More than just home loans
In recent months, there has been a sharp increase in the cost of funding for Australian home lenders that has been driven primarily by the US Government borrowing money to fund the Trump tax cut program.
Essentially the US Government is competing with and crowding out other borrowers.
The situation was summarised by Reserve Bank of Australia Governor Philip Lowe in his statement earlier this month:
“Conditions in US dollar short-term money markets have tightened over the past few months, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate. This has flowed through to higher short-term interest rates in a few other countries, including Australia.”
The graph tells the story better than 1,000 words.
From the AFR - 7 March 18
A leading national property finance company has collapsed potentially leaving an estimated 10,000 residential, commercial and property investors in the lurch about the fate of nearly $300 million worth of deposits.
Deposit Power, which provided interim finance to property buyers, has closed its doors after the collapse of New Zealand's CBL's insurance, which was an issuer and guarantor of deposit bonds.
CBL has yet to inform Australian liquidators about whether Sydney-based Deposit Power will fully, or partially, back the bonds.
Deposit Power had links with most of the major property broker networks, including Mortgage Choice and Connective, and major banks through their broker networks.
There are fears that the status of existing deals – which used the deposit bonds as a form of bridging finance for up to 48 months – could be jeopardised by the collapse of the insurance company
The full story in the Australian Financial Review
Here's the link to Deposit Powers Notice to Stakeholders
APRA continues to be concerned over the percentage of residential loans held by Australian banks - over 60% of thier total loan portfolios - and the percentage of loans that are for investment purposes and whre the repayments are interst only. The proposed measure will result in higher interest rates and repayments for borrowers that have investment loans that are interest only. The higher risk weightings will also apply to SMSFs that hold residential property that is subject to a mortgage. Likely winners will be SMEs that have business loans secured by property - the risk weighting will be reduced from 100% to 85% - should result in slightly cheaper rates
From APRA's Discusssion Paper released on 14 Feb 18 (Discussion Paper can be downloaded here)
A key focus is the appropriate capital requirement for investment and interest-only mortgage loans. Although, as a class, investment loans have typically performed well under normal economic conditions in Australia, this segment has not been tested in a nationwide downturn. Further, an increasing proportion of highly indebted households own investment property relative to past economic cycles. Experience in the United Kingdom and Ireland during the global financial crisis, for example, showed that previously better-performing investment loans can fall into arrears in higher volumes than loans to owner-occupiers in times of stress.
Importantly, regardless of historical loan performance, APRA’s view is that there are potential systemic vulnerabilities to the financial system created from high levels of residential mortgage lending for investment purposes. As noted by the RBA, investment lending can amplify borrowing and house pricing cycles:
Periods of rapidly rising prices can create the expectation of further price rises, drawing more households in the market, increasing the willingness to pay more for a given property, and leading to an overall increase in household indebtedness.
Similarly, the significant share of interest-only housing lending, including to owner occupiers, is a structural feature that increases the risk profile of the Australian banking system. Interest-only borrowers face a longer period of higher indebtedness, increasing the risk of falling into negative equity should housing prices fall. Borrowers may also use interest-only loans to maximise leverage, or for short-term affordability reasons. Even though loan servicing ability (serviceability) is now tested at levels that include the subsequent principal repayments, borrowers may face ‘payment shock’ when the interest only period ends and regular repayments increase, in some cases significantly. This payment shock is particularly acute when interest rates are low.
From ABC News 10 Feb 2018
If you needed a sign Brisbane has an apartment oversupply, a two-bedroom unit with city views in one of the most trendy suburbs has just gone for $50,000 less than it was bought for two years ago.
The reasons for the price plunge
b) Crackdown on foreign lending
c) Banks requiring higher deposits from domestic buyers
d) APRA cap on interest-only loans
e) Tougher lending criteria for developers
The Paddington unit, which sold for $440,000 after it was renovated, is just one of hundreds of units that have crashed in value since an apartment construction boom created an oversupply, with no end in sight.
It is not just small units affected, either. A big three-bedroom pad in South Brisbane is now on the market for $799,000, which is what it was sold for brand new 10 years ago.
A luxury three-bedroom unit at Toowong that would have snared up to $950,000 at sale two years ago has lost about $100,000 in value because of the soft market, according to its seller.
There are also plenty of investment units in middle-ring suburbs like Lutwyche, Mount Gravatt, Albion or Kelvin Grove. Units in Kelvin Grove's Urban Village that were valued at $450,000 two years ago are now going for $399,000. Agents in those areas are "submitting all offers" and taking buyers' low bids very seriously.
Unit prices are down 4.5 per cent in 12 months
Australian housing is worth $6.8 trillion according to the Australian Bureau of Statistics. Home and investment loans form 60% ($1.7 trillion) of the loan portfolios of Australian banks, a higher proportion of their assets than any other banking system in the world.
During 2008-9 the Labor Government turned on the financial taps to save the country from the worst of the GFC. Successive governments have left them on, and with an implicit guarantee from the Federal Government the banks have continued to make hay. Interest rates are lower than the 1970's, lending criteria were eased and valuation of properties bought at auction are no longer required. Add an out of control (unless you arrive by boat) immigration policy and you have the recipe for a property boom. (in Sydney & Melbourne).
Everyone wins - or do they?
The federal government takes the world record for avoiding a recession, the state govenments make a fortune out of stamp duty, and local councils in Melbourne & Sydney dramatically increase rate revenue. Baby boomers sell the family home to developers, pay out the mortgage, downsize, help the kids out and live happily ever after on the balance.
Here what some of our top economic forecasters think - Bear in mind that with one exception they have a vested interest in a soft landing - they either work for banks or companies that are heavily invested in the real estate industry, and then theres ScoMo.
Shane Oliver - Chief Economist AMP Capital
The comments from the following commentators are from an article in ABC News today 3 Jan 2018 ( read the article here)
Cameron Kusher, head of research Australia, CoreLogic:
Louis Christopher, managing director, SQM Research
Professor Steve Keen, Kingston University, London
George Tharenou, chief economist, UBS
Robert Mellor, Managing Director, BIS Oxford Economics
Nerida Conisbee, Chief Economist, REA Group
Scott Morrison, Treasurer, Australian Government
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SMEs are deserting Australian banks for online lending firms, but high fees can mean the loans do more harm than good. Angus Sedgwick, CEO of The Invoice Market, says cash flow financing can provide a fairer and more flexible funding option for Australian businesses.
Even before the report of the Small Business Loan Inquiry, which highlighted a range of problems with the Australian lending market earlier this year, businesses had been looking for quicker and fairer funding. While many online lenders certainly provide the former, high and opaque fee structures mean SMEs may find better options by moving away from the concept of debt finance altogether - Read more
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