The future of Australian property prices

[Dowdy]

some of you have some really funny ideas about housing......

all the jobs that would be lost if we simply lived in a hut or a cave....
the companies who make the building materials, who employ hundreds of thousands of workers....all those jobs gone

the builders employ similar numbers

the manufacturers of all the things that furnish a house...there goes China

the maintenance people....who keep the house in good order, or refurbishment, including the gardeners,cleaners, landscapers etc

you would probably lose half the workforce....if we lived in a cave
I have not mentioned all the other related industries....ie; financial including the banks, the estate agents etc

and all those jobs that rely on the housing industry to support them....if they were not there, you would not have a thriving metropolis...actually life as you know here in OZ....

it would be like the poor in India, China ,Africa and all those other god forsaken countries..

Your going a bit extreme there but there's several thing wrong with that.

If home are built for the SAKE of building then you're simply destroying one industry to appease another but what's happening here is the opposite.

Home need to be built while the government and major developers are not using the land so the opposite happens. Companies want to build but since the land isn't released it creates imbalances. It inflates the price due to supply and demand and people aren't working to their full productive capacity.

So in turn people are being left out of jobs that would otherwise be there if homes were available for them, like the people you mentioned gardeners, cleaners, landscapers etc

The government probably doesn't release based on the assumption that there is a certain amount of work people can do but in reality there is no limit to what can be done and hence the imbalances.

 

[professor_frink]

The party is over. The music has stopped. Looking at clearance rates though it would appear that some fools are still dancing.

http://www.ibtimes.com.au/services/pop_print.htm?id=119945&tb=bh

What about the other banks and non bank lenders? Are they all joining westpac in declaring the RBA irrelevant?

 

[kincella]

apparently you missed the following.....and you also missed the news last month...Westpac does not want fhb loans on their books, hence the reason they lowered the lvr and raised rates above the rba hike...

Kelly was with St George before she joined WBC....St George had failed miserably as a home lender, under her watch....history repeating itself for Kelly...
and this extract from that article.............

But, in a private briefing to big shareholders, Mrs Kelly suggested that the prospect of a political backlash from Canberra could make it difficult to hit home loan and business customers in a federal election year.

 

[UBIQUITOUS]

What about the other banks and non bank lenders? Are they all joining westpac in declaring the RBA irrelevant?

Whether they all declare it or not, all of the banks are subject to the same high wholesale funding rates. I have more respect for Westpac (as much as I can have for a bank) than I do for the others who are being covert with their views in an attempt to capture market share.

 

[UBIQUITOUS]

But, in a private briefing to big shareholders, Mrs Kelly suggested that the prospect of a political backlash from Canberra could make it difficult to hit home loan and business customers in a federal election year.

Quite right. If we weren't coming upto and election years, rates (both RBA and Bank rates) would be much higher. Does anybody have any analysis on how RE has performed in the run up to elections?

 

[professor_frink]

Whether they all declare it or not, all of the banks are subject to the same high wholesale funding rates. I have more respect for Westpac (as much as I can have for a bank) than I do for the others who are being covert with their views in an attempt to capture market share.

Did the rest of the big 4 join westpac after they raised over and above the RBA in December last year? I haven't been paying too much attention so may have missed it if they did.

Here's some recent news that seems to contradict that a bit FWIW

http://news.smh.com.au/breaking-new...s-on-entry-level-mortgages-20100321-qnvl.html

A stronger securitisation market has enabled AMP Bank Ltd to lower interest rates on its entry level home loan products after hiking mortgage rates earlier this month.

AMP Bank dropped the interest rate on its basic variable home loan by 22 basis points to 6.27 per cent, and cut the rate on its introductory variable mortgage by 45 basis points to 5.94 per cent.

 

[enigmatic]

Dropping interest rates is a sure sign of trying to increase market share..
They will soon increase them back once they have captured the suckers

I think a few people are missing the point aswell
on a $300,000 loan weekly interest was assuming 4.75% interest rate introductory rate was $274 interest only which was very cheap compared to rent $350-400
now that they are no longer on the introductory rate and on 6.27% as of AMP not using the high Westpac there paying $361 just to cover the interest repayments.
looks like those who just came of renting as houses were cheaper are no longer finding it cheaper..

 

[drsmith]

AMP is currently offering 5.75% for cash and the comparison rate for their base variable rate home loan (6.27%) is 6.29%.

