Moody's Assessment of Overvalued Australian Housing: Local analysts don't know how serious it is; Stark warning bells sound: Australians blind to impending financial Armageddon
Tweet Topic Started: 16 Jul 2013, 09:36 AM (10,595 Views)
Strindberg do you know of the 60% what proportion is lent to small businesses but secured on the property of the small business owner? (Genuine question).
I don't believe that is or can be known. If you take out a home equity loan or HELOC the money is yours to use as you wish.
Before banking deregulation in Australia, such loans were unavailable.
Many loans get classified as housing loans which are not used for house purchase,. These loans therefore cannot be said, as the falsely named Veritas claims, to be a factor in house price appreciation. Besides the small business owners who offer their own home as security, there are many others who simply take equity loans to buy other things. These loans all get classified as housing loans despite the fact that they are not loans for house purchase or even for house improvements.
In past times housing loans were only available for the purchase of houses or for home improvements like extensions.
The fact that people can now get cheaper loans to assist small businesses is a very good thing and aids small business success.
The fact that people can now get cheaper loans, rather than punitively charged personal loans, to purchase other things is a also an unequivocal good thing.
In previous times, the loans now taken out to purchase other things, like supporting small business, were secured either by nothing or by a rapidly depreciating asset like a boat or a car. Securing these loans against property actually improves the position and strength of the banks and benefits the borrowers with lower interest rates.
Business and personal loans are more profitable for the bank (due to higher interest rate) but riskier.
Real estate lending is less profitable (lower interest rate) and less risky.
The banks aim for a balance between overall profit and risk that they feel comfortable with.
They seem to be doing a pretty good job of striking that balance, since they are some of the most profitable and highest rated banks in the world.
That is until their mortgage book goes south.
Which they are very vulnerable to purely by virtue of the fact that they have so much riding on it.
This is RISK - you seem to be missing the key point that direct business lending / financing is MANY TIMES MORE RISKY than residential housing secured lending!!! You are hoisted on your own pertard - again!
EDIT: Remind me to stay well clear of "Veritas-Bank" if it starts up someday......
This is RISK - you seem to be missing the key point that direct business lending / financing is MANY TIMES MORE RISKY than residential housing secured lending!!! You are hoisted on your own pertard - again!
EDIT: Remind me to stay well clear of "Veritas-Bank" if it starts up someday......
Bullshit.
By that rationale, banks should stop lending to business all together.
Why would they bother when its so much more risky then just lending to housing investors?
Did you ever think that there might be another reason like the fact that they are absolutely killing the pig on res property loans?
Anyway, it changes nothing: they are overexposed, by international comparison, to a single asset class.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
This is RISK - you seem to be missing the key point that direct business lending / financing is MANY TIMES MORE RISKY than residential housing secured lending!!! You are hoisted on your own pertard - again!
EDIT: Remind me to stay well clear of "Veritas-Bank" if it starts up someday......
Bullshit.
By that rationale, banks should stop lending to business all together.
Why would they bother when its so much more risky then just lending to housing investors?
Did you ever think that there might be another reason like the fact that they are absolutely killing the pig on res property loans?
Anyway, it changes nothing: they are overexposed, by international comparison, to a single asset class.
I'm an ex-bank lender - business loans are way more risky than home loans, which is why the systems drawn up by the BASEL committee and locally by APRA push banks towards the lower risk home loans.
The most risky home loans are the low doc investor loans done some years ago - it's pretty hard to get one of those now.
Banks will do business loans against all sorts of security, but they either lend on a lower LVR or if they are lending unsecured they keep the loans small and at a high interest rate to offset the risk.
Commercial lending is a whole different ballgame to home loans although the basics are similar.
Any expressed market opinion is my own and is not to be taken as financial advice
Anglo Irish mainly dealt in business and commercial banking, and had only a limited retail presence in the major Irish cities. It also had wealth management and treasury divisions. Anglo Irish had operations in Austria, Switzerland, the United Kingdom, the United States, and the Isle of Man.
The bank's heavy exposure to property lending, with most of its loan book being to builders and property developers, meant that it was badly affected by the downturn in the Irish property market in 2008.
Anglo Irish went bust due to its commercial operations. It had little retail presence.
I suppose you will now either disappear or waffle some more lefty crap you got from your teat-sucking liberal studies lecturer. How about occasionally responding directly to the points raised?
This is RISK - you seem to be missing the key point that direct business lending / financing is MANY TIMES MORE RISKY than residential housing secured lending!!! You are hoisted on your own pertard - again!
EDIT: Remind me to stay well clear of "Veritas-Bank" if it starts up someday......
Bullshit.
By that rationale, banks should stop lending to business all together.
Why would they bother when its so much more risky then just lending to housing investors?
Did you ever think that there might be another reason like the fact that they are absolutely killing the pig on res property loans?
Anyway, it changes nothing: they are overexposed, by international comparison, to a single asset class.
Oh dear - you still have no concept of risk do you? Or risk weighting? Or the banking regulatory framework with respect to capital requirements?
