Welcome Guest [Log In] [Register]


Reply
Perfect storm hits east coast property markets; If history is any guide the east coast housing boom is right on the edge of a bust
Topic Started: 20 Oct 2015, 12:40 PM (745 Views)
Admin
Member Avatar
Administrator

Quote:
 
A perfect storm hits the east coast property markets

Ian Verrender

Westpac's decision to lift interest rates is just one piece of the real estate puzzle, and if history is any guide the east coast housing boom is right on the edge of a bust, writes Ian Verrender.

The governor giveth. Now the governor has to taketh the pain.

Having spent almost three years furiously pumping up the east coast residential property market bubble by cutting interest rates to record lows, the Reserve Bank has found itself a pickle; how to limit shockwaves from an impending downturn.

The only option? Further cuts to official interest rates. And soon.

Sydney and Melbourne housing went well beyond "irrational exuberance" more than two years ago when it began vying for the honours of World's Most Expensive Real Estate.

Now a perfect storm is enveloping the two capital city markets.

Looming oversupply, loan restrictions on investors, enforcement of foreign investment rules, slowing population growth and last week's move by Westpac to lift its mortgage lending rates have begun to bite. And all at once.

It is an impending headache for policymakers; house prices coming off a tear as the broader economy weakens.

It took until June this year for Reserve Bank governor Glenn Stevens to reluctantly admit the obvious.

His strategy of maintaining employment by shifting construction from west coast mining to east coast housing - via a real estate boom - was in danger of running off the rails.

"I am very concerned about Sydney, I think some of what's happening is crazy, but we've got a national focus to manage as well - that just increases the complexity," he told a lunchtime gathering in Brisbane.

Ain't that the truth. The idea of replacing a once-in-a-century externally driven boom with an artificially created speculation boom in real estate was always fraught.

It took even longer for the prudential regulator, the Australian Prudential Regulatory Authority, to enforce the decision to limit the investor frenzy driving the mania. Now it's all catching up.

Will Sydney and Melbourne property prices collapse? That depends on your definition of crash. If history is any guide, they undoubtedly will come under pressure and could easily afford to wipe out a significant portion of the 30 to 40 per cent gains of the past few years.

Macquarie Bank last week took a stab. According to the Millionaire's Factory, a 7.5 per cent decline through next year and 2017 is on the cards.

The next day, Morgan Stanley added another bearish tone to the debate, arguing in a note to clients that Westpac's rate hike "is likely to have a disproportionate impact on housing sentiment, given it affects the entire back book, comes without the cover of an RBA rate cut and takes effect right ahead of two 'super weekends' of elevated auction volumes".

The collective intake of breath immediately drew out property spruikers vehemently denying even the possibility of a downturn. But you don't have to delve too far into the past to see just how conservative Macquarie's estimate is.

Back in 2010 and 2011, as the global economy wheezed, Australian residential property dropped about 10 per cent, with the top and bottom ends of the Sydney market hit hardest.

And, whatever you do, don't mention the phrase "property boom" to anyone in regional Australia, where prices have been on the slide or stagnant for years, or the other capital cities, particularly the resource states.

According to RP Data Corelogic, Perth, Adelaide, Hobart and Darwin real estate have all registered falls in the past 12 months.

Whenever real estate prices decline, opportunistic sellers withdraw stock, which tends to limit the falls. At least, that is the experience when the economy is still growing. It's a different story during recessions and periods of high unemployment when sellers have no choice.

During the recession in the early 1990s, rising unemployment and labour dislocation caused a rise in defaults that shook a banking system already reeling from massive corporate loan losses in the late 1980s.

Ironically, just as now, it was loose monetary policy in the aftermath of the 1987 stock market crash that fuelled a housing boom that led into the "recession we had to have".

Back then, the Australian property market was still relatively sanely priced and household debt as a proportion of income was a modest 60 per cent. It's now risen to 180 per cent.

That makes Australian households extremely sensitive to any rise in interest rates and our banks extraordinarily exposed to any downturn in the housing market.

Westpac's decision to lift rates last week has been a year in the making.

Late last year David Murray's Financial System Inquiry recommended our banks become "unquestionably strong" with new rules to force them to hold greater reserves against their loans, particularly home loans.

Between them, the big four have raised $18 billion in new capital from shareholders so far this year to meet the stringent new requirements. There's probably more to come.

All along, the banks warned it would be customers who would bear the costs of the new rules; even if the rules were designed to save them from themselves. And so Westpac merely has opened the floodgates. The other members of the cosy little oligopoly that is Australia's banking system will wait a respectable week or two before following suit.

After all, there are record profits to protect. And with shareholders now dependent on bank dividends to fund retirements in a low interest rate world, no banker could afford to offend them and expect to remain employed.

So the profits are being directed towards dividends. And rates are rising to cover the dividend flow.

This is the conundrum facing Glenn Stevens. While even he now is pointing to the growing risk in the financial system from runaway housing prices and a banking industry overexposed to exorbitant mortgages, trying to unscramble it all will only add to the risk of a broader recession.

Higher interest rates are the last thing the Australian economy can afford as the mining boom winds down and shifts into second gear, slumping commodity prices tear a hole in the economy and with the automotive industry facing imminent shutdown.

To counter the hike in retail interest rates, the RBA will be forced to further hack into already record low official rates, just to keep retail rates steady.

It didn't have to come to this. Deliberately firing up the Melbourne and Sydney housing markets from their already elevated levels was a mistake.

Time and again since late 2012, the RBA rebuffed calls to impose lending controls on housing to ensure the benefits of low rates were directed towards more productive areas of the economy.

