Nine banks have today hiked interest rates, out-of-cycle, on regulators confirmation of a housing bubble.
On Monday, the Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft remarked “I’ve been saying for a while I thought it was a bubble, other people are catching up now,”
The latest Australian Bureau of Statistics (ABS) data on mortgage growth shows more risky investor loans surging 4.2 per cent in January, bringing the annual total to a worrying 27.5 percent.
Macro-prudential controls introduced in early 2015 (APRA to keep banking crackdown secret) had worked its magic until the Reserve Bank blew it, slashing the official cash rate in May and August of 2016. One month later in September, investor mortgage growth had rebounded.
Admittingly, the Reserve Bank has learned its lesson. The most recent statement on monetary policy states, “Recent data continued to suggest that there had been a build-up of risks associated with the housing market.”
“Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income.”
The central bank’s mistake has pushed it into a corner. It is now too risky to cut rates while the housing market runs red hot. And the rapid build up of household debt, means the market is now too indebted to hike rates.
The influx of investors into the rental market has been a win for renters, but has added significant additional risk. While investors each strive to become multi-property landlords, the steady supply of extra rental properties into the market have seen rental vacancy rates in some suburbs punch through ten percent and rental growth plunge to 22 year lows.
The increased vacancy rates are a risk for many investors, who rely on rental income to service their repayments. But the problem is about to get much, much worse.
Australia is in the grips of an unprecedented apartment construction boom. Over the next twelve to twenty-four months, a flood of apartments will hit the market.
The confirmation of the property bubble, now means debate can turn from the housing market to the stability of Australia’s banking system. Australian households carry some of the highest level of household debt in the world, making an “unquestionably strong” banking system so much more of a challenge.
The council of Australian regulators, comprising of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) are working on the next round of macro-prudential controls in response to the out of control 27.5 percent investor mortgage growth.
Banks must hold adequate loss absorbing capital (Common Equity Tier 1) based on the perceived risk of the loans they write (risk-weighted assets). Historically, both owner-occupier and investor loans for residential property have been lumped together and risk-weighted.
As the bubble evolves, Australian property investors are carrying ever increasing risks. Property investors have, over the last decade, traded yields for perpetual capital growth. When the market inevitably runs out of puff, it is unlikely investors will hold their properties with such poor rental returns. Doing so, in effect, they will be subsiding the living expenses of their tenants. Additionally, more and more investors are faced with the prospect of empty properties but are “materially dependent” on the rental income to service the mortgage.
Australia also has an extremely high portion of property investors on highly risky interest only loans, speculating on perpetual capital growth without paying down any principle.
It therefore makes perfect sense to categorise investor loans, especially interest-only, as much higher risk when contrasted to owner occupier loans. They are more likely to default.
Our four big banks currently have a minimum risk-weight for residential mortgages (both investor & owner-occupier) set at 25 per cent. Our remaining, “regulated” banks have a minimum of 35 per cent. It is believed regulators are mulling over increasing the minimum risk weights on investor loans to the region of 75 to 100 percent.
Increased risk-weightings on investor loans mean banks will have to hold significantly more extra loss absorbing capital. It will help make Australia’s banking system “unquestionably strong”, but will come at a cost to investors – a user pay system as such.
While regulators contemplate their next move, banks are already re-pricing those risky investor loans.
Last week, Westpac and NAB made the first move. Westpac nudged up owner-occupier (safer) mortgages by 8 basis points, and hit property investors with a 23 basis point hike for principal and interest loans and interest-only investor loans (high risk) with a 28 basis point hike. The NAB pushed owner-occupier loans up 7 basis points, and investor loans up 25 basis points.
Today the Commonwealth and ANZ followed suit. For property investors banking with the Commonwealth, this is the second rate hike in just six weeks, up 26 basis points. ANZ hit property investors with a 25 basis point rise, and the interest-only property investor with a 36 basis point rise.
Posted in Australian Housing, Banking Regulation, Melbourne Property Bubble, Sydney Housing Bubble | 25 Comments »
“Once you are in the Sydney housing market you are pretty well set then for the rest of your life,”
It’s the claim of New South Wales Housing Minister, Anthony Roberts.
The Sydney property market is one of the most expensive in the world, and with Australia also having the highest level of household debt to GDP, many argue it is the world’s largest debt-fueled housing bubble. It makes you wonder then, if you were to get into the Sydney market, would you actually be set for the rest of your life?
Robert’s comments were made at the opening of a new apartment development in Olympic Park on Thursday. He helped the developer preach the word of perpetual house price growth, irrespective of serviceability or debt levels.
“We are not dealing with a bubble in the Sydney market,” he said. “There is no bubble here.”
“What I want to do is to get people into the market place and then they can be beneficiaries of the increase in the value of their property.”
Housing affordability is expected to be the number one election issue and has been hotly debated while Susan Ley has been using tax-payer funded travel to purchase her investment properties.
Robert’s comments is just one of many that show how out of touch, if not comical, Australian politicians are.
Here are some of the “practical” solutions being offered by our political elite:
Get wealthy Parents
When Prime Minister Malcolm Turnbull was challenged by the housing affordability debate on ABC radio in Melbourne, his only suggestion was to get your wealthy parents to shell out for a house. Turnbull told ABC host Jon Faine, “You can provide a bit of inter-generational equity in the Faine family,” and a “wealthy man” like Jon Faine should “shell out” and buy his kids a home.
I’ve since written to Malcolm and Lucy asking for adoption.
Move to Tamworth
When Deputy Prime Minister Barnaby Joyce was interviewed by ABC radio, he told young Australian Dream hopefuls to move to Tamworth.
“We believe that houses will always be incredibly expensive if you can see the Opera House and the Sydney Harbour Bridge, just accept that,” Mr Joyce remarked to ABC listeners.
“What people have got to realise is that houses are much cheaper in Tamworth, houses are much cheaper in Armidale, houses are much cheaper in Toowoomba.”
Get a highly paid job
Federal MP Michael Sukkar, Assistance Minister to the Treasurer, says getting a “highly paid job” is the “first step” to owning a home.
“We’re also enabling young people to get highly paid jobs which is the first step to buying a house, it’s not the only answer but it’s the first step,” Mr Sukkar told Sky News.
