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Mortgage war erupts as CBA, NAB, Westpac slash interest rates; CBA cuts 70bp from its five-year fixed mortgage rate to 4.99%
Topic Started: 23 Jul 2014, 01:45 PM (10,165 Views)
Chris
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Shadow
23 Jul 2014, 09:04 PM
Yet despite all that doom and gloom Ted, house prices are still rising. Perhaps the doom and gloom is just in your head? You had better hope so, because if things are really that gloomy, and house prices are booming regardless, just imagine how much stronger the house price growth will be when conditions improve.
Mmmmmmm, did it ever occur to you that maybe, just maybe the inertia of a property bubble fuelled by cheap credit now has the banks on a one way course.

Investors have been the majority of buyers for over. 12 months varying from 45-50% approx per qrtr. They are driven by low interest rates and previous gains which encourages then to spend slightly more now safe in their knowledge (not reality) that the market will catch up in the short term and their risk will be justified. This is seen by the sidelines who jump in working on the theory that 'if they did it so can I' and they pay a little bit more and so on and so on.

This is the desired outcome for the banks, unbridled greed as it means more and more profits. What we all seem
To miss is the banks are there for one things only, profit. How this profit is derived is irrelevant, the potential risks in this environment also become irrelevant as profit is the only goal.

Profit can only continue to rise if they write more business, the most profitable business for any bank is mortgages, their business model is unworkable without it. The biggest mortgage market is investors and they are driving the market.

And here is the inertia I was talking about, cheaper credit leading to price speculation leading to greater demand for cheaper credit and so on. The banks have no choice, they have to write more business to keep their returns high for their shareholders based on past performance, whether speculative or not. They are also very focused on their own wages which are directly related to any profit. They are held to this inertia by the millions of investors like you are always willing to buy more based on a decade of growth that cannot be replicated in the next decade.

Without YOY dividend gains in profit the banks will lose their own shareholders, no bank will accept this so this inertia keeps them on a one way course. They didn't lower rates to be competitive, competition is merely a by product, they lowered rates to get more people to invest so they can write new business so profits can grow YOY. I feel sorry for anyone that feels this is something they chose to do not something they have to do and they only did it because the RBA are hamstrung and have no choice but to remain steady.

Once you get your mind around this concept of inertia you will truly understand how scary out property market is, we are really at a point if no return if investors keep driving a market on speculative gains.

Edited by Chris, 24 Jul 2014, 05:01 PM.
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Shadow
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Chris
24 Jul 2014, 04:57 PM
And here is the inertia I was talking about, cheaper credit leading to price speculation leading to greater demand for cheaper credit and so on. The banks have no choice, they have to write more business to keep their returns high for their investors based on past performance, whether speculative or not. They are also very focused on their own wages which are directly related to any profit. They are held to this inertia by the millions of investors like you are always willing to buy more based on a decade of growth that cannot be replicated in the next decade.

Without YOY dividend gains in profit the banks will lose their own shareholders, no bank will accept this so this inertia keeps them on a one way course. They didn't lower rates to be competitive, competition is merely a by product, they lowered rates to get more people to invest so they can write new business so profits can grow YOY. I feel sorry for anyone that feels this is something they chose to do not something they have to do and they only did it because the RBA are hamstrung and have no choice but to remain steady.
Thanks Chris - you've just put forward a great case for investing in property. You have described a market with many strong fundamentals. I didn't realise you were so bullish.

So armed with this knowledge, how do you plan to profit from this forthcoming boom/bubble?
Edited by Shadow, 24 Jul 2014, 05:02 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Chris
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Shadow
24 Jul 2014, 05:02 PM
Thanks Chris - you've just put forward a great case for investing in property. You have described a market with many strong fundamentals. I didn't realise you were so bullish.

So armed with this knowledge, how do you plan to profit from this forthcoming boom/bubble?
I will retain my relative wealth by staying away from it, that's how.

I can only imagine you will do the exact opposite, but that is the inertia I was referring to as you almost certainly feel overwhelmingly compelled to buy. You have just proven the exact speculative theory I was talking about.

