ABA: Extra rate hike due to housing bubble

The Australian Bankers’ Association has reviled today that the extra hike in mortgage rates is due to international investors getting extremely nervous about Australia’s housing bubble.

Steven Munchenberg from the ABA said “Over the last few weeks, we’ve had a lot of international investors asking very detailed and probing questions about why it is Australia thinks it doesn’t have a housing bubble,”

“Bankers were grilled at length as to why investors should not be worried Australia has a housing bubble.” Australia’s banks remain “very conscious of the risks of international investors becoming nervous about investing in Australia. “

We reported just over a week ago, comments from the Economist Magazine expressing concern that Australia’s central bank was not increasing the official cash rate at the time when China was trying to cool it’s property bubble. The Economist had valued Australia’s bubble as being 63.2 percent overvalued, while China was only 18.1 percent overvalued.

Fairfax reported the ABA’s Mr Munchenberg saying global lenders weren’t about to cut off funding for Australia, but the concerns over the housing market, “demonstrated how nervous international investors can get very quickly, if they feel there is something in Australia that can destabilise the banking system.”

» House bubble risks behind rate moves: ABA – The Sydney Morning Herald, 3rd November 2010.




8 Comments

  1. Well there is a very common sense approach – international markets think we have a bubble and there would like a premium on the funds they lend to this market. Maybe all the smoke and mirrors Commbank was trying to blow in front of their eyes became transparent?

    Interestingly… I was up at Marysville over the weekend. Blocks of land up there that were $105,000 before the fires are now $135,000. And there are people and estates thinking they can sell blocks of land up there where families have been burnt to death on for upwards of $150,000. These people have got to be kidding themselves surely. You would think after what happened in that town that prices would have bottomed in a hurry, in a bid to assist people rebuilt or move to the area and build.. Bizarre really..

  2. I had to turn off the 6 o’clock news tonight. I got sick of all the whining about the CBA.

    Personally I think the rate hike of 45 basis points was justified. The problem is we are constantly told that Australia is so strong a financial position and dodged the bullet that was the GFC that very few really understand the situation Australia is in at the moment. Not to mention that we are different.

    Without sounding like a bank, our banks get a lot of its borrowing in the international market. If the average joe had been watching CDS spreads they would know that the cost of funding for our banks is going up. The reason, of course is as the ABA says, with such a big housing bubble, lending money to Australia comes at an increased risk and that risk has to be priced in. I think we should just be grateful that there is people in the international community that still wants to lend to us.

  3. @Matt,

    I always thought it strange how we are bombarded with more good news about the economy since the GFC, than we did receive when things were (apparently) good before it. It’s amazing how Australians (well many people I know), see the global economy as a rugby game, and we Australians have punched off the GFC because of our resources and China. Nobody really elaborating on such claims, or slogans like, the U.S. is stuffed, E.U. is down the dunny bowl, Japan is K.O’ed, South East Asia is shakey, but Australia, BUT AUSTRALIA!!!, and I quote, “…our banking system is sound, the fundaments of the economy are good, unemployemnt is low, and we have resources China has to buy…”.

    A word for word spew from the TV, many of the slogan points being the complete opposite. Say something like China is in a spot of bother cause 60% of it’s GDP is from it’s Stimulus/Bailout Package (the world’s biggest), and you’ll be burnt at the stake. Ask them why China needed a bailout/stimulus package, and they’ll just stab you.

    I run my own business (and many I know do so too), from my experience I can claim how difficult it is to get Australian’s to spend their money your way, your services are questioned to the dotted I, and the crossed T, all related to the price they will pay you. *BUT* get a shack made of mud, morter and cardboard walls inside it, put a $2 Million dollar price tag on it, and they’ll kill each other to be the first to buy it. Its’ the same with huge TVs.

    “I think we should just be grateful that there is people in the international community that still wants to lend to us.”

    I know what you mean but, I can see more tears before bedtime because of it. I agree the interest rate increases are justified, I think the decible level of the scream sound is directly proportional to ones (sustainable) debt level.

    Do you believe people are screaming to re-regulates the Banks, thinking they’ll be saved, or helped somehow by this?

  4. Because Aussies cannot (or more likely will not) save, Aus. banks are obliged to look overseas for a significant element of their funding needs. Those who loan us “their” money decide the risk fee (interest) they will impose on these transactions, and as the risk fee increases, so our banks need to pass it on – if they are seen by overseas hedge funds as a poor risk (i.e. low profit), the fees will be adjusted up, so in fact by keeping their profits astronomically high, they are generally perceived as a “lower risk”, and so this results in easier funds availability, for an overall lower cost (to the banks, and so to us all).

    Just shows how very shaky thing are in “Investor” and “FHB” Land when a less than half-a percent rise in rates causes a National Outcry!

    Westpac going for 50bp rise anyone? If the “Big Four” need to raise their rates by 2 x the RBA increase, just think how tough it’ll be for the many smaller players, and other Mortgage Providers out there! I’d not be at all surprised if the likes of BoQ /Suncorp up theirs by 70bps! Watch the sparks fly if this happens!!

  5. @Matt

    “I think we should just be grateful that there is people in the international community that still wants to lend to us.”

    Are you serious? This is an abberation… the fact that this rubbish is allowed to happen is what has created the ridiculously expensive housing market we live with every day (note that it didn’t exist 15 years ago!). Whilst ever this continues, buying a house will = debt slave. Picture Gen Z – to buy a house in Sydney will cost average of $1M and average salaries at 100K. GOODLUCK!

    People blame the buyers the ‘investors’ etc, but the bottom line is the banks supply the drug!! CHEAP MONEY! And the international structured products market (mortgage backed securities) is the biggest supplier of all!

  6. It would seem that the ‘drug’ of cheap money isn’t that cheap anymore – but does anyone have any theories on how the latest fed stimulus in the US will factor into the price of money?

    I still think that regardless of the scenario – so long as the rest of the world thinks we are in a bubble (which we are) and there are downside risks to lending us money, they will ask for a premium on their funds.

    The fact they are lending to us at all is because the international institutions know that the Australian Government will ‘back’ any bank that fails. There is no risk of default of lending to a bank in Australia, but the international ‘drug suppliers’ need to be seen to be pricing in the ‘risk’ of the Governments ability not to support all four pillars if they collapsed.

    Record profits? All this means is that the banks are trying to raise cash while the going is good. How much of these record profits are they paying out in dividends vs. reinvesting in capital?

  7. J Hill, record profits from banks are not necessarily a good sign of economic strength. The record profits posted by our banks currently are due to record levels of personal debt in this country, which is logical: The greater the total of loans, the greater the amount of money removed from the real economy to be pumped into servicing loans.

    Anyone preaching the strength of our banks is either lying or doesn’t understand banking. PERIOD.

    Our banks hold a far greater percentage of RMBS than any of the foreign collapsed/failing banks ever did. Then add on top our record levels of private debt. Then isolate us with a currency that bobs like a cork, but has the habit of sinking like lead.

    The fact our banks consume so much of the publics money in interest payments is not a sign of prosperity. This massive debt load is beneficial to the cause of using interest rates to control the speed of the economy, but when the threshold is broken and the public start to default (either through lost jobs, interest rates or other shocks) then the economy will retract quite rapidly.

    This is the exact symptom displayed by all advanced economies over the last few years. As debt loads increase the public at large fell confident, but once peak debt is reached and the consumer restrains spending the whole scheme implodes.

Comments are closed.