Puzzle Financial Advice

May 10, 2019

11/05/2019 AFR https://www.afr.com/business/banking-and-finance/australian-property-still-world-s-most-expensive-despite-sharp-falls-20190508-p51l5x

Sydney and Melbourne’s median property prices are still about 60 per cent less affordable than booming Seattle and New York, despite nearly 18 months of sharp price falls in Australian markets, according to global investment bank Morgan Stanley.

Full article also at the link below.

September 26, 2018

• Westpac Group, the nation's second largest lender, is giving risky property investors less than a month to find another lender amid growing concerns about the impact of rising rates, falling values and oversupply. The bank is sending a single-page letter to investors warning it can "no longer support our commercial relationship with you", adding it will work with the borrower to help them find a new lender.

• Martin North, principal of Digital Finance Analytics, who has also been in contact with borrowers who have received the letter, said: "There is a sense of panic among lenders about the risk in their portfolios. They still want growth but there is concern about poor lending standards."

• It comes as new APRA analysis reveals a sharp spike in higher-risk loans by major banks in the three months to the end of June, despite prudential regulators increasing pressure to toughen serviceability.  The analysis reveals a near-threefold increase in the number of loans during the past 12 months that are outside the prudential regulator's new guidelines on borrowers' capacity to service their loans.

• Mortgage brokers, buyers agents and analysts claim the Westpac letters are sending a shiver through an already nervous property sector facing rising lending costs and lower values. They warn it could cause fire sales, as distressed borrowers struggling to finance their properties decide to cut their losses and sell into a falling real estate market.

• Analysis by investment bank Morgan Stanley shows the number of households with multiple investment properties has grown strongly in recent years. About 1.5 million households have one investment property, an increase of about 2 per cent year-on-year. About 384,000 households own two properties, a rise of about 3 per cent, and 18,000 own five, a jump of about 7 per cent.

• BB comment: Housing lenders are starting to cut loose the borrowers who they should not have loaned money to in the first place. (HOUSING SELLING PRESSURE GROWING - BEGINNING OF THE DOWNWARD VISCIOUS CYCLE?)

http://puzzlefinancialadvice.com.au/2018/GFC2/180926_AFR_Westpac_plans_to_dump_risky_property_investors_as_rates_rise_and_returns_fall.pdf

September 26, 2018

Article 1.  http://puzzlefinancialadvice.com.au/2018/GFC2/180920_AFR_Australia_is_most_exposed_to_next_potential_debt_crisis_State_Street.pdf

• "If you look at the increase in debt globally since 2010 it's up over 180 per cent," the visiting US fund manager told the JANA annual investor conference.

• "So it is argued that the next downturn, the next crisis may come from a very conventional place, it may simply come from the end of the debt cycle and a debt crisis," Ms Heinel said.

Article 2.  http://puzzlefinancialadvice.com.au/2018/GFC2/180920_AFR_One_in_five_interest_only_borrowers_could_run_into_mortgage_repayment_arrears_UBS.pdf

• One in five interest-only loan borrowers will struggle to make mortgage repayments when their interest-only loan expires, the latest UBS housing and banking survey reveals.

• The Reserve Bank previously indicated almost half a trillion dollars in interest-only mortgages - or about 30 per cent of all outstanding mortgages - will convert to principal and interest loans over the next four years, jacking up monthly repayments for almost 1.5 million borrowers and cooling housing markets further.

• "With a lack of refinancing options available and the banks reluctant to roll interest-only loans, these mortgagors will have to significantly pull back on their spending, sell their property or could potentially end up falling into arrears."  (SELLING PRESSURE IN HOUSING MARKET).

• "We believe interest-only product knowledge remains poor and the more we delve into the data the more concerning the responses," UBS said.

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November 01, 2017

John Maynard Keynes was one of the most famous economists of the twentieth century.  https://en.wikipedia.org/wiki/John_Maynard_Keynes  Keynes also became  a very good investor, and experience the debt and asset price bubble of 1929. Because of his investment experiences, one of his pearls of wisdom was. "The market can stay irrational longer than you can stay solvent.”  That is a useful piece of wisdom for anyone seeking to short the market during a speculative aset price bubble. https://www.maynardkeynes.org/keynes-the-speculator.html

June 13, 2018

The question is crucial because Australia is one of the few economies to have increased its debt burden since the global financial crisis. Household debt to GDP has tailed off a touch of late, but sits at record highs of around 120 per cent. The next nearest is Canada, at 100 per cent. We also have one of the highest household debt-to-income ratios in the world: 190 per cent. Five years ago it was 160 per cent.