The banks lend 60/40 if that's where the demand is, and it suits them in terms of maximising revenue, profit, and risk (ie, risk adjusted returns). Additionally, as Strindberg eloquently pointed out, the current situation aids economic efficiency, as it enables a much LOWER average cost of capital for both business and individuals for all sorts of purposes beyond simply the purchase or renovation of existing houses.
I think you yearn for some sort of communist type controlled economy nirvana? Where Veritas and friends get to tell banks and other businesses what/who they should/should not invest in or lend to? All based of course on your superior, socially minded moral compass?
I'm an ex-bank lender - business loans are way more risky than home loans, which is why the systems drawn up by the BASEL committee and locally by APRA push banks towards the lower risk home loans.
The most risky home loans are the low doc investor loans done some years ago - it's pretty hard to get one of those now.
Banks will do business loans against all sorts of security, but they either lend on a lower LVR or if they are lending unsecured they keep the loans small and at a high interest rate to offset the risk.
Commercial lending is a whole different ballgame to home loans although the basics are similar.
Peter,
Maybe I wasn't clear.
I understand perfectly well that lending to housing has, historically, been seen as a much safer bet than lending to businesses.
To see that all we have to do is compare business failure rates with loan delinquency rates.
I would add that I think banks know that Government is also, to some degree, backstopping the loans they make to all those voters throughout the country pursuing the Australian dream.
What I am saying is that with 60% of the book now nothing but res mortgages the Aussie banks are over exposed. If they were that heavily invested in the price of tulips it would be the same deal.
I am also saying that it represents an invidious situation for individual citizens of this country.
We would be far better served by a banking sector that was more invested in businesses than one that is contributing materially, in my view, to us having over priced property.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Would you rather the banks have more lending exposure to mining, retail and manufacturing?
The housing book is high quality assets and the average LVR across the book for, say, CBA is around 30% I recall. Good old fashioned banking business, lots of small exposures, geographically spread, fee and interest margin income. It's where banks depart from this business model they come unstuck.
Interest is a net cost to the economy that needs to be paid for by increased productivity. Without increased productivity, interest is purely inflationary.
Nobody could work very effectively without a house to live in. How productive would you be if you had to sleep in a cave or tent every night? That assumes each of the shares has an equal risk rating.
For banks, lending for property is a lot less risky and less volatile than any other form of lending.
Alright, well why stop at 60%? Why not?
If lending to property is as "productive" as any other type of lending then why not keep ramping it up.
Why not 90%?
Banks don't mind lending into the higher risk commercial sector, but to lend you need a credit worthy borrower. If none exist you can't just lend to whoever comes along. The bank is better off not lending than writing non-performing loans.
In past years banks did a lot of corporate lending to public companies. Now those companies just raise money on the stock market with an issue of shares. I would think that a lot of individuals purchase those shares by leveraging their property, so in effect banks still lend but not via a direct commercial loan. Those loans would more often than not be treated as a residential loan - often called "coded loan" in the jargon.
It's a lot harder now to work out whether the purpose of a loan was strictly retail use or commercial. If you borrowed $500K in total but $200K was commercial and $300K was residential, it would be counted as all retail because more than half is a coded loan.
It does make the overall lending figures a little vague as to the exact loan purpose. Are you confused yet?
Any expressed market opinion is my own and is not to be taken as financial advice
Anglo Irish went bust due to its commercial operations. It had little retail presence.
I suppose you will now either disappear or waffle some more lefty crap you got from your teat-sucking liberal studies lecturer. How about occasionally responding directly to the points raised?
Yeah, lefty crap. You're such a tool.
Strindberg, while it is true that Irish banks suffered badly from delinquent loans to developers, Anglo being the chief culprit, Allied Irish Bank and Bank of Ireland (the two main retail banks) have suffered badly from the weakness of their mortgage book. This matter remains unresolved in large part but is reflected in its share price of both banks and the fact that the Irish Government have had to transfer capital to both banks more than once since 2008.
Quote:
Moody’s has predicted the Irish banks will take “several more years to fully resolve the legacy issues from the crisis”. Although a lot of development loans were transferred to Nama, it said arrears remain high on the remaining property exposures.
“The asset quality of the banks’ residential mortgage books will also remain very weak, although we recognise that increases in arrears are beginning to slow,” it said.
Moody’s said the new personal insolvency regime approved by the Oireachtas at the end of late 2012 was likely to provide an “efficient mechanism” to deal with the mortgage arrears in the long term.
“However, over the outlook period [to mid-2014], the insolvency regime may lead to an increase in arrears,” it added.
It also highlighted how exposure to Irish government debt at the main domestic banks was “sizeable”, at about €13.8 billion at the end of June 2012.
This was the equivalent of about 54 per cent of the banks’ combined Tier 1 capital (excluding Government-guaranteed Nama bonds).
Moody’s said profitability across the sector was likely to remain “negative or low” during the outlook period.
This would be due to sustained high levels of provisions; high funding costs; lower top-line revenue due to muted demand and low interest rates; and the high proportion of low-yielding tracker mortgages tied to ECB rates.
It said the ending of the eligible liabilities guarantee by the Government would boost the operating incomes at the banks.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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.
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