If the Liberal Party really wants to win the next election, they need to brush up on their macroeconomics. They are coming across just a bit incompetent.
Are these people really running our country?
Posted in Australian Economy, Australian Housing | 90 Comments »
China’s most recent capital controls, introduced on the 1st of January, are having an immediate effect, with fewer Chinese buyers able to purchase property abroad. From London to Melbourne, Vancouver to Sydney, Chinese citizens are struggling to close property transactions in some of the world’s largest property bubbles.
International experts believe the drop in demand is expected to be worst felt in Australia, the biggest beneficiary of the capital outflow. According to Christopher Todd at consultancy firm Basis Point, Australia approved A$24 billion of real estate investments from China in the financial year ended June 2015, the latest figures available, making Australia by far the largest destination for Chinese buyers.
China’s currency has plunged to eight year lows on the back of a record braking capital flight. Its foreign exchange reserves has been slashed to $3.052 trillion, the lowest in almost 6 years. To help stem the tide, China further tightened controls on foreign exchange, a day prior to quotas resetting on the 1st of January.
In a statement from China’s State Administration of Foreign Exchange (SAFE), it said it wanted to stamp out money laundering and illegal overseas property purchases. While the regulator has left the quota of $50,000 yuan (A$9,600) foreign currency, per person, per year unchanged, it has significantly increased disclosure requirements. Chinese citizens must now pledge the money wont be used for overseas purchases of property, securities or life insurance. They must also give detailed accounts of what the money will be used for. Banks will now report any overseas transaction made by an individual exceeding $10,000 yuan (A$2,000).
Bloomberg reports on the despair:
“If it’s too difficult, I’m out,’’ said Mr. Zheng, 66, a retired civil servant in Shanghai who declined to give his first name to avoid attracting regulatory scrutiny. He may abandon a 2.4 million yuan ($348,903) home purchase in western Melbourne, even after shelling out a 300,000 yuan deposit last August. He’s due to make another big payment next month.
For Zheng, the decision on whether to walk away from his Melbourne property or risk breaking China’s foreign-exchange rules is fast approaching. He’s scheduled to wire another 800,000 yuan to Australia in late February to cover the rest of his down payment.
With the Lunar New Year starting today, an army of Chinese holiday makers are in the air heading for Melbourne and Sydney as local property agents prepare for the “golden week”. The agents are already witnessing a substantial drop off in demand. Many Chinese view property with a tour group, but only half the number of buses are filled this year. Ray White Balwyn director Helen Yan told the Domain, fewer Chinese tourists would be hunting for property this year. A positive to come from all of this – they will have more time to enjoy a real holiday in Australia.
Happy Chinese New Year.
» China’s crackdown on capital outflows sending shudders through global property markets – The Straits Time, 27th January 2017.
» China’s Army of Global Homebuyers Is Suddenly Short on Cash – Bloomberg, 27th January 2017.
» China Gets Strict on Forex Transactions to Stop Money Exiting Abroad – Bloomberg, 3rd January 2017.
Posted in Australian Housing, China, Melbourne Property Bubble, Sydney Housing Bubble | 46 Comments »
Credit rating agency Fitch has placed Australia’s banks on a negative credit watch, citing an increase in macro-economic risks stemming from the property asset bubble.
Fitch indicated a key risk for the banking system was the banks’ exposure to the overheated property market. Of special concerned is strong increases in household debt levels relative to household disposal income – at a time when Australia’s household debt relative to household disposal income sits at a staggering 187 per cent, one of the highest levels in the world.
“Household debt is high and rising relative to disposable incomes, making borrowers sensitive to changes in the labour market and interest rates,” Fitch analyst Andrea Jaehne stated.
Pressure from multiple fronts has forced Australian banks to hike interest rates in recent months following upward trends around the globe. But with significant levels of household debt, Australian households are going to feel the brunt of the rate hikes, more so than other countries with much more prudent household debt levels.
Fitch also expresses concern about growing job losses. Abnormally high housing costs has forced wages sky high in Australia, making the country a high cost economy and one struggling to compete in a global free market. This has caused the closure of complete industries and accelerated the offshoring of an increasing number of jobs, the very jobs required to service the high levels of household indebtedness. Essentially, Australia has a significant misallocation of capital towards unproductive markets such as housing, and at great expense to productive sectors of the economy.
Investor loans surge 21.4 per cent
Adding to macro-economic concerns is today’s release of housing finance commitments from the Australian Bureau of Statistics. Despite efforts by regulators to curb lending growth through macro-prudential controls, the value of loans to property investors surged 21.4 per cent over the year.
It’s more mounting evidence just how ill-equipped Australian regulators are in engineering a controlled, safe landing.
» Fitch Ratings turns negative on Australian banks – The AFR, 16th January 2017.
» Housing investor loan approvals surge 21.4 per cent in a year – The Sydney Morning Herald, 17th January 2017.
Posted in Australian Economy, Australian Housing, Banking Regulation | 55 Comments »
If there is one person that knows the severity of the Australian housing bubble and the repercussions for our banking system, it is ex Commonwealth Bank CEO David Murray. Murray more recently headed up the the government’s Financial System Inquiry.
In an interview broadcast on Sky News earlier this month, Murray said the Australian economy was “vulnerable because there is a bubble in the housing market”
But not just any bubble.
“Many of the signs are the same as the Dutch Tulips, [..] there are peoples behavior, peoples defensiveness about any correction in that market – all those signs are there.”
The 1637 Dutch Tulip bubble was one of the greatest bubbles in history.
“But when those risks are there, something needs to be done about it in a regulatory sense, and the Reserve Bank and APRA need to stay on it,” he recommended.
He is not alone.
More needs to be done
In a rare move, IMF deputy managing director Tao Zhang visited Australia earlier this month to speak with regulators on the risk posed to Australia’s economy. Mr Zhang told the Australian Financial Review, “both sides agreed that further measures were needed to strengthen resilience to housing market shocks”.
“We’re talking about prudential policies needing to be intensified, with targeted macro-prudential measures and banks being encouraged to robustly increase their capital position into unquestionably strong territory,” he added.
