Tag Archives: FHOB

Aussie Banks To Cut Lending, High Risk

11 Apr

From the Sydney Morning Herald:

Banks could be forced to curb sales of mortgages after a feeding frenzy on housing over the past 18 months has seen their exposure to the property market hit record levels.

Last month, BHP Billiton’s outgoing chairman and former head of the National Australia Bank, Don Argus, likened the big banks to ”giant building societies”, accusing them of neglecting business lending to chase the mortgage market.

Of the big banks, the Commonwealth has the most concentrated exposure to the property market – 65 per cent of its lending book is tied up in mortgages. For Westpac and St George combined it is 62 per cent.

ANZ and NAB, which traditionally have a bigger exposure to business lending, have pumped up their mortgage exposure – it accounts for more than 50 per cent of their Australian loans books.

Could Australia experience a property crash, just like those in the USA, UK, Ireland, Spain … in fact, like most of the Western world?

Professor Steve Keen, the only Australian economist to forecast the Global Financial Crisis, believes our property bubble must burst too. It is just a matter of time.

Thanks to the Rudd Government’s doubling of the First Home Owners Boost, tens of thousands of (mostly) younger Australians were suckered into huge mortgages when interest rates were at their lowest.  Now, with household debt levels at an all-time high, the experience of so many other nations says that our bubble will burst too.

“If you do not manage debt, debt manages you”.

Barnaby is right.

How Long Has The Lucky Country Got?

31 Mar

Edward Chancellor is the author of the classic text on financial manias, Devil Take the Hindmost. In 2005 he wrote Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain, in which he correctly predicted the GFC. His recent report for Boston-based GMO outlined ten signs of a mania in progress, and showed that the Chinese economy meets all ten of those signs. He has also written recently about the Australian housing mania.

From the Financial Times:

Between 1996 and 2006, US home prices rose by nearly 90 per cent in real terms. Australian home prices rose by roughly the same amount.

Over this period, the US private sector increased its indebtedness by two-thirds of GDP. Australian private debt increased by a similar magnitude. Over the past three years, US home prices have fallen by 30 per cent, according to the S&P/Case-Shiller Composite Index. American households have started to deleverage. By contrast, Australian home prices have climbed 30 per cent since 2006 and households continue to pile on debt.

There are a number of explanations for this divergence…

While other governments expended their resources on shoring up busted banks, the Australian stimulus went straight to consumers. Fiscal transfers increased personal disposable incomes by 4 per cent, according to Professor Steve Keen of the University of Western Sydney. Canberra also bolstered the housing market, raising the subsidy for first-time home buyers to a maximum of A$21,000 (£12,200, €14,000, $18,600). Rising home prices arrested incipient deleveraging by Australian households. Outstanding mortgage debt has actually grown by 6 per cent of GDP since February 2009.

Australia may have been fortunate. But it is not out of the woods. For a start, the real estate market remains in bubble territory. Australian home prices are currently some 70 per cent above their long-term trend level. A recent survey by Demographia International finds that all of Australia’s major housing markets were valued at more than five times average incomes, and defines them as “severely unaffordable.” Initial mortgage payments for a home in Sydney or Melbourne are likely to exceed half of your disposable income, claims Demographia. The Australian housing market looks vulnerable to further rate rises.

Then there are the waning effects of the government’s stimulus to consider. The extra subsidy for first-time home buyers ended last year. The removal of this grant could have a similar effect on Australian real estate as the UK government’s reduction in mortgage interest relief in 1988, which killed off the frenzied Lawson housing boom. Prof Keen claims the first-homeowner’s grant has sucked people into the housing market who would not otherwise have bought. One report suggests many recent first-time buyers in Australia are already struggling to meet payments. This is eerily reminiscent of early stage delinquencies on subprime loans in the US back in late 2005. Australia is also exposed to the removal of China’s stimulus measures. China’s actions boosted commodity prices and improved Australia’s terms of trade. Now, Beijing appears more concerned about inflation and potential bad loans from uneconomic investments.

Aussie house prices have not fallen since the early 1950s. A certain complacency is therefore understandable. Yet not long ago many Americans also believed that domestic home prices could never fall. So far Australia has avoided its day of reckoning. But how long will the lucky country’s luck last?

Not long at all.

A recent survey of 26,000 mortgage borrowers showed that:

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

On Monday, RBA Governor Glenn Stevens appeared on commercial TV – an unprecedented act by an RBA official – to warn the public about the dangers of the property market.

