Your editor is on a double shift today. We’re switching between writing today’s Money Morning and filling in for Dan Denning at Daily Reckoning.
Over at Daily Reckoning we gave the Climate Change ‘tree’ a bit of shake. You can check out what we had to say later on today after our webgeeks post the article to the Daily Reckoning website.
But on this side of the building on Fitzroy Street we’re taking another swipe at the banks.
Last week we tipped our cap to Westpac for trying to make a buck out of the interest rate rises by anticipating the Reserve Bank of Australia’s next move.
NAB spoiled the party by just raising by the same amount as the RBA, but then Commonwealth Bank and ANZ Bank rode in to split the difference between the two.
As we noted last week, the idea that the RBA can manipulate interest rates to perfectly control an economy is a complete fallacy.
It just can’t be done.
But anyway, the actions from the banks show just how desperate they are, and how close they are to insolvency.
As the back page of today’s Australian Financial Review points out, “[Westpac CEO Gail] Kelly’s aggression in home lending in 2009 delivered strong profits in the short term but it is now causing issues for the bank’s liability management. Westpac wrote $29 billion in new home loans in the year to September.”
You’ve seen the stats on home loans over the last year. A big percentage have come from first homebuyers who have been suckered into the market by the first homebuyers bribe.
It’s hardly likely that Westpac would have gone ‘underweight’ on first homebuyer’s mortgages. They would have lined up with the rest of them to get as many suckers onto their loan books as possible.
We mentioned above that the banks are close to insolvency, actually, there’s not much difference between the balance sheet of the banks and that of the frozen mortgage funds we wrote about last week.
The only difference is the banks have a government guarantee.
But aside from that the story is fairly similar. In some respects it’s worse because most of the bank’s deposits are in at-call accounts. That means accounts where savers have immediate access to their funds as opposed to a term deposit.
Yet on the other side of the balance sheet, the bank’s assets are tied up for the long term in mortgages and houses. The $29 billion of loans Westpac has written is against mortgages last 25 or 30 years.
But the savings inflows that have enabled the bank to make those loans would be mostly in at-call accounts. In other words the bank has let someone borrow your money for a term of 25 years yet the bank has no power to stop you from ‘calling in’ your funds by taking the cash out of your account.
It probably explains why the banks have been so desperate to raise more funds from the overseas markets using the government guarantee, and why they have been so quick to increase the interest rate on deposit accounts to discourage investors from withdrawing funds.
For instance, ANZ Bank has increased the rates on some term deposits by 0.75%.
It’s all part of the cycle of rising interest rates that we warned readers about earlier this year. And it’s these interest rate rises that will flow through to the inflation numbers as well.
While the mainstream has been harping on about inflation being dead, we see it differently.
Rising interest rates means a rising cost of living. And for individuals it means a coordinated attack from two sides.
You see, when interest rates go up, your disposable income goes down. You don’t need a Harvard degree to work that one out.
But by extension it also means your cost of living has gone up. Even if prices don’t rise, your cost of living has increased because you now have less money to spread across your weekly and monthly obligations.
The banks and property spruikers will tell you it’s “only” an extra $45 per month on an average mortgage, but they conveniently forget to mention that it’s $45 per month on top of $45 last month and $45 the month before.
They also forget to mention that in total, that’s $135 per month of after tax dollars that has to come from somewhere.
Does it come from savings? Maybe, but more likely it comes from your disposable income.
The individual this month has $135 less than they did three months ago. And chances are by the end of next year you can double and possibly even triple that amount as interest rates rise even further.
But that’s not the only place where individuals get stung. Because aside from the lower disposable income, the rising interest rates mean businesses that have borrowed will need to increase prices to cover their increased costs.
For all the rubbish about the rate of inflation being low at 2-3%, the real rate of inflation is much higher than that. It’s closer to 10% if you use the RBAs money supply figures.
So don’t think the interest rate increases have stopped there. By their own admission the RBA says rates are at emergency low levels.
It’s only a matter of time before rates are pushed up further, that price increases are filtered through to the consumer and the recession/depression that Australia famously avoided earlier this year rears its head.
On top of that, there’s the prospect of a further tax sting when the Stable Climate deniers get their way and foist a massive tax burden on the Australian public just at the time it needs it least.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 finished down on Friday to 4,702.20, lower by 72 points. The market has opened up this morning, however you can expect a choppy trading session today.
