In today’s Money Morning…the market is still bullish, but doubts are creeping in…imbalance in favour of property…the rise of Australia’s interest-only home loans…banks raising rates when the RBA won’t…and more…
Say goodbye to summer, folks. Today is the Autumn equinox. The sun is directly above the equator, on it’s way north. The northern and southern hemispheres get roughly 12 hours of sunlight each day today. Then it starts to shift. The north takes what we give up.
You’ll start to notice things cooling down in the next couple of weeks. Thank goodness. It’s been a long, hot summer for many parts of Australia.
Obviously global warming is to blame.
We just won’t mention the serious blizzard that dumped a huge amount of snow on New York last week. That’s hard to explain.
But money, not weather, is our beat. So let’s get to it. Markets continue to drift, just like the seasons. But there is no mistaking the fact that the general market outlook is bullish.
Have a look at the chart of the S&P 500, below:
Click to enlarge
The rally from the lows of 2016 has been relentless. There have been a few sharp sell-offs, but each quickly reversed, and the market went on to make new highs.
But was the early March high the top? After all, there is a lot of worry about rising interest rates and expensive valuations.
Which is kind of the point. Market’s don’t usually form major tops amid warnings about over exuberance. Sure, you’ll continue to see corrections from time to time (we’re ‘due’ for a decent one soon) but that doesn’t mean we’re heading into GFC Mark II
It’s quite normal for major stock indices to correct anywhere between 10-15% during a major sell-off. Selling out during these times of short term panic might make you feel safe, but it’s the wrong thing to do. Because you don’t normally have the nerve to buy back in, and then you miss the ensuing rally.
There is no ‘right’ answer on what to do. But you do need to have a system and a strategy to ensure it’s not your emotions making decisions on the fly.
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Aussie banks doing RBA’s job
While I don’t think it’s all plain sailing (it never is), I don’t see a major bust anytime soon. That’s in marked contrast with my mate Vern Gowdie. He sees the global stock rally as being on borrowed time.
More specifically, he sees serious problems with Australia’s economy. We agree on this point. I just don’t think it will lead to a stock market collapse. Not yet anyway.
As I’ve written to you before, the problem with Australia is our infatuation with property, and borrowing heavily to speculate on it. The RBA’s poor decision to cut rates twice in 2016, even though commodity markets had started to rally, just added more fuel to the property bonfire.
There’s no better representation of the speculation going on in the market than to witness the huge amount of interest only loans in the system. From last week’s Australian:
‘For the past six years more than half of new housing investor loans issued have been interest-only, a share that is rising towards 60 per cent. Over the same period, the share of even new owneroccupier loans that are interest-only has increased, from about a fifth to a quarter. Just think: swathes of working families not choosing to pay off the “family home”, the most sacred of assets.
‘These are rising shares of a rising flow too: total home loans in Australia rose 6.5 per cent to $1.64 trillion over the course of 2016.
‘The infamous low-doc loans that plagued the US financial system aren’t a problem in Australia. Only $1.5 billion of those were written last year. But more than $137bn worth of interest-only loans were granted, according to the latest APRA data. More than 40 per cent of Westpac’s outstanding mortgages, more than $390bn, were interest-only mid-last year.’
40% of Westpac’s mortgages are interest only? Nearly 60% of all loans written in the last six years are interest only? That’s crazy.
APRA, the banking regulator, may have complied the data, but it would’ve been better served by putting a stop to it.
Interest only loans are great for banks, as they collect the interest income and the principle stays the same. But it’s not so good for the speculators when interest rates inevitably rise.
Only in a country where house price appreciation is so ingrained in the culture would you see such a large proportion of interest only loans.
Why build equity yourself (by paying down the principle) when you can let the market do it for you? That’s how you get wealthy in Australia.
But because we don’t have enough savings to satisfy our huge demand for debt, we have to borrow from foreigners. And interest rates are starting to rise globally. Not by much, but by enough to make our banks pass on some of the costs.
Last week, Westpac Bank [ASX:WBC] and National Australia Bank [ASX:NAB] raised interest rates on investor and owner-occupier loans. Given the banking industry is an oligopoly, it probably won’t be too long before the other two major banks lift rates too.
Although I bet that ANZ Bank [ASX:ANZ] will be the last to move. Given its retreat from Asia, the bank has a bit of catching up to do to build up its Aussie mortgage business.
NAB moved first last week by raising rates for owner occupier loans by 7 basis points, and 25 basis points for investor loans.
WBC followed with a tiny 3 basis point increase for owner occupiers, and 8 basis points for owner occupiers with interest only loans. Investor loans increased by 23 basis points, or 28 basis points for interest only.
The economy will no doubt be able to handle such a small rate rise. The risk — and it’s a big risk — is that inflation starts to pick up sharply and rates will keep on moving higher.
That will deal a major blow for Australia’s property market.
Maybe Vern’s ‘End of Australia’ thesis isn’t so far-fetched after all? If you want to know how to protect your portfolio in such a scenario, and pick up a cheap as chips copy of Vern’s latest book, click here.