The future of Australian property prices

trainspotter · 1 June 2011

Commonwealth Bank has posted another record. For the six months to the end of December 2010, cash earnings came in at $3.3 billion.
Westpac has posted a record half-year statutory profit of $3.96 billion, with underlying cash earnings up a more modest 7 per cent to $3.17 billion.
NAB half year profit increases 21.7% from previous year to 2.7 billion dollars
ANZ kicked off the big banks' interim reporting season by posting a net profit of $2.66 billion, 38 per cent better than a year earlier.

They are concerned that bank profits are coming under pressure from the rising cost of sourcing wholesale funds offshore, particularly from Europe.

James Rosenberg, a private client stockbroker with Macquarie Bank, says the whole banking sector was affected by the bailout.

The Australian banking sector may not be under threat yet, but the risks remain for homeowners.

http://www.abc.net.au/news/stories/2011/05/23/3224808.htm

NAB 10 year rate 8.18% FIXED residential home loan
ANZ 10 year rate 8.17% FIXED residential home loan
CBA 10 year rate 7.89% FIXED residential home loan
WESTPAC 10 year rate 8.31% FIXED residential home loan

Now this is not making any sense to me whatsoever. First of all they are declaring record breaking half year profits during the GFC etc then they are claiming they are going to have to increase margins due to wholesale funding cost increases and YET they have 10 year residential home loans at a mean average of 8.1375%.

Surely if the costs of wholesale funding was encroaching on profit margins for the banks in the forseeable future then WHY would the banks have such a LOW interest rate for such a long term?

Would you not as a smart investor/homeowner/whatever go and fix your rate at 8.13% for the next 10 years if the media/banks/shills are screaming that wholesale funds are going up so therefore the banks will be passing the increases onto you !!!!!!!!!!!!!

sinner · 1 June 2011

trainspotter said:
Now this is not making any sense to me whatsoever. First of all they are declaring record breaking half year profits during the GFC etc then they are claiming they are going to have to increase margins due to wholesale funding cost increases and YET they have 10 year residential home loans at a mean average of 8.1375%.

Surely if the costs of wholesale funding was encroaching on profit margins for the banks in the forseeable future then WHY would the banks have such a LOW interest rate for such a long term?

I can think of a few possibilities, the most likely of which is a combination of:

a. Banks are desperate for more suckers because they know profit margins turn from growth to contraction very quickly without a perpetual influx of buyers to keep the game going.
b. They know real rates aren't going up on a long term basis, this implies they know another downturn in the domestic or global economy is coming or in progress.
c. They know any major losses they take will be socialised, and therefore happy to take on riskier investments than they would if it was their own neck on the line.

Would you not as a smart investor/homeowner/whatever go and fix your rate at 8.13% for the next 10 years if the media/banks/shills are screaming that wholesale funds are going up so therefore the banks will be passing the increases onto you !!!!!!!!!!!!!

d. You can lead a horse to water but you can't make it drink. The pool of potential borrowers is likely tapped out and many more are now aware of the incompetence/malice of both medias/banks role in predicting/creating financial calamity. ergo, money will remain cheap until it is bid up.

sinner · 1 June 2011

KurwaJegoMac said:
Completely agree with you here Sinner. It's a big problem and you're 100% right - more and more people are needing to put in more and more effort just to maintain the same position.

If we keep heading this way we'll destroy our middle class, I certainly don't like the situation and I don't think Government throwing cash at young, naive people will fix the issue.

Just for the record, this has been my argument all along!

My participation in this discussion was never about personal investment or whatever in property I am not a permabear yet somehow seeing the imminent potential for catastrophic system failure makes me one!

If you agree so much with my statements, then you must concede these things can never continue on forever and the longer they go on the worse the resulting effect will be (and it has already gone on for quite some time). Systems always return to equilibrium one way or another, in the case of complex systems it is usually the case that they snap back in a rapid fashion which causes the system to fail.

I was always in the hopes of raising awareness that what the current financial system perpetrates leads to ruin, leads to a reduced standard of living for all of us. The accusations that followed include me being a permabear, me being too afraid to purchase property ever, me wanting property to crash so I could purchase it myself, me being an idiot, etc.

