Howdy folks,
With the end of the noughties ensuing, maybe it's timely to look forward to 2010 and what that lending environment will bring to us investors.
Just happened to receive a newsletter from Investors Direct by Bill Zheng and I paste below the main point he was making:
" ................ Let me throw in my own two cents here, hopefully they can give you a few more angles to consider with your investing activities.
Lending is still not getting easier, but there are encouraging signs that Australia may start to get out of this tight lending environment next year (but no guarantees).
If you ask anyone who has borrowed money recently, especially property developers and commercial real estate investors, they will tell you that they have never been so frustrated dealing with lenders over the last 12 months than any other time before.
I spoke to a valuer who does a lot of commercial property valuation, he told me that many valuers need to do a lot more work to get the same valuation done, and very often they are losing money by doing a valuation because the lenders keep asking them to provide more information.
His view was that he would have appreciated it, if the lenders would just tell him and the borrower upfront that they don't want to lend the money. It would have saved everyone so much time and money. This is just some evidence on how tough lending is in the commercial and development market.
If you look at residential mortgage lending, it has become more difficult for both the borrowers and the mortgage professionals as well. Lenders have asked a lot more questions and put on a lot more restrictions on just about all areas of the assessment, everyone has to work harder but still with less chance of getting a loan.
Amongst all the not so encouraging news in the credit market, there are some interesting developments I have noticed since my last newsletter to you:
A non-bank residential mortgage lender has recently managed to borrow money from some financial institutions in the private sector here in Australia, without having to go to overseas lenders in the securitization market. Apparently they were over subscribed too.
For those who are not familiar with the lending industry, a very large percentage of the residential mortgages here in Australia were borrowed money from the international market using a process called securitization. Since the Global Financial Crisis, the securitization market is almost closed or too expensive for just about any lender to raise more money.
This non-bank lender is obviously not getting the money they want from the international market. It has to go through all the trouble to raise the money locally. This goes to show that the local financial institutions seem to have more faith in our own mortgage quality and property price stability than the international market which has been bashed quite badly from other parts of the world.
How significant this event is in terms of getting credit flowing better again is still too early to tell, but I won't be surprised that other non-bank lenders may follow suit and making more money available to us and hence borrowing condition may get a little easier sooner.
A second tier Australian bank was able to raise money from the international market without using the Australian government's guarantee. Up until recently, only the big 4 banks could do so. So this shows a level of recovery of the international credit market, or at least some confidence in Australian borrowers.
A few overseas banks are getting active in the Australian mortgage lending space. Some of them are making strategic baby steps starting next year. Others have already been aggressively making offers to buy large mortgage businesses.
I spoke to a senior executive of one of these foreign banks a few weeks ago and tried to find out whether their interest rates will be competitive compared to the Big 4 banks here. To my surprise, they will be if they want to compete on price. His explanation was that because the big 4 banks here in Australia has twice as much gearing as they have in terms of how much mortgage lent vs how much deposit the bank has. The lower the gearing, the cheaper it is to raise money for a bank, all things being equal.
Apart from that, these overseas banks don't carry a large retail network of branches, so the overhead is lower. They also don't have much bad debt to write off compared to the local Australian banks since they are relatively new to our mortgage market here.
I am quite encouraged by this new development, if some of this eventuates into something concrete next year, we will see more competition in the lending market, and the borrowers will definitely benefit, and it can also help property prices too.
Australia as a country is quite highly leveraged, but we have a very large resource pool compared to a relatively small population. If a country can't repay its debt, it can always sell its assets to reduce debt so that it can buy itself time to recover.
Some of Australia's best assets are commodities (that we have more than we need) and life styles (that are the envy of many other countries).
If you have seen commodity hungry countries buying into Australian mining stocks, or newly arrived migrants bidding for $3m+ homes, you know they are, in an indirect way, helping to reduce our debt. If only the US and the UK can sell their way out of trouble, they may be able to avoid a recession too! ................."
According to some US commentators we are in the eye of the storm:
http://wallstreetpit.com/11555-new-wave-of-adjustable-rate-mortgage-resets-around-the-corner
There is also a nine minute video here about the double bubble in US housing:
http://www.youtube.com/watch?v=kunB4SnAh4g
The Alt A and Option ARM loans that are due for re-sets in 2010 and 2011 will no doubt affect the US housing market further.
Personally I don't think it will translate to property value losses here, although there are markets and sub-markets that will perform at different rates of increase and decline. Not the purpose of debate here. My point relates to confidence of money and it's flow to us as investors.
What I envisage (and I am no economist or financial services wiz) is that credit may become even tighter. I don't see how the purse strings can be loosened when (as with the toxic NINJA loans) the white wash will affect the supply of credit.
Also how exposed are our banks, municipalities and other investment groups to some of these products that may (as with subprimes from 2008) also have been packaged up by the smoke and mirrors merchants (investment banks) and onsold as investments?
Are there any more collapses to come on the back of financial products that are derivatives of derivatives and backed by nothing but fresh air and toxic debt?
My glass is half full as far as our values here (except perhaps brand spanking new FHOG estates with the ensuing rate rises), however will the choke-hold on money supply and money confidence stifle our market?
The only positive I see from this (assuming I am correct and I could be wrong) is pent up demand for rental housing akin to a wound up spring ready to be let go. Supply will be tight yet demand is strong.