Your a smart man Shadow, I'm sure you realise the point I am making and I think in a way you just validated the inertia theorem.
Edited by Chris, 24 Jul 2014, 05:17 PM.
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Shadow
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Chris
24 Jul 2014, 05:16 PM
I can only imagine you will do the exact opposite, but that is the inertia I was referring to as you almost certainly feel overwhelmingly compelled to buy. You have just proven the exact speculative theory I was talking about.
No plans to buy until after the next correction - probably around 2018-2020. I bought a few houses between 2005 and 2009, so now I'm just riding the boom. I might actually sell one or two of them late next year or early 2016. If the Sydney median does hit $1 million next year then I think that will be the peak for some time, so I may decide to sell and buy back after the correction. It will depend on what the fundamentals look like next year, especially supply and interest rates. If the construction boom creates a big oversupply, and interest rates look like heading back up, then it will probably be a good time to get out.
Edited by Shadow, 24 Jul 2014, 05:24 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Chris
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Shadow
24 Jul 2014, 05:22 PM
No plans to buy until after the next correction - probably around 2018-2020. I bought a few houses between 2005 and 2009, so now I'm just riding the boom. I might actually sell one or two of them late next year or early 2016. If the Sydney median does hit $1 million next year then I think that will be the peak for some time, so I may decide to sell and buy back after the correction. It will depend on what the fundamentals look like next year, especially supply and interest rates. If the construction boom creates a big oversupply, and interest rates look like heading back up, then it will probably be a good time to get out.
It appears you are saying you agree that it is not a good time to buy into the market now ?! But if your in, stay in, is tat right?

If that's the case you are now saying your bearish on property as a start up venture either FHB or investor, or that's how it appears. If that is the case I'm going to have a bex and a lie down.............

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MMM
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Shadow
23 Jul 2014, 09:04 PM
Yet despite all that doom and gloom Ted, house prices are still rising. Perhaps the doom and gloom is just in your head? You had better hope so, because if things are really that gloomy, and house prices are booming regardless, just imagine how much stronger the house price growth will be when conditions improve.
But things are not improving, just heading further into decline as I have clearly explained it would.

Highest unemployment in ten years and getting worse day by day , just as I said.

Record low interest rates that have not been this low since the great depression , just as I explained they would be years ago, explained as clear as day , but you went and locked in your loans at 6% because you did not have a clue what was going on. :wak:

So the decline continues regardless of anything you clowns say , just as explained. ;)

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Why banks are cutting rates

Christopher Joye

When The Australian Financial Reviewbroke the news in May that a significant decline in funding costs was allowing lenders to cut home loan rates to record lows outside of any Reserve Bank of Australia move, some assumed that this was through tapping cheap overseas money.

One example was ANZ raising billions from US investors in early June at a total annual interest rate of just 1.25 per cent, which was about 0.40 percentage points above the benchmark 3-year US government bond rate.

This superficially appeared much lower than the cost of bank funding in Australia, given our 3-year government bond rate was sitting at 2.75 per cent, versus 0.85 per cent in the US at the time.

So it looked as if ANZ was borrowing at 1.25 per cent in the US, then making out like a bandit by lending to home owners at a much dearer 5 per cent in Australia. But this is incorrect.

The so-called “cross currency basis swap” takes the fixed-rate or floating-rate money banks source overseas and allows them to convert it into Australian dollars that can then be used to provide cash for (mainly floating-rate) borrowers in Australia.

“If it was as simple as being able to borrow money in foreign currencies where cash rates are at or near zero per cent, then banks would be able to source funds in the US, Japan or Europe and lend here at much lower rates,” Whetton says.

Nomura’s analysis suggests ANZ would have swapped back its US funding into Aussie dollars at a cost of the 3-month bank bill swap rate, which was 2.7 per cent, plus an extra margin of 0.46 percentage points.

So the total “landed” Aussie dollar cost of the US money ANZ originated would have been around 3.1 per cent (not 1.25 per cent). “This is approximately the level ANZ would borrow at in the domestic funding market” for senior-ranking bonds, Whetton says.

On occasion there are also slightly more favourable terms offered to Australian banks in foreign markets. While Nomura’s Whetton reiterates the point that the main driver for offshore bond issuance is to harness multiple funding channels, he notes that “from time to time investor demand for exposure to Australian bank names creates an opportunity to borrow at better levels than domestic conditions warrant”.

So the cheap money phenomenon is a global dynamic. Funding costs for banks, as measured by credit spreads, have been falling everywhere, including in Australia.

As one striking example, subordinated major bank bonds, which cost as much as 5.2 per cent annually in 2012, are now being priced at interest rates as low as 3.9 per cent (or close to term deposits). That’s a massive 1.3 percentage point reduction in annual bank funding costs. Similar cost declines have been recorded in the banks’ safest, AAA-rated “covered” bonds.

