nothing.”
One of the challenges of the Macroprudential policy framework is accurately targeting the risky activity without shifting the problem elsewhere. The council has risky loans provided to naive and overconfident property investor’s firmly in its sight. Currently investor loans make up almost half of all lending. It certainly does not want to introduce policy to hinder dwindling first home buyers.
“We’re keeping a close eye on the build up of credit to investors in the housing market, not to owner-occupiers per se and certainly not to first home buyers. They’re not the issue,” said RBA governor Glenn Stevens.
Another challenge for regulators is targeting the specific problem markets. While Australia has a sizeable housing bubble in all states and territories, the current concern is the unsustainable activity in both the Sydney and Melbourne markets. “What the community wants is sustainable competition and sustainable growth, not something that accelerates through the roof and then drops through the floor,” said Wayne Byres.
The most recent data from the Domain Group (formally Australian Property Monitors) suggest house prices are starting to correct in the rest of the country. In the September quarter, Canberra home prices recorded a 1.7 percent fall, followed by Perth with a 1.5 percent decline, Hobart and Brisbane both recorded drops of 1.3 percent and Adelaide fell 1.0 percent.
It is widely expected the regulators will decide to impose capital charges on higher risk investor loans, especially interest only loans. This would require the bank to hold more loss absorbing capital and would likely pass this on to the borrower though higher interest charges. On Wednesday, Wayne Byres said in his opening statement to the Senate standing committee on economics:
First, within our regulatory framework APRA generally seeks to avoid outright prohibitions on activities where possible: instead, our regulatory philosophy is to focus on institutions’ setting their own appetite for risk. We also use the regulatory capital framework to create incentives for prudent lending and ensure that, while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements.
» Banking regulator outlines likely response to housing investor surge – The ABC, 24th October 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» APRA warns bank lending standards are being stretched – The Sydney Morning Herald, 23rd October 2014.
» APRA ready to act on housing – The Australian, 11th October 2014.
Posted in Australian economy, Australian Housing | 76 Comments »
New lending finance data released by the Australian Bureau of Statistics (ABS) today show the Sydney property bubble is now undeniable as it continues its dangerous acceleration – unchecked.
Investors are starting to feel the strain as they fight each other for tenants in an oversupplied marketplace. With August figures showing 60 percent of all new home loans in NSW is for the purchase of an investment property, the highest ever, rents are starting to fall. According to the Domain Group, apartment rents have dropped below $500 a week to $495. Rents for houses remain static at $510 a week.
Rents are also falling in Perth and Canberra, while rents remain static in all other states – failing to keep up with inflation.
» Change in the wind for Sydney’s rental market – The Domain, 10th October 2014.
Posted in Australian Housing | 84 Comments »
On Sunday, the Bank for International Settlements (BIS) released residential property price statistics for most developed countries around the world – (‘Australians struggle with world’s second largest housing bubble’). The data confirms Australia has the second most overvalued residential property market in the world, second only to Norway. The data, collected at the start of this year, shows on a price to rent metric, Australian residential property prices were 50 percent overvalued. On an income to rent metric, Australian house prices were 40 percent overvalued. House prices have appreciated significantly since the survey was done.
One of our readers, Alex, asked if there were a similar report comparing capital cities of Australia?
Here it is for the June 2014 quarter:
We have indexed the data to 1997, a period of stable house price growth (research shows long term house prices only rise by inflation). Note income is derived from a single wage – the ABS Wage Price Index – total hourly rates of pay excluding bonuses and is not household disposable income.
A price to CPI ratio (real house price) has been included. There is evidence both rents and incomes are inflated. Rents started to rise faster than inflation after the financial crisis, but with the significant influx of investors in the market at present (investors accounted for a record 49.7 per cent of total loans in July), rents are now contracting and will likely further exacerbate over-valuations. The same can be said for wages, with wage growth and household disposable incomes coming under pressure.
The over-valuations assume a healthy, stable market (like in 1997). If the economy were to deteriorate, larger falls could be expected.
Posted in ABS House Price Indices, Australian economy, Australian Housing | 64 Comments »
Treasurer Joe Hockey has once again demonstrated ignorance toward issues effecting everyday Australians, this time denying Australia is amidst the grips of a credit fuelled housing bubble.
