Fact, Australian banking standards are better than overseas.
Fact, Australian borrowers are better placed to cope with the recession than those overseas.
Fact, Australian house prices will hold up better than overseas houses.
Or so we are told. Of course it’s mainly the vested interests that tell us. But you know what, the numbers still don’t stack up. In fact, all the statistics and ‘facts’ provided by the vested interests can easily be used to argue the case for a housing crash.
Now, we don’t know for certain when a crash will happen, but the way the pump is being primed at the moment, it won’t take long. And chances are we could even see a false rally in house prices in coming months as all the tax breaks and subsidies filter through.
But after that…
That’s when it could get messy. You see, I still can’t get past the ‘bullish’ statements on property without thinking, “surely that a top-of-the-market signal.”
Let’s take a couple of recent comments:
“We continue to believe that the market here will hold up better than overseas. There are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere.”
That came from Reserve Bank of Australia deputy governor, Ric Battelino. I’ll address his comments on lending standards in a moment. But he also had this to say…
“In the period ahead, there will be forces pulling the arrears rate in opposite directions. On the one hand, as unemployment rises, more households will have difficulty continuing to service their housing loans. On the other hand, the very large reduction in interest rates has greatly reduced the debt servicing burden of households. On an average-sized mortgage, loan repayments are now $7,000 a year less than they were six months ago. This is a very large reduction, equal to about 8 per cent of average household income.”
In other words his argument is “Recession, what recession?” Forget the concept of a perfect storm conspiring to make thing worse, Battelino argues that the recession will be a Perfect Summer or a Perfect Spring. Everything will be fine. Don’t worry about it.
We can only think that Mr. Battelino is unfamiliar with recessions. Or that he’s got the blinkers on. It is true that interest rates have come down to such as extent that the average borrower is saving about $500 per month on mortgage repayments.
But can it really be true that if someone loses their job they will be fine? Of course not. If your income drops from $60,000 per year to zero, then having a saving of $500 per month on your mortgage isn’t going to be much comfort if you can’t afford the other $1,500.
Also Mr. Battelino shouldn’t forget that by this time next year, that half the saving from the interest rate cuts will have been eaten away by inflation. So even if interest rates stay low, the cost of other goods and services will have risen.
And think about this as well. Where is most of the boost in new home buying coming from? Most of it is from first home-buyers. They are the ones likely to have the least equity and least savings. What would happen to a first home buyer if they lose their job?
According to JPMorgan, the unemployment rate will hit 9% later this year. When companies start to cut staff, who will they chop first? Chances are the company will make the newer staff member redundant first, as the cost of terminating that employee will likely be less.
So if a first homebuyer loses their job, they are less likely to receive a significant severance package compared to those that have worked longer.
Of course, that’s all hypothetical. But even the most ardent property bull would probably agree it’s not as rosy as saying “interest rates down, unemployment up, everything will be fine.”
And what about Mr. Battelino’s comments on the lending standards of Australian banks. It’s a comment that we have seen written everywhere. In fact it is almost a cliché. If you say it often enough it must be true.
Again, the numbers don’t stack up. If we quickly look at the commercial property sector, comments from Gail Kelly at Westpac and Mike Smith at ANZ clearly indicate the banks have over-exposed themselves to marginal projects. If they truly were as conservative as is claimed they should have little problem with taking market share by financing new projects now.
The reason they aren’t, is because they are at the limit (if not over) of what they can lend.
But what about the residential property sector, and the claims of Australian banking superiority here.
Again, it is a fallacy.
Back in February, the Commonwealth Bank introduced a policy that required borrowers to provide an additional 3% on top of any government subsidy. Notice the emphasis? In other words, prior to February borrowers didn’t need this. They could just get the cash from the government and that was all that was required.
Is a no-deposit mortgage Mr. Battelino’s idea of a better level of lending standards?
At the same time the National Australia Bank announced it would cut its loan-to-valuation ration from 100% to 95%. Again, how is that a higher level of lending standards? The only reason a bank would lend 100% of the value of a property is because they believe the value would rise.
And why wouldn’t they, that’s what everyone has been told. The banks obviously started to believe their own spin.
But wait, it gets even better than that. Because of Australia’s superior lending standards it means you can go to the Westpac owned RAMS Home Loans and take out a loan for 110% of the full purchase price.
Now that probably isn’t news to you. ‘Lo doc’, ‘no doc’ and ‘no deposit’ home loans have been around for years. Except that the top brass at the RBA and the banks and the mainstream media appear to have forgotten that.
Because they have told themselves so many times that our banking system is so much better run than anywhere else.
Even the property spruikers are using the ‘strength’ of the Australian banking system as part of their sales pitch. In today’s Australian Financial Review (AFR), chief executive of RP Data-Rismark Christopher Joyce says:
“The resilience of Australia’s housing market has been underpinned by our robust banking system. The improvement [in house sales] highlights the absurdity of the sensationalist predictions by one or two economists in 2008 that prices would fall 30 to 40 per cent.”
The paper also reports that RP Data-Rismark national research director, Tim Lawless claims the better sales figures represented a “return to stability” and that “In essence, it’s static and we will see that for the next couple of quarters.”
What we are seeing now in the property market is a ‘suckers rally.’ Just like the ones we’ve seen in the stock market since early 2008.
Despite what the policy makers claim about the banks being robust and lending standards being high, the reality paints a different picture. And right now the artificially low interest rates and government subsidies are just going to make things worse.
If you’re after a property bargain, you’re probably better off waiting until next year.
Don’t Cheer Too Loud for Middle Class Welfare Cuts
If you want to earn some political points with very little media backlash, announce a cut to ‘middle class welfare.’
In general there’s nothing wrong with that. Taxing people and then redistributing it, or even giving it back to the same taxpayer is ridiculous. But the calls to cut it back won’t help. Or, not in the way the government is bound to do it.
Because the government won’t cut the welfare and cut taxes, it will cut the rebates and just spend it elsewhere, giving you even less choice of how your money is spent. Business Council of Australia president Greg Gailey (he of the inspirational idea to give everyone vouchers to spend in shops and boost the economy!) believes that cutting these tax breaks in order to…
“take action today that will make this task easier, providing greater scope to spend on building capacity and normalizing the budget over the coming years.”
It’s the same old message from the pressure groups. Don’t let the taxpayers spend their own money, give it to government and let us tell you where it should be spent.
Other Stuff on the Markets
Here’s a question for you, why would Macquarie buy 31 million shares in BrisConnections held in the name of a $1 limited company? Only if it has plans to default on the $60 million obligation it now has (a default that would leave it only liable for half the amount as underwriter… Deutsche Bank or the co-underwriters so they would pick up the rest!).
Is this the behavior you would expect of a supposed ‘respected’ financial institution? There’s something rotten at Macquarie.
There’s little to say on the broader market. It’s in a trading range. Having hit the top of the range last Friday it’s taking a breather. Now we just need to look for it to either get a leg-up to move higher or whether it will ease back further.
In January I came that close to tipping Webjet [ASX: WEB] in the Australian Small Cap Investigator. Instead I went for another ‘recession beating’ stock that has returned 20.31% in two months.
But Webjet hasn’t done too bad either, adding about 14% since I first looked at it. So, having run up so quickly in the last week to its current price of $1.22, is it still worth buying? For that answer, I turned the case over to our Swarm Trading technical analyst Gabriel Andre…
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