#RBA

Houston we have a housing problem

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Yes, Australian banks are the most levered to the Home mortgage market. Over 61%. Daylight comes second followed by Norway and Canada. US banks are half the Aussies. Of course any snapshot will tell us that prices are supported by immigration and a robust economy. However when Aussie banks are c.40% exposed to wholesale markets for credit (Japanese banks are around 95% funded by domestic depositors) any turn around in global interest rates means Aussie banks will pay more and eventually be forced to pass it on to tapped out borrowers. The Reserve Bank of Australia kept interest rates flat while tacitly admitting its stuck

A study back in March showed that in Western Australia almost 50% of people with a home loan would be in stress/severe stress if rates jumped 3%. Victoria 42% and bubbly NSW at 38%. I can’t remember bubble Japan property (as dizzy as it got) experienced such stress. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

The Weekend AFR reported that according to Digital Finance Analytics, “ there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

The problem for Aussie banks is having so many mortgage loans on their books backed against lofty housing prices means that we could face a situation of zombie lending. The risk is that once the banks mark-to-market the real value of one house that is foreclosed upon the rest of the portfolio then starts to look shady and all of a sudden the loss ratios blow out to unsustainable levels. So for all the negative news flow the banks cop for laying off staff while making billions, note net interest margins continue to fall and when confidence falls out of the housing market, the wholesale finance market will require sizable jumps in risk premiums to compensate. Indulge yourself with the chart pack from the RBA on pages 29 & 30 where net margins are 50% lower than they were in 2000, profitability under pressure, non performing loans starting to rise back toward post GFC levels…call me pessimistic but housing prices to income is at 13x now vs only 7x when GFC bit, how is that safety net working for you?

Some may mock, but there is every chance we see a semi or total nationalization of the Aussie banks at some point in the future. Nobody will love the smell of napalm in the morning but then again when the Vic government is handing out interest free loans to the value of 25% of the house price for first home buyers you know you’re at the wrong point in the cycle. Maybe TARP is just short for tarpaulin.

Reserve Bank of Australia in a Hurt Locker of its own making

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The comments made by the Reserve Bank of Australia (RBA) today take some beating. The AFR wrote, “The [RBA] signalled that it is in no mood to deliver official rate hikes to cool the market amid fears the heavily leveraged household sector would react badly to higher borrowing costs at a time of sluggish wages growth.” Two things are obvious. The RBA finally admits it has a bubble on its hands yet it is so out of control that lowering rates would exacerbate the situation. The most dire prediction I can think of is the risk posed to Aussie banks – part of whole nationalization. We can talk about theoretical stress tests TIL the cows come home but in the real world Aussie banks source 40-50% of their funding from wholesale markets not savings. With a rising rate environment in the US, growing risks of a local sovereign credit downgrade and the most unstable period of politics in Aussie history the upside risk on funding costs is unhinged. Aussie banks balance sheets are saddled with 60% mortgage debt. Housing prices in Sydney are 12x income vs 7x leading up to the GFC in 2008.

It is almost impossible to topple the group think that pervades the US Federal Reserve, ECB or BoJ but the RBA has joined in. Almost a year ago I finally put to paper what I’d argued for years – central banks had lost the plot. Endless printing with less and less impact to show for it. Just asset bubble creation. The RBA is somehow surprised by the bleeding obvious.

Australia has 4 of the top 10 most expensive property markets globally. No other country has anything close. The US has two. Sheer common sense would tell you it is unsustainable. Now we have governments like Victoria thinking they’ll solve the first homebuyer conundrum by removing stamp duty under $600,000 and giving an interest free grant for 25% of the value of the property. I think Premier Daniel Andrews may have indeed called the top of the property market in the space of two weeks. You can take it to the bank (no pun intended) that when governments get deeply involved in markets they must be channeling Ronald Reagan who said, “If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”

Searching for more data points, note that the Australian Bureau of Statistics has not updated the people working multiple jobs data since 2009. If one looks at the US data, those working two jobs or more is at an all time high as people struggle to get by. Look back to Australia and note that electricity prices have doubled in a decade, health insurance is up another 20% this year alone (my own experience).

Sifting through the Reserve Bank of Australia’s statistics section I stumbled over an interesting selection on credit cards. It is quite detailed. After cutting, dicing and slicing the data I noted that financial institutions are perhaps hiding their hand with respect to confidence in consumers. Aussies have around 16.6mn credit cards in service yet since 2010 average credit card limits have stayed stagnant. Normally if wages are rising and confidence is booming credit card companies can up the limit and feel confident of being repaid. Other data suggests that Aussies aren’t going overboard on nudging the limit but could it be that with 180% household debt to GDP ratios that household budgets are stretched. Average cash withdrawals and debit card usage don’t explain away the gap but to me this is telling of how tapped out the average Aussie punter is. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

The Weekend AFR reported that according to Digital Finance Analytics, “there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

What we can be assured of is if we get a housing collapse, Australia’s economy will implode in such a way that these numbers may end up being conservative given the knock on effects of the rapid drop in consumption that would follow causing unemployment to surge. Don’t be surprised if some Aussie banks require a bail out.

The RBA has lost credibility. The Aussie housing market has depended on it for confidence but comments like those made here are evidence that it is chained to an unexploded bomb

Aussie Debit Card average monthly spending growth slowing YoY

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In the previous piece looking at stagnating spending on credit cards and static credit limit growth for the past 7-8 years I checked whether the use of debit cards showed any trends. Of course the high levels in the early 90s was driven by the simplicity of cashless EFTPOS services. High growth was a given. After the tech bubble collapse and after GFC, monthly spending YoY in percentage terms fell. Once again we are entering into a similar slowdown as of the latest Nov 2016 figures. Interesting that the Reserve Bank doesn’t openly publish such data in its ‘chart pack’ but at least leaves the data for people with too much time on their hands.