No recommendations from Coalition inquiry on housing affordability
But, in an embarrassment to the government, a two year inquiry into housing affordability by the Coalition has failed to make even a single recommendation. The report, released on Friday has been, and quite rightly, branded a waste of time and money by commentators.
But reading between the lines, it would now appear the Government considers the housing bubble so big and top heavy, they are unable to make any changes, without triggering a devastating correction and creating considerable political carnage to their parties brand.
Best to leave that to the regulators. After all, APRA never saw the collapse of HIH Insurance coming – the largest corporate failure in Australia’s history.
» Switzer Daily – David Murray Interview – Switzer, 1st December 2016.
» “All the signs of a bubble are there,” says ex-CBA CEO – Australian Broker, 12th December 2016.
» Housing affordability: Inquiry that made no recommendations a ‘waste of money’, Labor says – The ABC, 16th December 2016.
» ‘It’s laughable’: Government slammed for housing affordability probe that proposes no changes – The Sydney Morning Herald, 16th December 2016.
Posted in Australian Economy, Australian Housing, Banking Regulation, Melbourne Property Bubble, Sydney Housing Bubble | 120 Comments »
Australia’s property investors and debt slaves were in shock on Friday, when Westpac joined the ranks of smaller banks, significantly hiking mortgage rates out of cycle, on its fixed term loans.
Westpac’s five year fixed investment loan will jump 60 basis points or 2.4 times the standard Reserve Bank increase to 4.79 per cent come Monday. Two and three year investment loans will rise 30 basis points, while two and three year owner occupier mortgages will increase 24 basis points. It follows earlier rises by Westpac’s RAMS and a 60 basis point rise from the Bank of Sydney.
Over the past fortnight, another ten smaller banks had increased rates.
Investors were too naive and complacent to see it coming, but they should have. Banks are facing pressure on a number of fronts.
IRB Risk Weights
Australian banks not the safest in the world – far from it – 8th December 2014.
Have the Big 4 just flunked APRA’s stress test? – 16th November 2014.
As we have reported over the years, Australia’s big banks or IRB (internal ratings-based) banks – Westpac, Commonwealth, ANZ, NAB and Macquarie, have been abusing their size and status. As silly as it sounds, regulators thought these banks knew what they were doing, so they were given the power to risk rate their own mortgage books. As you can guess, in a bid to enhance profitability at the detriment of financial stability, the IRB banks rated the risks on their mortgage portfolios so dangerously low so as to not have to hold as much expensive loss absorbing capital. After all, the taxpayer would be at hand if they needed to be bailed out. A stress test conducted by the Australian banking regulator in 2014 found that the five IRB banks were insolvent, if they were unable to access further capital, after a moderate housing and commodities crash. Something had to be done.
Effective 1st July 2016, APRA has raised the average risk weights for the IRB banks to a minimum of 25 per cent. This will require the IRB banks to hold extra loss absorbing capital to assist with solvency in a banking crisis. The banks have two options, reduce the level of profitability, or hit up mortgage holders. The later is preferable, as at some stage the banks may have to – go cap in hand – to shareholders to shore up balance sheets when default rates materially rise.
“Regulated banks” i.e. all our other banks, have a minimum risk rate of 35 per cent, so the big banks are still unfairly advantaged.
Net Stable Funding Ratio (NSFR)
As part of the International Basel III accord designed to make banks more resilient, banks will have to start relying more on domestic deposits for funding, rather than the risky overseas wholesale markets. A global shock (brexit, Italy, Europe, China etc) could cause liquidity problems for rolling over short term debt. As Australia’s household debt rapidly grew, Australian banks relied more heavily on short term wholesale debt markets to get the much needed cheap funding to satisfy Australia’s craving for perpetual debt.
APRA says big banks at risk from short-term, wholesale debt addiction – The Sydney Morning Herald, 16th September 2015.
Australia set to lose AAA credit rating
As we reported in July, Australia is on a credit rating outlook of negative with ratings agency Standard and Poor. S&P, at the time, said “There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.””
Since the warning, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison has more or less sat on their hands when it comes to budget repair. Only this week, former RBA board member John Edwards has suggested cutting negative gearing subsides to secure our AAA credit rating, but the Prime Minister has ruled out the change to prevent any backlash from Liberal backbenches who heavily depend on the negative gearing gravy train. The problem facing the soft Prime Minister, is he can’t find any cuts that won’t effect someone. Today, even former coalition Prime Minister, Tony Abbott has called on Turnbull to harden up!
Australia’s over extended and risky banks are seen only as safe as a government bailout, and hence cannot have a credit rating that exceeds the government. The loss of the government credit rating is expected to make any overseas wholesale funding more expensive.
Former RBA board member John Edwards backs negative gearing change to secure AAA credit rating – The ABC, 25th November 2016.
The Trump Effect
A future with Donald Trump, leader of the free world, is the hardest to predict, but has attracted most of the blame for rising interest rates. Trump policy is largely expected to be inflationary with pro-growth, large infrastructure builds in the wings. His election win earlier this month has caused pandemonium in world debt markets, but there is some evidence to suggest bonds have been out of favor since August. Whether the bond market sell-off started in August, or November with the election of Trump, bond yields are heading in one direction, up, and is considered a good proxy for future interest rate moves.
Janet Yellen, United States Federal Reserve chair, is expected to move on American interest rates in December.
Should we panic?
Australia’s banking regulator has repeatedly maintained banks should have a serviceability floor of 7 per cent for when interest rates inevitably go up. Provided banks didn’t flout this requirement, there should be some scope for rising interest rates over the next 12 to 24 months.
But then, who is confident the banks screened mortgage applicants with a 7 per cent floor? Certainly not me.
Posted in Australian Economy, Australian Housing, Banking Regulation | 34 Comments »
Australia is facing an unprecedented apartment oversupply as an estimated 230,000 new apartments flood the Melbourne, Sydney and Brisbane markets over the next 24 months.
The surge in new apartment building was in an attempt to satisfy the insatiable demand from the foreign Chinese property investor. Under an Australian law designed to increase housing stock, foreign investors can only purchase new dwellings.
But as we reported in May (“Banks tighten screws on foreign buyers“) the banks were uncovering traces of what would turn out to be systemic fraud. The ANZ bank asked its Asian subsidiaries to verify and cross check the obscure offshore companies being cited as sources of foreign income to service these property loans. Most offshore companies didn’t exist.