What are other people's views?
With the end of the noughties ensuing, maybe it's timely to look forward to 2010 and what that lending environment will bring to us investors.
Just happened to receive a newsletter from Investors Direct by Bill Zheng and I paste below the main point he was making:
" ................ Let me throw in my own two cents here, hopefully they can give you a few more angles to consider with your investing activities.
Lending is still not getting easier, but there are encouraging signs that Australia may start to get out of this tight lending environment next year (but no guarantees).
If you ask anyone who has borrowed money recently, especially property developers and commercial real estate investors, they will tell you that they have never been so frustrated dealing with lenders over the last 12 months than any other time before.
I spoke to a valuer who does a lot of commercial property valuation, he told me that many valuers need to do a lot more work to get the same valuation done, and very often they are losing money by doing a valuation because the lenders keep asking them to provide more information.
His view was that he would have appreciated it, if the lenders would just tell him and the borrower upfront that they don't want to lend the money. It would have saved everyone so much time and money. This is just some evidence on how tough lending is in the commercial and development market.
If you look at residential mortgage lending, it has become more difficult for both the borrowers and the mortgage professionals as well. Lenders have asked a lot more questions and put on a lot more restrictions on just about all areas of the assessment, everyone has to work harder but still with less chance of getting a loan.
Amongst all the not so encouraging news in the credit market, there are some interesting developments I have noticed since my last newsletter to you:
A non-bank residential mortgage lender has recently managed to borrow money from some financial institutions in the private sector here in Australia, without having to go to overseas lenders in the securitization market. Apparently they were over subscribed too.
For those who are not familiar with the lending industry, a very large percentage of the residential mortgages here in Australia were borrowed money from the international market using a process called securitization. Since the Global Financial Crisis, the securitization market is almost closed or too expensive for just about any lender to raise more money.
This non-bank lender is obviously not getting the money they want from the international market. It has to go through all the trouble to raise the money locally. This goes to show that the local financial institutions seem to have more faith in our own mortgage quality and property price stability than the international market which has been bashed quite badly from other parts of the world.
How significant this event is in terms of getting credit flowing better again is still too early to tell, but I won't be surprised that other non-bank lenders may follow suit and making more money available to us and hence borrowing condition may get a little easier sooner.
A second tier Australian bank was able to raise money from the international market without using the Australian government's guarantee. Up until recently, only the big 4 banks could do so. So this shows a level of recovery of the international credit market, or at least some confidence in Australian borrowers.
A few overseas banks are getting active in the Australian mortgage lending space. Some of them are making strategic baby steps starting next year. Others have already been aggressively making offers to buy large mortgage businesses.
I spoke to a senior executive of one of these foreign banks a few weeks ago and tried to find out whether their interest rates will be competitive compared to the Big 4 banks here. To my surprise, they will be if they want to compete on price. His explanation was that because the big 4 banks here in Australia has twice as much gearing as they have in terms of how much mortgage lent vs how much deposit the bank has. The lower the gearing, the cheaper it is to raise money for a bank, all things being equal.
Apart from that, these overseas banks don't carry a large retail network of branches, so the overhead is lower. They also don't have much bad debt to write off compared to the local Australian banks since they are relatively new to our mortgage market here.
I am quite encouraged by this new development, if some of this eventuates into something concrete next year, we will see more competition in the lending market, and the borrowers will definitely benefit, and it can also help property prices too.
Australia as a country is quite highly leveraged, but we have a very large resource pool compared to a relatively small population. If a country can't repay its debt, it can always sell its assets to reduce debt so that it can buy itself time to recover.
Some of Australia's best assets are commodities (that we have more than we need) and life styles (that are the envy of many other countries).
If you have seen commodity hungry countries buying into Australian mining stocks, or newly arrived migrants bidding for $3m+ homes, you know they are, in an indirect way, helping to reduce our debt. If only the US and the UK can sell their way out of trouble, they may be able to avoid a recession too! ................."
According to some US commentators we are in the eye of the storm:
http://wallstreetpit.com/11555-new-wave-of-adjustable-rate-mortgage-resets-around-the-corner
There is also a nine minute video here about the double bubble in US housing:
http://www.youtube.com/watch?v=kunB4SnAh4g
The Alt A and Option ARM loans that are due for re-sets in 2010 and 2011 will no doubt affect the US housing market further.
Personally I don't think it will translate to property value losses here, although there are markets and sub-markets that will perform at different rates of increase and decline. Not the purpose of debate here. My point relates to confidence of money and it's flow to us as investors.
What I envisage (and I am no economist or financial services wiz) is that credit may become even tighter. I don't see how the purse strings can be loosened when (as with the toxic NINJA loans) the white wash will affect the supply of credit.
Also how exposed are our banks, municipalities and other investment groups to some of these products that may (as with subprimes from 2008) also have been packaged up by the smoke and mirrors merchants (investment banks) and onsold as investments?
Are there any more collapses to come on the back of financial products that are derivatives of derivatives and backed by nothing but fresh air and toxic debt?
My glass is half full as far as our values here (except perhaps brand spanking new FHOG estates with the ensuing rate rises), however will the choke-hold on money supply and money confidence stifle our market?
The only positive I see from this (assuming I am correct and I could be wrong) is pent up demand for rental housing akin to a wound up spring ready to be let go. Supply will be tight yet demand is strong.
What are other people's views?