"Economic history shows that there is usually a consequence of a prolonged period of rapidly rising debt, the only question is: how bad will the consequence be", Capital Economics chief Australia economist Paul Dales writes in a provocatively titled new report "Is a financial crisis looming?".

http://www.afr.com/markets/is-an-australian-financial-crisis-on-the-cards-20180612-h11act

https://www.smh.com.au/business/the-economy/boom-turning-to-bust-is-an-aussie-financial-crisis-on-the-cards-20180613-p4zl94.html

https://www.capitaleconomics.com/about-us/our-team/global-economics/paul-dales/

https://www.capitaleconomics.com/publications/australia-new-zealand-economics/australia-new-zealand-economics-focus/is-a-financial-crisis-looming/

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May 07, 2018

Fidelity International says the Australian housing market appears overvalued on three key measures and is a risk for investors, with unemployment and rising interest rates the potential triggers for a correction. Paul Taylor, the highly rated manager of Fidelity's Australian Equities Fund, said there were two questions investors needed to ask about the housing market – is it fundamentally overvalued and what catalyst would shine a spotlight on that overvaluation and create a market reaction?

http://www.afr.com/markets/equity-markets/fidelitys-paul-taylor-is-watching-for-two-triggers-to-spark-house-price-falls-20180507-h0zrbb

The 2 key charts that worry Fidelity's Paul Taylor are here:  https://www.puzzlefinancialadvice.com/single-post/2018/05/08/Fidelity-worries-about-house-prices

It should be noted that on a nominal aggregate incomes to dwelling prices measure, the Sydney market is approximately 45 per cent overvalued. SQM Research expects this over valuation to wind down somewhat over an extended period of time."

http://www.afr.com/real-estate/sydney-and-melbourne-house-prices-could-fall-as-much-as-4-per-cent-says-sqm-20180506-h0zpq5

http://puzzlefinancialadvice.com.au/2018/AFR/180508_AFR_SQM_Sydney_house_prices_are_approx_45pc_overvalued.pdf

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April 10, 2018

• The world's housing markets have become remarkably synchronised, according to  International Monetary Fund research that warns Australian property prices may be vulnerable to unexpected foreign shocks. A study of 40 countries and 44 major cities across advanced and emerging economies shows there has been a simultaneous upswing since the global financial crisis, driven by ultra-easy monetary policy and a pick-up in investor activity led by Amsterdam, Melbourne, Sydney, Toronto and Vancouver.

• The result is that governments and regulators may need to watch offshore markets for threats, such as rising interest rates. The IMF warns this may prompt investors who were attracted to Australia's property markets to increasingly withdraw as borrowing costs escalate, for example in the US,  even if the Reserve Bank of Australia itself keeps the official cash rate steady. Those dangers are particularly acute in housing markets where lending has become too lax.

• A lack of affordable supply and high prices – funded for many Australians carrying one of the advanced world's highest debt loads – remains a political nightmare and raises systemic risks across the economy. The IMF report warns that local powers may be less able to shield Australians if a trigger is set off abroad, such as another financial crisis or sudden economic shock that drives up unemployment.  "Policymakers' ability to address imbalances in the housing market through national or local policies may be constrained, particularly if house prices across many countries decline at once," the fund's economists write.   Australia may be even more vulnerable than some economies because of its reliance on foreign income from exports. "In this case, a decline in external demand may exacerbate the challenges of stabilising household balance sheets, financial markets, and economic activity.  "In this sense, a sharp reversal of the prevailing accommodative global financial conditions could challenge how policymakers address financial and macroeconomic instability should a simultaneous decline in house prices occur."  Worryingly for investors who like to believe houses are "always safer than stocks", the IMF report cautions that "the dynamics of house prices are similar to those of other financial assets.

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http://www.afr.com/news/economy/sydney-melbourne-house-prices-are-now-global-imf-warns-20180409-h0yjty

http://puzzlefinancialadvice.com.au/2018/AFR/180411_AFR_Sydney_Melbourne_house_prices_are_now_global_IMF_warns.pdf

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April 05, 2018

UBS analysts Jonathan Mott says:

• UBS analyst Jonathan Mott was even more bearish. On Thursday he said believed the banking royal commission was likely to recommend a much higher level of due diligence from the banks which would translate into fewer loans being written and potentially a credit crunch.

• Under a more extreme credit crunch scenario, Mr Mott says home loans would fall 8 per cent in 2018, 25 per cent in 2019 and a further 10 per cent in 2020 in a development he says would not be inconsistent with the GFC.