The Dow Jones Industrial Average ended the day higher by 22 points, closing at 10,388.90. The positive news regarding unemployment pushed the Dow to finish up, but could potentially lead to the Fed lifting the near zero interest rates. Read more here.
In the UK overnight, the FTSE was up 9 points to 5,322.36
The Nikkei was up to 10,022.59 higher by 44 points. The index added a total of 10.4% for last week, its biggest weekly gain in one year.
The price of spot gold in Australian dollars is trading at $1,270.65, while in US Dollars it is trading at $1,161.90. The price of silver in Aussie dollars is $20.22 and in US Dollars it is $18.49.
The Aussie dollar versus the US dollar is trading at USD$0.9150, and against the Japanese Yen JPY82.48
Crude oil closed at USD$75.47
For the biggest movers on the market yesterday click here…
{ 29 comments… read them below or add one }
oh wow 135$ LESS?? BIG DEAL
houses have gone UP astronomically since
try $30 -200,000 $$$$$$ at least
& thats not talking bout the top-end of the market
135$ wat u buy with that ?????????????????????????????
some ice-creams ???????
Good analysis. The real reason rates have to go back (forget the crap about ‘up’) to around 5.5% is funding cost. The US and UK are slowly strangling themselves with near zero settings and setting themselves up for a prolonged era of economic instability. Lending large amounts of money should always be seen as a risk. If it will cost the gambler bugger all and they have little buy in on success – well they’ll take a punt. The greatest issue is moral hazard and that is why property developers are moaning and whining that banks are requiring up to 70% pre-construction sales contracts before they stump up funding. Whats wrong with that
BB – Nothing wrong with it, I suppose, unless less and less new home starts are a problem. Are they?
How about Westpac’s interest rate hike being a masterstroke in anticipation of property prices dive?
How else do you get rid of borrowers you sucked dry and don’t want anymore? Does wonders for the bank’s balance sheet…
HHAHAHAHA! You gave the climate change tree a shake, did you?
Oh dear.
Kris, you’re good financially, but on climate change? Not so much. Epic fail, in fact.
Seriously, clam up on this Kris, you really sound like a moron.
Cheers,
tim
Here we go, just for starters. Oh, but silly me, OF COURSE the glaciers, trees, birds, nature et al are in on the horrible sneakie commie left wing tax cabal.
http://skepticalscience.com/What-happened-to-the-evidence-for-man-made-global-warming.html
Forgive my ignorance, but how is this government guarantee on deposits going to work, when the government keeps throwing away money on stimulus spending. Where is it going to get the millions to fund this guarantee when needed?
Forgive my ignorance, but how is this government guarantee on deposits going to work, when the government keeps throwing away money on stimulus spending. Where is it going to get the millions to fund this guarantee when needed?
Hi cb – yes less home starts exacerbate the existing undersupply problem, especially in NSW.
Something that has been on my mind recently and believe me i know absolutely next to nothing about about financial affairs as you will surmise by my question :
If the stimulus package was a way to increase consumption why would you have to raise interest rates to reduce consumption .
WWAT ALOAD OF COCK-N-BULL this topic
houses have gone UP astronomically since RBA dropped rates to emergency levels ,,,UP,UP,UP,UP,&UP
try $30 -200,000 $$$$$$ at least
& thats not talking bout the top-end of the market
wat kinds of drucks this author is on???????????
but then of course the RBA can manipulate to break the market by keeping increasing rate levels to 9-11%……………………………………………..
Thanks, PF. I would be inclined to agree, except for the repeated warnings in this forum that said shortage is a myth, and that it will be exposed none too soon for all of us to see.
But if reports of rising rents are to be believed, then the case against the sceptics seems solid enough. As I suggested before, no tenant will pay more than they have to for their accommodation, so this indicator would be pretty difficult to rig or fudge.
The economy is more fragile than ever before. When people start crying about home mortgage rates reaching the dizzy heights of
6-1/2% it is obvious many have over committed themselves to overpriced real estate. Banks and Governments will fall if the Ponzi scheme is not maintained. The Mainstream media will also be held responsible for this fraud on the Ausralian people. One day the debt has to be payed back and it wont be pretty for those who borrow money to make money instead of working hard for a living.
http://dandelionsalad.wordpress.com/2009/12/07/professor-michael-hudson-on-the-global-financial-crisis/
Anyone else suspicious that the banks may have been a bit spooked by S&Ps recent global banking assessment (which they didn’t fair too well in), and are endeavouring to shore up the cash balance as risk mitigation of a housing slump?
