Have Banks Put their Needle in the Housing Bubble?

When the property market headed in only one direction — up — it almost became a national obsession.

News bulletins reported weekend auction results, as if they were a sporting contest. Each monthly, quarterly and annual gain, further reason to celebrate.

Unlike a sporting contest, though, property owners were all on the same side. Cheering on as the median prices compounded year after year.

The only people not cheering were those still trying to get onto the property ladder. For many first homebuyers, that train felt like it had left the station a long time ago.

For them, each weekend was another disappointment. Investors and overseas buyers outbidding them at auctions.

With prices peaking in parts of Sydney and Melbourne in 2017, and softening since, a sudden burst of pragmatism has unfurled itself on the market.

All of a sudden, it is a ‘market’ again. Like any other market, driven by demand and supply.

After waiting so long to get their turn, and with fewer investors to compete against — first home buyers too are re-thinking things. What’s the point in buying, if the market could still have some way to fall?

And the reason for the fall?

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The banks pushed back

Normally, interest rates are to blame when property prices head south. With each rate move higher, more would-be buyers decide that they will sit on the sidelines. It also makes it tougher for those already in the market.

However, property investors can’t blame the RBA this time. The RBA cash rate has not budged in 31 months.

Sure, some banks have gently nudged their variable rates higher to reflect slightly higher funding costs. But that wasn’t enough to bring the property boom down.

This time, the banks are well and truly in the firing line. Not just from the royal commission, which highlighted plenty of bad deeds.

No, this time they stand accused of turning off the credit tap. By tightening up their lending criteria, it is supposedly the banks who put their needle in the bubble.

Last Friday, though, one of the Big Four pushed back. It was Brian Hartzer, CEO of Westpac — perhaps the bank that fared best in the commission — doing some pushing. Though, ever so subtly.

Appearing before a House of Representatives economic committee, The Australian reported that Mr Hartzer has a very different view about falling property prices. He stated it was:

‘…more to do with housing supply and demand factors than with banks’ tightening credit.’

From Westpac’s viewpoint, the falls comes from a market doing what it does. That is, adjusting itself between demand and supply.

He continued:

For Westpac, approval rates have been steady, and our risk appetite hasn’t changed significantly in the last 12 months.’

However, perhaps the most telling was what he said next (again reported by The Australian):

The bigger issue is that not as many people—particularly investors—are applying for loans.’

I guess you can’t put it any more simply than that. By his reckoning, normal market forces are now back at work.

Beware of the real cost

No doubt bank bashing is one of the easiest games in town. With populism now a mainstay of politics, banks will be too easy a target to ignore with an election just months away.

The opposition has already proffered to allocate $640 million to establish a Banking Fairness Fund. The money is destined to help fund financial rights lawyers and counsellors. More specifically, an extra 200 lawyers and another 500 counsellors.

It doesn’t take much of a guess to work out who will fund it. If elected, the current opposition will put a levy on the Big Four banks, plus other financial services companies inside the ASX 100 (like Suncorp, AMP and Macquarie Bank).

Good luck to any politician going into bat for a bank right now — particularly with an election so close. No hard hat will be hard enough.

Commissioner Hayne’s report highlighted the good work these lawyers and counselors do. Especially for those who can’t afford proper legal representation.

Either way, it is a cost the banks will have to absorb. And that means passing them on — via increased interest rates — to all those who own, or want to own, property.

Westpac argue that the supply of new homes already exceeds demand. Well intentioned, or pure politicking, a levy (and therefore higher interest rates) could do more damage than good. Meaning with even less buyers, property price falls could accelerate further.

All the best,

Matt Hibbard,
Editor, Options Trader

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Matt Hibbard is Money Morning’s income specialist. With nearly three decades in the markets, Matt has traded just about every asset class there is. The one thing that has stuck with him over this time is a very simple premise. That is, it’s the cash a company generates that ultimately determines its value. Sure, some stocks might fly away to multi-digit gains. But unless these companies can convert the ‘story’ into real money, the market will eventually find them out. And when that happens, the share price quickly falls back to Earth. That’s why, over at Total Income, Matt is on the hunt for the next generation of dividend-payers. Stocks that should be able to pay their shareholders reliable and rising dividends into the future. Matt is also the editor of Options Trader, where he shows subscribers how to use basic options strategies to generate income. This is income they can generate on top of regular dividend payments. Matt doesn’t play the prediction game, where the aim is to be proven ‘right’. Instead, his goal is to generate as much income as he can for his subscribers, irrespective of whether the market is going up or down.


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