February 09, 2018

Some quote from this article:

• Falling property prices in Sydney and Melbourne could cause the nation's wealthiest consumers to cut back sharply on spending and drive the economy into recession, according to leading economists. Belt tightening by the biggest spenders and most highly geared property investors could have the "unintended consequence" of seriously squeezing retail spending, their research finds.  Growth in consumer spending – which accounts for nearly 60 per cent of gross domestic product – could fall by half over the next 12 months, weakening economic growth unless offset by major capital expenditure by governments and business, economists warn. Daniel Blake, chief economist for investment bank Morgan Stanley, said: "A slowing housing market could force reassessment of gearing and lead to a household balance sheet recession. This is the most likely cause of a shock to the economy."  A 'balance sheet' recession happens when high levels of private sector debt cause individuals to focus on savings by paying down debt rather than spending or investing, causing economic growth to slow or decline.

• The nation's debt to income ratio has hit 200 per cent and mortgage debt has soared from 86 per cent to 92 per cent of household debt in the 10 years to 2017. Mr Lowe (RBA governor), who was speaking at an economic forum hosted by Citi, said the recent macroprudential clampdown was motivated by concerns about household, rather than lenders' balance sheets. "Our concern … was the day might come, when faced with bad economic news, households feel they have borrowed too much and respond by cutting their spending sharply, damaging the overall economy."

• Martin North, principal of Digital Finance Analytics, an independent consultancy, said household consumption has been a key driver of economic growth for the past five years. Mr North said: "There is a tendency to think the more affluent have plenty of capacity to repay and can take on more risk. But quite a few of these wealthiest households are up against it – even with record low interest rates." The bulk of investment properties are held by the nation's wealthiest, many of whom are facing higher repayments as interest-only mortgage payments are replaced with higher cost principal and interest.

• Mr Blake (Morgan and Stanley) said: "The pivotal debate for 2018 will be whether increased capital expenditure – by governments and private sector – can offset the headwind to consumption from falling real incomes, a downturn in house prices and the impact that will have on consumption growth in 2018."

• Brendan Coates, a fellow at the Grattan Institute, a public policy think tank, said: "We should be more concerned that higher debts could prompt a rapid fall in household spending in the event of a [housing] downturn."

• Most of the recent increase in the nation's debt is accounted for by the wealthiest 20 per cent and is roughly split between increased borrowing for owner-occupied housing and investment properties.

• One-third of borrowers have either no accrued buffer to absorb rising costs or falling income, or a buffer of less than one percent.

• One recent RBA paper estimated that each dollar of housing wealth lost reduced household consumption by about a quarter of one per cent, or a tenth of a percentage point fall in GDP for each 10 per cent fall in house prices.  Other analysis shows the "wealth effect" could be ten times as large.

http://www.afr.com/personal-finance/property-slump-could-push-the-economy-into-recession-top-economists-warn-20180206-h0uumi

January 30, 2018

'Unsustainably high housing prices put Australia's economy "at the precipice" of a once-in-a-century bust if global borrowing costs rise more than 150 basis points, warns Industry Super Australia, the peak body for industry super funds.

Housing prices in Melbourne and Sydney rose to nearly seven times average weekly earnings last year from four times in 2000 even as real bond yields – a proxy for lending costs – more than halved, and a country of highly indebted households would suffer if interest rates rose, ISA's chief economist Stephen Anthony said.

"In the 2000s it has gone ballistic, to a point where it looks unsustainable," Mr Anthony told The Australian Financial Review.

"If we have a rapid rise in borrowing costs faced by banks through global markets – we look at long-term US interest rates [which] even this year have risen by 40bp since Christmas ... Once you start getting a 150 basis-point-plus rate increase, you think that a lot of these highly exposed households are in significant trouble."'

http://www.afr.com/real-estate/overvalued-housing-puts-economy-at-the-precipice-industry-super-australia-20180129-h0qco3

January 03, 2018

Richard Holden professor of economics at UNSW Business School, says:  "Having lived in the US during the mortgage meltdown I'm sorry to say that I've seen this movie before (referring to Australian housing market). The question is: why haven't our bankers?" 

• "I don't know if there's a bubble in the Australian housing market, but there are some very troubling markers that suggest impudent borrowing and lending. Just the sort of things that preceded the US housing implosion nearly a decade ago. And I worry that bankers, borrowers, and regulators seem not to have learned the lessons of that very painful piece of economic history. First, the markers.

  • Australia lenders will let you borrow a lot compared to your income.

  • A staggering 35.4 per cent of home loans in Australia are interest only.  Don't forget that a key trigger of the US housing meltdown was when five-year adjustable rate mortgages could not be refinanced, and borrowers faced steep upticks every quarter in their interest rates.

  • So-called "liar loans".  A UBS survey in late 2017 found that approximately 30 per cent of home loans, or $500 billion worth could be affected. This is exactly what occurred in the US

  • We can't even be sure that people have true equity in their new properties. With deposit insurance one can get away with a 5 per cent deposit, although it is typically 20 per cent without. But how careful are banks about where the deposit comes from? There are now troubling suggestions that the leading use of unsecured personal loans is for a mortgage deposit.