That strikes me as a rather slender margin.

 

[Tysonboss1]

AMP is currently offering 5.75% for cash and the comparison rate for their base variable rate home loan (6.27%) is 6.29%.

That strikes me as a rather slender margin.

that would be the minimum margin, You have to also think that they are making much higher margins on other products.

Also if they have a deposit of $1000(real money) that they pay 5.75% on, it may allow them to lend out over $5000(bank credit/fictional money) at 6.29%.

 

[drsmith]

that would be the minimum margin, You have to also think that they are making much higher margins on other products.

That's true although one would think that serious depositors would be chasing the higher rates.

Also if they have a deposit of $1000(real money) that they pay 5.75% on, it may allow them to lend out over $5000(bank credit/fictional money) at 6.29%.

How though does that affect the interest margin ?

A simplistic bank balance sheet is made up of assets (mostly loans and the remainder being shareholder's equity) minus liabilities (deposits).

 

[Tysonboss1]

That's true although one would think that serious depositors would be chasing the higher rates.

In regards to the other products I mean loan products, For example only a portion of the total loan book is written out as low interest variable loans at 6.27%, There would be many other business loans @ 10%, margin loans @ 8%, personal loans @ 12%, credit cards @ 13%-18% etc, etc.

 

[Tysonboss1]

That's true although one would think that serious depositors would be chasing the higher rates.


How though does that affect the interest margin ?

Because it not like a depositor banks $1000 @ 5.75% and the bank then lends that depostors $1000 @ 6.29% making a small gross profit of $5 from a 0.5% margin.

The bank takes the depositors $1000(real cash) @ 5.75%, they then lend out up to $9000(bank credit) at a mimimum of 6.29% making a gross profit of over $500, this profit is made even bigger if they can lend it out via higher interest products such as personal loans or credit cards.

 

[drsmith]

The following comments (Dec 2009) on bank funding by the Deputy Governer of the Reserve Bank make for interesting reading.

http://www.rba.gov.au/speeches/2009/sp-dg-161209.html

Net interest margins have increased in the past 12 months as loan rates overall have outstripped deposit rates however I note the following comment in relation to the cost of deposits (graph 3)

The increased competition by banks for deposits has added substantially to their cost of funds. It used to be the case that on average banks paid about 125 basis points less than the cash rate on deposits. Now they are paying interest rates that are on average in line with the cash rate (Graph 3).

With online at call accounts offering close to 200 basis points higher than the cash rate it will be interesting to see how this graph trends through this year (or how the interest rate premium on the online accounts change).

I also found this comment on net interest margin (graph 5) interesting.

Between 2000 and 2007, the net interest margin on the major banks’ Australian operations had narrowed by about 100 basis points (Graph 5). This was driven by competition, and was made possible by sizeable reductions in banks’ operating costs over that period, which allowed banks to continue operating profitably despite falling margins.

No mention of increased household debt (lower interest margins but on bigger debt pie).:dunno:

Perhaps Wespac feels that in the longer term household debt cannot continue to increase in relation income and in fact may decrease resulting in a situation where interest margins have to increase to maintain reasonable profit growth.

 

[MR.]

Because it not like a depositor banks $1000 @ 5.75% and the bank then lends that depostors $1000 @ 6.29% making a small gross profit of $5 from a 0.5% margin.

The bank takes the depositors $1000(real cash) @ 5.75%, they then lend out up to $9000(bank credit) at a mimimum of 6.29% making a gross profit of over $500, this profit is made even bigger if they can lend it out via higher interest products such as personal loans or credit cards.

Tyson, do you have any further information on the above? Although I see where you are coming from, can this be right? If it is deposit rates can go alot higher than loan rates!

Perhaps Wespac feels that in the longer term household debt cannot continue to increase in relation income and in fact may decrease resulting in a situation where interest margins have to increase to maintain reasonable profit growth.

I recall Gail speaking about this about a year ago. She at the time appeared very cautious on the outlook.

 

[drsmith]

Tyson, do you have any further information on the above? Although I see where you are coming from, can this be right? If it is deposit rates can go alot higher than loan rates!

Not in relation to interest margins as they are relative to total assets and liabilities, not just depositors funds.

