Is the Sub-Prime Crisis in US going to affect IPs in Australia ?

[Kennethkohsg]

One more point....those who think fundamental demand for property will absorb reasonable increased tightening of foreign credit should keep in mind over 40% of new loans written nowadays are for IPs, not PPRs.

I would argue most investors are more sensitive to rate rises than owners, on the basis they are buying based on less elastic serviceability.

&&&&&&&&&&&&&&&&&&&&&&&&&&&
Dear WinstonWolfe,

1. If what you said is indeed true, I must further infer that the Australian housing markets are in some sort of a housing bubbles at this point in time with some 40% of the new loans being taken up to purchase new investment properties.

2. Which specific housing markets are such high levels (40%) of new investment loans being presently concentrated in?

3. Can you please further point us to the relevant source that shows that the 40% of all the new loans taken up recently in Australia are for housing investments rather than for owners-occupiers house purchase or/and for existing home renovations purposes.

4. Looking forward to learning from you further, please.

5. Thank you.

Cheers,
Kenneth KOH

 

[Kennethkohsg]

We should care because the end of cheap credit will effect short term property growth....

I agree the near tripling of prices in the last 7 years would not have been possible without foreign credit, which has been lubricated by securitization (the ability of lenders to keep higher risk loans off their balance sheets)...and we need to keep in mind securitization has been seriously shaken up by some dubious calls by the ratings agencies.

......if foreign credit flow into Australia is significantly tightened, it is logical property growth will stall, and possibly fall... I am already seeing growth in land on the fringe of Brisbane stall due to ever more buyers hitting a debt serviceability wall at current prices and credit terms.

And I'd add that there's significant pressure for local banks to rely more on foreign credit. It is more profitable for them and makes their balance sheets look healthier. The share of their funding coming from retail deposits has fallen from 40 per cent twenty years ago to 23 per cent today, and been replaced by foreign funds. (Graph 10). Some might argue banks have been trying to deal with reduced retail deposits by increasing their involvement in funds management. However, that trend has stalled in the last few years as indicated in the graph.

All this means to me that australian property growth is becoming more exposed to the volatility of global credit conditions. This hasn't been the case historically.

&&&&&&&&&&&&&&&&&&&&&&&&&&
Dear WinstonWolfe,

1. When the overseas funds are no longer "cheap" in comparison to local deposits savings accounts, I guess that the Australian Banks will simply revert back to paying a higher interest rate for their local savings/term deposits accounts, and reduce their profit margins accordingly, so as to quickly attract more local retail savings/term deposit funds from the average Australian household, into its own fold.

2. I believe that KR and his ALP Federal Govt are presently working towards promoting a higher saving rates among Australians as part of his own anti-inflation fight, together with the RBA, isn;'t it?

3. Consequently, I see no immediate adverse short term impact on the various housing markets at this point in time, given the present ongoing strong Australian Economy, saved for the implied housing bubbles building up as indicated by some 40% new loans being used for investment house purchases which you have suggested in one of your earlier post.

Cheers,
Kenneth KOH

 

[WinstonWolfe]

&&&&&&&&&&&&&&&&&&&&&&&&&&&
Dear WinstonWolfe,

1. If what you said is indeed true, I must further infer that the Australian housing markets are in some sort of a housing bubbles at this point in time with some 40% of the new loans being taken up to purchase new investment properties.

Depends how you define bubble Kenneth. Bubbles generally involve some speculation driving prices beyond what they'd be without that speculation. In the last 7 years, I think it is fair to say that there has been a very high increase in investor activity in the property market. Does that mean we have a bubble? Well, it is open to interpretation.

2. Which specific housing markets are such high levels (40%) of new investment loans being presently concentrated in?

I don't have those figures. The 40% is something I am sure I read via reputable source, and I believe I linked to it in an earlier post on another thread.


3. Can you please further point us to the relevant source that shows that the 40% of all the new loans taken up recently in Australia are for housing investments rather than for owners-occupiers house purchase or/and for existing home renovations purposes.