  • All of this is aided and abetted by mortgage brokers—or at least some of them. A remarkable 55 per cent of all new mortgages come through a broker. And those brokers get paid based on how many dollars of home loans they write - moral hazard.

  • Mr Elliott, also told ABC's Four Corners that mortgages are all individual risks, saying "The reality is that housing loans are pretty good because they're quite diverse in terms of lots of relatively small loans across ah across the country." "Ah", indeed. One of the key lessons from the US experience was how highly correlated the risks on mortgages are. Do Australia's lenders really not get that?  [i.e. Aussie mortgage lenders seem deluded about how much risk is in their loan book - which is dominated about 60%-70% by mortgages.]

  • http://www.afr.com/opinion/columnists/housing-bubble-or-not-the-property-market-is-repeating-us-mortgage-mistakes-20180103-h0csz8

December 08, 2017

"THE world is shouting at Australia: You’re in over your head with debt. But we’re too revved up on our $1.7 trillion bender to care."

November 22, 2017

"The party is finally winding down for Australia’s housing market. How severe the hangover is will determine the economy’s fate for years to come.

After five years of surging prices, the market value of the nation’s homes has ballooned to A$7.3 trillion ($5.6 trillion) -- or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them."

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Full article  plus video is here:  https://www.bloomberg.com/news/articles/2017-11-23/australia-faces-housing-hangover-twice-size-of-u-s-subprime-era  

November 23, 2017

http://www.afr.com/news/economy/canberras-endemic-shorttermism-should-terrify-the-rba-and-the-rest-of-us-20171123-gzrjrf   24/11/2017 Some key quotes:

• "For much of the past decade – and Friday marks exactly 10 years since the election of Kevin Rudd – economic leadership has been heavily underwritten by the Reserve Bank of Australia."

• "Throughout this clown show the Reserve Bank has steadily managed a remarkable post-boom landing for the economy. Often on its own. With scant political cover in the form of a complementary fiscal policy. There's no doubt it hasn't been perfect. It (RBA) has been forced to cut rates lower than it should have, creating a housing debt bubble of unprecedented proportions.  That debt leviathan – ANZ Bank economists expect the household debt-to-income ratio to clear 200 per cent within a year – is now being nervously dismantled by bank regulators with the same pant-filling suspense and existential terror of a bomb disposal squad. No pressure guys. But the odds aren't stacked in your favour for a mishap-free de-mining operation. Just keeping the debt-to-income ratio from climbing further means inducing a growth-choking fall in overall lending across the economy. For quite some time.

• "Thursday's foreign policy white paper provides fresh evidence of why we should remain very worried about things we cannot control, such as debt in China, or regional security."

• "The financial risks that have built up from ultra-low rates are there for all to see. And the longer-term imperatives of restoring strategic capacity to do good when it'll be needed is arguably more important than the lack of price pressures. The really ugly part of this equation is that by putting the onus back on monetary policy alone to rebuild the defences against the next downturn it needs to run twice as hard. And that's a seriously sub-optimal solution for a nation badly hocked to the gills."

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A very much related issue, is the planned personal tax cuts announced over the last few days. Chris Richardson of Deloitee Access Economics responds as follows:

• http://puzzlefinancialadvice.com.au/2017/AFR/171124_AFR_Chris_Richardson_Hello_personal_income_tax_cuts_goodbye_budget_surplus.pdf

November 19, 2017

Some important commentary at the Sohns Hearts and Minds Conference. Paul Keating:

• Paul Keating: "No-one's running for the door, and also right now, no-one knows where inflation is or when it might spring back. We're in this twilight zone where asset prices are popping, the valves are popping on the engine, we know that." But "it's only when the screws go on that these distortions will reveal themselves, and Mr Minsky actually might have his moment again," he said. A Minsky moment is when leverage-fuelled asset prices are brought down suddenly after a long period of growth.

• At the second annual Sydney chapter of the Sohn event, Mr Keating's concerns were echoed by investors from the venture capital world, bonds and equities.

• The article: http://www.afr.com/markets/market-euphoria-could-be-setting-up-a-minksy-moment-paul-keating-says-20171117-gzno9n  18/November/2017

Second article:

• Former prime minister Paul Keating's prediction that the bull market can be pierced by a "Minsky moment"-style collapse has an element of truth, economists agree, but will be almost impossible to avert.