 

[MR.]

some snippets to ponder... (for the higher interest rates brigade)
extracts only...you really should read the whole article
ps...the asterisks are mine

Interest rates rose three times in the year before, yet prices in three cities -- Brisbane, Adelaide and Melbourne -- rose more than 20 per cent.
So, despite the fear and rhetoric, evidence that property prices automatically fall when interest rates move up is hard to find. http://www.theaustralian.com.au/bus...rates-not-so-bad/story-e6frg9gx-1225842032129

Lets have a closer look at that article. (Added the red)

Higher Interest Rates Not So Bad

Looking at the track record, the answer is not as clear as you might expect. It's true that residential property prices stopped growing during the last interest rate peak, (April 08 to August 08) but a worldwide financial calamity also peaked during the 2008 spring market (Sept - Nov 08), when 40 per cent of Australia's property transactions (usually) take place. (So if the GFC didn't happen properties were going up in those months? OK... ) Interest rates rose three times in the year before, (so that makes it 2007 when they appear to have risen twice not three times) yet prices in three cities -- Brisbane, Adelaide and Melbourne -- rose more than 20 per cent.

The market went 10 months in 2007 with one interest rate rise in the 8th month.

The author’s a bit of a try hard!
Mind you 4 rises in a row followed in Jan, Feb, March and April 08. I bet that slowed things down for the RBA .... But no, it was the financial calamity thingy! That made the poor yearly return. That’s right.

Not in relation to interest margins as they are relative to total assets and liabilities, not just depositors funds.

Ok not "interest margin" as that is relative to the amount of their assets.

 

[UBIQUITOUS]

It looks like the time is nigh. I wouldn't want to be in the position of a recent FHB


http://www.smh.com.au/business/bubble-risk-rates-set-to-rise-rba-says-20100325-qxo8.html?autostart=1

Bubble risk: Rates set to rise, RBA says
March 25, 2010 - 10:32AM
Comments 76
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Interest rates are set to continue rising towards more normal levels and waiting for the global outlook to become clearer runs the risk of moving too late to contain inflation, a top central banker said today.

Reserve Bank of Australia assistant governor Philip Lowe remained upbeat on the outlook for Australia, citing a significant rise in the terms of trade expected this year. This was one reason the central bank expected the Australian dollar would be higher than the average of the past decade.

But he also issued the clearest warning yet against a speculative bubble in home prices, saying the recent price rises risked turning into a speculative bubble that would be "unhelpful".

The property bubble: it's here already

Rising home prices have been one reason the central bank has hiked interest rates four times since October, a far more aggressive unwinding of stimulus than any other country.

The Australian dollar duly rallied after his hawkish speech while bill futures slid as investors revised up the chance of a rise in the 4.0 per cent cash rate as early as next month.

His confidence helped the Australian dollar pare early losses and rise a quarter of a US cent to $US0.9110. It had slipped overnight when a Fitch downgrade of Portugal stirred fesh worries of debt contagion in the euro zone.

"The RBA remains very upbeat and that means a rate hike in April is more likely than not," said Rory Robertson, interest rates strategist at Macquarie.

The central bank has already lifted rates by a full percentage point in six months and the market was now implying a 57 per cent probability of a move to 4.25 percent at the next policy meeting on April 6, up from below 50 per cent before the speech.

That was a marked swing from a 25 percent probability early this month and came despite escalating concerns about sovereign debt in the euro zone which had tempered the global appetite for risk.

Some analysts had thought the angst over debt abroad might deter the RBA from moving at home, but Mr Lowe seemed to think otherwise.

"The alternative of waiting to see how the myriad of risks evolves before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings," Mr Lowe said.

He alsso pointed to a number of challenges globally, including the need for some indebted countries to tighten their belts, the need for Asian countries to promote domestic demand and the likelihood that higher interest rates in Asia would suck in capital putting upward pressure on asset prices and currencies.

All these posed risks to the RBA's positive outlook for Australia but that had not stopped it lifting rates.

"The alternative of waiting to see how the myriad of risks evolves before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings," Mr Lowe said in a speech to an industry conference.

Mr Lowe noted recent domestic data had been firm, with employment growth robust, business and consumer confidence above average, the housing market strong and signs that businesses were borrowing again.

"Collectively, these outcomes provide us with some confidence that the economy is now in a reasonably solid upswing," he said.