On the same day, I came across the following comment by a reader of The Australian newspaper:

Waiting for the “correction” Posted at 1:22 PM Today

Now here’s something interesting. My “relationship manager” at Westpac says the housing market is heading for a “significant correction” because the major banks are about to insist on much higher deposits because of their alarm at the amount of questionable loans on their books. This guys says the word is that the Commonwealth will soon insist on a 30 per cent deposit for new purchases and then only to existing customers. “When that kind of thing happens, the heat will immediately go out of the market so stay out of it till the dust settles”. This bloke says Westpac is especially worried about the impact of the first home buyers grant and they’re already seeing significant loan defaults as interest rates rise. “These people took their $14-thousand, then got Mum and Dad to throw them the rest of their deposit because they were led to believe they’d miss the boat. Kevin Rudd has used taxpayer funds to entice a whole lot of young people into buying places they couldn’t afford and going bankrupt as interest rates rise”. That’s a direct quote from a guy at Westpac who used to be in the business of throwing money at you. God’s honour. Maybe the South Seas bubble IS about to pop?

To learn more about the dangers of debt, and how it has fueled the Australian housing bubble, visit the website and blog of Professor Steve Keen.

Special Note:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

Australia’s Property Bubble: It’s Here

27 Mar

From the Sydney Morning Herald:

It’s official: 60 per cent of investors believe Australia has a property bubble. A confluence of housing shortages, low interest rates, speculative fervour and last year’s move by the Rudd Government to relax foreign ownership rules on real estate have turbo-charged house prices.

This is all scary stuff.  Investors played a key role in expanding the property bubble through the late 90s. In 1990 investment loans represented 16 per cent of Australian mortgages at $13 billion. By 2008 that figure had ballooned 2400 per cent to $310 billion, or 31 per cent of total mortgages. Investor attitudes matter.

The survey revealed, however, that moral hazard may be much larger than investors themselves admit, with 42 per cent expecting the Rudd Government to introduce another round of first home buyer grants if the current boom shows signs of ending.

The increase in foreign purchases also cannot be under estimated, following the decision last March by the federal government to relax its rules on property ownership. This abolished mandatory reporting of such acquisitions in a bid to ”enhance flexibility in the market”.

Before the change, foreign investment in Australian residential property had already started increasing, up 33 per cent to $20.4 billion. It is not known what the figures stand at in 2010 but there are suggestions that more than 30 per cent of homes auctioned are purchased by foreign speculators. If this is the case, it will dramatically add to the property bubble.

It is a potential political time bomb. Numerous readers have written in complaining that they are being priced out of the market by overseas bidders…

Another Investor Pulse reader wrote: “So much for Rudd’s ‘working families’. Australians should get priority over foreign investors for what limited housing we have. How can Australians compete when Chinese borrow at home at 1 per cent? The Australian property market is strong and doesn’t need to be propped up. The Government should act now to stop this misguided and UN-Australian policy. Shame on you, Mr Rudd, for selling out on Working Families.”

Barnaby Joyce is the only Australian politician who has been brave enough to endure smears and criticism, by daring to question the Rudd Government’s relaxing policies on foreign investment.

Here’s just one of Senator Joyce’s press releases on the topic from last year,  “FIRB Changes – Australia’s Sovereignty At Risk“:

Senator Joyce today called on Treasurer Wayne Swan to re think his undermining of the present system of reviewing foreign investments and takeovers.

Mr Swan’s announcement should sound very loud alarm bells to anyone concerned with maintaining Australia’s sovereignty over its resources and business interests given that  Mr Swan plans to remove  Foreign Investment Review Board supervision of over 20 percent of all business applications currently reviewed by the board.

This effective sidelining of the FIRB relating to a substantial number of applications is deeply troubling as it removes a long standing and much needed level of accountability and transparency of foreign investment in Australia particularly by individual investors from countries such as the Peoples Republic of China.

It is astounding Mr Swan would seek to punch such a big hole in Australia’s foreign review processes, leaving the back door wide open for foreign interests to buy Australia paddock by paddock, business by business without any accountability to the Australian people.

Unfortunately for Australia each of the announced measures will allow that hole to get bigger to the detriment of Australia’s sovereignty and its national interest.

Yet again, Barnaby is the only one who is on the ball.

UPDATE:

From The Age:

Foreign buyers inflating market

Reserve Bank governor Glenn Stevens says foreign buyers are a factor in rising house prices.

Mr Stevens said the bank was monitoring how much the federal government’s decision last March to relax its rules on foreigners owning property had contributed to surging prices for housing.

He said the role of foreign purchases was ”an important one and it’s one we’re giving some attention to”.

Household Finances Deteriorate

20 Mar

From the Sydney Morning Herald:

The Australian economy is set to grow further in 2010, but household financial conditions are deteriorating to the extent the nation could experience a W shaped economic recovery, a report shows.