His comments come almost a month after he said the fuel excise increase won’t effect the poor. The out of touch Treasurer told ABC radio, “The poorest people either don’t have cars or actually don’t drive very far in many cases.”
Hockey’s argument today is Australia’s housing bubble isn’t debt fuelled, but caused by a lack of supply.
“I’m not so sure it’s credit fuelled,”
“It is just an infinite mantra for international commentators, for analysts based overseas to say ‘well, you know, there’s a bit of a housing bubble emerging in Australia,” commented Hockey after the Bank for International Settlements (BIS) yesterday released a report showing Australia has the second most overvalued property market in the world.
“That is rather a lazy analysis, because fundamentally we don’t have enough supply to meet demand.”
“That doesn’t suggest there’s a bubble; there might be a price increase of some substance, but you’d expect the market to react and produce some more housing.”
Actual data from the Reserve Bank of Australia show Australians have racked up excessive household debt levels, suggesting the bubble is in fact credit fuelled. Australia’s household debt to disposable income is one of the highest in the world.
Despite the official cash rate sitting at levels not seen in over 50 years, Australians are still paying more to service their mortgages today as a percentage of household disposable income, thanks to record debt levels, than in 1989 when interest rates hit 17 percent:
A recent report shows Joe Hockey owns four investment properties.
Hockey said today, “I don’t see at the moment any substantial risk.”
» Joe Hockey denies Australia in a property bubble – The Sydney Morning Herald, 16th September 2014.
» Hockey dismisses any property bubble – The Australian Financial Review, 16th September 2014.
Posted in Australian economy, Australian Housing | 16 Comments »
Australians have enjoyed the second fastest wage growth of any developed economy over the past 13 years according to the OECD. Interest rates are now at record low levels not seen in almost 60 years. You would think the average Australian would be on easy street.
But a survey from National Australia Bank today reveals almost 1 in 5 Australians are living pay day to pay day, struggling to make ends meet. Of those, 70.4 percent are dipping into their savings and 40 percent have been spending on credit cards.
The answer can be found in the Bank for International Settlements (BIS) quarterly review on Residential property price statistics across the globe, released today, that finds Australia has the second most expensive housing market in the world, second only to Norway.
And the National Australia Bank’s answer to all this? Today it has teamed up with Good Shepherd Microfinance to loan people who find themselves in difficult financial circumstances, more money.
» Almost one in five Australians never have any money left over from their regular pay packets, according to a NAB survey. – SBS, 15th September 2014.
» Australia’s house prices second-highest in world: BIS – The Sydney Morning Herald, 15th September 2014.
» BIS figures confirm Australian housing overvalued – The ABC, 15th September 2014.
» Residential property price statistics across the globe – BIS, 14th September 2014.
Posted in Australian economy, Australian Housing | 25 Comments »
In an ominous sign for the global economy, the International Energy Agency (IEA) has said a sudden drop in oil demand for the second quarter of 2014 is “nothing short of remarkable.”
The second quarter saw demand slow to below 0.5 million barrels per day, the lowest level in two and a half years.
The IEA has “revised down sharply” demand forecasts for 2014 and 2015 to 0.9 million barrels per day and 1.2 million barrels per day respectively citing a weaker outlook in both Europe and China. The agency fears Eurozone economies “are getting perilously close to deflation.”
Last week the price for Brent crude fell though $100 USD a barrel, the first time in 16 months. Since the peak in June, prices are down over 14 percent. West Texas Intermediate is trading around $91 per barrel, the lowest level in 7 months and down 12 percent from the peak.
China’s Factory Output Slumps
According to China’s Nation Bureau of Statistics, growth in China’s factory output fell to 6.9 percent in August yoy, the weakest growth since the 2008 recession. Growth is expected to slow further with Xu Gao, chief economist at Everbright Securities in Beijing saying “The August data may point to a hard landing. The extent of the growth slowdown in the third quarter won’t be small,”
» International Energy Agency says sudden drop in the global demand for oil ‘nothing short of remarkable’ – The ABC, 12th September 2014.
» China’s factory growth slows to near six-year low – The Sydney Morning Herald, 13th September 2014.
Posted in China, Eurozone | 5 Comments »
Coca-Cola Amatil has this week closed a pay deal that will see wages frozen for current Victorian warehouse employees and new employees will be paid 38 percent less for carrying out the same job. A spokesperson for Coke said the deal will bring wages closer to market rates and restore the business to a sustainable earnings growth.