I do not and would not take heart in being correct on a property crash! The only asset I want to crash is gold, so I can buy more.

trainspotter · 1 June 2011

sinner said:
I can think of a few possibilities, the most likely of which is a combination of:

a. Banks are desperate for more suckers because they know profit margins turn from growth to contraction very quickly without a perpetual influx of buyers to keep the game going.
b. They know real rates aren't going up on a long term basis, this implies they know another downturn in the domestic or global economy is coming or in progress.
c. They know any major losses they take will be socialised, and therefore happy to take on riskier investments than they would if it was their own neck on the line.
d. You can lead a horse to water but you can't make it drink. The pool of potential borrowers is likely tapped out and many more are now aware of the incompetence/malice of both medias/banks role in predicting/creating financial calamity. ergo, money will remain cheap until it is bid up.

Thanks for the response sinner. Makes a lot of sense. Especially (b)

doctorj · 1 June 2011

Morgan Stanley produced the handy diagram below (as part of a paper on UK house prices which I can send if anyone is interested) that explains their view of how supply, demand and the availability of funding will play out in the UK. There are some differences between the UK and Australia - the UK's main wealth generating sector (finance) has already been hit for six, where as Australia's is yet to (commodities). Central Bank interest rates in the UK are virtually 0, whereas in Australia there's a lot more flexibility to cut them. Having said that though, there are some similarities - constrained supply and poor affordability.

KurwaJegoMac · 1 June 2011

sinner said:
Just for the record, this has been my argument all along!

My participation in this discussion was never about personal investment or whatever in property I am not a permabear yet somehow seeing the imminent potential for catastrophic system failure makes me one!

If you agree so much with my statements, then you must concede these things can never continue on forever and the longer they go on the worse the resulting effect will be (and it has already gone on for quite some time). Systems always return to equilibrium one way or another, in the case of complex systems it is usually the case that they snap back in a rapid fashion which causes the system to fail.

I was always in the hopes of raising awareness that what the current financial system perpetrates leads to ruin, leads to a reduced standard of living for all of us. The accusations that followed include me being a permabear, me being too afraid to purchase property ever, me wanting property to crash so I could purchase it myself, me being an idiot, etc.

I do not and would not take heart in being correct on a property crash! The only asset I want to crash is gold, so I can buy more.

I do agree with you and do concede that this cannot go on forever. I can see why it'd be difficult to raise awareness of this issue in the property thread - got some balls on you to do that here

ginar · 1 June 2011

trainspotter said:
\NAB 10 year rate 8.18% FIXED residential home loan
ANZ 10 year rate 8.17% FIXED residential home loan
CBA 10 year rate 7.89% FIXED residential home loan
WESTPAC 10 year rate 8.31% FIXED residential home loan

Now this is not making any sense to me whatsoever. First of all they are declaring record breaking half year profits during the GFC etc then they are claiming they are going to have to increase margins due to wholesale funding cost increases and YET they have 10 year residential home loans at a mean average of 8.1375%.

Surely if the costs of wholesale funding was encroaching on profit margins for the banks in the forseeable future then WHY would the banks have such a LOW interest rate for such a long term?

Would you not as a smart investor/homeowner/whatever go and fix your rate at 8.13% for the next 10 years if the media/banks/shills are screaming that wholesale funds are going up so therefore the banks will be passing the increases onto you !!!!!!!!!!!!!

historically in last 20 years a rate of 8.13% is above median variable rates , in the main banks usually get it right on fixed rates but im sure there are periods where they have it wrong , there are ways of hedging rates whilst still taking advantage of cheaper variable rates but these are beyond the abilities of the average loan takers . i wouldnt be locking in 8.13% thats for sure .

trainspotter · 1 June 2011

ginar said:
historically in last 20 years a rate of 8.13% is above median variable rates , in the main banks usually get it right on fixed rates but im sure there are periods where they have it wrong , there are ways of hedging rates whilst still taking advantage of cheaper variable rates but these are beyond the abilities of the average loan takers . i wouldnt be locking in 8.13% thats for sure .