By the end of April, the ANZ was forced to retract the approval on 90 loans to foreign investors. Not long after, the truth came out with the disclosure that ANZ and Westpac banks have approved hundreds of loans supported by fraudulent foreign income documentation. All the banks immediately began to toughen eligibility and serviceability requirements. Some even chose to freeze the writing of all new loans to foreigners, citing the risk was just too great.
Many foreigners had put down deposits on their apartments but were no longer eligible for the loans from Australia’s big banks, loans essential to complete settlement.
To help mitigate disaster, Chinese real estate portal, aofun.com.au has set up a Nominee Sale Platform in a bid to shift some of the thousands of apartments where buyers are unable to complete settlement.
Foreign property investors locked out of apartment re-sales
But in an ironic twist, the foreign property investor has been locked out of the re-sale market and unable to snag a bargain.
According to a spokesperson from the Australian Taxation Office, “Under subsections 15(4) and (5) of the Foreign Acquisitions and Takeovers Act 1975, a dwelling is considered to be sold when an agreement becomes binding,”
“If the property is onsold after the date upon which the contract becomes binding, and prior to settlement, then this is considered to be an established dwelling.”
As foreign investors cannot purchase what is now deemed an established dwelling, they are unable to help soak up some of the burdening oversupply.
Agents target the first home buyer
Not to be defeated, apartment sales agents are now targeting the first home buyer. Aofun even claims “Australian FIRST HOME BUYERS can pick up a bargain with the deposit already paid for”
But can they soak up 230,000 apartments in 24 months?
Earlier this month, the Australia Bureau of Statistics (ABS) revised down first home buyer participation in the market skewed towards the speculative investor. Original figures suggested a low of just 14.1 per cent of buyers in July 2016 were first home buyers, but actual figures are much worst.
After revision, the ABS now believe just 13.2 per cent of participants in the market in July were first home buyers. Numbers had been steadily falling for four years.
High housing costs have been zapping disposable incomes, shutting down business and leading to higher unemployment and the casualisation of the workforce. Coupled with run away house prices, first home buyers, the one who have jobs, are struggling to get into the housing market – regardless of if their staple diet includes smashed avocado with crumbled feta on five-grain toasted bread.
With trouble brewing in the apartment market, the banks are further cracking down on lending. On Saturday, the National Australia Bank (NAB) expanded its confidential lending blacklist to cover over 600 towns and suburbs. Buyers now need a minimum 30 per cent deposit to purchase property in these suburbs exposed to the mining downturn or apartment oversupply. Today, Bendigo and Adelaide bank cracked down on high risk locations increasing the minimum deposit to 40 per cent.
If first home buyers were struggling to save a twenty per cent deposit, they will face even more difficulty to cough up a thirty to forty per cent deposit for a high risk apartment.
But it’s also a mistake to assume all Generation Y and X endeavor to enter Australia’s housing bubble and become lifetime debt slaves.
So the question stands, just who will purchase all the apartment defaults?
» NAB cracks down on property lending to ‘reduce risk’ – The AFR, 21st October 2016.
» Adelaide Bank cracks down on property lending – The AFR, 24th October 2016.
» Failed off-the-plan apartments ‘second-hand’ – News Limited, 24th October 2016.
» First home buyers at lower numbers than previously thought, ABS reveals – The ABC, 6th October 2016.
Posted in Australian Housing, Melbourne Property Bubble, Sydney Housing Bubble | 52 Comments »
Australia’s unprecedented housing bubble has forced a significant number of mortgage applicants to falsify loan applications, simply to get a foothold in the ever challenging market.
A recent UBS survey found mortgage fraud in Australia was rife, with 28 per cent of applicants admitting to falsifying loan documents. Many had either overstated household income, overstated asset values or understated debt or living expenses.
Borrowers barely able to break into the market were the group most likely to stretch the truth, with UBS reporting, “there was a correlation between borrowers who misrepresented their application and: those whose expenditure was broadly equal to their income; stated they are under financial stress; or have missed a debt payment.”
AMP’s 2016 Financial Wellness Report, released today, found 24 per cent of workers in Australia are now classified as “financially stressed.”
UBS indicated its survey was likely to understate the number of falsified mortgages and suggested mortgage fraud was “systemic” in Australia, and especially prevalent among brokers.
Wayne Byres, Chairman of the Australian Banking Regulator, APRA, has told the Senate Economics Legislation Committee, the watchdog has instructed Australia’s largest banks to have their external auditors conduct a review on their fraud control procedures.
Byres told the committee, “We have told the larger institutions that we’ll be asking them to have their external auditors do a review of what are essentially fraud control mechanisms to ensure that there are mechanisms in place and…are working,”
With such systemic fraud, there are fears a return to more prudent lending could send Australia’s overextended housing market into a downwards spiral.
Earlier this month, Roy Morgan Research found 311,000 mortgage holders in Australia had little or no equity in their home. A cooling of the market would plunge hundreds of thousands of mortgage holders into negative equity.
» Mortgage fraud ‘systemic’ in Australia, UBS survey shows – The ABC, 7th October 2016.
Posted in Australian Economy, Australian Housing, Banking Regulation | 14 Comments »
It’s not just those struggling to break into the property market that need to cut back on smashed avocado with crumbled feta on five-grain toasted bread.
Interest rates might be at record lows, but delinquency rates have hit record highs in Western Australia, Tasmania and the Northern Territory.
In South Australia, delinquency rates are just 0.1 per cent shy of the record.
The housing bust in Western Australia and wage deflation has contributed to mortgage arrears hitting 2.33 per cent, surging 0.69 per cent in the past year.
Nationally, delinquencies have risen in every state and territory.
The number of delinquent mortgages in Australia is at three year highs and is likely to rise further, according to Moody’s Investors Service. Mortgage holders more than 30 days late on their mortgage currently stands at 1.5 per cent, and is nudging towards the 1.59 per cent record recorded in April 2013.
Australians have the highest level of household debt in the world.
» Mortgage arrears break records in two states and NT – The ABC, 19th October 2016.
