Australian Banks Hold Insufficient Capital

Fears Australian banks ill-prepared for housing-induced crisis

"Murray is suggesting, as others are, that you need enough capital to be able to deal with adverse situations without having to rely on the government. That's clear but what is not clear is the amount of capital, the length of time and the types of risks banks can continue to take on their balance sheets," he said.

APRA and other regulators have allowed some banks to use internal models to set risk levels, resulting in further downward revisions in the size of their assets and the amount of capital they hold. Because mortgages have historically had low levels of defaults banks have been allowed to hold only thin slivers of capital against large mortgage portfolios, making home loans very profitable.

Mr Brunton said AMP's white paper, which was published initially in November last year and updated recently to factor in the potential impact of the Murray inquiry, explored one bank and found that because of risk-weights it held just $4 billion of capital against $400 billion of mortgage loans – a leverage ratio of about 100 times.

Mortgage Debt Relative to Economy Size : Australia, Canada, U.S.

Australia
1.6 trillion (AUS) GDP
1.3 trillion (AUS) residential mortgage debt
81%

Canada
1.55 trillion (CAN) GDP
1.2 trillion (CAN) residential mortgage debt (http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/fin21-eng.htm)
77%

U.S.A.
16 trillion (US) GDP
11 trillion (US) residential mortgage debt (http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm)
69%

Russians buying in South Africa

Foreign purchases estimated at 4% of the market.
Russians boost South Africa's Luxury Real Estate

But after President Vladimir Putin began to tighten restrictions last year on the freedom of the Russian elite to move their capital, Russians may now be motivated to move their assets more permanently overseas.

“There is a sense that [Russian] people want to get their money out [of the country] because of Putin closing down the doors,” said Steward, of the Knight Frank property agency. “That could be a reason why they want to invest here. The Russian market has certainly found London, and I think Cape Town is now being discovered.”

Bubble update from China

China's property market represents 15% of GDP
China's money supply has increased 3x since 2008
July was the lowest for inflows in six years
China real estate: A bubble bursting?

"The exposure of China's banks (and now shadow banks) to real estate may look different than it did in the U.S., but it's very real. The main exposure is the reliance on property as collateral to support virtually all forms of lending throughout the economy, a situation that is very similar to Japan in the 1980s," he added, referring to a collapse in Japan's property market after a boom.

In recent weeks, mid-sized developers such as Hong-Kong listed Greentown China Holdings and Shui On Land issued profit warnings amid a downturn in the housing market.

France's house prices flat last quarter

Prices down 1.2% on a yearly value after a 1.9% drop the previous quarter. 0.0% for the country as a whole on the quarter vs. 0.5% fall for the Paris region. The fall was halted by stimulus measures, it seems. Has France’s property market turned a corner?

Faced with a newbuild shortfall and the failure of its "Target 500K" initiative to build half a million new houses every year to 2017, the government unveiled a slew of measures in early July to boost the sector. These include the simplification of construction rules and regulations as well as the extension of the "0 percent interest loan" to boost middle and low-income first-time buying.

RBA says high prices not a crisis

Australia's high house prices not a 'crisis', says RBA

Price growth in almost all capital cities in the three months to June has helped the median Australian house price soar almost 11 per cent in the past year.

But RBA board member John Edwards has tried to cool fears that the property market is becoming overheated, saying the rapid rise won't continue indefinitely.

The RBA has kept interest rates on hold. Australia's economy grew at its slowest pace in more than a year in the June quarter after a sharp fall in exports and weak business investment in the June quarter.

The Economist: Canadian real estate among world's most overvalued

Canadian Real Estate Among World's Most Overvalued, The Economist Says

A chart provided by the publication showed that Canada's price-to-rent ratio sat at 175.9 per cent in the second quarter of 2014, right on top of the world alongside Hong Kong and New Zealand.

Charts from the Economist

RBA will not lower interest rates to avoid stoking housing bubble

Australia RBA wary of stoking house prices with lower rates

"It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that," Stevens told an economics event in Adelaide.

The RBA this week held interest rates at a record low of 2.5 percent, marking 12 straight policy meetings since it last cut.

Stevens said a recent rise in unemployment to a 12-year high of 6.4 percent was "concerning", though he cautioned that it was hazardous to read too much into one month's data.

The cycle is running out of steam if you are stimulating but the returns on stimulating are declining.

Banks are to blame for Australia's housing bubble

Australia's housing bubble is real and banks are to blame, says author

But in his mind, it's everyone else who is living in a "Disneyland" delusion by failing to spot a bank-led property bubble that shows no sign of deflating. "No one in the Western world has ever done what we are doing." It's "the sheer size of the loans relative to the incomes here" that troubles Mr David.