Thanks ginar but the point I was making is that the banks are claiming WHOLESALE funds are costing them more so they will have to pass on the costs of them borrowing more to the mortgage owner. If this is the case and the banks are saying it is costing them more and more to borrow money due to European debt sovereignty etc blah blah blah then why the hell are they letting money go for 10 years at 8.13%

Another matter ..... from October 1973 (IR at 8.38%) to January 1997 (IR at 8.25%) rates did not go under this magic figure (8.13%). And up to 17% 1989-1990. Usually when the country goes into recession RATES go up. Early 90's with Keating "The recession we had to have" and early 2000 when Howard and Costello only just squeaked past a recession because the ABS rounded up the figure to ZERO %. (IR 8.05%) I also recall rates went to 9.45% in August 2008 for some strange reason ???

http://www.loansense.com.au/historical-rates.html

sinner · 1 June 2011

trainspotter said:
Another matter ..... from October 1973 (IR at 8.38%) to January 1997 (IR at 8.25%) rates did not go under this magic figure (8.13%). And up to 17% 1989-1990. Usually when the country goes into recession RATES go up. Early 90's with Keating "The recession we had to have" and early 2000 when Howard and Costello only just squeaked past a recession because the ABS rounded up the figure to ZERO %. (IR 8.05%) I also recall rates went to 9.45% in August 2008 for some strange reason ???

http://www.loansense.com.au/historical-rates.html

Difficult to use a historical perspective in this case, because 'this time it's different'.

Take a look at global bond yields from Sept 11 2001 onwards. Or instead of global bond yields, look at the correlation between global stock yields and global bond yields pre and post Sept 11 2001.

To me the changes in the normal operating structure of the global market after that event indicate Greenspan turned on the money tap, and it never got turned off. Not really.

Can note at least one obvious example of this 'new way' manifesting itself: one of the reasons the RBA isn't hiking rates 'like they used to' is because the market is doing most (not all) of their legwork and bidding up the AUD (to levels good enough to not just kill off good stuff like ecotourism and education which brings in money without high environmental cost but now is even starting to reduce our competetiveness in resource markets). How has a strong AUD come about? IMHO largely thanks to a weak USD more than anything else and the reasons for that if you ask me is the money tap.

ginar · 1 June 2011

trainspotter said:
Thanks ginar but the point I was making is that the banks are claiming WHOLESALE funds are costing them more so they will have to pass on the costs of them borrowing more to the mortgage owner. If this is the case and the banks are saying it is costing them more and more to borrow money due to European debt sovereignty etc blah blah blah then why the hell are they letting money go for 10 years at 8.13%

Another matter ..... from October 1973 (IR at 8.38%) to January 1997 (IR at 8.25%) rates did not go under this magic figure (8.13%). And up to 17% 1989-1990. Usually when the country goes into recession RATES go up. Early 90's with Keating "The recession we had to have" and early 2000 when Howard and Costello only just squeaked past a recession because the ABS rounded up the figure to ZERO %. (IR 8.05%) I also recall rates went to 9.45% in August 2008 for some strange reason ???

http://www.loansense.com.au/historical-rates.html

true enough there certainly has been some volatility in rates last couple years . maybe that 8.13% isnt that bad in the long term , cant find any aussie interest futures any more than 2 years out atm so hedging seems difficult past 2013 at this stage . i may be wrong on this , the 30day cash rate futures are only indicating one more rate rise by end of 2012 so the banks are comfortable offering this 8.13 at this stage , you are correct on your data , the high rates in 08 were likely due to credit spreads blowing right out , was pretty well what inspired the final capitulation in GFC . we do live in interesting time , my powder is dry and i already have my eyes on a couple areas where id be comfortable buying although im remaining patient , certainly no need to rush and waiting for another rate rise is my first caveat ...............

tothemax6 · 1 June 2011

trainspotter said:
Thanks ginar but the point I was making is that the banks are claiming WHOLESALE funds are costing them more so they will have to pass on the costs of them borrowing more to the mortgage owner.

I would love for somebody to tell me why this is. What do the banks mean by 'wholesale funds'? If they mean that people are not depositing enough, and they are running up against their minimum target reserve ratios, fair enough. But retail deposits do not sound 'wholesale' to me. 'Wholesale' sounds like a big loan, and since it couldn't be from other aussie banks (since they are in the same situation), it must be from abroad.