Melbourne Institute bulletin of economic trends shows the domestic economy is set to grow by 0.8 per cent in the March quarter and by 0.6 per cent in the June, September and December quarters.

But the report’s household financial conditions index fell 16.6 per cent to 28.8 index points in the March quarter of 2010.

It was the first fall in the index after four consecutive quarters of improvement.

More than half of the 14.4 per cent households who consider themselves to be financially stressed, are employed while employed people with a household income of over $80,000 are the most financially stressed out of all income groups.

The report said part of the deterioration in financial conditions was due to the increased need to service household debt, in particular mortgage debt.

This report indirectly highlights the very real danger of Australia’s unprecedented level of private debt. And in particular, mortgage debt.

Economist Steve Keen, who predicted the GFC in 2005, is Australia’s leading proponent of the argument warning against high private debt levels, and against government policies which have dangerously inflated Australia’s private debt, such as the First Home Owers Boost.

Visit Professor Keen’s ‘Debtwatch‘ website to learn more.

Special Note:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

Europe’s Banks Brace For UK Debt Crisis

14 Mar

From the UK’s Telegraph:

UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece.

“I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors,” said Kornelius Purps, Unicredit’s fixed income director and a leading analyst in Germany.

Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance.

Sound familiar?

Our economy too, was once cushioned by low debt levels. Not any more.

In my view, the only really fundamental difference between the UK’s dire economic situation and Australia’s, is this: as happens so often, with so much in Australia, we are simply running a couple of years behind on the major international trend.

The UK property bubble has already burst. Ours hasn’t … yet.  Only because the Government had cash in the bank to prop up our property bubble – and thus, our banking sector – by doubling the First Home Owners Boost.

When another wave of the GFC rolls in, we no longer have a “low debt” position to cushion the blow.

The only question seems to be, from which direction will the next wave come?  From Europe?  From the UK? From the USA? Or, from China?

Australia Only OECD Nation With Rising Debt

11 Mar

From Marketwatch:

Australia’s seemingly bulletproof economy could soon face fallout from high debt levels and purportedly misguided policies designed to pump up asset prices, according to an outspoken skeptic of the nation’s housing boom.

Economist Steve Keen of the University of Western Sydney, who claims* to have accurately foreseen the global financial crisis, said he’s been dismayed by what he sees as a growing nationwide housing bubble stoked by government efforts to forestall economic pain.

Keen points to a first-time homebuyer subsidy program, various other stimulus programs, and a 4-percentage-point reduction in interest rates — policies introduced in the wake of the 2008 crash and which he termed “The Boost” — as having helped fueled a new housing boom and a 6% rise in mortgage debt last year.

“The Boost has … given Australia a dubious distinction when compared to the rest of the OECD. Yes, we are the only country that avoided a technical recession; but we are also the only country where debt levels are rising once more compared to GDP, rather than falling” …

*Proof of Professor Keen’s “claim” can be independently verified in this research paper, which references a handful of economists who did predict the GFC in advance.

UPDATE:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property mania that has been driven directly by insane – and in my personal opinion, immoral – Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

Tanner Lies About Budget, GFC

11 Mar

Finance Minister Lindsay Tanner has demonstrated yet again that he is a liar and a fraud:

Lindsay Tanner today accused the Opposition of punching a $2 billion hole in the budget after it helped defeat a means test on the private health insurance rebate last night.

“Tony Abbott and the Liberal Party are blocking almost all the government’s major initiatives in the Senate these days,” Mr Tanner told ABC radio.

“We faced a huge budget problem as a result of the global financial crisis. We have to repair the damage to the budget and we have to get the budget back into surplus as quickly as possible.”

“Yet he’s punched a huge hole in our savings initiatives that are designed to get the budget back into surplus quickly.”

In a recent column for the Sydney Morning Herald, ironically and hypocritically titled “Dishonesty in the debt debate”, Lindsay Tanner wrote:

Why are we going into debt?  Because the global financial crisis punched a huge hole in our projected revenues, and forced us to act to support the economy and to sustain jobs.  Had we just sat back and watched, as our opponents seem to suggest, we would have seen unemployment rise dramatically.  That would have reduced tax revenues even further, and thus pushed us into deficit anyway… The Rudd government had no choice but to intervene to protect Australian working people from the ravages of the crisis.  The dishonest campaign about debt being prosecuted by our opponents should be seen for the fraud it is.

Tanner’s claim that the GFC “punched a huge hole” in the government’s projected revenues, is an outright lie. And I will prove it to you, from the government’s own Budget documents.

The real reason that Rudd Labor faces a “huge budget problem” is not a result of the global financial crisis. Instead, it is entirely a result of their panicked, monumentally incompetent response to the idea of a GFC.