Posted in Australian Economy, Australian Housing | 25 Comments »
Australian Prime Minister warns on household debt levels; Moody warns Australian banks in uncharted territory.Written by admin on September 15, 2016 – 7:59 pm
Prime Minister Malcolm Turnbull has called on Australians to be prudent towards excess household debt, saying interest rates will not always remain low.
“It’s not for me to give lectures on household finance but I think most Australians are very alert to the fact that while interest rates are low they haven’t always been low and that you’ve got to be prudent in terms of your borrowing,” he told the West Australian Newspaper.
“It’s up to the Reserve Bank to maintain financial stability, and they have a number of levers, interest rates being the most obvious one, to address excessive borrowing if that’s the right term.”
In the March quarter, household debt as a percentage of household income continued to climb to 187 per cent on the back of emergency low interest rates. Australians carry the highest level of household debt of anyone in the world.
This burdening and record high household debt level has caused Moody’s Investors Service issue a recent warning that Australian banks will be in uncharted territory when the nation’s households have to contend with an economic downturn.
“The resilience of household balance sheets and, consequently, bank portfolios, to a serious economic downturn has not been tested at these levels of private sector indebtedness,” Ilya Serov, senior vice-president at Moody’s Financial Institutions said.
» Prime Minister’s debt warning for Australia – The West Australian, 15th September 2016.
» PM Turnbull urges homebuyers to be prudent with money, reminds Australians interest rates will not always be so low – International Business Times, 15th September 2016.
» Home debt threat: Moody’s bank warning – The Herald Sun, 19th August 2016.
Posted in Australian Housing, Melbourne Property Bubble, Monetary Policy, Perth Property Bubble, Sydney Housing Bubble | 41 Comments »
Foreign investors in Australian real-estate will need to conduct their own sound due diligence after it has been revealed one of the countries leading house price indices has been overstating growth. But it is not the only problem they face.
Australia’s central bank has been forced to drop using a home price index from CoreLogic after the bank said it is “overstating” house price growth.
In a country obsessed with real estate, everyone used CoreLogic statistics as it always portrayed strong, perpetual growth regardless of actual market performance. The last monthly update, published on the 1st August found Adelaide dwellings surged a stunning 1.4 percent in the month of July. Sydney was up a hot 1.3 per cent and Melbourne 1.1 per cent. Corelogic boasted, “Capital city dwelling values reach a record high in July”
As of the 31st of July according to Corelogic, Sydney’s median dwelling price was $775,000 down from $780,000 the month earlier (yes down), Melbourne was $585,000 down from $587,500 a month earlier (yes down) and Adelaide was $417,500 down from $420,000 (no, no mistake – down). This on its own is not a concern. The Corelogic Home Value index is a Hedonic index meaning the data is “massaged” to better track attributes of the property – i.e. the number of bedrooms and bathrooms.
But it had become a regular occurrence this year. Month after month, median down, index up. Sydney started the year with a median $800,000 dwelling price and closed last month at $775,000 according to Corelogic. Despite the fall, Sydney has recorded impressive monthly growth, 0.5 per cent (Jan), 0.5 per cent (Feb), 1.0 per cent (Mar), 2.4 per cent (Apr), 3.1 per cent (May), 1.2 per cent (Jun), 1.3 per cent (Jul).
It is understood Corelogic made a “methodological change” in April and forgot to advise customers of the changes, including the Reserve Bank of Australia.
If you have been in Sydney, Melbourne or Brisbane of late, no doubt you would have witnessed the sight of endless cranes. Australia is in the grips of an unprecedented apartment building boom.
In the March quarter, according to the ABS, the private sector was building 150,706 “other” residential dwellings, typically units and apartments. This is triple the roughly 50,000 only 6 years ago.
Most of these dwellings are off-the-plan and are being built for foreigners. Investors put down, typically, a 10 per cent deposit and is required to pay the remainder when the apartment is complete. This could involve obtaining a loan with a bank when the time comes.
“All the deals have been frozen”
As we reported in May (Banks tighten screws on foreign buyers), Australia’s Big 4 had started retracting and clamping down on loans to foreign investors after detecting widespread fraud.
According to overseas mortgage brokers, many are now struggling to complete their purchases.
Mark Yin, an agent with Shanghai-based Home Tree Group told the AFR, “All the deals have been frozen,” According to the report, nearly 100 per cent of his clients were unable to get finance from Australian banks. Most were buying apartments in the Melbourne CBD.
“I have now stopped dealing in Australian property,” he said.
Lanny Xu, CEO of Iron Fish China said about 20 per cent of her clients were trying to on sell apartments after failing to obtain loans.
For local buyers, the oversupply of apartments have seen prices fall. Banks are valuing the apartment at settlement and many are coming up short. In Melbourne’s Docklands, CBD and Southbank, apartments are selling at up to 24 per cent discounts to the off-the-plan price.
According to a recent article in the AFR, off the plan apartment sales in Brisbane’s inner city is down 44 per cent in the last quarter. (Brisbane apartment sales collapse, settlements now key focus for developers)
» Brisbane apartment sales collapse, settlements now key focus for developers – The AFR, 10th August 2016.
» RBA says Melbourne, Brisbane apartment glut could increase settlement risk – The AFR, 5th August 2016.
» Surviving the off-the-plan finance crunch – The AFR, 28th July 2016.
» Frozen loans trigger Australian property funding crisis – The AFR, 25th July 2016.
» New apartment resale prices tumbling in Melbourne – The AFR, 27th May 2016.
» Risk and fear rise as failed apartment deals reach $5b – The AFR, 27th May 2016.
» Lender Firstmac adds to squeeze on apartment borrowing – The AFR, 27th May 2016.
» Receivers warn apartment developers to get ready on settlement risk – The AFR, 19th May 2016.
Posted in Melbourne Property Bubble, Sydney Housing Bubble | 41 Comments »
Years of spending beyond our means has caught up with Australia today, with ratings agency Standard and Poor’s lowering Australia’s credit rating outlook to negative.
While Australia retains its prized AAA credit rating for now, it is a strong warning Australia could lose its coveted credit rating if our budget position fails to improve.
In a statement, Standards and Poor’s said, “There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.”
One such improvement could be the grandfathering of negative gearing and the reduction of the capital gains discount from 50 per cent to 25 per cent, forecast to save tax-payers over $6 billion a year.
