IR - How well are Somersofters Coping

[sash]

Michael,

You have hit the nail on the head!

The credit crunch has now well and trully hit Australia....the banks are now getting tougher on lending. We in OZ did not have it hit us up until now. I suspect that if I was one of those people with X-collateralised loans with one lender....your rapid aquisition days maybe limited as they find sneaky ways to increase their asset to lend ratios without actually asking for it.

At this point I cannot see the RBA doing anything other than sitting on their hands as the banks are raising rates without being prompted. With spending and building starts on the decline....I suspect that we will be rock bottom somewhere in Oct. or Nov. 2008....hopefully with one rate cut in Oct. or Nov. 2008.

On a more positive view......looking back in a couple years at this period may also indicate the best time to buy. Both the share and property markets are taking a flogging!

Time will tell................

My concern (as has been posted by sash and robwilliams590) in the medium term is tightening of credit. It will mean being extra prudent with spreading the lenders around.

I got caught in the early 90's having three X-colled loans with a mortgage group. They were different times and getting 110 % lends for fixed interest only loans in those days did not happen with banks. In those times I paid the mortgage broker his fee. Now it's the other way round. Anyway equity had retreated and I sold one at a loss (offset to a cap gain a couple of years ago). Lesson learnt.

What I'm leading to is that I think lending policy will get tougher and high LVR's in this climate are likely to end up sour.

 

[ILoveProperty]

The banks are trying to maintain their margins, not profit more from it.

But the banks are maintaining their profits - or even increasing them.

I agree with Ziggy. CBA profit will be up this year. And using subprime as a cover.

 

[sash]

Can I ask what is stopping you from increasing rents?

Over the last two years my units in Sydney have gone up from 160-180pw to 220-250pw. And these are still under market by about 10-20pw.

greedy landlord,
I wish I could do the same..

 

[ziggy2214]

Can I ask what is stopping you from increasing rents?

Nothing really other than the fact that I just did increase them by 5% on top of the 10% increase late last year.

I am sort of up to date with my rents but if the market can take more I will increase them again.
I am also looking to refinance but it does come at a cost and I don't want to take everything to 1 lender and get a bigger discount because cross col in this climate can be very dangerous.

 

[ziggy2214]

I agree with Ziggy. CBA profit will be up this year. And using subprime as a cover.

The way they are going all banks will have increased profits in a zero growth market...
unless ofcourse they have some writedowns. I think it could be NAB??

 

[steveadl]

But the banks are maintaining their profits - or even increasing them.

I agree with Ziggy. CBA profit will be up this year. And using subprime as a cover.

The way they are going all banks will have increased profits in a zero growth market...
unless ofcourse they have some writedowns. I think it could be NAB??

When it all boils down - banks are a business, just like any other business in the country. EVERY business wants and acts to increase their profits. They are not charities.

The problem the banks have is their product hits raw emotional nerves and effects massive amounts of people compared to other businesses.

 

[WinstonWolfe]

Sorry, but the fact remains that their funding costs have gone up. But believe what you want - yes banks are evil and we'd be better off without them.

Steve, ask your banker mate what % of bank borrowings come from overseas wholesale funds.

I think it interesting the banks are all talk about how their costs are going up, and yet they also spruiked last year they were not exposed to sub prime and they are insulated from the US credit crisis.

I've tried for months to find out exactly what % of big 4 loan money is foreign sourced. The difficulty in doing so is that the info available talks of on balance sheet sources, while loans packaged for securitization are off balance sheet.

The RBA's figures showed 2007 big 4 foreign sourced funds were around 30% of total loans.

If foreign exposure is less than 30%, then 70% of bank customers are borrowing domestic funds, and it is a hard to believe ALL bank customers need their rates put up to cover banks' additional costs.

IMHO, if the cost of doing business justifies putting rates up independent of RBA announcements, it is because Aussie banks are trying to recover from bad investments in sub prime.

 

[ziggy2214]

When it all boils down - banks are a business, just like any other business in the country. EVERY business wants and acts to increase their profits.
.

aaa.... and I will have to increase my rents to manage my business.
It seems to me that these are highly inflationary tactics that the RBA quietly/conveniently agrees to at our expense.
I wonder why the government is absent on this issue and on the petrol price
rippof as well. Why aren't they protecting the rights of their voters?
i.e my tenants? What did they get voted in for?

 

[steveadl]

Steve, ask your banker mate what % of bank borrowings come from overseas wholesale funds.