Coke is not the only Australian employer straining under our high cost economy. Holden workers had agreed on a three year pay freeze in a futile attempt to keep manufacturing in Australia and many public servants also face the prospect three year wage freezes.
Data from the Australian Bureau of Statistics (ABS) show real wage growth started to fall at the start of this year. Wage growth has been lower than inflation for the first two quarters this calender year – the worst in 17 years – as higher paying jobs are lost and existing employees are fearful of negotiating pay rises.
But falling wages should actually be a welcome relief for Australia, helping to increase our global competitiveness and retain much needed jobs. While trade exposed export markets such as manufacturing steal most of the limelight, many administrative, IT and back office jobs are also being lost offshore as larger corporations try to contain wage pressures and retain sustainable business units.
Earlier this year, Boston Consulting Group published its Global Manufacturing Cost-Competitiveness Index ranking the world’s 25 largest good-exporting nations on wages, productivity growth, energy costs, and currency exchange rates. No prices for guessing – Australia ranked last.
Organisation for Economic Co-operation and Development (OECD) data released last year, showed Australia’s relative unit labour costs had surged 54.1 per cent since 2000, while for comparison, unit labour costs fell in Germany, UK, US and Japan by 14.6, 20.4, 25.9 and 46.2 per cent respectively. The report showed Australia had the second fastest labour cost growth in any developed economy.
In March, the Australian Council of Trade Unions’s (ACTU) called for a rise in the minimum wage to offset our unprecedented housing bubble. The Sydney Morning Herald reported the story :
While the minimum wage was equivalent to 14 per cent of the mean house price in 1993, it is now at less than 7.5 per cent.
ACTU secretary Dave Oliver said a 250 per cent increase in average house prices in the past 20 years had made it impossible for those earning minimum wages to buy a home.
“For those on a low wage, home ownership is a now pipedream,” he said. “Someone on a minimum wage of $622 per week has enough to cover their basic costs and that’s about it. These workers tell us it’s impossible to save up a deposit, let alone afford the weekly repayments.”
Mr Oliver said the minimum wage had increased by 91.2 per cent from 1993 to last year, and would have needed to rise by 254.7 per cent – $1154.42 a week or $60,029.84 a year – to keep up with house prices.
But trying to keep wages in pace with an unsustainable housing bubble is a sure fire bet to shut Australia down.
When businesses shut down or move offshore, getting them back is extremely difficult. Even more so when you lose an entire sector such as Automotive.
While it is disappointing not to hear even a peep from our legislators on this serious structural issue plaguing the economy, the good news is automatic stabilises are rapidly kicking in.
In commenting about Coke’s pay deal and falling wages, HSBC chief economist Paul Bloxham told Fairfax, “There is a disconnect between income growth and house price growth and that needs to be watched very closely. If house prices keep running so far ahead of income growth, there is an increasing risk of a very sharp slow down in property,”
A “very sharp slow down in property” will be disruptive in the short term, but will pay dividends with a sustainable, globally competitive economy in the long term.
» Coca-Cola Amatil slashes wages with new employees to work for less – The Sydney Morning Herald, 11th September 2014.
Posted in Australian economy, Australian Housing, Unemployment | 23 Comments »
After a fruitless attempt to talk down the high Australian dollar, Glenn Stevens has today embarked on a new project – talking down house prices.
The jawboning comes after overwhelming evidence suggests Australia’s property bubble, already one of the biggest bubbles in the world, is accelerating out of control fuelled by record low interest rates.
It has put the central bank in quite a bind, with one hopeless instrument – the official cash rate – to manage inflation, booming housing prices, the excessively high Aussie dollar and surging unemployment. You could easily call it mission impossible.
Increasing interest rates at this point in time to combat the frothing property market, would cause an appreciation in the dollar, exposing trade exposed industries to even more heartache. For much of the past year, Stevens has been trying to talk down the Australian dollar – all in vain.
It would seem sensible for the bank to embark on macro-prudential controls, but the central bank has conveyed its belief it would cause distortions in the market – probably insignificant to the current distortion. The comments sound synonymous with a Q&A session in 2012 when the then Prime Minister Julia Gillard suggested you couldn’t remove negative gearing, as doing so would create distortions in the property market.