Standard and Poor’s later today placed NSW, Victoria and the ACT on a negative outlook indicating “no state entity can receive a higher rating than the Commonwealth of Australia.”
Subsequently, for similar reasons our big four banks – ANZ, CBA, WBC and NAB were placed on a negative outlook.
S&P remarked, “The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia”
S&P described government debt as low, but indicated its biggest concern is Australia’s “high external and household indebtedness”.
“A portion of Australia’s external debt has also funded a surge in unproductive household borrowing for housing during the 1990s and 2000s.”
Australia has the highest level of household debt as a percentage of GDP in the world. Approximately 30 per cent of bank funding comes from external wholesale markets, exposing Australia to external shocks.
Ireland was in a similar situation pre GFC with low government debt and significantly high household debt. When the Irish people could no longer service their mounting debts, the banking system buckled, the government was forced to bail out them out, effectively shifting the household debt onto the balance sheet of the government.
» Australian Government, major bank credit ratings put on negative watch by Standard & Poor’s – The ABC, 7th July 2016.
Posted in Australian Economy | 46 Comments »
Australia’s trek to the polls on Saturday has resulted in a nail biting, too close to call result. At the conclusion of counting at 2am Sunday morning, the ALP had 67 seats, LNP – 65 and the minor parties have picked up five. 13 seats remain in doubt with counting to resume on Tuesday.
The results suggest Australia could be heading for a hung parliament and three years of political deadlock for economic reform and attempts to rein in spending.
Such a deadlock could spell the end of Australia’s coveted AAA credit rating with speculation Australia could be put on credit watch negative within weeks.
The consequent loss of the triple AAA credit rating will not only make government debt more expensive, but it will result in a spate of downgrades for Australian banks and companies and potentially result in the rise of mortgage rates due to banks over reliance of wholesale funding. The downgrade will also be a blow to confidence.
Australia’s total debt surges to 254 per cent of GDP
The loss of our AAA credit rating was going to eventually happen, regardless of the outcome of the election. There has been speculation looming about the loss for months.
An Australian Bureau of Statistics (ABS) release last Thursday tallied another record high for Australian debt levels. Total debt racked up by households, the public sector and business (but excluding finance companies) totaled 254 per cent of GDP for the first quarter to March.
Households’ insatiable appetite for a slice of the Australian housing bubble, and at any cost, made the largest contribution to total debt levels at 125 per cent of GDP. Australian households remain the most indebted in the world as a percentage of GDP. A significant risk is our big banks’ reliance on overseas wholesale funding to support the residential mortgage market. As the world increasingly questions the Australian miracle and recalculates risk, the spreads of this wholesale funding will increase.
According to the Courier Mail, analyst, John Steiner from United States based Hedgeye Risk Management has recommended investors short Australia’s big four banks. He believes the housing oversupply and falling demand has signaled Australia’s housing market is in a bubble and is about to blow.
Business debt now sits at 84 per cent of GDP, while Government debt ticks up to 47 per cent of GDP.
Earlier this year when total debt was only 243 per cent of GDP, Morgan Stanley calculated for every dollar of extra GDP growth, Australia accumulated an extra $9 worth of debt. At the time, Daniel Blake, a Sydney based economist for Morgan Stanley said Australia needs to urgently find other sources of growth that are less debt-intensive rather than the hugely leveraged property market.
“We’re not getting that much growth for the money we’re borrowing,”
» Australia’s debt levels hit record high as households, businesses and governments load up – The Courier Mail, 30th June 2016.
» Australia’s debt problem looks worse than China’s, says Morgan Stanley – The Australian Financial Review, 4th July 2016.
Posted in Australian Economy, Australian Housing, Melbourne Property Bubble, Perth Property Bubble, Sydney Housing Bubble | 12 Comments »
Negative gearing was intended to create more affordable housing, but as house prices surge, causing rental yields to tumble, more evidence is mounting to the contrary.
Research by UNSW’s City Futures Research Centre has found a higher concentration of vacant homes in the inner cities. When it investigated further, it found a strong correlation between empty homes and poor rental yields.
Inner city dwellings typically attract higher prices but return lower yields due to a ceiling on incomes. They have, in the past, exhibited better capital growth prospects. Apartments with a rental yield of approximately two percent were 2.5 times more likely to be intentionally left empty compared with apartments yielding 6 per cent.
Since 1997, price-to-income and price-to-rent ratios have close to doubled. As home prices continued to outpace rental growth, rental yields fell to the point where for many investors it is no longer worth offering the home for rent. There is less hassle with tenants, limited maintenance requests and no wear and tear on the property. Rather, the focus is now firmly on capital growth and as a result, some 90,000 properties sit idle in Sydney, a trend that is set to continue.
In Melbourne, 83,000 properties, representing 4.8 per cent of the market is considered empty based on water meter readings.
UNSW’s Professor Bill Randolph and Dr Laurence Troy state, “Leaving housing empty is both profitable and subsidised by government,”
“This is taxation lunacy and a national scandal.”
Tax distortions such as negative gearing and the fifty per cent capital gains discount is believed to be behind this ill-considered trend. Leaving property empty allows investors greater negative gearing offsets while capital gains is treated more favorably with a fifty per cent tax discount.
High housing costs are making Australia noncompetitive in global markets and channeling vital capital from what was productive sectors of the Australian economy into non-productive housing. If we are fair dinkum about jobs and growth, structural changes are urgently needed around taxation policy driving these distortions. Pain will be felt in the short term, but the long term benefits will exceedingly outweigh the negatives should politicians have the vision to see past one term.
Flawed housing policy has resulted in Australia having some of the highest levels of household debt in the world, relative to both GDP and household disposable incomes. Such, precarious and unsustainable levels greatly exposes Australia to external economic shocks such as the Brexit. Australian banks rely heavily on foreign wholesale debt markets to fund many residential property loans and a global liquidity crisis could cause quite a road bump.
Tax distortions are also establishing the scene for one day, when house prices are unable to achieve anymore growth and the yields simply won’t stack up.
» Negative gearing has created empty houses and artificial scarcity – UNSW Newsroom, 29th March 2016.
