September 14, 2017

Blinded By A State Of Euphoria

A report from the Sydney Morning Herald in Australia. “I have a ‘liar loan’ – a mortgage based on less than absolutely factual information. I’ve pretty much always had liar loans. And I recently obtained a ‘liar credit card.’ So what? Given readers’ (and therefore the media’s) love of stories that combine housing and doomsday scenarios, investment bank UBS received saturation coverage with its idea that $500 billion in ‘liar loans’ are a hanging over the Australian housing market, set to come crashing down on the economy at the first hint of trouble and damn us all to hell.”

“How many people want to do the work to supply detailed financial information about their mortgage application and, apparently, admit they lied? Something isn’t adding up. And there’s the particular case of the ANZ which received the worst result: ‘Of those who took out loans with ANZ in 2017 (directly or through a broker), 55 per cent of respondents stated their application was completely factual and accurate (implying 45 per cent of customers misstated their application), down from 66 per cent in 2016.’”

“The most obvious point is, when applying directly to your bank, the bank should know more about your finances than you do anyway. For my ‘liar loans,’ all my income and spending washes through the bank cheque account. I’m Australian – near enough is good enough.”

From The Herald. “Soaring house prices have lifted the wealth of the average Sydney household to $1.3 million, but hundreds of thousands of families in the city have been left ‘over-indebted.’ The Bureau of Statistics’ latest survey of income and wealth has classified 407,000 Sydney households with property loans as over-indebted, meaning they owe at least three times more than they earn in year. The typical over-indebted household in Sydney is carrying a hefty $765,400 in total property debt.”

“‘Growth in debt has outpaced income and asset growth since 2003-04,’ the bureau said. ‘Rising property values, low interest rates and a growing appetite for larger debts have all contributed to increased over-indebtedness.’ Nationally, average household debt has almost doubled since 2003-04.”

The Australian Financial Review. “Scott Morrison made a rare appearance at the Council of Financial Regulators’ meeting in March, and he had housing investors in his sights. Property price growth in Sydney and Melbourne had accelerated into double digits over the first two months of the year, exposing the federal Treasurer to Labor’s demands for a crackdown on property tax breaks.”

“Back in 2015, Treasury secretary John Fraser had already called out a housing price bubble. By early 2017, loans that required the investor to repay only interest costs had rocketed to a disturbing 40 per cent of lending. APRA fired off a round: lenders would have to rein this back to 30 per cent. It’s the byproduct of a long period of bank misconduct and scandals. These climaxed with last month’s explosive charges against the Commonwealth Bank of Australia by the anti-money-laundering agency AUSTRAC, the other financial regulator on the rise.”

The West Australian. “The liquidators of Diploma Group say they are likely to urge creditors to reject a rescue plan proposed by the family behind the failed builder-developer. The insolvency specialists from Grant Thornton are nevertheless seeking a Federal Court order allowing their appointment as administrators of the listed Diploma entity so a vote can be held. The liquidators estimated the revised Deed of Company Arrangement would see a return to unsecured creditors of between zero and 3.31¢ in the dollar. Under a liquidation scenario, it was between zero and 11.6¢.”

From The Australian. “The slowdown in the apartment market is worsening and will have a severe impact on the economy if it is not arrested, according to the country’s biggest apartment builder, billionaire Harry Triguboff. The number of new apartments sold had dropped and prices had fallen about 10 per cent over the past six months, the founder of Meriton Group told The Australian. ‘The falling prices will have a big impact on the economy,’ said Mr Triguboff. ‘The big question is whether the government will allow prices and volumes to go down before they start helping. Australians could lose an enormous amount of wealth.’”

“China’s continued restrictions on capital flowing out of the country, the local banking crackdown limiting finance for investors and sluggish domestic wages growth had combined with government policies causing a perfect storm for apartment construction. At the same time, Reserve Bank governor Philip Lowe last week said he was watching the Brisbane property market carefully, particularly given the pressure on prices from the large rise in the supply of new apartments in that city.”

From Domain News. “In an effort to sell off enough apartments to allow construction to go ahead, one Brisbane developer has slashed prices by 12 per cent, and halved the upfront costs on two-bedroom units in a Cannon Hill development. The third tower of Lime Living is nearing its scheduled construction date, without enough apartments sold to commence. Project marketers Colliers International have taken the opportunity to target first-home buyers, offering a 5 per cent upfront deposit for those looking to take their first step into the property market.”

“Associate director for residential Rachel Hutson said it wasn’t common for a developer to be willing to slash prices and take a lower deposit on an off-the-plan apartment. ‘It’s very rare,’ she said. ‘The only other projects that have offered close to 12 per cent is where the original buyers have defaulted.’”

“Settlement risk and lowered investor appetite was another reason why Colliers wanted to target owner-occupiers rather than investors. ‘There are investors who have bought in there,’ Ms Hutson said.”

From the University of Melbourne. “Amid sky rocketing house prices in Sydney and Melbourne, record low interest rates, and a tax system that works in favour of investors - those who entered the housing market at the right time are reaping the benefits. But after 25 years of unprecedented economic growth in Australia, are we still in a boom or are we blinded by a state of euphoria?”

“Melbourne University Economist Dr Matthew Greenwood-Nimmo sees some alarming parallels between the Australian housing market and the evolution of asset prices in the run-up to the Global Financial Crisis of 2008, which was a famous example of a so-called ‘Minsky moment’. A ‘Minsky moment’ is named after the Polish economist Hyman Minsky, whose work focused on boom-times and the transition from boom to crash.”

“‘An easy way to envisage a Minsky moment is to think of a timeline,’ says Dr Greenwood-Nimmo. ‘To illustrate the idea, let’s start when the economy comes out of a recession. After a recession growth is generally quite quick and there are lots of profit opportunities if you’re a lender. You can make a lot of money and there’s not a lot of risk because the economy is growing fast. If that boom phase continues for a long time, people get complacent. It’s this complacency that can turn into a Minsky moment.’”

“‘After 25 years of growth, it could be that a euphoric sentiment has taken hold in the housing market,’ he warns. ‘The good times have been going on so long, people start thinking they will go on forever. In a euphoric market, safety margins get eroded. By that, I mean that banks become increasingly willing to make large loans based on small deposits and borrowers become increasingly willing to take on a large debt burden. As long as house prices continue to rise, this strategy can work but it only takes a small shock to put you underwater on your mortgage.’”

“‘A Minsky moment occurs when the euphoria ends, prices slump and those euphoric investors suddenly realise that they’re high and dry. The greater the proportion of investors that were swept up in the euphoria, the worse the overall outcome for the economy at large.’ he said.”