• That being so, financial markets are seemingly willing to disregard the flashpoints building up.   "You can equally talk about the Minsky-moment concept across any asset, and Australian housing does seem to be one where there's a build-up of credit."  (Alex Joiner, chief economist at IFM)

• We don't have a corporate debt problem, we have a housing debt problem. For us that's where this Minsky-style moment would be the most clear and present danger to my mind." (Alex Joiner, chief economist at IFM)

• Independent economist Warren Hogan says that "what we think of as normal", spanning the past 30 years, is informed by falling long-term rates, access to credit and the impact of technology. "We essentially had a Minsky moment in 2008 when we had taken on clearly too much debt and the response by central banks has been to encourage the accumulation of more debt to keep the economy going through quantitative easing and super low interest rates. My guess is that Keating's saying we're out of ammo. If we get another financial shakedown of some sort, there's very little we can do about that."

• The article: http://www.afr.com/markets/paul-keatings-minsky-moment-prediction-rings-true-among-economists-20171118-gzoaos 20th November 2017.

A bit more about Minsky moments: https://en.wikipedia.org/wiki/Minsky_moment

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November 09, 2017

AFR article 9/November/2017 "Mortgage stress grows in the suburban fringe" makes the following comments:

• The Institute estimates a 2 percentage point rise in interest rates would recreate the mortgage stress of 1989 when rates topped 18 per cent.

• But one third of borrowers have either no accrued buffer or a buffer of less than one month's mortgage repayments, according to the institute.

• John Flavell, chief executive of Mortgage Choice, a listed national mortgage brokerage, said a recent survey of 1250 households found that nearly 47 per cent said they would struggle if interest rates increased by 1 per cent.

• Martin North "Remember there is an 18-24 months' lag between stress and default."

  http://www.afr.com/personal-finance/mortgage-stress-grows-in-the-suburban-fringe-20171107-gzgwac

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March 30, 2017

Except from IMF report 1/April/2016-31/March/2017 https://www.bis.org/publ/arpdf/ar2017e.pdf  Page 48.

Excessive household debt and medium-term growth

Excessive indebtedness has been one of the root causes of financial crises and the ensuing deep recessions. In recent years, the focus has been on household debt, as excessive leverage by the household sector was at the heart of the Great Financial Crisis.

It is well recognised that household borrowing is an important aspect of financial inclusion and can play useful economic roles, including smoothing consumption over time. At the same time, rapid household credit growth has featured prominently in financial cycle booms and busts. For one, household debt – or debt more generally – outpacing GDP growth over prolonged periods is a robust early warning indicator of financial stress.   Furthermore, there is growing evidence that household indebtedness affects not only the depth of recessions but growth more generally. In an influential paper, Mian et al (forthcoming) find that an increase in the household debt-to-GDP ratio acts as a drag on consumption with a lag of several years. BIS research reinforces this conclusion.

https://www.livewiremarkets.com/wires/the-bis-says-we-ll-soon-have-to-pay-for-our-private-debt-binge

November 02, 2017

Some quotes from this article:

• The number of Australian families facing mortgage distress has soared by nearly 20 per cent in the past six months to more than 900,000 and is on track to top 1 million by next year, according to new analysis of lending repayments and household incomes.  That means net incomes are not covering ongoing costs in nearly 30 per cent of the nation's households, up from about 25 per cent in May, the analysis by Digital Finance Analytics, an independent commentator, shows.

• "Risks in the system will continue to rise," Martin North, DFA principal, said. "The numbers of households impacted are economically significant," "Mortgage lending is still growing at three times income. This is not sustainable."

• "If interest rates increase by 2 percentage points,  mortgage payments on a new home will be less affordable than at any time in living memory, apart from a brief period around 1989 -- an experience that scarred a generation of home-owners."

• Nearly 22,000 households, of which 11,000 are professionals or young affluent, are facing severe distress, which means they are unable to meet mortgage repayments from current income and are having to manage by cutting back spending, putting more on credit cards, refinance, or sell their home.

• About 52,000 households risk 30-day default in the next 12 months, up 3000 from the previous month. A lender, or creditor, can issue a default notice to a borrower behind on debt. 

• Mr Coates said: "Growing household debt has made the Australian economy more vulnerable. But the debt situation is not as worrying as the aggregate figures suggest.

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In a related article:  http://www.afr.com/news/economy/household-debt-still-growing-six-months-into-apra-crackdown-20171031-gzbquy   we find that "the (Australian) household debt-to-income ratio has climbed above 190 per cent, an unprecedented level and one of the highest in the world."

October 27, 2017

Residential property developer Michael Yates says "all cycles come to an end."

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This article says as follows:

It is the last site he owns.

The developer who made a $36 million profit in 2014 from selling a site at 661 Chapel Street in South Yarra - which Malaysian developer Gamuda is now building on - is selling the Claremont Street site, for which he was offering apartment buyers the incentive of a shared electric vehicle, and has joined it with a neighbouring one owned by cleaning company AES Services boss George Haritos to make one 969-square-metre site.