In my opinion, Australian property has shifted from a supply and demand market to a tradable commodity. One could argue that a supply and demand model is only applicable if the majority of the buyers are buying out of necessity, and not for capital gain. I believe the completely irrational increase in the house price index in Australia has primarily been driven by a social mania………how many property investment books have been published in the past 10 years, how many reality TV shows on property, how many seminars offering to turn you into a millionaire through a property portfolio?????
Look at the change in average occupancy statistics for Australian dwellings over the past 20 years……….supply and demand is not driving the market…….there are far fewer people, on average, living in each dwelling. (which is part of the swell in feeling of entitlement which has been an integral part Australia’s era of prosperity.)
In a severe recession/depression, the young and unemployed will move back in with Mum and Dad……..any tangible supply and demand issue evaporates further.
But then again, maybe Australian property IS the only market in the world which is completely immune to a severe correction.
Bevan
Bevan – I totally agree and have been saying the same things for 12 months. In fact, reading your well-written paragraph just made me even more assured of the fickleness of the Oz housing market.
Like you said, this is not been driven by the demand of people to buy their own place. Its been driven by young property investors who are looking to retire at 40. I have a few mates that have multiple properties at the age of 27…however they still can’t come out some nights because they are ’strapped for cash’!!!
How can you buy 3 houses and be strapped for cash???
The social mania has now led to a credit mania. I told the story the other day of an 18 year old mate who wanted to buy a house and didn’t have a cent to his name. He went all the way into a mortgage broker before he was told he needed SOME SAVINGS
This is the insanity of the situation. These little stories may seem random, but anecdotally they show what is going on. People think that all you have to do is pay a 10% deposit, borrow 400K, buy a house, rent it out at a crappy yield and when property prices rise you can sell at a capital gain and bam, you’re a genius.
Also – if you watch the bulls, they are getting more and more desperate. Joye has been on full attack over at Business Spectator. I love how the bloke always refers to David Gruen from the Department of Treasury as someone that KNOWS we have a housing shortage. Who is this oracle and why does Joye think his projections are so much better than anyone else’s??? He doesn’t – he is just clinging to anyone that will back up his story.
He also loves to cite Guy Debelle…well considering the speech mabe by his RBA brethren (Battelino) the other day, I would say no one from the RBA has any idea what they are doing with the oz housing market.
The only thing is to start considering how the politics will play out. I for one hope that the banks, brokers and all the other parasites (real estate agents, conveyance lawyers) get hung out to dry…same with property investors that own multiple properties.
The only people i feel for are mates of mine that have bought houses at way over the fair price and all they want to do is pay it off and raise their family. If they run into trouble, then I would want some form of debt moratorium to be available for them
PuntPal – How do you think your mates are different from the rest of the property speculators? You sound somewhat tribal, whishing clemency for your mates but damnation for the rest.
Interesting take on the supply – demand question, something that I have been scratching my head over all this time. On the one hand, rising rents seem to indicate that there indeed is a shortage of supply, even at current prices. But, countering this is this line of argument that a lot of the current demand is going to dry up when we start hitting the rockier part of the road. I try to stay open minded, and would like to hear more about how this is likely to unfold. Will it be young couples who will move back with parents? Or will it be young singles, or both? And what is going to make them do this? Will it be job losses from a collapsing economy? Or will it be a changed trend from it becoming cool again to squat rent free?
Have a read of the ‘Distillery’ over at Business Spectator. It provides an excellent analysis of the stories floating in the press. Today’s really highlights Australia’s ‘one trick pony’ – the Great Australian Housing Miracle. What with the Governor and the Banks warning of the inevitability of increasing official and unofficial interest rates into 2010 you are beginning to see the start of the great house debt unravelling. Rudd and Swan were complete and utter novices throughout 2008 when confronted with the reckoning every other developed nation was experiencing they bet on artificially stimulating housing and got lucky in 2009. Their luck and the luck of many others who bought in on the false impression that somehow, someway we here in in the great southern land were isolated and insulated from our mountain of debt by our mountain of iron ore just like every other gambler is likely coming to an abrupt head on collision with reality.
the chinese stimulus in 2010 will not focus so much on fixed investment but boosting consumer demand. That means no more building roads and bridges so not very bullish for resources
LME stockpiles continue to grow rapidly
The resources boom will eventually implode and many jobs will be lost
Those rich miners with multiple houses will suddenly find it hard to make repayments
OZ banks using gov guarantee again??? not a good sign
remember….chickens always come home to roost…..
cb – I dont want any favours for mates that have specualted on houses…they should get what happens when you place a bad bet…you lose out, big time! If you read my post, I clearly say it is the owner occupiers who were forced into the market coz they wanted stability for their families (remember, the Aussie Dream).