Today, Stevens said the bank was unable to further drop interest rates to cushion our faltering economy due to our housing bubble:
In our efforts to stimulate growth in the real economy, we don’t want to foster too much build-up of risk in the financial sector, such that people are over-extended. That could leave the economy exposed to nasty shocks in the future. The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle. It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that.
Stevens is not the only banker ring alarm bells. ANZ chairman David Gonski said yesterday that a correction in Australia’s housing market is inevitable. He said banks “are very aware of history. They know that you can have the growth in prices that we have had and over time and there will be a correction,”
“But the fact is anybody who believes that prices will always go up is a fool,” remarked Gonski.
Ratings agency Moody’s has warned our banks are writing more risky loans with the proportion of investor loans, interest only loans and subprime loans increasing. An analyst for Moody’s, Robert Baldi, even went as far as saying “Australia is out there at the front of the market” in issuing subprime loans. Moody’s senior credit officer Ilya Serov said “The increase in higher-risk lending is credit negative for Australian banks because it weakens the credit quality of their portfolios,”
Ex Commonwealth Bank of Australia CEO and now chairman of the Financial System Inquiry, David Murray, warns real estate is now the biggest risk to the Australian economy.
Two weeks ago, the United Nations warned the Australian housing asset bubble need to be “closely monitored.”
» RBA’s Glenn Stevens urges action to avoid property ‘bust’ – The Australian Finacial Review, 3rd September 2014.
» RBA governor Stevens: ‘Unwise’ to further boost ‘elevated housing prices’ – The ABC, 3rd September 2014.
» RBA’s Glenn Stevens ramps up warning over property investment – The Australian, 3rd September 2014.
» RBA governor Glenn Stevens warns of housing bubble risk – The Sydney Morning Herald, 3rd September 2014.
» House price correction inevitable, warns David Gonski – The Australian, 2nd September 2014.
» UN report warns of asset bubble in housing – The Age, 19th August 2014.
» Moody’s warns on rising bank home loan risks – The ABC, 2nd September 2014.
» Australia ‘at the front’ of growing subprime mortgage market – The ABC, 26th August 2014.
» Moody’s issues Aust bank warning – Business Spectator, 2nd September 2014.
Posted in Australian economy, Australian Housing | 58 Comments »
Grave fears are mounting for the future stability of the Australian economy as new data released today shows the Reserve Bank of Australia’s housing bubble is surging at records not seen since 2003.
The RP Data statistics confirms reports of investor led irrational exuberance in the Sydney and Melbourne markets. On an annualised quarterly basis, Melbourne surged an unsustainable 21.2 per cent, followed by Sydney at 13.8 per cent. The investor surge is both eroding rental yields and increasing vacancies causing many experts to warn of a bleak future for investors when capital gains slow to more sustainable levels, or worse – starts falling.
The boom stems from emergency record low interest rates set by the Reserve Bank of Australia – the lowest in over 5 decades. This latest data should force the central bank to either increase interest rates or bring in macro-prudential controls, although the bank has been happy to sit on its bum to date, opting to watch the bubble grow more top heavy.
Martin Conlon, Schroders head of Australian equities told Fairfax, “There is ample evidence that lower interest rates are fuelling nothing other than increasing asset prices, suppression of yields and misallocation of capital,”
David Murray, chairman of the Financial System Inquiry warns real estate is now the biggest risk to the Australian economy.
The surge comes at a dangerous time for the Australian economy, a time when jobs losses are mounting and wages are falling. Housing bubbles act as a leach to the economy, sucking the lifeblood from our already weak economy. It causes a misallocation of capital from productive sectors of the economy to unproductive sectors, and sucks household disposable income dry with huge mortgage serviceability requirements stemming from crushing household debt levels.
Official Australian Bureau of Statistics (ABS) unemployment data showed unemployment surged to 6.4 per cent last month, a 12 year high. Private gauge unemployment surveys from Roy Morgan more accurately place unemployment at 12.2 per cent.
The loss of jobs is putting pressure on wages. In the last two quarters, according to the ABS, wage growth has failed to keep up with inflation – i.e. real wage growth is negative. Wage growth is now the worst in 17 years.
But the biggest concern is in the youth unemployment sector. A report from the Brotherhood of St Laurence released today show youth underemployment is now at levels not seen in 36 years and unemployment is at 13 year highs. It has many social ‘scientists’ warning we are creating an entire generation that will be jobless. Housing affordability will be the least of their concerns.