Sharp increase in prices for coal and iron ore, Australia's two biggest export earners, would deliver a significant rise in the country's terms of trade.

This was a boon to business investment, the government's budget position, asset values, overall confidence in the economy and the growth of domestic incomes.

Mr Lowe noted the housing market had been very buoyant with auction clearance rates high and measures of home prices rising by around 1 per cent a month. There were a few signs the market might be cooling, and a pick-up in home construction would help somewhat. Banks were also tending to tighten lending standards rather than loosen them.

"This is good news, as it would obviously be unhelpful if a speculative cycle were to emerge on the back of the recent strength in housing prices," Mr Lowe cautioned. "This is an area that lenders and current and prospective home owners will need to watch carefully over the months ahead."

Mr Lowe said underlying inflation still looked like slowing to around 2.5 per cent this year, from 3.2 per cent last quarter.

"In addition, the Reserve Bank's liaison with retailers suggests that there has been significant discounting recently, and business surveys point to below average price increases."

Expanding the supply side of the economy and easing bottlenecks would help keep inflation anchored, he added.

"In addition, as the Bank has noted a number of times, with the economy having relatively limited spare capacity, it is likely that interest rates will need to continue their gradual move towards more normal levels," said Mr Lowe.

 

[MR.]

The bank takes the depositors $1000(real cash) @ 5.75%, they then lend out up to $9000(bank credit) at a mimimum of 6.29% making a gross profit of over $500, this profit is made even bigger if they can lend it out via higher interest products such as personal loans or credit cards.

Tyson, do you have any further information on the above?

No answer? Why?

It now appears funny to me, your assumed smart remark on the following thread (post 6) https://www.aussiestockforums.com/forums/showthread.php?t=15145&highlight=WHO+OWNS+THE+MONEY

Why do I watch conspiracy videos, Gullible? I’m certainly not alone.

Who cares about Fractional Reserve Banking it is just the percentage of “cash” held by the banks basically for withdrawal at anytime. The RBA can fully print all the money if you like but what is the point in that? Almost all that money will just sit in vaults. The current reserve system would have to be abolished and all banks would have to have the paper cash on hand to equal loans. Nothing has really changed.

That $1000- which turned into $9000- by magic or whatever has “already” happened. So there are depositors and the like for every loan. In fact it is more like that $10,000- was already on the books or “in existence” and so the RBA made a percentage of that available for cash withdrawals like $1000-.

Wonder why we get confused!

Simple stuff really.
I laugh at myself for filling my head with crap!

http://www.theaustralian.com.au/bus...e-for-a-spanking/story-e6frg9io-1225844478939

There are about $1.6 trillion in bank loans outstanding in Australia, growing at about 8 per cent a year, and $960 billion in deposits, growing at 5 per cent.

That funding gap must be closed in the wholesale market, and Westpac is the sixth-biggest borrower in the global wholesale market.

 

[drsmith]

Rates won't go up much more in the short to medium term as loan interest costs relative to household income is still high.

The RBA also considers rates to be in the lower end of normal range as of Dec 2009 and we have allready had a rise of 0.25% since.

http://www.rba.gov.au/speeches/2009/sp-dg-161209.html

What Does This Mean for Monetary Policy?

Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.

Another 0.5% over the remainder of 2010 would be my guess. The tightrope remains very skinny.

 

[satanoperca]

Rates won't go up much more in the short to medium term as loan interest costs relative to household income is still high.

The ASX 30 Day Interbank Cash Rate Futures is steadily climbing to the side of another interest rate rise in April. 55%

I do agree that interest rates do not need to go up much to start to effect our overly indebted RE market.

I can hear the distant screams of those overly indebted already, complaining that it will break them and destroy the economy.

Locking up so much capital in a relatively non productive asset will destroy the economy. Paying ridiculous amounts in interest payments to the banks does not benefit anyone else but the govnut protect banks. Less money to the banks means more money spent on creating business, eating out, spending on luxury items, holidays etc etc all that benefit a wider spectrum of the community.

As per a previous link, the banks have no become money casinos.

FHB are at the coal face this year seeing mortgage repayments going up >30% in a single year.

I have watched like for like properties in my area go from $700K to $900 in a little over 1.5years. These same properties have also gone from 5% gross rental returns to around 3% while vacancy rates continue to increase.

Cheers and have a pleasant evening

6 days & counting