I've had a quick look back through my posts here and searched at RBA and ABS but haven't found the definitive source. But googling found this link and quote.....

In recent years the value of loans going to investors for residential property has grown at more than 33% a year. and has not slowed down. Around 40% of every dollar lent by financial institutions for residential property now goes to investors – a level that we have not seen before. In other comparable countries the proportion of investment loans of this sort is in single figures.


4. Looking forward to learning from you further, please.

5. Thank you.

Cheers,
Kenneth KOH

..............................

 

[Kennethkohsg]

Dear Winstonwolfe,

1. I've visited your link.

2. Since the article you referred to, "Property investment under the microscope" by David Tomlinson, was last published on 18th December 2004, I believe that the "40% new investment loans figures" that you have quoted, was actually referring to some of the new loans figures reported during the 2003 property boom period, when the Australian Federal Govt decided to call in the Productivity Commission to examine the various housing issues in Australia.

3. I do not think that it is still relevant to the present housing markets in 2008, at this point in time.

Cheers,
Kenneth KOH

 

[WinstonWolfe]

Dear Winstonwolfe,

1. I've visited your link.

2. Since the article you referred to, "Property investment under the microscope" by David Tomlinson, was last published on 18th December 2004, I believe that the "40% new investment loans figures" that you have quoted, was actually referring to some of the new loans figures reported during the 2003 property boom period, when the Australian Federal Govt decided to call in the Productivity Commission to examine the various housing issues in Australia.

Kenneth, the article is copyrighted 2007, which is when I believe it was written based on the reference in the last sentence to the upcoming election....



3. I do not think that it is still relevant to the present housing markets in 2008, at this point in time.

Will eventually find the original source...am sure was less than 2 years old....

and could I ask if your view that 40% is not relevant in 2008 is based on personal opinion or reliable published data?


​

Cheers,
Kenneth KOH

...................................

 

[WinstonWolfe]

Kenneth, this article highlights many of the concerns I have...
http://www.businessspectator.com.au...wn-credit-out-APHC9?OpenDocument?OpenDocument

 

[buzzlightyear]

Mortgage Brokers, have practices changed?

Since the first wave of sub-prime anxiety hit the market back in August, 5 months have passed.

Given the amount of prophecising about this effect, interest rises aside, can people who have personal knowledge or examples, of where banks and just as importantly mortgage insurers have now changed their lending practices to property? That is changed their calculations on their serviceability models, LVR requirements, increased LVR restrictions on more postcodes etc..?

 

[WinstonWolfe]

Given the amount of prophecising about this effect, interest rises aside, can people who have personal knowledge or examples, of where banks and just as importantly mortgage insurers have now changed their lending practices to property? That is changed their calculations on their serviceability models, LVR requirements, increased LVR restrictions on more postcodes etc..?

http://www.somersoft.com/forums/showthread.php?t=35054

 

[WinstonWolfe]

I am continuing to post what unfolds with the bond and mortgage insurers because of my belief that it is fundamental to the availability and cost of foreign credit in Australia.

Further ratings agency downgrades of the insurers credit rating will force many banks to increase written losses.....

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajygNY3Jw0UM&refer=home

 

[grossreal]

hi all
I think that the us market will only effect the companies that have
A borrowed in that market and
B want to borrow from that market and in the case of a couple have to borrow now.
remembering we have not seen our whale as yet.
england had it north rocks
france has just seen it boy wonder with the heighest loss in one day.
the states have there sub prime.
were is our dying fish its not come to the surface as yet.
maybe the only reason that you have so many investors taking loans and not ppor is very simple.
the supply is drying up and the investors are the only ones looking.
if you were a mum and dad in blacktown and you saw on the tv
guy in france just lost 3 billion dollars.
mfs is about to close with the loss of 500mil
the us just put 3 trillion or billion into their market to keep it afloat
the reserve bank is not sure if to put rates up or down.
england north rock bank is not out of hot water and could close its doors.
centro your local shopping center cant get funding.
and heres the weather
do you think they are going to jump out of there seats and say lets going shopping for a home loan and put our house on the market.
no they say
lets put the shutters up
get out the credit card and buy pizza
as it will all blow over tommorrow.
the question is will it effect an ip here for me no not unless the lender has an issue and I think a few of them will.
mfs and a couple of others are going to come out of left field and they are more of a concern due to the fact that in todays finance market you don't really know where the money has come from (unless you have only banks lending and even then not sure if its the banks money).
if you are worried then revalue and loc the money in the properties as a form of fighting fund.