» Thousands of empty homes adding to Sydney’s housing crisis, experts say – Sydney Morning Herald, 28th Match 2016.
Posted in Australian Economy | 6 Comments »
Western Australia’s highest residential vacancy rate in decades has turned the state into a hot spot heaven for squatters.
Squatters are finding home in some of the tens of thousand vacant properties sitting idle in WA. Some are changing the locks and threatening landlords. Others are conducting their own renovations and painting walls.
Sharon Fox-Slater, executive general manager of EBM RentCover, one of Australia’s largest providers of landlord insurance said that she use to see a squatting related claim every few years, but they are now common place in Western Australia.
“The downturn, high vacancy rate and number of job losses is taking its toll.” she said.
» Perth’s high rental vacancy rate has resulted in rise in squatters – Herald Sun, 20th June 2016.
Posted in Australian Economy, Australian Housing | 6 Comments »
Australia’s banking regulator has expressed “perpetual concern” about the dominance of Australia’s big four banks in the lending market.
Charles Littrell, Australian Prudential Regulation Authority (APRA) supervision general manager told a Centre for International Finance and Regulation showcase event on Thursday, “In 1990, the four major banks had 40 per cent of the banking market; now they’ve got 80 per cent”
“They’re all in the same business model, they’re all hugely exposed to each other … and we don’t quite know what would happen if that business model gets whacked by external stress all at once.”
The warning is timely given Britain’s decision to exit the EU today, shaking global finance markets.
Also of concern by the regulator is the big four’s exposure to residential housing loans. “It is a significant issue of concern to us that close to two-thirds of balance sheets are exposed to property…mainly housing loans,”
Australia has the highest level of household debt in the world.
It is expected the regulator will impose greater capital requirements in the next wave of reforms due by the end of the year.
In 2012, the International Monetary Fund (IMF) highlighted identical concerns about the concentration and interconnectedness of Australia’s big four banks. (‘Too big to fail‘).
Under a stress test scenario conducted by APRA in 2014, the big four banks would have been insolvent if they were unable to access further capital, highlighting the need to bolster the banks with further capital. (‘Have the Big 4 just flunked APRA’s stress test?‘)
» Surprise jolt could bring down big four banks, says regulator APRA – The Herald Sun, 24th June 2016.
» Regulator dials up pressure on banks’ real estate lending – The Australian, 24th June 2016.
» IMF: Bank capital needs to be ‘substantially higher’ to prevent banking crisis – Who crashed the economy?, 24th June 2015.
Posted in Australian Economy, Australian Housing, Banking Regulation | 6 Comments »
A Treasury report released under Freedom of Information has found over half of all negative gearing tax benefits aid our top twenty percent of income earners and the top ten percent of income earners gain 75 percent of the capital gains tax concessions.
Despite claims by the coalition that Mums & Dads and average wage earners were the main beneficiary, the report states “Negative gearing benefits high-income families,” and the capital gains discount “overwhelmingly benefits high-income families.”
The lowest twenty percent of income earners only obtain 5 per cent of all benefits under the generous negative gearing scheme, costing the budget billions of dollars each year.
It is understood the report is written by ANU’s associate professor, Ben Phillips for Treasury, and the government had known about the contents of the report for three months, while fiercely maintaining it’s claim that negative gearing benefits average wage earners.
The report, which the coalition tried to keep secret, found Labor’s plan to quarantine negative gearing to new properties and reduce the capital gains discount from 50 per cent to 25 per cent would save the Australian taxpayer approximately $6 billion a year.
» Government hides the truth on Negative Gearing – My Sunshine Coast, 18th June 2016.
» Election 2016: Government maintains negative gearing stance despite Treasury documents – The ABC, 18th June 2016.
» Labor seizes on Treasury advice that wealthy get most from negative gearing – The Guardian, 18th June 2015.
Posted in Australian Economy, Australian Housing | 5 Comments »
Moody’s Investors Service has warned today, the recent resurgence in house price growth following last month’s rate cut would been seen as a credit negative for Australian banks.
The surge, “against a back drop of an already-high level of household indebtedness” would increase the sensitivity of Australian banks to a housing downturn.
The report stated, “And although we expect such an adjustment to be gradual, the likelihood of an outright downward correction in prices is rising.”
» Resurgence in housing prices and debt a greater risk for banks, Moody’s says – The ABC, 9th June 2016
» Moody’s rings alarm on housing – The Australian, 8th June 2016.
» Moody’s flags housing risk to Australian banks as investors surge – The Courier Mail, 8th June 2016.
» Moody’s: Australian banks face increased tail risks from rising house prices – The Star, 8th June 2016.
Posted in Australian Economy, Australian Housing | 12 Comments »
“Domestically, the unwinding of housing-market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing.”
This is the latest warning from the OECD Economic Outlook and comes after the Reserve Bank of Australia stoked the hot coals last month, slashing the official cash rate by 25 basis points and sending Sydney’s property prices surging 3.1 per cent in the month of May.
It highlights the enormous challenge the Reserve Bank faces in trying to support an ailing economy while engineering a soft landing in Australia’s unprecedented housing bubble. No central bank has ever pulled off such a feat – anywhere in the world.
Some economists argue cutting the official cash rate is actually detrimental to the economy. Australian households are burdened with some of the highest levels of household debt in the world.
Conventional monetary policy wisdom is that cutting interest rates should spur more spending by both households and businesses, but this is looking less likely with each rate cut as Australia joins in the race to the bottom.
Most banks don’t automatically pass on rate cuts with a lower repayment amount unless asked. With an uncertain outlook for jobs and growth, many households are opting to maintain repayments at previous rates. On the other hand, savers, such as retirees are forced to cut back spending. Poor deposit rates are forcing savers to leverage into equities and property bubbles in the pursuit of perceived higher yields.
The latest GDP numbers indicate business investment is contracting sharply. Private sector capital expenditure on buildings, equipment, plant and machinery fell 5.2 per cent in the March quarter, contributing to a 15.4 per cent annual decline. While mining investment plunged a foreseeable 12 per cent in the quarter, the manufacturing sector, currently experiencing soft demand simply didn’t have the confidence to invest in capital expenditure, also fell 10 per cent. Outside of mining and manufacturing, however, was a glimmer of hope with capital expenditure picking up 1.8 per cent but failed to contribute anything significant.
