Aussie Banks Toying with the Property Market

I never used to take notice of confidence levels, indices or anything of the sort.

Why does it matter how people feel?

We shouldn’t care about feelings. We should care about facts, and what could happen next.

That way we can look at potential opportunities and set ourselves up to make some dosh.

But as I wrote on Tuesday, confidence does matter.

Confidence encourages investors to invest and borrowers to borrow. Why would you put your money in stocks if you thought we were going to fall?

Confidence, or lack of it, is why people aren’t piling into crypto anymore.

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Of course, you should take all this confidence stuff with a grain of salt. Investors and borrowers can flip on a dime. Sometimes all it takes is a few choice words to boost confidence, investing and spending.

Aussie property hasn’t lost its cachet, yet. But prices, as you would have seen, continue to fall. The fall likely has more to do with borrowing ability than confidence.

However, there’s one thing the Aussie property is telling us. It’s proving the complete ineffectual role of banks

[In our latest video, Kris talks about what falling property prices mean for the economy. He also explains how cars, holidays and other big-ticket consumer items in some way depends on ever-rising house values. What happens when prices stop rising? You can find out by clicking the picture below.]

Who creates these property cycles? Banks!

Did you strap in with the family on Tuesday?

Popcorn ready, drinks flowing, sitting around a laptop screen waiting for the Reserve Bank of Australia (RBA) to announce their rate decision?

Of course you didn’t! You know why? Because it, like most other rate decisions, was a complete non-event.

Rates are on hold, again. Exports decline a little. Life goes on.

While Tuesday was a non-event for you, the ‘intellectuals’ of Australia were lapping it up.

Going off just three months of activity and a few words, the economists of Australia cut their growth forecasts.

I won’t bore you with an explanation of their target. Knowing their growth guesses wouldn’t help you anyway.

At a separate event on Wednesday, RBA head Philip Lowe made the obvious comment by saying the Aussie housing market is not uniform. It’s made up of pockets. And what affects the market for property in Melbourne may not affect the market in Brisbane.

Do you know what’s affecting all of these markets simultaneously? Shoddy lending practices that leads us forever into boom and bust cycles.

Money Morning

Source: Bloomberg
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Earlier this year, we saw bank executives saying it was wrong to blame the banks for property woes. But, I ask, where are all these cashed-up buyers coming from?

How can they push each other up another $100,000 at auction to buy that dream home near the water?

It’s obviously coming from the banks. Their lax lending standards and their motivation to lend out as many large mortgages as possible pumps the market up.

Money Morning

Source: Bloomberg
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Then, when regulators step in to curtail lending standings, lending growth reduces, and buyers see their buying power fall.

Money Morning

Source: Bloomberg
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As Kris explains in the video above, these price falls don’t happen within a vacuum. Falling house prices have a real effect on the spending and investing of everyday Aussies.

Maybe they drew down equity in their home to buy a new SUV. Maybe they drew down equity for a deposit on another home. Or maybe they wanted some cash to go on a holiday and enjoy the luxuries of life.

Whatever their reason, many of these ‘spend now, worry later’ Aussies are drowning in debt. Seeing the value of their homes drop makes them more cautious. It kicks their confidence to the curb. And they spend less.

It’s why the RBA has one eye on the property market. Bloomberg speculates that Lowe is keeping rates low to help those in Sydney.

They’ve seen property values come down below the million-dollar mark. Most of these home owners also likely drew down equity in their home when prices kept rising.

Money Morning

Source: Bloomberg
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So not only does Lowe have to worry about the Aussie dollar and price stability, he’s now got to play goldilocks with the property market, checking whether the market is just right to lift interest rates.

I have no confidence in this system

And here is the problem — not just with Aussie banks, but the banking systems at large.

They lend far too much for consumption and speculative means and not enough for value-added activities.

The latter could be loans to businesses that want to produce more goods and services. This is actually what makes the economy grow.

The problem with the RBA and most central banks is that they give commercial banks (the ones that actually create most of the money in the economy) little to no direction.

To boost the supply of money, the RBA can lower banking reserves. This effectively allows banks like CBA and NBA to create more money, which they can push out into the economy.

Yet, the RBA gives banks little to no guidance on where this newly created money should go. So bank managers target the easy fish (homebuyers) and lend out as much as they can.

The solution I’m implying is not dictatorial monetary demands. Maybe the central bank could incentivise value-added lending and discourage consumption and speculative lending.

Such incentives could spur economic growth and create far less cycles in our property market.

This is something similar to what Japan did post-war. The central bank encouraged banks to create money and push it into specific sectors of the economy.

By doing so it was businesses, not consumers that took on the majority of the debt. And with this new money, businesses created new goods and services.

They saw earnings rise, giving them cash to repay their debts and capital to continue reinvesting in operations.

This is what led to Japan’s economic miracle.

The central bankers of today turn their nose up at this example. And instead they rely on commercial banks to choose correctly.

But take another look at the graphs above.

They almost never choose correctly.

Your friend,

Harje Ronngard,
Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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