 

[willair]

.
It's a pity they don't do this in this country..willair..
http://www.abc.net.au/news/stories/2008/01/30/2149683.htm?section=business

 

[alexlee]

I wonder if they would be doing this if it wasn't an election year?

 

[WinstonWolfe]

I think that the us market will only effect the companies that have
A borrowed in that market and
B want to borrow from that market and in the case of a couple have to borrow now.
remembering we have not seen our whale as yet.
england had it north rocks
france has just seen it boy wonder with the heighest loss in one day.
the states have there sub prime.
were is our dying fish its not come to the surface as yet.

Check out graph 10 GR.
Aussie banks HAVE to borrow foreign funds if they want to keep revenues stable. Foreign funds make up on average 30% of their liabilities. And I am talking banks, not the Wizards and Rams of the world....

Though obviously, as foreign credit continues to cost more, and the banks (and non bank lenders) are automatically compelled to pass that cost onto ALL of its customers (rather then just the non conformers), we might expect demand for credit to drop......and ultimately demand for housing....

I wonder if any mortgage brokers are planning extended holidays over the next 2 years, after all the hard work of the last 5?

 

[alexlee]

Though obviously, as foreign credit continues to cost more, and the banks (and non bank lenders) are automatically compelled to pass that cost onto ALL of its customers (rather then just the non conformers), we might expect demand for credit to drop......and ultimately demand for housing....

Bank deposits, presumably, aren't sufficient to fund all the loans the banks want to make. And if the banks can lend at 8% and borrow at less from overseas, and pocket the spread as profit, isn't that exactly what they are supposed to do? As a bank shareholder, why should I complain?

If they had not borrowed from overseas, presumably their profits would not be as high. I doubt it would have stopped the property and credit boom, though: deregulated as the Australian market is, foreign-funded mortgage companies would have taken even more market share away from the banks. You can't stop liquidity when it builds up like that, just as you can't stop it when it dries up.

So what if prices fall as a result of the current liquidity problems? That's just the market cycle. Are you saying the banks have a moral imperative NOT to indulge in the massive liquidity available in the last couple of years because that pushed property prices to unsustainable level growth rates? As a shareholder, that's not what I want, and the directors should answer to shareholders.

And again, as property owners, we have benefited (greatly) from the property boom. If you'd bought early, you would now be sitting on a nice bit of equity that you can use to buy up when the market falls.

What, exactly, is the problem?
Alex

 

[WinstonWolfe]

Bank deposits, presumably, aren't sufficient to fund all the loans the banks want to make. And if the banks can lend at 8% and borrow at less from overseas, and pocket the spread as profit, isn't that exactly what they are supposed to do? As a bank shareholder, why should I complain?

If they had not borrowed from overseas, presumably their profits would not be as high. I doubt it would have stopped the property and credit boom, though: deregulated as the Australian market is, foreign-funded mortgage companies would have taken even more market share away from the banks. You can't stop liquidity when it builds up like that, just as you can't stop it when it dries up.

So what if prices fall as a result of the current liquidity problems? That's just the market cycle. Are you saying the banks have a moral imperative NOT to indulge in the massive liquidity available in the last couple of years because that pushed property prices to unsustainable level growth rates? As a shareholder, that's not what I want, and the directors should answer to shareholders.

And again, as property owners, we have benefited (greatly) from the property boom. If you'd bought early, you would now be sitting on a nice bit of equity that you can use to buy up when the market falls.