It’s no wonder Tony Abbott wants to cut this cohort loose to save his budget.
» RBA flags housing risks but does nothing – The SMH, 1st September 2014.
» David Murray warns Australia’s financial risks concentrated in real estate – The ABC, 29th August 2014.
» Banks demand bail-out protection – The SMH, 29th August 2014.
» Record housing investment boom accelerates – 1st September 2014.
» Barely Working – Young and underemployed in Australia – Brotherhood of St Laurence, 1st September 2014.
Posted in Australian economy, Australian Housing, Unemployment | 28 Comments »
The latest annual QBE report into mortgage and property market sentiment shows Australian’s perceptions towards the residential property market is deteriorating rapidly amid concerns the market is overvalued.
The survey found only 36 percent of respondents now believe it is a good time to buy property in the next twelve months. This is down significantly from a weak 42 percent in 2013. The reason appears to be the federal budget, with 59 percent intending to hold off and review the impact of the harsh budget.
But perceptions the market is overvalued could be holding just as many back. 59 percent now believe the Australian residential property market is overvalued, with 31% believing the market over-valuation exceeds 10 percent. This has also rapidly increased with only 20% believing the market was more than 10% overvalued last year.
But it is no longer just individuals doubting the fundamentals of Australia’s infallible property market. Billionaire Lang Walker, Executive Chairman and owner of Walker Corporation – one of Australia’s largest property developers, has warned this week house prices in Sydney and Melbourne has surged too much. He is now forced to turn to Malaysia to reduce risk and find growth.
Yesterday, Stockland – one of the largest residential developers in Australia, said double-digit house price growth is unsustainable, and could screech to a halt.
» An annual study of the mortgage market and associated insurance in Australia – QBE, 7th August 2014.
» Billionaire Lang Walker says Sydney, Melbourne house markets ‘too hot’ – The Sydney Morning Herald, 15th August 2014.
» Stockland says double-digit house price growth not sustainable – The Sydney Morning Herald, 18th August 2014.
Posted in Australian economy, Australian Housing | 30 Comments »
The Australian has today reported on an emerging wave of subprime repossessions in Australia as times start to get tough.
On Saturday, we reported how Australia has one of the largest property bubbles in the world, significantly larger than the USA subprime bubble. While evidence is emerging, our politicians are very much behind the bubble, you have to ask yourself, can Australia have such a large property bubble with prudent lending standards?
“We have been in denial for years as a nation that we don’t have a subprime problem, but we do,” Ms Brailey, President of the Banking and Finance Consumers Support Association said.
The Australian reports on a Perth disability pensioner who was enticed to take out a $370,000 investment loan with a mortgage broker five years ago. After last year halting her payments, the loan has ballooned out to more than $1 million. Now the subprime lender has launched Supreme Court action to recover the property and the $1 million debt owing.
At 8:30am, ABC radio in Brisbane started a talkback show on Australia’s subprime mortgage crisis. The segment discussed how it is our major banks, who are writing[falsifying] most of these loans. As times start to get tough and the property market turns, people defaulting on their subprime loans has surged to three times normal levels. You can listen to the 15 minute segment, here.
And Tonight, the ABC’s 7:30 report has reported on alleged loan fraud by The Investor’s Club, now known as the Property Club. Mr McNally and Ms Mathews were enticed into buying four properties through the “free” club, and are now struggling to keep the family home after being forced to sell their business. They are suing The Investor’s Club after it was found the club’s broker has allegedly falsified loan application forms, grossly overstating income and providing loans they could not service.
The ABC said there are now four other TIC investors who have evidence of falsified loan application forms suggesting the practice is wide spread within the club. No doubt, many others could emerge tonight after the story has gone to air. Other TIC investors have also lost significant portions of their wealth investing in TIC properties such as Kirribilli Heights and now feel The Investors Club has mislead them. The ABC claims some properties have dramatically lost value and the projections of rental incomes have not been achieved.
» Pensioner represents tip of $100bn sub-prime iceberg: advocate – The Australian, 12th August 2014.
» Australia’s subprime mortgage crisis – The ABC, 12th August 2014.
» The banks and the battlers’ bad loans – A Current Affair (Channel 9), 14th August 2014
Posted in Australian economy, Australian Housing | 38 Comments »