But the "animal spirits" of entrepreneurialism that Stevens attempted to conjure, only had eyes for real estate speculation.

Booms tend to precede busts. And that adage about the bigger the boom still holds true. It's playing out right now on a global stage with commodities.

That's well beyond the RBA's remit. The Sydney-Melbourne housing bubble isn't.

Ian Verrender is the ABC's business editor and writes a weekly column for The Drum.

Read more: http://mobile.abc.net.au/news/2015-10-19/verrender-a-perfect-storm-hits-the-east-coast-property-markets/6864580
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
Admin
Member Avatar
Administrator

Quote:
 
Defusing the fuss surrounding Westpac's rate hike

Stephen Bartholomeusz, 19 Oct, 12:05 PM 1

The continuing controversy over Westpac’s decision to raise its variable home loan rate by a modest 20 basis points is weird, as is the debate about whether the bank’s move might force the Reserve Bank’s hand on official rates.

The decision to increase its home loan rate on its $180 billion variable rate loan book was triggered by the $3.5bn equity raising Westpac announced last week, which took the amount of new capital the group has raised this year to $6bn.

The need to increase its core equity base was imposed on Westpac and its major bank peers by its regulator, the Australian Prudential Regulation Authority, as part of the global push to strengthen the capital bases of banks that forms the still-flowing international response to the financial crisis.

APRA, which had already cracked down on bank lending for investment properties, has followed the recommendations of the Financial System Inquiry in introducing a floor under the risk-weights for the major banks’ home loan books.

It has imposed a 25 per cent risk-weighting from July 1 next year compared to the average risk-weighting produced by the 'advanced' approach, under which the majors are able to calculate their own risk-weights.

The smaller banks, using the 'standardised' approach, have an average risk-weight of about 39 per cent.

There were several key rationales for APRA’s decision.

One was to conform to the global push to reduce the extent of the discrepancies between the risk-weights produced by the advanced approach and the standardised calculations; another was to reduce the perceived risk created by the massive exposures the majors have to the residential property market; and another was to create a more level playing field between the majors and their smaller competitors.

The lower capital intensity of the major banks’ home loan portfolios relative to their smaller bank and non-bank peers meant either higher returns on capital/lower cost of capital or the capacity to under-cut their rivals on price even though the underlying asset against which they were lending (residential property) was the same for all the lenders.

The regulator’s policy was designed to force the majors to raise capital -- sufficient capital to put them among the top quartile of banks globally -- and with an understanding that this would force them to increase the pricing of their home loans, accept lower returns on capital or, more likely, do a bit of both.

Which is what Westpac has done. The 20 basis points, as discussed last week (Westpac is heeding the regulators’ call, October 15) equates to a 7 per cent after-tax return on the $3.5bn of new equity it has raised and only 4 per cent on the entire $6bn of capital is has added this year.

That says, very strongly, that Westpac shareholders -- who supply capital on the expectation that bank will generate a return on equity in the mid-teens -- are absorbing most of the weight of the new regulatory regime through lower returns than they have experienced in the recent past.

If the twin aims of APRA’s policy were to reduce risk in the system by forcing the majors to raise more capital and while also improving the competitiveness of smaller lenders, Westpac’s actions -- indeed, that of all the majors, which have raised $20bn of new equity this year between them -- one would say that it is having the desired impact.

APRA isn’t the only regulator that has had concerns about the state of the housing market and how that might impact the stability of the financial system and economy if there were to be a crack in that market. The Reserve Bank has also expressed some concerns.

The change in risk-weights will not only reduce the attractiveness of home loans to the majors (albeit modestly) relative to other types of lending but to the extent that it does force a re-pricing of the loans to generate acceptable returns on capital, it might take some of the heat out of the housing market. (We’ve yet to see the other majors follow Westpac’s lead.)

The RBA, which really only has one relatively crude policy instrument -- it can shift the rate curve up or down for all borrowers and savers -- might welcome the kind of targeted increase in the cost of home loans in the current environment that a re-pricing of mortgages by the majors could provide.

The Westpac move, if emulated by its peers, would give the RBA options.

It has an opportunity to sit on its hands for a while and monitor whether or not the move blows some of the froth off the housing market, where Sydney and Melbourne house prices have been rising at disturbing rates.

In an ideal world, a modest increase in major banks' home loan rates would see some slowing in the rate of growth in prices in those cities, with no spillover effects into the rest of the economy. That would enable the RBA to focus more on the needs of the real economy.

If the other majors do follow Westpac’s lead and it had a wider effect on confidence and activity, the RBA would have the option of lowering official rates -- of pushing the entire yield curve down -- to offset the bank’s actions.

Whether one looks at the near-term effects of the Westpac decision (the potential for it to help dampen activity in the over-heated sections of the housing market) or the longer-term policy objective of safer big banks and a more level playing field across the system, a re-pricing of the majors’ home loan books is consistent with what the regulators appear to want.

With Westpac’s variable home loan rate still at levels that haven’t been seen for nearly half a century, it is also unclear why the 20-basis point change has generated as much emotion as it has.

Read more: http://www.businessspectator.com.au/article/2015/10/19/financial-services/defusing-fuss-surrounding-westpacs-rate-hike
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
Admin
Member Avatar
Administrator

The house price bubble is deflating, and we should be grateful
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
ZetaBoards - Free Forum Hosting
ZetaBoards gives you all the tools to create a successful discussion community.
Learn More · Register Now
« Previous Topic · Australian Property Forum · Next Topic »
Reply



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy