The future of Australian property prices

trainspotter · 27 November 2013

sydboy007 said:
My understanding is pretty much the gang of 4 + the regionals are all glorified building societies with over 60% of loans for residential mortgages.

Got any proof? Are you saying that the big 4 banks have 60% market share or are you saying thier lending books consist of 60% of residential home loans?

Meanwhile back in reality:-

The financial regulator says it is "working assertively" with banks to make sure they do not slash their home lending standards to chase more business.

The Australian Prudential Regulation Authority's chairman John Laker has told an economics lecture that banks need to remember the lessons of the US housing meltdown.

He says bank directors have assured him that lending standards are being maintained and APRA audits have not found any major problems, despite some major banks now advertising 5 per cent deposit home loans.

"We are pathologically worried about poor credit standards if they became pervasive," he said.

http://www.abc.net.au/news/2013-11-27/apra-working-with-banks-on-lending/5119022

1) RBA lowers interest rates AGAIN
2) Unemployment rising
3) FIRB relaxation of policy (read Asian purchasing)
4) ???? ... anybody care to comment?

Number 4 ladeeez and generalmen ....

4) Lending standards (is the answer)

With economists predicting a rate REDUCTION in 2014 then the market is CERTAINLY showing signs of heading South. WHY ? Because the more banks lend at low rates and 95% LVR the more likely a default or mortgage in possession will result. What happens to prices then? A FIRE SALE results which then sends confidence tumbling as well as resulting in the banks tightening their lending ..... blah blah blah .... bored yet?

trainspotter · 29 November 2013

HSBC chief economist Paul Bloxham said a lower exchange rate will also help the domestic economy and save the RBA from cutting its rate again.
In the past six weeks the Australian dollar has steadily fallen, losing six US cents since October 25 to its current level just below 91 US cents.
"RBA governor Glenn Stevens has suggested that it is his judgement that the Australian dollar is currently above levels that we would expect to see in the medium term," Mr Bloxham said.
"Our own view is still that the Australian dollar will be around 90 US cents at year end and will fall modestly through 2014 to 86 US cents."
As new mining and resource projects come into production, mineral exports and housing will be the main drivers for the Australian economy in 2014, he said.
"We expect the housing boom to continue as low interest rates continue to provide support," Mr Bloxham said.

http://www.thebull.com.au/articles/a/42478-cash-rate-cutting-cycle-coming-to-an-end.html

Rates rising will also depend on US fiscal policy and if they decelerate the quantitative easing measures taking pressure off the Aussie dollar. IMO ... DYOR

#10912 posted 5th November

Hmmmmmmm ... what would I know ... Just need that pesky dollar to get under 90 cents and we are away again !

#10940 posted 11th November

Mr Bloxham must be reading this thread?

satanoperca · 29 November 2013

trainspotter said:
http://www.thebull.com.au/articles/a/42478-cash-rate-cutting-cycle-coming-to-an-end.html

#10912 posted 5th November

#10940 posted 11th November

Mr Bloxham must be reading this thread?

So, in your opinion what is the future of Australian property prices in 1 year, 3 years and 7 years, given your analysis of the above facts?

Cheers

sydboy007 · 29 November 2013

trainspotter said:
Got any proof? Are you saying that the big 4 banks have 60% market share or are you saying thier lending books consist of 60% of residential home loans?

--------------------

Current outstanding mortgages in Australia ~ $1.3 trillion

------------------

http://www.macrobusiness.com.au/2013/11/imf-pushed-apra-conservatism/

The IMF believes the dominance of the Commonwealth Bank of Australia, Westpac Banking Corp, ANZ Banking Group and National Australia Bank (NAB), which hold 80 per cent of banking assets and 88 per cent of residential mortgages, creates risks for the economy. “Significant and protracted difficulties in any one of them would have severe repercussions for the entire financial system and, in turn, the real economy,” the IMF’s review said last November.

------------------

http://www.macrobusiness.com.au/2013/07/australias-huge-property-market-gets-bigger/

graph from this article.

yes I'm in the real world

sydboy007 · 29 November 2013

trainspotter said:
Got any proof? Are you saying that the big 4 banks have 60% market share or are you saying thier lending books consist of 60% of residential home loans?

Meanwhile back in reality:-

further reality check

http://blog.rpdata.com/2013/04/outs...redit-unions-is-growing-at-record-low-levels/

Every month the Australian Prudential Regulation Authority (APRA) publishes monthly banking statistics which include amongst other things the total value of outstanding loans on the books of Australian banks for owner occupied housing and investment housing. This information is published individually for every bank operating in Australia.

As at February 2013, domestic banks had a total of $1.147 trillion in mortgages on their books; at the same time rpdata estimates that the total value of all housing in Australia was around $4.85 trillion. Over the month, 66.9% of all outstanding mortgage debt was for owner occupier homes compared to 33.1% for investment homes. Outstanding loans mortgage debt accounted for 63.1% of all outstanding loans of domestic banks.

As mentioned, the total amount of outstanding mortgage debt to banks as at February 2013 was $1.147 trillion, to all ADI’s it was $1.2 trillion. The data shows that banks are overwhelmingly the most popular institutions for mortgages in Australia, accounting for 95.8% of all outstanding mortgages. Of course the banking sector in Australia is dominated by four major players; ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac. These four major banks, excluding CBA’s subsidiary BankWest but including Westpac’s subsidiary St George, hold 85.1% of all outstanding mortgage debt by banks operating in Australia and 81.5% of all outstanding mortgage loans to domestic ADI’s. These figures indicate that more than four out of every five mortgages in Australia are to either ANZ, CBA, NAB or Westpac.

Pretty scary figures. Any decent housing correction means at least 1 of the major banks is likely to require more help than the Government can provide.

trainspotter · 30 November 2013

Soooo the big 4 banks post a 27 billion dollar profit and their default rate is the lowest in the world and you are claiming a reality check? Just LOL at this syd. What catatrophic event can you predict will cause this to change?

sydboy007 · 30 November 2013

trainspotter said:
Soooo the big 4 banks post a 27 billion dollar profit and their default rate is the lowest in the world and you are claiming a reality check? Just LOL at this syd. What catatrophic event can you predict will cause this to change?

Income shock due to mining boom fall and mining CAPEX cliff - looking at a headwind of around 2% of GDP each year till end of FY 14/15.

Current real wages growth is practically 0 economy wide, and for much of the bottom 50% is negative. Real GDP per capita has been stagnant for over a year now.

If Abbott and Treasure Ponzi Joe actually do try to get the budget back to surplus that will also be another 1-2% cut to GDP as well.

Then we have China seemingly getting serious about rebalancing it's economy, which will be a short to medium term negative for Australia.

Spanish banks looked safe and sound before they crashed, Irish banks too. The Spanish Govt was even running a decent budget surplus at the time.

http://www.macrobusiness.com.au/2013/08/banks-long-term-safety-questioned/

Only 4.8 per cent of the $2.83 trillion in total assets of Westpac, CBA, National Australia Bank and ANZ is shareholders’ equity, according to Macquarie Bank, up from 4.1 per cent before the global financial crisis. The rest is debt.

...given the amount of capital held against total credit exposures ranges from only 2.7% (Westpac) to 4.3% (NAB), with capital held against mortgages at around half that level.

I dun't know about you, but a 20 times "gearing" seems pretty scary to me. Add in the low risk weighting given to resi mortgages (say up to 40 times gearing) and it doesn't take too much of a market downturn to cause the banks some major headaches. Our banks are just glorified building societies.

I just hope I'm ready for semi retirement and sell before the inevitable mean reversion kicks in and property prices fall back to be in line with their rental yield.

ps. more than likely the "catastrophic event" is as likely to come out of left field as it is to be predictable. Maybe another major terrorist attack, or a fighter pilot gets a little gung ho over some bird droppings encrusted islands in the south china sea and starts a small war. World growth has been on the decline over the last 3 years. Wont take much more of a downgrade before that starts to slow our rate of growth further and increase the rate of unemployment faster.

McLovin · 30 November 2013

sydboy007 said:
Spanish banks looked safe and sound before they crashed, Irish banks too. The Spanish Govt was even running a decent budget surplus at the time.

Hmmm...I'm not sure about that. At their peak, loans to developers were something crazy like 30% of all Spanish bank assets. I imagine a similar situation existed in Ireland given they were building more houses in Ireland than in all of the UK. Has there ever been a banking crisis in a period of weak credit growth?

sydboy007 said:
Only 4.8 per cent of the $2.83 trillion in total assets of Westpac, CBA, National Australia Bank and ANZ is shareholders’ equity, according to Macquarie Bank, up from 4.1 per cent before the global financial crisis. The rest is debt.

...given the amount of capital held against total credit exposures ranges from only 2.7% (Westpac) to 4.3% (NAB), with capital held against mortgages at around half that level.

I dun't know about you, but a 20 times "gearing" seems pretty scary to me. Add in the low risk weighting given to resi mortgages (say up to 40 times gearing) and it doesn't take too much of a market downturn to cause the banks some major headaches. Our banks are just glorified building societies.

Well that's the nature of banking, and why it is (in this country at least) heavily regulated.

ROE · 2 December 2013

The Dutch lost their Triple AAA over the weekend due to housing down turn.... Interesting read

http://www.bbc.co.uk/news/business-23681604

trainspotter · 2 December 2013

Perth's median house prices have reached their highest level yet as the housing market comes out of a slump in turnover.
Data from the Real Estate Institute of Western Australia showed that sales turnover lifted during both October and November, pushing Perth's median house price to a new record.
Sales have returned to normal levels and Perth's median house price climbed to somewhere between $530,000 and $535,000 in the three months to November.

Read more: http://www.watoday.com.au/wa-news/p...een-so-high-20131202-2yks8.html#ixzz2mHC766PA

Just like shares - CERTAIN areas do well in a given timeframe. Note the 10km radius CBD property leading the charge. Inner city living is the new black in WA due to congestion on the road and rail links.

It would appear that RE is gathering too much speed too quickly IMO, not good for the economy. See picture below for the reasoning:

sydboy007 · 2 December 2013

trainspotter said:
It would appear that RE is gathering too much speed too quickly IMO, not good for the economy. See picture below for the reasoning:

Um, I've yet to hear the RBA, or any central bank for that matter, say they want to "lean against the wind" to try and minimise the rise of asset prices.

As for inflation in the economy, with more of us worried about job loses, I doubt wage inflation is going to be an issue, but imported inflation might be should the business community get their Christmas wish of an AUD worth circa 0.8 USD.

Nothing over the next 12-18 months look like providing the income boost needed to keep the property gravy train running, but the high LVR loans becoming more popular might give the bubble a little more pumping.

trainspotter · 2 December 2013

sydboy007 said:
Um, I've yet to hear the RBA, or any central bank for that matter, say they want to "lean against the wind" to try and minimise the rise of asset prices.

As for inflation in the economy, with more of us worried about job loses, I doubt wage inflation is going to be an issue, but imported inflation might be should the business community get their Christmas wish of an AUD worth circa 0.8 USD.

Nothing over the next 12-18 months look like providing the income boost needed to keep the property gravy train running, but the high LVR loans becoming more popular might give the bubble a little more pumping.

Ummmmmmm you might want to do a bit more homework syd,

6.4 Asset prices

Interest rate changes can affect asset values, which in turn affect people's wealth and therefore their spending decisions. There are several classes of assets through which this type of mechanism might be thought to work: houses, property investments, shares or other financial investments. In theory, higher interest rates can be expected to reduce many asset values relative to what they would otherwise be, because they increase the opportunity cost of holding those assets. A fall in asset prices, in turn, could be expected to dampen spending by reducing wealth, and also by reducing borrowing capacity to the extent that the assets concerned could have been used as collateral for loans.

http://www.rba.gov.au/education/monetary-policy.html

Ummmmmm low interest rates are driving the property market at the moment syd. Which in turns increases asset price, which in turn affects inflation which in turn the RBA will yank the only lever they have. Which is? They are also trying to drive the AUD down ....... oh why do I bother?

sydboy007 · 2 December 2013

trainspotter said:
Ummmmmmm you might want to do a bit more homework syd,

http://www.rba.gov.au/education/monetary-policy.html

Point me to an RBA publication that shows they support leaning against the wind in terms of asset price inflation?

Heck, the RBA can't even get it's head around using macroprudential tools to stem the rise in house prices while allowing lower interest rates. The RBNZ has achieved it.

http://www.macrobusiness.com.au/2013/11/ubs-banks-are-waiving-servicing-criteria-not-lvr/

Interest Only hit 40%; Loan “Outside serviceability” continues to rise
Interest Only loans continued to rise in the September quarter hitting 40% of Major bank mortgage approvals. While many of these loans are for investment property (maximising negative gearing) they appear increasingly popular with owner occupied borrowers.

We also note that approvals “outside serviceability” (i.e. fail the interest rate sensitivity/affordability tests, but have been approved anyway) have grown 36% vs pcp and now represent ~3.3% of all mortgage approvals.

Approvals >80% LVR stabilise at 34%, Investment Property hit 35%
High LVR loans remain relatively elevated at 34% of approvals, but are down on the 37% peak seen during the First Home Buyer Grant period of FY09. Investment property (buy-to-let) continued at record levels of 35% of approvals in September.

trainspotter · 3 December 2013

satanoperca said:
So, in your opinion what is the future of Australian property prices in 1 year, 3 years and 7 years, given your analysis of the above facts?

Cheers

1 year = 8 - 11% increase over 8 capital cities. Isolated growth pockets of 40% in CERTAIN areas. CERTAIN rural areas to remain stagnant with coastal larger population towns to show vigorous signs of infrastructure growth = capital gains.

3 year = Peak or near peak of cycle. Too many investors and mummy and daddy wannabes overheating the market. No sign of a FHB ANYWHERE.

7 year = After a 4 year period of stagflation and redonkolous pricing structures (some property is selling very high and in the same street, similar property is selling very low = reason: mortgage stress) we will find ourselves in a very similar position to where we were in March 2011. At the beginning of another cycle.

NONE OF THIS IS ADVICE AND IS MY OPINION ONLY. DO NOT CONSTRUE THIS AS ANY FORM OF INFORMATION THAT CAN BE RELIED ON TO MAKE A FINANCIAL DECISION.

trainspotter · 3 December 2013

sydboy007 said:
Point me to an RBA publication that shows they support leaning against the wind in terms of asset price inflation?

Heck, the RBA can't even get it's head around using macroprudential tools to stem the rise in house prices while allowing lower interest rates. The RBNZ has achieved it.

http://www.macrobusiness.com.au/2013/11/ubs-banks-are-waiving-servicing-criteria-not-lvr/

Interest Only hit 40%; Loan “Outside serviceability” continues to rise
Interest Only loans continued to rise in the September quarter hitting 40% of Major bank mortgage approvals. While many of these loans are for investment property (maximising negative gearing) they appear increasingly popular with owner occupied borrowers.

We also note that approvals “outside serviceability” (i.e. fail the interest rate sensitivity/affordability tests, but have been approved anyway) have grown 36% vs pcp and now represent ~3.3% of all mortgage approvals.

Approvals >80% LVR stabilise at 34%, Investment Property hit 35%
High LVR loans remain relatively elevated at 34% of approvals, but are down on the 37% peak seen during the First Home Buyer Grant period of FY09. Investment property (buy-to-let) continued at record levels of 35% of approvals in September.

_________________________________________________

As at 30 September 2013, the total assets of ADIs were $3.80 trillion, an increase of $191.6 billion (5.3 per cent) over the year. The total capital base of ADIs was $195.5 billion at 30 September 2013 and risk-weighted assets were $1.61 trillion at that date. The capital adequacy ratio for all ADIs was 12.1 per cent.

Impaired assets and past due items were $36.4 billion, a decrease of $4.9 billion (11.8 per cent) over the year. Total provisions were $22.7 billion, a decrease of $5.1 billion (18.4 per cent) over the year.

ADIs’ total domestic housing loans were $1.15 trillion, an increase of $80.4 billion (7.5 per cent) over the year. There were 4.88 million housing loans outstanding with an average balance of $231,000.

http://www.apra.gov.au/adi/Publicat...y ADI Property Exposures - September 2013.pdf

Might want to go to the source and do some research syd, note how he has cherry picked the data? Have a look on page 21 and show me where the "Outside Serviceability" loans have risen? OK technically they have risen BUT in line with the VOLUME of TOTAL loans written. As a percentage it has actually DECREASED !

As for the RBA ... have you been living under a rock or in a cave? The interest rate lever has ALWAYS been used to speed up or slow down the economy in Australia.

Oh yeah ... average loan = $231,000, average house value = $534,000 ... 43% LVR is not that bad !!

sydboy007 · 4 December 2013

trainspotter said:
_________________________________________________

http://www.apra.gov.au/adi/Publicat...y ADI Property Exposures - September 2013.pdf

Might want to go to the source and do some research syd, note how he has cherry picked the data? Have a look on page 21 and show me where the "Outside Serviceability" loans have risen? OK technically they have risen BUT in line with the VOLUME of TOTAL loans written. As a percentage it has actually DECREASED !

As for the RBA ... have you been living under a rock or in a cave? The interest rate lever has ALWAYS been used to speed up or slow down the economy in Australia.

Oh yeah ... average loan = $231,000, average house value = $534,000 ... 43% LVR is not that bad !!

Averages hide the problems.

Western Sydney just before the GFC was a prime example of what goes wrong when lending standards fall and people have too much debt for their own good.

The increase in 90%+ LVR loans is not a good thing.

The RBA uses interest rates against goods and services inflation. I've yet to see them target asset price inflation. They talk about it, but don't seem to quite know what to do about it. Restricting high LVR loans would be a good start, as well as setting loan to income serviceability levels.

Can't see it happening since both the RBA and Govt are looking for housing to somehow save the economy. More non productive housing, more debt, less ability to service the debt.

trainspotter · 4 December 2013

sydboy007 said:
Averages hide the problems.

Western Sydney just before the GFC was a prime example of what goes wrong when lending standards fall and people have too much debt for their own good.

The increase in 90%+ LVR loans is not a good thing.

The RBA uses interest rates against goods and services inflation. I've yet to see them target asset price inflation. They talk about it, but don't seem to quite know what to do about it. Restricting high LVR loans would be a good start, as well as setting loan to income serviceability levels.

Can't see it happening since both the RBA and Govt are looking for housing to somehow save the economy. More non productive housing, more debt, less ability to service the debt.

There will always be an average. There will always be a top end as well as bottom end of the market.

Not just Western Sydney syd, Ipswich had severe mortgage stress as well. Just like Sydney the population is younger than the rest of the demographic as well as ethnicity percentile is higher.
You figure it out !!

I agree with the 90%+ LVR statement which is why I wrote this several posts ago:

4) Lending standards (is the answer)

With economists predicting a rate REDUCTION in 2014 then the market is CERTAINLY showing signs of heading South. WHY ? Because the more banks lend at low rates and 95% LVR the more likely a default or mortgage in possession will result. What happens to prices then? A FIRE SALE results which then sends confidence tumbling as well as resulting in the banks tightening their lending ..... blah blah blah .... bored yet?

The RBA does not have the power to regulate the banks lending standards inclusive of serviceability ratios. The Australian Prudential Regulation Authority (APRA) is the watchdog on this one.

Rates DIRECTLY effect house prices, see graph below as evidence:-

RBA not targeting assets by using interest rates? Pffffffffffffffttttttttttt ! Talk about a contradiction and a tautology at the same time. Logical contingent anyone?

During 2002 and 2003, the RBA came in for some criticism from those who saw it as exceeding its mandate or who interpreted its actions as targeting housing prices. The RBA went to considerable lengths to explain its actions as consistent with flexible inflation targeting and to explain that it was not targeting credit growth or asset prices. Developments in the housing market were, however, given as one reason for increasing interest rates in response to general macroeconomic conditions sooner rather than later.

http://www.rba.gov.au/publications/confs/2011/kearns-lowe.html

CanOz · 4 December 2013

Really enjoying the discussion here guys, appreciating your presentation of facts and figures. So many can learn from an active property investor answering questions and responding to arguments like this...Thanks for keeping it civil.

Thanks!

trainspotter · 4 December 2013

Uncle Festivus said:
Unemployment is rising - http://www.tradingeconomics.com/australia/unemployment-rate
job security back to normal levels - ???. More temp jobs than full time would mean less security??
pent up demand???? - low LVR from a financial system complicit in force feeding liquidity fed via media frenzy stories

Plain & simple liquidity trap where banks are looking to put to use excess loot.......

Employment is rising in the retail sector:

Ai Group chief executive Innes Willox says the service sector's momentum is slowly improving.
"Confidence appears to be building with the lift in employment in November suggesting more optimistic hiring among services businesses in the lead-up to what is hoped to be a busy Christmas period," he said in a statement.

http://www.thebull.com.au/articles/a/42572-employment-helps-services-sector-recovery.html

Dollar is heading to RBA target of just under 90 cents for Christmas:

The Australian dollar has shed more than half a US cent following a slightly weaker than expected economic growth result.
At 1200 AEDT on Wednesday, the local unit was trading at 90.77 US cents, up from Tuesday's closing level of 90.67 cents.

http://www.thebull.com.au/articles/a/42575-$a-tumbles-after-gdp-print-disappoints.html

Pent up demand answered:

Australian house prices are surging on tight supply, a lack of construction, pent up demand and increased interest from self-managed super funds.

But amidst the discussion of a possible housing bubble and a lack of affordability, comes a series of charts from ANZ which provides some perspective on the debate.

The verdict?

Australian house prices are not that elevated relative to borrowing capacity
Australian house prices are not that expensive on an international comparison
The house price to household income ratio is as low as it has been in a decade
The population keeps growing but we aren’t building enough houses

http://www.businessinsider.com.au/e...n-housing-in-ten-brilliant-charts-2013-11#ANZ

Totally agree on the 95% LVR:

The prudential regulator has told banks not to increase risky lending as they compete aggressively for mortgage *customers, raising the prospect of more direct controls to prevent record low interest rates from fuelling a destabilising surge in house prices.

With housing prices at double-digit annualised rates in Sydney, Perth and elsewhere, the Australian Prudential Regulation Authority said there was a danger that banks would relax lending standards to attract borrowers, who may not be able to afford repayments when rates go up.

http://www.afr.com/p/business/finan...o_banks_on_risky_loans_BeyedI29NJFsu0mLxSxSCO

Caveat emptor and do your research on WHERE you buy

DB008 · 5 December 2013

trainspotter said:
1 year = 8 - 11% increase over 8 capital cities. Isolated growth pockets of 40% in CERTAIN areas. CERTAIN rural areas to remain stagnant with coastal larger population towns to show vigorous signs of infrastructure growth = capital gains.

3 year = Peak or near peak of cycle. Too many investors and mummy and daddy wannabes overheating the market. No sign of a FHB ANYWHERE.

7 year = After a 4 year period of stagflation and redonkolous pricing structures (some property is selling very high and in the same street, similar property is selling very low = reason: mortgage stress) we will find ourselves in a very similar position to where we were in March 2011. At the beginning of another cycle.

NONE OF THIS IS ADVICE AND IS MY OPINION ONLY. DO NOT CONSTRUE THIS AS ANY FORM OF INFORMATION THAT CAN BE RELIED ON TO MAKE A FINANCIAL DECISION.

I would also like to agree with this statement.

I dont have it on hand (as I'm using a smartphone to type this from Budapest), but there was a graph outling house price growth when newly elected Lib/ALP governments come into power.

Was along the lines of;

Libs come into power - house prices rise between 5-10% within 12 months (capital cities)

ALP come into power - house prices decline by 5-10% within 12 months (capital cities)

I'll post said graph when l get back to Oz...

(sorry for any typos)

The future of Australian property prices

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