Credit Suisse goes underweight on Australian banks due to housing bubble

Credit Suisse has expressed concerns about the Australian Banking Sector in its latest research report. It fears job cuts, payment shocks and declining house prices could cause downside risks to earnings and dividends as Australia’s households continue to de-leverage.

According to the research, leveraged investors are struggling to make money with low rental yields of approximately 3.2 per cent, but mortgage rates of 6.4 per cent. As a result, most investors can only afford to be 50 per cent geared, but actual data shows most investors are 60+ per cent geared and many on interest only.

“Essentially, investors are subsidising losses on their property portfolios out of wages, in the hope of future capital gains. But their ability to keep doing this will be stretched if house prices do not rise, and if payment shocks hit.”

As they are already finding it hard to make money from residential property, it does not make sense for current investors to increase leverage and exposure to property. “Therefore, there is a distinct lack of momentum in the market to keep the bubble going.”

Credit Suisse believes house prices are between 20 to 40 per cent overvalued and as potential buyers are concerned with affordability and job losses, “demand is extremely low.”

“If demand remains low relative to supply, house prices could fall substantially.”

It also believes “Households are under more financial strain than the official data suggest” and the “RBA is now too far behind the curve to prevent a major slowdown in 2013.”

Interestingly, it believes if the RBA were to take deep, pre-emptive cuts to the cash target rate (1.5%), the end result may “not have to end disastrously”, but it believes the RBA seems unsympathetic to mortgagees. It is unclear what exposure Credit Suisse has to the Australian residential property market.

But with so much of the mainstream media, the property industry and governments peddling real estate as a sure bet, the RBA does not want to refuel a new bubble built on abnormally low interest rates.




15 Comments

  1. Then why do the RBA keep dropping interest rates? Because Wayne Swan tells them to? Isn’t it about time the RBA grows some balls and a spine?

    I’ve just signed a three year lease on a house that I wouldn’t have a hope in hell of affording if I’d wanted to buy it. I happen to know that the rent I pay just covers the owner’s mortgage – and they have a more ‘landlord’ expenses and overheads besides. The rent is still expensive, but it’s preferable to having the house as a metaphorical ball and chain that will likely ruin my marriage and my children’s futures.

    Being a debt slave so you can own a house in the current economic climate is a total mug’s game – and borrowing when interest rates are low is fiscal suicide! I’m gonna stash the cash and grab myself a ‘fairly-priced’ house in 2015/16. Meanwhile I, like so many of my friends with savings and a well-paid career, are on strike as far as buying property right now is concerned.

    More people are wising up – shame the government, the property industry, the mainstream media and other ‘peddlers’ can’t!

  2. @Rupert

    2015/16 is THE year, maybe early if there were more wise men like you and your friends out there.

  3. @Rupert – problem is most politicians would also be home / property owners – it’s not in their interest for values to fall. Notwithstanding their actions the bubble will and has been deflating since 2004 and while still not back to realistic levels it’s only a matter of time.

    I made the decision 12 months ago to de-risk out of property and pass that burden onto a landlord – at 50 I’d rather save the excess than fund a non-growth asset with downside risk. Having moved 3 times in the past 10 years due to changes in work requirements renting provides much greater flexibility without the switching costs of ownership.

    There will be a time when it will make sense to return to property – but for me that will require a significant correction.

  4. @ Rupert & DX, hoping to pick up a property earlier than 2015-2016 but if the property market does not correct itself then I don’t mind waiting. Both myself and my wife have good jobs but we are at a crossroads, to buy a house or to have kids. We can’t do both as it just isn’t affordable. We both earn about the same and have calculated that at current prices one of our salaries will have to go to paying off the house, the other for living expenses. We have 100K to put down as a deposit minus stamp duty etc. but for what we want we just cannot afford to buy. Sure, we can buy a nasty house in a bad suburb but we don’t want to live like that for years while paying off our mortgage. We have already accepted that we will have to live one hour out of the city, that is fine but if we are going to throw down 500K then it better be damn nice, which currently 500K seems to get you just an average house, sometimes just a townhouse 1 hour out of Melbourne. Nah, no thanks, I rent a better place for cheaper than if I paid 500K, plus I get to live life with the money saved. So, you can say that we are on strike, if we never buy then so be it as I really do enjoy the flexibility of renting. Having said all of that, we do own a property, just not in Australia.