The latest CPI figures show a deflationary 0.2 per cent fall in consumer prices over the quarter including a “shock” 0.2 per cent decline in Food and non-alcoholic beverages. A statement on the monetary policy decision released by the reserve bank suggested the decision to lower the cash rate last month “follows information showing inflationary pressures are lower than expected.” (‘Australia joins club deflation, cuts cash rate.‘)
Further cuts are expected in the coming months as the Reserve bank endeavors to combat falling inflation.
It would be reasonable to expect, cutting interest rates in today’s abnormally low cash rate will only reduce consumption, fuel housing and stock bubbles and increase debilitating household leverage. It’s not hard to fathom how the Reserve Bank will lose control of the economy, if it hasn’t already, resulting in the “dramatic and destabilising” demise of the Australian economy.
Excessively high household leverage and monetary policy mistakes will not be the only contributor.
Property developers and banks prepare for onset of apartment crash
In order to justify bubble prices, property spruikers had repeatedly shouted their call to action, Australia has a chronic shortage of homes. But like so many bubbles that have burst before, Australia now faces a growing oversupply.
Australia’s property frenzy and the fear of missing out has seen an unprecedented surge of apartment building along the east coast. It has now developed into an alarming supply overhang resulting with prices slumping.
According to the Australian Financial Review apartments in Melbourne’s Docklands, Southbank and the CBD are reselling for up to 24 per cent less than their off the plan purchase price. A WBP Property Group Survey of 1,794 of-the-plan apartment purchases in Victoria from December 2009 to August 2015 found the average resale loss was 9.4 per cent.
The decline in apartment prices as oversupply balloons has seen banks tighten lending for apartment purchases. Macquarie bank now requires a 30 per cent deposit to purchase apartments in at-risk postcodes.
Lender Firstmac also requires a 30 per cent deposit, but has excluded rental income from serviceability tests due to the sheer number of empty rental apartments. Non-resident lending has been suspended for high density apartments, something Firstmac categorises as over 6 floors.
Insolvency specialists, PPB advisory are warning apartment developers to be prudent toward settlement risk.
“They need to ask themselves some simple questions about the purchaser – can I locate them, where do they live, what is their capacity to settle, are they a cash buyer or will they be seeking finance, who is their financier?”
“A complete due diligence of their purchasers will assist developers to mitigate settlement risk in the residential developments nearing completion.”
$5 billion worth of residential developments got suspended in the week ending 27th May, according to the Australian Financial Review,
Another Australian Financial Review article suggests half of Sydney’s suburbs face a housing oversupply. (Half of Sydney suburbs face housing oversupply; buyers agent)
Despite signs of cooling (pre RBA rate cut), the OECD recommends “close vigilance on housing-market developments is still required.”
» New apartment resale prices tumbling in Melbourne – The Australian Financial Review, 27th May 2016.
» Lender Firstmac adds to squeeze on apartment borrowing – The Australian Financial Review, 27th May 2016.
» Risk and fear rise as failed apartment deals reach $5b – Australian Financial Review, 27th May 2016.
» Half of Sydney suburbs face housing oversupply; buyers agent – The Australian Financial Review, 31st May 2016.
Posted in Australian Economy | 19 Comments »
All four of Australia’s big banks have tightened lending for foreign buyers over the past months, some blaming increased regulatory requirements. Under the Basel III banking reforms, banks will face higher capital requirements on loans reliant on foreign income.
Highly elevated house prices and paltry rents in Australia means rental income is often insufficient to service the loan. Hence, banks require extra income to service the loan and obtaining this top-up income from foreign sources can pose additional risks in an increasingly challenging economic environment.
Martin North from Digital Finance Analytics adds, “In addition, if house prices were to slide, overseas investors might be more willing to cut and run, and we also know that some investors from China are finding it harder to get funds out of the country.”
A recent distressed property report from SQM Research found there are some 27,000 “distressed” properties for sale in Australia. The most concentrated area for distressed properties is the Gold Coast, Queensland, where banks are being forced to sell homes after being unable to contact the borrower.
The Commonwealth Bank of Australia (CBA) no longer provides loans to self employed applicants who use foreign income to service the loan. Temporary residents must now earn their income within Australia and be paid in Australian dollars. They can only obtain a loan with a maximum loan-value ratio (LVR) of 70 per cent, down from 80 per cent.
Westpac, including St George Bank, Bank of Melbourne and BankSA have ceased lending to non-residents, temporary visa holders and borrowers using foreign, self-employed income to service loans. It has also reduced the LVR for loans serviced with foreign income to 70 per cent, down from 80 per cent.
NAB reduced its maximum LVR from 80 per cent down to 70 per cent for foreign applicants, but continues to lend on a case by case basis.
ANZ will no longer accept loans serviced with 100 per cent foreign income and now has a maximum LVR of 70 per cent applying to these loans.
Of the big four, the ANZ has been the most transparent indicating as early last month that many foreign loans were missing critical information. Later in the month, it was reported ANZ had retracted the approval on approximately 90 loans after the parties were unable to provide supportive documentation for their sources of foreign income. It was understood at the time, some borrowers were being paid by obscure and often non-existent offshore companies. ANZ has an extensive network of retail and business banking contacts across Asia and had no record of these companies.
The truth may have finally come out yesterday, when it was disclosed ANZ and Westpac banks have approved hundreds of loans supported by fraudulent foreign income documentation.
The banks have blamed dodgy mortgage brokers for the fraud, reporting the cases to the regulators and police.
Westpac continues to say “the primary driver of our decision was the changes in capital and funding requirements.”
» ANZ, Westpac hit by hundreds of Chinese home loan frauds – The Australian Financial Review, 9th May 2016.
» ANZ Bank’s clampdown sees home loan approvals retracted – The AFR, 28th April 2016.
» Australian Lenders Are Clamping Down on Foreign Buying of Homes – Bloomberg, 27th April 2016.
» Westpac stops lending to foreign property investors – The Sydney Morning Herald, 27th April 2016.
» ANZ Banking Group cracks down on dubious offshore mortgage funding from Asia – The Australian Financial Review, 5th April 2016.
Posted in Australian Economy | 21 Comments »