And last time I looked, the interest rates abroad were around nothing.

sinner · 1 June 2011

doctorj said:
Morgan Stanley produced the handy diagram below (as part of a paper on UK house prices which I can send if anyone is interested) that explains their view of how supply, demand and the availability of funding will play out in the UK. There are some differences between the UK and Australia - the UK's main wealth generating sector (finance) has already been hit for six, where as Australia's is yet to (commodities). Central Bank interest rates in the UK are virtually 0, whereas in Australia there's a lot more flexibility to cut them. Having said that though, there are some similarities - constrained supply and poor affordability.

Interesting that MS reckons so doctorj, afterall I am sure you have seen this composition chart of the S&P ASX 200.

I always thought our main wealth generating sector is/was the eminent ability to double the value of our homes using nothing but faux granite kitchen tops

trainspotter · 1 June 2011

sinner said:
Difficult to use a historical perspective in this case, because 'this time it's different'.

How has a strong AUD come about? IMHO largely thanks to a weak USD more than anything else and the reasons for that if you ask me is the money tap.

I concur sinner with this theory and I also think that the fact that Australia had very little Government Securities on Issue (compared to the USA that is) when the credit squeeze hit helped the situation.

sinner · 1 June 2011

tothemax6 said:
I would love for somebody to tell me why this is.

I thought I gave a pretty good answer.

What do the banks mean by 'wholesale funds'? If they mean that people are not depositing enough, and they are running up against their minimum target reserve ratios, fair enough. But retail deposits do not sound 'wholesale' to me. 'Wholesale' sounds like a big loan, and since it couldn't be from other aussie banks (since they are in the same situation), it must be from abroad.

And last time I looked, the interest rates abroad were around nothing.

The loans are from abroad. 30-60% of the total funding requirement depending on who you ask. There aren't enough retail deposits to keep mortgage origination growing because everyone is using their money to leverage up into homes or flatscreen tvs. The loans in this case come from banks in countries where the CB is running a loose money policy (borrow from your CB at 0.25% lend at 4.75% what could go wrong), or countries locking in AUD for later commodity purchases I imagine China does a lot of these.

The rates abroad are quite cheap you are right, but only if you borrow in the foreign currency. AUD daily LIBOR is 4.75% and most of the loans are done around that basis. i.e. short term, not long term.

ginar · 1 June 2011

tothemax6 said:
I would love for somebody to tell me why this is. What do the banks mean by 'wholesale funds'? If they mean that people are not depositing enough, and they are running up against their minimum target reserve ratios, fair enough. But retail deposits do not sound 'wholesale' to me. 'Wholesale' sounds like a big loan, and since it couldn't be from other aussie banks (since they are in the same situation), it must be from abroad.

And last time I looked, the interest rates abroad were around nothing.

not going to get into a longwinded debate here but world reserve bank cash rates have little to do with real rates involved in borrowing money . credit spreads , risk and exchange rates all have to be negotiated when borrowing from overseas . banks being risk adverse ( australian ) will try and hedge all of these points , that all costs and is passed on in the form of higher spread to cash rates . the RBA cash rate is 4.75% and a few years ago the variable rate was approx 2% higher than that , the risks have now blown that differential out to >3% . these risks are not diminishing so id expect little relief from banks in forseeable future , im sure my explantion is pretty basic with a lot of holes but its how i see the situation , im sure there are some here on higher pay scales than i who can explain it in finer detail with more clarity

fatmango · 1 June 2011

My crystal ball tells me Obama will move hell and high water to improve the US domestic economy as the election approaches. The US will rise, leading to a corresponding fall in the AUD. This will boost many sectors of the Australian economy, however, interest rates will not fall to where they should. We will continue to have an opposition leader who opposes everything - therefore, no great big new taxes to take the pressure off interest rates. Structural change will be stifled. Australians want change but only if they don't have to pay for it. Property prices will plateau for a few years as our national psyche of owning property will keep house prices bubbling around current levels. The quality of our housing will suffer in order to keep the quantity up.

doctorj · 2 June 2011

sinner said:
Interesting that MS reckons so doctorj, afterall I am sure you have seen this composition chart of the S&P ASX 200.

The editorialising was my own... I wonder if we were to look at it against GDP if it would look any different? I'm guessing unlisted miners (Vale? Rusal? etc) contribute more to GDP than unlisted FIs.

sinner said:
IThe loans are from abroad. 30-60% of the total funding requirement depending on who you ask. There aren't enough retail deposits to keep mortgage origination growing because everyone is using their money to leverage up into homes or flatscreen tvs. The loans in this case come from banks in countries where the CB is running a loose money policy (borrow from your CB at 0.25% lend at 4.75% what could go wrong), or countries locking in AUD for later commodity purchases I imagine China does a lot of these.