  5. Good on you, Rupert. We sold our place in 2009 because prices had already dropped and we saw that the bubble was popping. Of course we hadn’t taken into account that the government would prop up the bubble as much as it did, and prices would take off again, peaking in 2010. Anyway, we have been renting for the past 3 and a half years, and I would dearly love to buy again, but not at these prices! Especially when you know that everything is overpriced and should be much cheaper based on fundamentals.

    For a long time we looked like idiots with our prediction that the bubble would burst, when it seemed to defy gravity no matter what. But finally, now that unemployment is growing and those with jobs are increasingly worried about keeping those jobs, and with big businesses closing their doors, unable to compete with cheaper prices on imported/internet goods, it looks like the bubble may just burst after all. Sure, prices have been dropping a little bit, but a 10% drop when a house is maybe 40% overpriced, isn’t enough of a drop to make me want to buy.

  6. …most investors can only afford to be 50 per cent geared, but actual data shows most investors are 60+ per cent geared and many on interest only.

    I think that 1/3 of mortgages are interest only. Is that disastrous? Or is it just my over-reacting gut feeling?

    Oh man…!

  7. Admin, like the new look’n’feel bog theme. Your masthead photo, is that taken in Sydney’s Hills district? NSW Kiama? I guess they all look the same.

  8. ECONOMIC COLLAPSE IS COMING AND TIMELINE COMPLETE!!!!!

    GFC explained – Go to youtube and search “Understanding the Financial Crisis – very well explanation!”

    Peter Schiff – predicting credit crisis and no one believing him since 2002 – http://www.youtube.com/watch?v=Z0YTY5TWtmU

    US current debt is over 17 trillion dollars and rising, the US has been printing money 4 times now with no impact – http://www.youtube.com/watch?v=ShLOM5Acgh0

    Tony Robbins explaining how much trouble US(worldwide) is in – http://www.youtube.com/watch?v=TRaLytkf6vU

    Robert Kiyosaki – property “guru”, economic collapse BY 2016, buy silver and gold – http://www.youtube.com/watch?v=FkJ9sMDkwto

    Peter Schiff – predicted first crash – QE is quantitive easing or printing money – http://www.youtube.com/watch?v=H_ZkwlLaJyw

    Obama plans to spend/borrow another 3.8 trillion in 2013 taking the debt to nearly 21 trillion, QE is infinity from now on from US treasury, put your savings in physical silver and gold or buy gold/silver mine shares to insulate from the collapse of the US Dollar/hyperinflation and make millions. Then buy a house for $150,000.

    Peter Schiff current expectation coming to fiscal cliff – http://www.youtube.com/watch?v=WATn7PMOTLo

    Party song – AC/DC – Jail Break – http://www.youtube.com/watch?v=gYou7SqyDdo

    WAKE UP PEOPLE!!!!!!!!

  9. @BotRot – thanks. Yes, I think the photo was taken around the Kellyville/Rouse Hill Area in November 2008. I know what you mean about it all looking the same. I often went down to Kiama and the photo is amost a splitting image of Shell Cove and Kiama Downs from the Princes Highway.

  10. Imagine this when the Aussie banks have to get bailed out by the Aussie wonder what that will do to the economy. The credit freezes up. Oh wait a minute didnt the RBA and Govt say over a year ago the Aussie economy is strong and can withstand any downturns. Oh didnt Gillard tell Europe and the US to their house in order……. LOL

  11. @admin, I know the area and recognise it too, now that you have mentioned it.

    Anyone feel like a drive around, or somewhere around Sydney, check out the Beaumont Hills, Kellyville, Rouse Hill, Castle Hill, Bella Vista, … area. Its’ not just the houses that will amaze you. You should check out the cars parked in front of them. I live in Sydney’s Cremorne-Mosman area, and can testify that, there are far more Toyotas in this area, than there are in the Hills district.

    Banks, Financiers, Creditors, Governmants, and Other Slime, can’t be the only ones th wear the blame for this economic state. Want an Audi, BMW, Merc? Sign here, here, and here.

  12. At rental yield rates of 3.4% and motgage rates of 6.4% it will only be a matter of time before over extended “investors” need to sell. I suspect the RBA will lower interest rates to stop this happening. After all we do not over inflated real estate to fall in Australia. Pity the same effort is not put into developing the manufacturing sector in Australia, rather than this ponzi scheme real estate bubble .

  13. I like the new look on this webpage keep up the brilliant work guys..And the way things are crumbling in the Aussie economic front looks like its going to be a busy year ahead. Merry Christmas and a happy new year to all.

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