I think it interesting the banks are all talk about how their costs are going up, and yet they also spruiked last year they were not exposed to sub prime and they are insulated from the US credit crisis.

I've tried for months to find out exactly what % of big 4 loan money is foreign sourced. The difficulty in doing so is that the info available talks of on balance sheet sources, while loans packaged for securitization are off balance sheet.

The RBA's figures showed 2007 big 4 foreign sourced funds were around 30% of total loans.

If foreign exposure is less than 30%, then 70% of bank customers are borrowing domestic funds, and it is a hard to believe ALL bank customers need their rates put up to cover banks' additional costs.

IMHO, if the cost of doing business justifies putting rates up independent of RBA announcements, it is because Aussie banks are trying to recover from bad investments in sub prime.

WW, as far as he knows - around 50% sourced from overseas, but don't take this as gospel - he's not that high up.

I think when the banks were spruiking last year about how they were not exposed to the sub-prime, they were referring to the fact they had little in the way of debt at risk amongst the US problem ie. loans that were likely to go bad. I think between the big 5 they came out with something like $700M total exposure (from memory) - so not a very large exposure compared to their total lending book.

They would however be open to changes on the global credit market that result from the credit crunch ie. decreased risk tolerance and therefore higher rates.

As far as not all bank customers needing to have their rates put up - that's fair enough, but how on earth would you propose they do that? "Mr Smith, glad to have you aboard with your new home loan, your rate will be 9%." Mr Jones, glad to have you, your rate will be 9.4%" LowDocs can be the exception, but wouldn't amount to a large base of clients/funds.

(WW, I'd add to my comments above that you'd know a hell of a lot more about this stuff than me, I'm just making a few observations on my take)

 

[WinstonWolfe]

I wonder why the government is absent on this issue and on the petrol price
rippof as well. Why aren't they protecting the rights of their voters?
i.e my tenants? What did they get voted in for?

There's one opinion that the whole western world is overlevered, and that has to be wound back, and bad debt written off as smoothly as possible.

The RBA wants to slow down our economy, reduce household debt, reduce business debt, slow mining exports to reduce exported asian inflation, and give the global banking system time to write off bad loans against future profits. THose future profits are what our banking system are now trying to maximize.

The US Fed are playing on the side of their banks moreso by keeping rates low and allowing their banks greater profit margins; and allowing their weaker economy to inhibit growth of household debt.

However, central bank strategies are seriously at risk by the growing cost of staples, esp oil and food.

I only am saying what I've read from reasonable sources. I'm always keen to learn more, and that's one of the advantages of a forum.

Steve, some of our banks lent money to keep Bear Stearns solvent, while the Fed was running around trying to organize other backing. I would not be surprised if our banks have much more exposure to the US mess than they admit in the 6 oclock news.

 

[steveadl]

aaa.... and I will have to increase my rents to manage my business.
It seems to me that these are highly inflationary tactics that the RBA quietly/conveniently agrees to at our expense.
I wonder why the government is absent on this issue and on the petrol price
rippof as well. Why aren't they protecting the rights of their voters?
i.e my tenants? What did they get voted in for?

Absolutely! I increase my rents at every opportunity, as much as the market will allow anyway.

 

[evand]

Can you please explain how the government can control world oil prices? Not to mention tell China to stop increasing demand for our commodities.

Your hear us Kev, get on the phone to China now.

I wonder why the government is absent on this issue and on the petrol price
rippof as well. Why aren't they protecting the rights of their voters?
i.e my tenants? What did they get voted in for?

 

[WinstonWolfe]

Can you please explain how the government can control world oil prices? Not to mention tell China to stop increasing demand for our commodities.

Your hear us Kev, get on the phone to China now.

Evan, I think the Aussie public sector are slowing oil demand intentionally or otherwise by not developing Aussie infrastructure necessary to export minerals to Chindia quicker. If they did, Chindia economic development and demand for oil would be higher. If you think about it, the most effective brake to apply to the growth of Chindia is the supply of raw materials.

 

[ziggy2214]

Can you please explain how the government can control world oil prices? Not to mention tell China to stop increasing demand for our commodities.
.

Evand

I don't mean at international level.
They could start by auditing the petrol companies
I bet there is a lot of excess profit and price fixing taking place at our expense

Auditing the banks wouldn't be a bad thing either.
I have a problem with the lenders who choose to borrow money in the US at 2.5% and then convert it to an appreciating currency (AUD) for even more profit down the track and then lend it out at 9.5% and at the same time cry poor and put rates up.
Thats not running a business that's daylight robbery and as I said before is highly inflationary and it should be stopped...