What, exactly, is the problem?
Alex

What did I say that makes you think I have a problem with the banks?
I am spelling out what I expect to happen. The banks are predictable to the point of being automatons, because their imperative is to maximize profits.....and it would seem with less judicious calculation of medium and long term risk.

My reason for taking an interest in this matter is purely as due diligence into the future value of Australian property. And I imagine anyone looking at increasing exposure to property at this point would be equally interested in whether prices fall in real terms.....I am sure you get that, now that I have spelt it out Alex........the HTW guy who gave the BIG presentaton last night certainly got it, as did the 50 odd PIers in the room.

 

[yieldmatters]

Bank deposits, presumably, aren't sufficient to fund all the loans the banks want to make. And if the banks can lend at 8% and borrow at less from overseas, and pocket the spread as profit, isn't that exactly what they are supposed to do? As a bank shareholder, why should I complain?

If they had not borrowed from overseas, presumably their profits would not be as high. I doubt it would have stopped the property and credit boom, though: deregulated as the Australian market is, foreign-funded mortgage companies would have taken even more market share away from the banks. You can't stop liquidity when it builds up like that, just as you can't stop it when it dries up.

So what if prices fall as a result of the current liquidity problems? That's just the market cycle. Are you saying the banks have a moral imperative NOT to indulge in the massive liquidity available in the last couple of years because that pushed property prices to unsustainable level growth rates? As a shareholder, that's not what I want, and the directors should answer to shareholders.

And again, as property owners, we have benefited (greatly) from the property boom. If you'd bought early, you would now be sitting on a nice bit of equity that you can use to buy up when the market falls.

What, exactly, is the problem?
Alex

I don't know if it is a problem but it's interesting that companies like Centro, or RAMS borrowed short term and invested long term and then wondered why they blew up? Isn't that textbook finance - try to match your assets with your liabilities? I guess that is the name of the game but as an outsider I think it's obvious that every now and then the system will fall apart.

 

[alexlee]

I don't know if it is a problem but it's interesting that companies like Centro, or RAMS borrowed short term and invested long term and then wondered why they blew up? Isn't that textbook finance - try to match your assets with your liabilities? I guess that is the name of the game but as an outsider I think it's obvious that every now and then the system will fall apart.

They thought the good times would last forever. It didn't. This is nothing new. The junk bond era, the dot-com era..... same idea. Every so often people decide that 'this time it's different'.

Of course the system falls apart every so often, simply because it involves humans, and humans are notoriously short-sighted.
Alex

 

[grossreal]

