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Moody’s describes the new Australian property bubble; House price boom not fuelled by a credit boom
Topic Started: 9 Sep 2014, 09:12 PM (451 Views)
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From Moody’s:
Quote:
 
Australian Banks Resilient to Housing Stress, But Tail Risks Are Rising

Concerns Over Sustainability as Australian House Prices Rise. Residential house prices have been rising rapidly in recent quarters, increasing by close to 14% since May 2013 (Exhibit J in the Appendix). The recent rise resumes the upward trend in home prices seen over the past two decades. While a further acceleration in prices could over time become credit-negative,2 housing market developments on their own are unlikely to cause significant losses for Australian banks. Bank Residential Mortgage Portfolios are still Healthy. An accelerating housing market presents a medium-term risk for the Australian economy, and, consequently, household balance sheets and the quality of bank mortgage portfolios. Nevertheless, the housing market is not a significant source of potential losses for Australian banks in the immediate future because:

HOUSE PRICE INCREASES NOT FUELLED BY A CREDIT BOOM.

House price increases have thus far not been accompanied by the rapid credit expansion and sharp loosening of lending standards that characterize historical examples of credit boom-and-bust cycles. Overall credit growth at around 6% per annum remains at levels significantly below those recorded before the global financial crisis of 2008-09. Similarly, although there are some signs of increased higher-risk lending, overall lending standards have remained relatively stable. The proportion of mortgages with a high loan-to-value ratio (LVR) has remained broadly similar to long-run averages, and the percentage of low documentation loans is negligible (Exhibit 8). At the same time, the increased proportion of investment and interest-only loans is a notable negative development: at 37.9% and 43.2% of all newly written mortgages, this type of higher-risk lending is at historical highs.

LOW EXPOSURE TO HIGH LVRS PROTECTS BANKS AGAINST HOUSING PRICE FALLS

Australian major banks3 report average LVRs below 50% on a dynamic calculation basis4 (Exhibit 9). Moreover, the proportion of loans with an LVR over 80% is low, in the 10%-15% range; limiting the extent to which borrowers may be forced into negative equity in a house price correction, and consequently, any adverse impact on bank problem loan metrics.

INCREASED LOSSES WOULD BE COMFORTABLY ABSORBED.

Our stress tests show that Australian banks have sufficient earnings capacity and capital to absorb housing loan-related credit losses under various adverse stress scenarios. In our mild stress scenario, which is based on a normal cyclical economic recession, the major banks can absorb housing-only credit losses through earnings. Even in the less probable highly adverse scenario – similar to that experienced in the US during the economic slump of 2008-11 – credit losses from the banks’ housing portfolios are unlikely to exceed the major banks’ earnings capacity, and will only marginally deteriorate the capital ratios of regional banks.5

BANKS REMAIN EXPOSED TO SUDDEN ADVERSE CHANGES IN INVESTOR SENTIMENT.

Australian banks are characterized by their relatively high reliance on offshore wholesale funding. Sudden falls in investor confidence that may be triggered by a sharp housing downturn would likely increase the cost of, or restrict access to, such funds. These considerations highlight the risk that credit and ratings outcomes for Australian banks in the event of a housing downturn could be more material than those suggested by our analysis of credit loss absorbency alone.
Edited by CrossPost, 9 Sep 2014, 09:12 PM.
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Bonnie
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Quote:
 
House price increases have thus far not been accompanied by the rapid credit expansion and sharp loosening of lending standards that characterize historical examples of credit boom-and-bust cycles.


Where is the “extra” money coming from? Or how can prices boom without significant credit growth?

Theories:

- mortgage lending as a percentage of total lending is expanding;

- “extra” money is coming in from foreign purchasers borrowing offshore (assume this is not measured)

- “extra” money coming in from non-bank lenders/securitised. (Assume this is not measured)

- “extra” money is actually equity (e.g. people pulling $500k from their bank account and buying property)

- “extra” money isn’t needed because transaction volume is way down.

So, what’s really happening?
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Guest
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Sudden falls in investor confidence that may be triggered by a sharp housing downturn would likely increase the cost of, or restrict access to, such funds
The pollies and the RBA and APRA will not like that sort of talk.

It draws people’s attention to the fact that the housing market is being goosed with cheap off shore money and on and off shore speculators, that could dry up a lot more quickly than expected.

Rather embarrassing if lots of Australians realised that our economy is incapable of generating a large chunk of the capital required to deliver something as fundamental as shelter.

A smart government and wise policy makers would have spent the last 6 years calling for the over dependence on off shore capital to build shelter (i.e. more correctly bid up the price of the dirt beneath the shelter) to be wound down to ZERO.

But nope instead everyone keeps clutching for the cheap off shore money as a solution and recommending that some locals be forced to wear a MP chastity belt.

Having done nothing to wean us off our dependence for cheap money we know what to expect when the next chill blows through the off shore credit markets.

The taxpayer will yet again be forced to ‘support’ our useless banks who put the nation at risk in pursuit of expanding loan books and bonuses.

Credit growth may be low but house prices – especially in specific markets and for short periods – can be driven by borrowers who do not need to borrow a great deal to buy.

Off shore buyers burying loot do not need an Australian bank loan to join the party.

No doubt that is part of the appeal and part if the reason for a tame FIRB.

They keep houses prices rising but don't require a lot of debt to do so.

The fact that household credit growth is still rising and not falling when it is circa 150% of disposable income says it all.

Still heading towards the cliff – just at a lower speed.
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