The simple fact is this: Contrary to Tanner’s recent claim, and Labor’s shrill proclamations throughout 2009, the GFC barely affected Australian government revenues at all. The “huge budget problem” is entirely of the Rudd Government’s own making. Because their team of uneducated economic illiterates panicked, and went on a massive, unnecessary spending binge. And now they are lying to cover up that fact.

Want proof?

Take a look at the Government’s 2009-10 Budget, Statement 10, released in May 2009.  It shows that Government income (“Receipts”) was estimated to be down by just $7.8bn (2.7%) on the previous year –

Continue reading ‘Tanner Lies About Budget, GFC’

Home Loans Slump Most In A Decade

10 Mar

From the Sydney Morning Herald:

The number of home loans plummeted by 7.9 per cent in January, the biggest fall since June 2000, after the phasing out of last year’s first-home buyers’ grant boost and interest rate rises sapped demand.

January’s result follows a revised 5.1 per cent drop in December, the Australian Bureau of Statistics reported, citing seasonally adjusted figures. Economists had been predicting a 2 per cent increase in January.

As usual, over the “long run” we again see that the predictions of mainstream economic “experts” are wrong.

This result underlines what contrarian economists such as Professor Steve Keen have been warning for several years.  That the government and Reserve Bank of Australia have, together, fuelled a massive bubble in property prices.  Rudd Labor’s doubling of the First Home Owners Boost, and the RBA’s slashing of interest rates in late 2008, have encouraged tens of thousands of borrowers to take on ever greater levels of debt. In the process, these buyers armed with cash handouts from the government and tempted by record-low interest rates, have bidded up the already record-high prices of Australian real estate.

Now that the FHOB has been withdrawn by a debt-laden government, and interest rates are beginning to rise, immediately we see a dramatic fall in demand for the loans that support Australia’s unprecedented housing bubble.

Rain For Henry, Stevens’ Parade

5 Mar

From Business Spectator:

Today’s commentary is all about lessons learned and not learned in the GFC.

ABARE has rained on the commodity bulls’ parade with forecasts of falling commodity prices in the medium term, and a falling dollar from next year. This is no surprise to this column, which has argued consistently that the prices of the last cycle will not be repeated because that cycle’s global building boom – from Shanghai to Dubai – was a once-in-a-lifetime event, characterised in the worst cases by massive empty buildings. Mine supply has also now caught up.

The commentary then goes on to critique Michael Stutchbury’s recent article regarding the Australian housing bubble:

Heavens to Betsy. This column will simply observe that house prices reached unprecedented multiples of income in the last cycle and are now threatening to go higher still. And even in Stutchbury’s own terms the boom is based upon easy money – this time fiscal – the First Home Buyers’ Grant (FHBG). We might also note that it was coupled with the lowest cost of mortgages in fifty years. Let’s call a spade a spade. The FHBG was, in the long run, a calamitous policy. It has re-inflated the great Australian housing bubble, underpinned it with moral hazard and badly compromised monetary options… A historic opportunity to de-risk the Australian economy was missed.

If we learned anything form the GFC it is not to trust financial advice, and John Durie of The Australian analyses where new regulation to protect small investors is headed. “Myriad studies have revealed that 50 per cent of Australian adults don’t understand what 50 per cent means.

Britain Grapples With Debt of Greek Proportions

5 Mar

From the New York Times:

Suddenly, investors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets.

“If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup. “In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent. It is only just beginning.”

Since the Labour government’s intense fiscal intervention in 2008 and 2009, yields on British government debt have soared to among the highest in Europe. And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product, according to a recent report by the consulting company McKinsey.

Britain is not in the 16-nation euro zone and, unlike Greece and other struggling countries that use the currency, it retains control over its monetary policy. As a result, it has benefited so far from a huge bond-buying program undertaken by the Bank of England — proportionally, the largest in the world — that has kept mortgage rates and gilt yields at unusually low levels.

That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation.

Indeed, the increase in private and government debt here contrasts sharply with the deleveraging that has been going on in the United States.

British household debt is now 170 percent of overall annual income, compared with 130 percent in the United States. In an echo of the United States’ rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.

As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

Sound familiar?

In Australia, household debt is over 150 per cent of income. And in an echo of the British rush into US-style sub-prime mortgages with low teaser rates, some 250,000 homeowners in Australia have piled into variable-rate mortgages that are linked to the rock-bottom base rate, until recently the lowest in 50 years. Many highly ‘marginal’ borrowers who could not previously even raise a deposit, were lured into mortgage debt by the Rudd Government’s First Home Owners Boost, plus additional state-based grants.

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