The rates abroad are quite cheap you are right, but only if you borrow in the foreign currency. AUD daily LIBOR is 4.75% and most of the loans are done around that basis. i.e. short term, not long term.

The other thing to point out is that banks ideally don't fund 30 year mortgages with retail deposits and overnight loans from the reserve bank (does the RBA lend anything longer????) otherwise they face an open liquidity gap and are running a big refinancing risk. So banks fund themselves with wholesale funding in AUD (or in Fx, with swaps to cover the open currency exposure). Ignoring the fx side at the moment, if a bank issues 10 year debt, it will pay more than it does for overnight money (google 'Yield Curve' - basically a longer loan is more risky).

Banks can of course fund themselves with USD and save themselves 300bps or so, but they run the risk of the fx rate movements or if they try to hedge, they may suddenly find the swap market disappear as was the case recently with Polish banks. It was common for Polish Banks to borrow in CHF and swap it in to PLN - very quickly they found they couldn't swap any more and they didn't have any PLN sources of long term funding.

sinner · 2 June 2011

doctorj said:
The editorialising was my own... I wonder if we were to look at it against GDP if it would look any different? I'm guessing unlisted miners (Vale? Rusal? etc) contribute more to GDP than unlisted FIs.

True, but what portion of our GDP is in the form of increasing house values? Projected tax receipts on increasing house values? etc?

The other thing to point out is that banks ideally don't fund 30 year mortgages with retail deposits and overnight loans from the reserve bank (does the RBA lend anything longer????)

I think the GFC, Treasury bank guarantee and recent disclosure (in a format obfusicated for data querying no less) by the Fed of the banks (our banks!) who took part in their shenanigans show that there is a pretty large disparity with what is 'ideally' going on and what is 'really' going on.

If one of our banks can't stay alive without an overnight loan the size of which would be enough to feed the homeless population of an entire city for a year, what is going on behind that supposedly APRA regulated curtain?! Of course we couldn't use that money to feed the homeless, fund infrastructure or directly bail out distressed mortgagees...they say that would be inflationary this money here is a different sort of money, the kind that's only good for bailing out banks.

Interesting to watch comments dismissed as conjecture and conspiracy for years turn out to be pretty close to the bone in the end.

Macros · 2 June 2011

[video=vimeo;11211712]http://vimeo.com/11211712[/video]

KurwaJegoMac · 2 June 2011

sinner said:
Interesting to watch comments dismissed as conjecture and conspiracy for years turn out to be pretty close to the bone in the end.

Isn't that always the case throughout history though? It's only until the situation gets to the point where average joes can see the effects that the 'truth' is admitted to - obviously at this stage the smart money has already left and average joe picks up the bill. When average joe starts selling then in comes the smart money to lap it all up. Rinse and repeat.

Our economies are a lot more cyclical than people realise - obviously it's hard for one to accurately time these cycles but we're always going to boom and bust, boom and bust. The best we can hope to do is to educate ourselves so that we can position ourselves to weather the bust and participate in the start of the boom.

In terms of property I see us at or near the peak of its' cycle, as has been pointed out by many here we're at a stage where prices are putting pressure on capacity to repay. The number of arrears and defaults are still low and we have interest rates that can drop to boost things up again (can't understimate the naivety of people rushing in to make a purchase on seemingly 'bargain' interest rates) so when we hit a downturn (which we will) I struggle to see the crash that many are hoping for.

That's one other thing I want to point out - people tend to be looking past the facts and focusing on the US crash and hoping that it would be replicated here. Why? They look at the US and go 'house prices fell 40%, i'd be clever and buy up if that happened here.' so people are hanging onto that desire. If we start hitting high unemployment with record low interest rates like the US then i'd be worried. But for now I just really don't see it happening.

Just to be clear: I do believe we will be in for lacklustre performance in the short term - whether that be from very low growth, stagnation or 'softening of prices' (haha gotta love the media).But I have yet to be convinced we're headed for a crash (or a boom for that matter).

Would obviously welcome anybody with a different opinion - I may be suffering from confirmation bias

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