October 23, 2017

Wayne Byres, head of APRA says it will "keep its caps on loans to property investors in place until household debt levels stabilise."

Since the house price bubble mirrows the mortgage debt bubble, this declaration by APRA in effect is a declaration of determination to stop Australian house prices rising.  And  since, we know from history, that bubbles do not just peak and then stabilise, almost by definition this will bring an end to the house price bubble. That is, it will bring on the house price crash. Speculators in residential property, seeing no more capital gains potential when house prices level out, will start selling down their residential property portfolios, bringing on the house price crash.

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A few more quotes from this article:

• Australian Prudential Regulation Authority chairman Wayne Byres said that while lending restrictions in interest-only and investor loans were working, it won't step back until it sees household debt levels stabilise and lending standards increase.    "For those of you who chafe at the constraint, their removal will require us to be comfortable that the industry's serviceability standards have been sufficiently improved and – crucially – will be sustained,"

• "We will also want to see that borrower debt-to-income levels are being appropriately constrained in anticipation of, eventually, rising interest rates."

• Mr Byres said he expected that in a period of high house prices, low interest rates, weak income growth and rising household debt levels, bankers would respond by tightening lending standards, which had "absent regulatory intervention, been drifting the other way".  The, banks, Mr Byres  said, have favoured increased market share over prudence.  "That temptation has, unfortunately, been widespread and not limited to a few isolated institutions – the competitive market pushes towards the lowest common denominator."

• In a separate report published on Monday, credit rating agency Moody's Investors Service said Australia's high household debt levels remained a "long-term threat to financial stability". A sharp rise in property values  had pushed household debt-to-income levels to a historic high of 190 per cent, and while unemployment was low, underemployment was on the rise.  "Highly indebted households experiencing only moderate income growth are vulnerable to a rise in interest rates or a deterioration of their finances, which could lead to a housing market downturn and larger losses for banks," Moody's said. 

October 23, 2017

"The chart also points to the most obvious risk. With households more indebted than ever, the impact of rising rates could hit very hard. That risk is not reflected in the rewards of owning residential property, which has become a game of speculation.

Gross rental yields currently sit at record low levels, hovering at around 3.0% in Sydney and 2.8% in Melbourne. After expenses, that’s no better than returns to cash, which means residential property investors are punting on future house price rise."

October 22, 2017

http://www.afr.com/real-estate/150-basis-points-on-lending-would-trigger-a-recession-property-exec-20171021-gz5o8v

• "About six to 12 months ago we formed the view that if interest rates in the broad-based mortgage market moved 150 basis points it would effectively trigger a recession," Mr Fehring said, "It's moved about halfway by now."

• "Housing is the largest asset class in the country – it's $7.5 trillion in savings so if you destabilise it you will put this economy into a recession – it's absolutely guaranteed," Mr Steinert said. "So for APRA to see distortions in lending practices and then put some overlays onto that is very good regulatory practice. I think APRA prevented a crash in Brisbane."

January 01, 2020

AFR 21 October 2017  "Morry Schwartz is out of 'toppy' property market"

• Veteran Melbourne publisher and property developer Morry Schwartz is out of a "toppy" property market and has no plans to return. Mr Schwartz, who said he survived the 1989 property crash "by the skin of my teeth", told AFR Weekend his last crane came down a year ago and for the first time in 30 years he is out of the game.   I haven't got one property under development and I don't have any property development planned at the moment," he said. "It's much better to be out when things are toppy."  The Melbourne publisher and property developer was virtually wiped out in the 1989 property plunge that followed the Black Monday stockmarket rout 30 years ago this week. 

• The revelation comes as one of Australia's most well-regarded property minds, Lyn Shaddock, who ran the listed developer Trinity Group during and after the 1987 crash, told The Australian Financial Review this week "it actually took about two years before things started to get nasty in property".  "But I honestly believe history does repeat itself. Most of the time property follows the stockmarket by about two years – it's precisely what happens every cycle." Mr Shaddock believes the market is now "highly priced and will correct itself".

October 13, 2017

AFR 14 October 2017.

• "Some 1.9 million investment properties could come under selling pressure as speculators with multiple properties or those nearing retirement are forced to sell, Citi Research says. Citi says the traditional response of investors to ride out a downturn was now less viable because of high debt levels, particularly among investors aged in their 50's and 60's.

• The analysis of Digital Finance Analytics data revealed a surprisingly high level of property speculation, with around 12 per cent of residential investors owning six or more properties, a risk factor also highlighted by the Reserve Bank on Friday. Martin North, co-author of the report and principal of Digital Finance Analytics, an independent consultancy, said regulatory attempts to curb an estimated $680 billion of interest-only mortgages had come too late." 