 

[boomtown]

I am sorry to say that some tenants are in for a big shock come renewal time. Rental increases are not keeping pace with the rate of increase of cost of funds which has a multiplicative impact on IP owner's cashflow.

 

[HiredGoon]

It's not just wholesale markets, but also deposits - don't forget that raising rates encourages domestic saving.

Australia has some of the highest (or highest?) debt per person in the world, and negative savings rates. I'm all for encouraging saving.

Much of our trade deficit is interest flowing overseas from borrowed money, and where did most of it go? Into speculating on asset prices without increasing future productivity.

The mining boom has given us record terms of trade but because we borrowed so much, we send more money overseas than we get, still running deficits. The debt burden now is very high and is causing consumers to go into their shell, and our infrastructure is falling behind as there wasn't much money for investing in it, rather it was diverted into bubbles and consumption.

It would be good to have money to say, build a sustainable society and convert to renewable energy, but that money has already been spent on changing the price tags on existing houses, holidays, cars and granite counter tops.

Rental increases are not keeping pace with the rate of increase of cost of funds

The solution is simple. Don't bid houses up so high. Houses still provide shelter regardless of how much debt the owner of them is in.

 

[yieldmatters]

If foreign exposure is less than 30%, then 70% of bank customers are borrowing domestic funds, and it is a hard to believe ALL bank customers need their rates put up to cover banks' additional costs.

The foreign and domestic markets aren't independent markets. Blaming it on foreigners is just PR spin. The cost for domestic funds has gone up as well. Why? Because why would I invest my cash here if I can invest overseas and get a better return? Our local market has to keep up - they are connected.

To illustrate if I put my cash in a term deposit I can get 8.6% at Bank of Queensland. That was unheard of years ago and higher than even a few months ago. And this is "domestic" funds - as it would come from ME!

 

[s_t]

Are they loaning out domestic funds sourced at that rate (ie. the 8.6%mentioned)? I thought that it was a matter of loaning out as much money as they wanted (and paying the rba cash rate on it), till the point that deposits = certain % of loans (10% or something?). Isn't that the source of funds for the 70% WW mentioned. Then once that is reached they go elsewhere.

The 8.6% would be a way of increasing/encouraging deposits. They can loan much more than the deposit though, so paying 8.6% on a small amount of money (% wise) - which then enables them to borrow lots at rba cash rate - might be better than going overseas and paying 8% dollar for dollar.
Quite possible I've got my understanding of banking all mixed up though!

The foreign and domestic markets aren't independent markets. Blaming it on foreigners is just PR spin. The cost for domestic funds has gone up as well. Why? Because why would I invest my cash here if I can invest overseas and get a better return? Our local market has to keep up - they are connected.

To illustrate if I put my cash in a term deposit I can get 8.6% at Bank of Queensland. That was unheard of years ago and higher than even a few months ago. And this is "domestic" funds - as it would come from ME!

 

[WinstonWolfe]

The cost for domestic funds has gone up as well. Why? Because why would I invest my cash here if I can invest overseas and get a better return? Our local market has to keep up - they are connected.

To illustrate if I put my cash in a term deposit I can get 8.6% at Bank of Queensland. That was unheard of years ago and higher than even a few months ago. And this is "domestic" funds - as it would come from ME!

YM, I am referring to rate rises additional to those announced by the RBA. Retail deposit interest goes up with with loan interest, with each RBA announced rise.

I somehow doubt bank initiated rate rise announcements apply to retail deposits as well.

Further, I realize borrowers who tap into domestic funds can't be charged one rate and foreign funds another rate, though there is a bit of that via std vs lo doc. I mean it is hard to swallow that the banks need to have these very significant non RBA increases when 70% of their business is sourced domestically, and therefore should not be affected by US conditions.

 

[yieldmatters]

YM, I am referring to rate rises additional to those announced by the RBA. Retail deposit interest goes up with with loan interest, with each RBA announced rise.

I somehow doubt bank initiated rate rise announcements apply to retail deposits as well.

I think they have - the spread above the RBA cash rate has increased on term deposits as far as I know - when I get time I'll check to be sure.

But putting term deposits aside - just look at the regular domestic money markets. Our mortgage market has collapsed as well and the cost to raise funds has increased.