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 (10,594 Views)
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.
That is basically true - hence you want a banking / financing system that results in the lowest possible interest costs in aggregrate for both business and the household sector. Ie lowest cost possible for access to capital when it is needed. The current system results in lower over-all interest costs (net of inflation) compared to previous more regulated systems, especially for individuals and small/medium sized business.
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.
It is a function of the RBA to maintain a stable banking system, and if need be the RBA will lend to any bank to overcome a short term liquidity problem. This is not a new idea, it's largely why central banks came into existence.
Any expressed market opinion is my own and is not to be taken as financial advice
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.
Like Anglo Irish Bank and Allied Irish Banks invested in business?
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.
You fail to mention that money is a utility used by all participants in an economy, and the practice of lending changes the value of money. If money is lent, it creates money (increases the supply). If the production of goods and services is not also increased by the same amount, the interest on capital is purely inflationary i.e. it destroys the purchasing power of income and savings, and inflates asset prices.
The utility of money is shared by all, but lenders and borrowers change the value of that utility without the consent of those who are not borrowers or lenders.
Something like 50% of new businesses go bust within three years.
Do you really think this would be a less risky area for banks to be more heavily exposed to?
This is exactly the idiotic "lets spend on non-productive assets" mentality which will result in Australia becoming an economic wasteland once mining slows down ever more.
Sounds like a bunch of scared bulls here, pathetic.
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
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?
Actually, I do.
But that is detail that is not important.
Stick to the main issue.
I also find it interesting that your starting position seems to be that the banks have it all under control and are acting in the best interests of us all.
Its an extremely strange point of view to have given recent events.
You are obviously unmoved by the behaviour of banks in Europe and the US recently?
Including, I might add, their ability to take the nation states they operate in down with them.
All watched over by those very clever regulatory men who are watching our backs.
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.
Actually--rather emphatically--yes, particularly with respect to the latter two.
From a risk management perspective, a sound banking system, much like a conservative investment portfolio, will be diversified in its sectoral allocation, and will not over-allocate its exposure to any one sector, whether consumer mortgages or anything else.
And from a national economic growth perspective, which surely corresponds with the Big 4's commercial interests over the long haul, allocating lending resources across a more diversified business portfolio (i.e. perhaps trending down in mining and consumer real estate compared to recent activity) anticipates a more broadly based set of growth opportunities based on recent changes in exchange rates and commodity price levels.
Why *wouldn't* you rather have the banks have more lending exposure to retail and manufacturing, considering recent changes to the exchange rate and national terms of trade?
It is a function of the RBA to maintain a stable banking system, and if need be the RBA will lend to any bank to overcome a short term liquidity problem. This is not a new idea, it's largely why central banks came into existence.
And they are doing the best they can.
But we would do well to remember that many of the countries that started down the path we did with residential property lending since the 1990s have since suffered because of it.
These are the facts.
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
I also find it interesting that your starting position seems to be that the banks have it all under control and are acting in the best interests of us all.
No, you misunderstand my position.
The banks are acting in their own interests and in the interest of their shareholders. The economic systemic risk associated with the banking system is managed via regulation of those self-interested businesses via the RBA and APRA.
The problems in other countries stemmed primarily from their own regulatory failings, and the resulting poor lending and capital destruction. Our system in Australia has been PROVEN by recent events to be on a much more solid standing in this respect, hence my level of comfort with the current status-quo.
PS: Your admission re "yearning for some sort of communist type controlled economy nirvana" is very also pertinent and interesting. I'll keep that in mind when reading your comments in the future.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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