• http://puzzlefinancialadvice.com.au/2017/AFR/171014_AFR_Speculators_lose_the_ability_to_ride_out_house_price_downturn_Citi.pdf

• http://puzzlefinancialadvice.com.au/2017/AFR/171018_AFR_Falling_house_prices_extremely_painful_when_owners_highly_leveraged_warns_Citi.pdf

October 13, 2017

The October 2017 RBA Financial Stability Report included the following comments:

• Key Vulnerabilities

  • Authorities in the affected countries have expressed concern that high, and rising, household debt relative to income, together with riskier lending, has likely made households less resilient to negative shocks. At the same time, there is concern that the rapid increase in housing prices has increased the risk of a subsequent sharp price fall, particularly if it has been partly driven by speculation. Taken together, these developments have increased the risk of financial and macroeconomic instability.

  • While household debt levels are high, and rising, to date the impact on households’ ability to service their debt has been muted by falls in interest rates to historically low levels. Nonetheless, highly indebted households are more likely to struggle to repay their debts, or substantially reduce their consumption, in response to a negative shock, such as a rise in unemployment, an unexpectedly large increase in interest rates or a sharp fall in housing prices. This could lead to bank losses and slower economic growth. Banks in turn might be less able or willing to provide credit to the economy, amplifying any downturn.

Key links:

• https://www.rba.gov.au/publications/fsr/2017/oct/pdf/box-a.pdf

• https://www.rba.gov.au/publications/fsr/2017/oct/

These concerns will be why the RBA is about to do some stress testing on Australian banks.

• http://puzzlefinancialadvice.com.au/2017/AFR/171014_AFR_Reserve_Bank_to_stress_test_banking_sector_as_risks_rise_RBA_worried.pdf

October 13, 2017

"Closer to home, Sydney and Melbourne house prices are extremely high and household debt-to-income ratio has hit a record 189 per cent, following a buying binge over the past five years. The psychology among most local buyers seems to be that property values only ever go up, not down. Thaler's empirical research shows that such irrational thinking can sometimes turn out to be dreadfully misguided."

October 05, 2017

A few points from this article:

• UBS said that over 70 per cent of survey respondents who took out an interest-only loan said they were "under moderate to high levels of financial stress". Peter Braig (Bruce Baker comment: This suggests that many mortgagees are stretching themselves the limit of the size of loan they could get, leaving no margin for error. From that point, it does not take much to start falling behind on repayments.)

  • "we believe many borrowers may face substantial stress as interest rates rise or when they revert to principal and interest," UBS wrote.

• About one third of new borrowers with interest-only loans don't understand how their mortgage works, investment bank UBS has claimed in a follow up to its controversial "liar loans" research report.

  • • Note: "interest-only loans account for $600 billion of the $1.7 trillion of mortgages."

• The only plausible explanation, they said was that "around one-third of interest-only customers do not know or understand that they have taken out an interest-only mortgage".

For full article, click photo or link below.

October 03, 2017

Some of IMF comments as reported in AFR:

• It suggests that a 5 per cent increase in the ratio of household debt to gross domestic product leads to a 1.25 per cent fall in real GDP three years ahead, and rising household debt is correlated with future falls in private spending.

• For a country such as Australia, where households have a debt-to-income ratio of more than 190 per cent, servicing the burden can "cause significant debt overhang problems when a country unexpectedly faces extreme negative shocks," the fund said.

• Higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high, and with greater risk of declines in bank equity prices," the report warns.

Full article at link below or by clicking photo.

August 19, 2017

Updated global house prices - from "The Economist" is here 20Aug2017.

July 17, 2017

The article starts as follows:

• • ‘Billions of dollars of hybrid securities issued to retail investors by the major banks will eventually cause problems for the financial system, according to outgoing chairman of the Australian Securities and Investments Commission Greg Medcraft.

  • In an interview with The Australian Financial Review to mark his six-and-a-half years as chairman, Mr Medcraft said hybrid securities were a "ridiculous" product for retail investors. He said it was notable that they had been banned for retail investors in other markets such as the United Kingdom.

  • "If a bank has any trouble they're the first line of defence," he said."If you wipe out retail and all those retail investors are superannuation investors you are robbing Peter to pay Paul.’

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In June 2017, one Spanish and 2 Italian banks had to be rescued. My summary of the key issues for Aussie investors is here:   http://puzzlefinancialadvice.com.au/2017/Core/Bank_rescues-Italian_banks_are_the_latest_170718_01.pdf

July 02, 2017

'Pre-emptive interest rate hikes aimed at curbing Australia's property boom and surging household debt are likely to be "very costly" to the broader economy and jobs, warns a leading US central banker who also says house prices are "flashing red". Unlike in the US, which saw its housing market crater in 2008, many buyers in countries such as Australia and Canada "perhaps didn't learn the lesson of how painful" a house price bust can be, warned John Williams, president of the Federal Reserve Bank of San Francisco.'