hi yieldmatters
there is a little problem with your calculation.
the people today may not have gone throw the problems of yesterday so they have no understanding of it.
and if the people above have got there because the people above have left the tree gets very tight at the top.
now if you have 10 or 20 years
there is not alot at the top that have seen the hawke/keating 17%( in banking its more then in macdonalds and they call them the rising stars rise very quickly and die just as quick).
so you have people that don't understand risk.
they understand margin and customer risk but not corporate risk.
so trading is easy with others peoples money.
lending is even easier.
and if you do a structure that allows both you are in for trouble.
but remember that you are lending out not real money you are lending out debt
a $100 to you is $100 dollars put to a lender thats $100 debt and they are in the market to increase debt so the more debt the better the balance sheet.
And I am not going to explain how they work out profit against debt.
as for us trading no we don't.
nothing really goes anywhere
the exchange for me is the same as a cfd its a difference between what the gold in the us is worth to what the gold in aust is worth it has nothing to do with the dollar.
if rams borrows from the the us thats got nothing to do with the aust currency.
and to say aust borrows from the us for there currency is not the case.
no country borrows from another for there currency even fiji uses it currency reserve.
and tonga at one stage was using ivory from shark teeth to back its currency and I think penticostal island still do.
a currency of a country is backed by its( in our case reserved bank) and that currency is increased or decreased depending on its demand.
banks don't borrow funds and the reserved would not need to from any country.
lots of lenders or banks fund other banks and yes we have alot of external funder but that because we are a free market and that not because we need then its because they see that we make money just as the macq bank does.
australia does not have for me business best banking but its not bad.
but to understand any form of banking you do need to understand how, why banks were and are formed and then understand how they work.
this is not just to understand money but also to understand the mindset when doing a loan.
and to most brokers this has not been taught.
banks are very different to the rest of us.
they lend you money they don't have
they charge you an interest on money thats not theres.
they charge you a monthly account keeping charge on money they didn't have in the first place.
and if you don't pay the money back that was not theres in the first place they liquidate you and sell all your assets and kick you out on the street.
and the share holders see a margin that is made out of really nothing.
and anyone that does not understand the above needs to start to learn.
because very time you hear that there is a problem with confidence in the market.
the reason is that this whole machine only work on confidence.
if you look at the balance sheets of the people that have lost money.
(except ram and your centro of this world)
they are not borrowers they are lenders.
the councils that have big problems are lenders not borrowers.
westpac and nab of this world are lenders not borrowers.
the mfs/centro of this world which are not banks are borrowers not lenders.
and I can tell you london to a brick that not one dollar of westpac or nab real currency ever left aust soil they lent it just as they do to mum and dad in blacktown on 10cents for every dollar or if they get a 25 to 1 thats 2.5 cents(depending on the bank/lender).
so if they lose say 1 mil they are up for 40k off there book value if 10 to 1 thats 100k, 10 to 1 is the lowest most aust banks are 25 to 1 this is the amount they should have as a reserve compared to the amount out.
and even this is very iffy as it can be in actual cash, renouncalbe notes and even quarantees depending on the country and the bank.
believe it or not to be a bank and trade in aust cost under 5mil and that 5 mil will allow you to extend 25 mil in loans and you could open up in cbd sydney and for every 1 dollar in you (on your books) can lend out $25 out and then for every 1 dollar in in interest you can lend out another $25 and your 5 mil does not increase and if you but your money in as a depsit the same happens 1 dollar in 25 dollars out.
interesting isn't it.
but that my lesson for today

 

[human]

the exchange for me is the same as a cfd its a difference between what the gold in the us is worth to what the gold in aust is worth it has nothing to do with the dollar.
if rams borrows from the the us thats got nothing to do with the aust currency and to say aust borrows from the us for there currency is not the case.
no country borrows from another for there currency even fiji uses it currency reserve.
and tonga at one stage was using ivory from shark teeth to back its currency and I think penticostal island still do.

hmmmm... very interesting observation

lots of lenders or banks fund other banks and yes we have alot of external funder but that because we are a free market and that not because we need then its because they see that we make money just as the macq bank does.
australia does not have for me business best banking but its not bad.
but to understand any form of banking you do need to understand how, why banks were and are formed and then understand how they work.

Cool.. Easy as..

and I can tell you london to a brick that not one dollar of westpac or nab real currency ever left aust soil they lent it just as they do to mum and dad in blacktown on 10cents for every dollar or if they get a 25 to 1 thats 2.5 cents(depending on the bank/lender).

Ahh.. easy peezy.. I wonder how come I never understood that concept before.. Thanks for explaining it so clearly !

so if they lose say 1 mil they are up for 40k off there book value if 10 to 1 thats 100k, 10 to 1 is the lowest most aust banks are 25 to 1 this is the amount they should have as a reserve compared to the amount out.

Geez.. couldnt realise I was so dumb that I couldnt decipher this before.. It so simple the way you ve spelt it out..

interesting isn't it.

Very interesting indeed.

but that my lesson for today

Ohh.. No.. Is that all for today..? Can't wait to see another one of your simple lessons..

 

[MichaelW]

Hi guys,

I just posted a new thread which shows that Mirvac seems to believe that the US sub-prime issue WILL have a direct impact on house prices in Australia.

They have reduced their LVR and are looking forward to bargain buying in the coming few years as mortgages become painful and we go "back to basics" on property.

Here's the link to that new thread I started:

http://www.somersoft.com/forums/showthread.php?t=39442

Cheers,
Michael.