A final factor at play has been declines in the long-term bond yields that serve as the benchmarks when banks source fixed-rate, as opposed to floating-rate, money. Whereas a floating-rate bond will price at a margin over a short-term 3-month bank bill rate, which gets reset every quarter, fixed-rate bonds price off long-term benchmarks with the same 3- or 5-year maturities.

The benchmark 3-year Australian government bond yield trended around 3 per cent, or two RBA hikes above the current 2.5 per cent cash rate, between August last year and April 2014. In recent months it has fallen back towards the current cash rate as investors started pricing in the possibility of near-term rate cuts.

This has helped banks source cheaper money for fixed-rate loans (over and above lower credit spreads) and would certainly have been a factor in CBA chiselling its fixed rates this week.

Read more: http://www.afr.com/p/blogs/christopher_joye/why_banks_are_cutting_rates_0zqxsE2EwIvIHznSy0ZiyO
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MMM
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Dr Watson
24 Jul 2014, 02:18 PM
I see all of that Ted but house prices continue marching higher. They are higher now than one year ago.

Australia is a case apart. Our housing market defies gravity. It defies the normal laws of physics that seem to apply in the US or the UK. Our economy is weak but our property market is red-hot.

I can't explain it — but it is what it is.
Just the last tricks being used up doc, leveraged super funds being the latest amungst that many.

And you think its different here doc, only delayed thanks to the mining boom , while Us euro and UK for putting off jobs in record numbers in 2009, we were hiring in record numbers, so things here were merely delayed, but thats over now :bye: . can you see that too. :)

You can't explains it doc, I just did :bye:
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Shadow
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Chris
24 Jul 2014, 05:46 PM
It appears you are saying you agree that it is not a good time to buy into the market now ?! But if your in, stay in, is tat right?

If that's the case you are now saying your bearish on property as a start up venture either FHB or investor, or that's how it appears. If that is the case I'm going to have a bex and a lie down.............
I'm not bearish - I think Sydney prices will keep rising for another 18 months or so, but they could then fall back close to current levels again (in real terms or price/income adjusted terms). So I think the best time to buy has passed for this cycle, and late next year or early 2016 will be a good time to sell.

That's just Sydney though. Some of the other capitals are at the beginning of their upswing, rather than half way through like Sydney is.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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o2sd
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b_b
24 Jul 2014, 02:44 PM
The real estate market has many different components. When I think of replacement cost, I think of the commodity end of the market (not Hornsby or Mosman), but the new estates being developed on the city fringes.
OK, thanks for clarifying. So at the commodity end of the market, where one ticky-tacky box on a hillside is the same as any other, the replacement cost metric makes perfect sense for new supply. And as long as the existing housing stock is insufficient to house the current population, that price will always be the floor, and will only decrease if a significant component of the cost base declines e.g. government reduces taxes (stamp duty, GST) or wages decline or the labour component of construction is materially reduced e.g. using pre-fab components that are mass manufactured.

If population growth went negative then there would be sufficient housing stock to house everyone and the replacement cost of the commodity end of the market would be irrelevant.
Quote:
 
Inner suburban locations move away from being a commodity style asset and more toward franchise asset. So land really has no marginal cost of production, and replacement cost becomes far less relevant.

Right, the price is determined by perception of value, either for lifestyle, as a status symbol, or via monopoly (like art works). Still, if population growth goes into decline, the existing stock will increase relative to the demand, which will still put downward pressure on prices.
Quote:
 
But in 2011-2012 when Sydney MEDIAN house price was $650k (ish), and new commodity style assets on the fringe were being delivered for the same price, it did not take rocket science to realise the median had to increase to a level that the price difference would encourage new supply. That is where we are today.

Sure. As long as the demand exceeds the supply, prices will always rise, as will costs.
Quote:
 
I think you meant to say if CPI > AWE (real wage declined) then the average cost of building is not keeping up with inflation (wages being the substantial component cost of a new house).

No, I mean't what I said, but that doesn't mean I disagree with the above. I simply mean't that if the cost of construction increases at 3% per year, but income increases 4% per year, in income terms, the cost of construction is getting cheaper. i.e. affordability improves 1% per year.

If the cost of construction increases 1% per year, but incomes stay flat, then the cost of construction increases by 1% in income terms each year.
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