July 03, 2017

Given that Australian household debt to GDP is bigger than that of Ireland before their house price crash, does that mean that Australia's coming house price crash will be bigger than that in Ireland?

Note: the US Fed keep track of Aussie household debt to GDP here. https://fred.stlouisfed.org/series/HDTGPDAUQ163N

July 03, 2017

I think the comparaison between Australia and Ireland is very instructive.

June 09, 2017

Australians ratio of household  debt to household income worse than US & UK and their house prices have already crashed. Australian house price crash is still to come.

June 25, 2017

Bank of International Settlements warning - as reported in the Australian:

Australia will pay a price for its household debt boom through lower future growth, even if it avoids a housing debt bust. The Bank for International Settlements believes Australia and Canada, which both avoided banking failures during the global financial crisis, are among the countries most at risk. With the US leading what is expected to become a global lift in interest rates, the burden of servicing household debt could rise sharply.

The BIS annual report,( http://www.bis.org/publ/arpdf/ar2017e.htm ) released today, draws on an emerging body of academic research highlighting the links between household debt and subsequent underperformance.

“Household debt — or debt more generally — outpacing GDP growth over prolonged periods is a robust early warning indicator of financial stress.

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Related article: 

• http://puzzlefinancialadvice.com.au/2017/AFR/170625_Australian-One_quarter_of_Aussie_households_face_mortgage_stress.pdf

• "Private sector surveys have shown that almost a quarter of households face “mortgage stress”, meaning other consumption is crimped to make way for mortgage payments."

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June 06, 2017

'A large decline in house prices from current elevated levels poses the "single largest domestic risk" for the Australian economy, according to the Organisation for Economic Co-Operation and Development.

In its June economic outlook report, the OECD flagged the possibility of a sharp fall in house prices as the major risk factor for the economy and said that, if it eventuates, such a drop could reduce household wealth and consumption and damage the construction sector, leading to significant job losses.'

July 03, 2017

When you look at the long-term price movements of house prices, you have to wonder how it is that some people have come to the view that house prices always go up.

November 30, 2014

Loose money supply (and very low interest rates) has fed massive speculation in asset prices (particularly residential property prices) in the Anglosaxon world (and parts of Europe) over most of the last 20 years.

February 26, 2012

“Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion. Tell an Australian and you’ll have World War III.” Jeremy Grantham - https://en.wikipedia.org/wiki/Jeremy_Grantham.  Grantham, one of the most famous successful value investors writes regular newletter. In one of those newletters, he provides a set of pointers to help guide good long-term value investing.  http://puzzlefinancialadvice.com.au/2018/Grantham/120227_JGLetter_LongestLetterEver_4Q11_Guides_to_long_term_investors.pdf     His 6th point is as follows:

Try to contain natural optimism. Optimism has probably been a positive survival characteristic. Our species is optimistic, and successful people are probably more optimistic than average. Some societies are also more optimistic than others: the U.S. and Australia are my two picks. I’m sure (but I’m glad I don’t have to prove it) that it has a lot to do with their economic success. The U.S. in particular encourages risk-taking: failed entrepreneurs are valued, not shunned. While 800 internet start-ups in the U.S. rather than Germany’s more modest 80 are likely to lose a lot more money, a few of those 800 turn out to be today’s Amazons and Facebooks. You don’t have to be better; the laws of averages will look after it for you. But optimism comes with a downside, especially for investors: optimists don’t like to hear bad news. Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion. Tell an Australian and you’ll have World War III. Been there, done that! And in a real stock bubble like that of 2000, bearish news in the U.S. will be greeted like news of the bubonic plague; bearish professionals will be fired just to avoid the dissonance of hearing the bear case, and this is an example where the better the case is made, the more unpleasantness it will elicit. Here again it is easier for an individual to stay cool than it is for a professional who is surrounded by hot news all day long (and sometimes irate clients too). Not easy, but easier.

The best book on asset price bibbles "Manias, Panics and Crashes" was written by Charles Kindleberger https://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146 . Charles Kindleberger described price bubbles as collective hysterias.  As summary of some of the key points from this book can be found here. http://www.businessinsider.com/bubbles-all-look-the-same-2014-8?IR=T

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The point here is simply as follows:  The inability of most Australians to have a rational discussion about house prices and to consider the possibility that house prices could fall substantially, is a classic symptom that you would expect in a price bubble. I think a big part of why such discussions are more readily accepted in Europe is that in many European countries there is a much fresher memory of major house price crashes eg around 2008/2009 (or in the case of USA 2006-2010).

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