But we decided to turn houses into an asset class and my point is that the speculators and investors are more to blaime than the people that are buying one house and one house only
cb – here is how demand will dry up.
Stimulus wears off, banks tighter lending flows through to smaller loans (and rising interest rates do this anyway) so house prices dip. Those 190,000 young couples that have been duped into the housing market since the FHBG boost realise that rates, maintenance etc… add up and after not having a night out in 3 months, decide to move back home and rent their place out.
As I have been saying, we have so many spare bedrooms and people were beggining to use this in 2008 when the GFC hit. I saw in my area the number of bedrooms available to rent rise from 300 to 500 in a matter of 3 months. When this happens across the nation, then all of a sudden that 50,000* shortage of houses that apparently exists will evaporate.
* it was meant to be nearly 200,000 shortage, but the housing spruikers realised that lie was too big to sell even to the most naive and stupiud public going around, so they settled on 50,000 coz its round and sounds realistic. In March 2010, they will be talking about the 20,000 shortage in houses and in June there will be an oversupply. This is how weak the shortage argument is
bb – i thought distillery was awesome too. He has been banging on about Australia’s idiotic housing policy for a long time. You are spot on…the housing miracle that allowed us to dodge a recession is a sham and with Dubai, Greece etc.. you can already see what 2010 is going to be like.
GB – totally agree with your view on China. I think when they stopped building roads that are not needed, they will turn their attention to forcing the Chinese people to buy the things that the yanks wont buy anymore. Like you said, this will help Chinese manafacturers, but hurt Australian companies hoping to ride the China boom all the way through 2010
cb – the myth is a myth.
So what is the figure at now PF – it was 200K a year ago and now its only a 50K shortage of homes?
Have we really built that many homes?
What about when the oldies move to the coast to retire or into homes, what will supply look like then?
What about interest rates – surely that will force some cohabitation – how do they project that over at Rismark, especially considering mortgages are at a full time high?
These are the questions the bulls wont answer – they just say we have a shortage and then expect people to accept it…some people, the dumb ones, do just accept it…I dont!
I am only new to these subjects – just getting started to “get the hang of it”.
Once I am ready I will participate in your written-word-fight! As for now you are all too clever for me!
(Especially Puntpal and cb: I really do enjoy reading your comments and learning from it- so thanks).
Now I have a question: Dan Denning referred to a report he has written 2004 – about the house bubble bursting in the USA. He was a bit early on this but knowing what we know today utterly awesome to read. Did you read this report aswell?
According to Dan Denning there are 6 Domino stones – once starting to fall hardly to stop and “wumm” the bubble might burst.
As I said I am new to all this but as far as I am concerned I think we in Austrlia are pretty much into Domino Number 3. Or do I see this wrong?
PuntPal, my vague sense is that the shortage claim is based on a declining ratio of new home starts relative to population growth. Not sure if any more precise measurement is available, but rising rental could be taken as sufficient enough justification for interpreting the declining ratio as being indicative of a worsening housing shortage.
But I am somewhat puzzled. Are you saying that the estimated shortage number is decreasing? That would be contrary to what would be implied by the falling ratio in question, so there seem to be a few wires crossed in the debate, which would need to be cleared up to make any headway, in either direction, with the argument.
http://www.elliottwave.com/single-issues/ff/0810FF_Special_Report_End_of_the_Mania_Era.aspx?code=cg2
http://www.elliottwave.com/single-issues/gmp/European-Real-Estate-Mania.aspx?code=cg
The main reason why Australia’s property sector is grossly unaffordable to the average taxpaying Australian, is due to Federal government policy that allows mega rich forigners to purchase Australian residential property, thus escalating house prices. Until this law allowing foreign nations to purchase residential property is removed, a large number of Australian’s will be denied the Australian dream. The Australian dream will become the Foreigners’ dream, at our expense, courtesy of our Federal government. Interest rates are a minor threat, when compared to the mega rich forigners. Afterall, we cannot purchase land in their countries, but the lame Federal government allows forigners to buy our land. In short, we are mugs.
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