The median house price to income of Sydney is nine times, compared to 6.2 times in New York and 7.3 times in London. Even Adelaide is more expensive than New York on price-to-income basis. He is particularly troubled by the surge in asset values in his Sutherland Shire neighbourhood, where land is changing hands for more than $1 million. "I have never seen so many Range Rovers in the Shire. It's a small world out there and you know they haven't become millionaires overnight. It's eerily similar to Miami [in 2005 before the sub-prime crisis]. It feels like Groundhog Day," he said.

Distortion of negative gearing adds 9% to the cost of houses in Australia

Negative gearing adds $44k or 9% to the cost of houses. Negative gearing pumping house prices, but they're not overvalued yet

Moody's compared house prices with long term valuations – taking into account rents, income and the costs associated with borrowing, including interest rates and other charges – to assess whether the 10 per cent year-on-year rise in house prices in Australia's eight largest cities means property prices were overvalued.

Its analysis shows that 18 months ago house prices in all states were undervalued.

But rising house prices, which have not been accompanied by rising incomes or rents, have now pushed property values in most states to "fair value".

Taking into account the costs of borrowing. That means that if you have cash, the absolutely last thing you should do with it is jump in and compete with supercharged leveragers in the housing market. Hard-earned, long-saved cash doesn't suddenly get any more easily earned just because emergency interest rates are kept in place for years and years.

When Moody's calculated the impact of rising interest rates, ''the story begins to change, with nationwide prices trending towards overvalued under normalised interest rates'', the report says.

Short term thinking rules the financial world.

The report said negative gearing costs the federal government about $4 billion in lost revenue a year and noted economists had labelled it "an unfair and unproductive distortion".

Sympathy for the Doomster Devil

Three reasons bears predictions have not come true for Canadian housing:

Extremely easy monetary policy
Demographics (the echo boom)
Foreign Buying
Three ‘unusual’ reasons you should have sympathy for Canada’s housing doomsters

Over the past 11 years average housing prices have doubled despite the recession, mortgage debt has topped $1.23-trillion (a record 60% of GDP) and Canada’s housing market is fully valued by price to rent and price to income measures.

But he points out that this remedy [demographics] has a short shelf life. BMO economists expect demographics to turn against the housing market by the turn of the decade, just when rising interest rates really begin to bite, creating a “potential double-whammy” for housing.

The Haves and Have-nots of Canadian Real Estate Market

How the housing market has cooled in most of Canada
Canada overall up 7% year on year.
Up 5.2% ex-Vancouver and Toronto.
Vancouver is 10x income.
Toronto is 7x income.

"We really haven't seen a national market like this where we have such sharp regional differences."

In provinces like Manitoba and Saskatchewan, sales continue to be reasonably strong, Rabidoux said, but there is "unprecedented inventory" on the market.

"Especially in places like Winnipeg and Regina, you have these extremely soft markets. and that's going to keep prices very weak for probably another year."

Ontario is a bit of mixed bag, he said. Sales are strong in Toronto and Hamilton, but weaken once you head east.

"I think the low interest rates have become a curse, not a blessing for the economy because it's encouraging people to pay even higher prices for housing relative to their income," Madani said. "And when interest rates start to creep back up, affordability will become an even greater problem."

Fitch: Canada 20% Overvalued Overall

Why Fitch is sticking to its 20% Canadian home price overvaluation

The 20 per cent is derived from our sustainable home price model for the Canadian market, where we compare changes in home prices historically to changes in five major macroeconomic indicators that we consider to drive the housing market, which are income, employment, interest rates, housing supply and population growth.

I don’t think we’re the first to draw connections between the Canadian market and the Australian market. They’ve similarly benefited from positive home price growth, even throughout the financial crisis. So where we are with Canada at about 20-per-cent overvaluation for the country, and up to maybe 25 or 26 per cent for provinces like British Columbia and Ontario, we have similar market value decline projections for the Australian market in the range of 25 to 30 per cent. And it’s a similar story, you’ve got low interest rates that have supported affordability, again limited supply in the big cities like Melbourne, Sydney, Perth, and also you’ve had in that market population growth that’s been above historical averages that’s also supporting house prices on the demand side.

They also say the U.S. market is 10% overvalued.

IMF's most overvalued housing markets around the world

Era of Benign Neglect of House Price Booms is Over

Theory asserts that house prices, rents, and incomes should move in tandem over the long run. If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in alignment. Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them––that is, from their income. The ratios of house prices to rents and incomes are thus often used as an initial check on whether house prices are out of line with economic fundamentals. 

Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.

Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.

IMF have posted several graphs. (Yes, they let a graphic artist go a bit wild with them…)

According to the blog, Belgium is an exception to being in trouble, despite the higher than average price to income and rent. That leaves Canada as the most troubled country on both measures with New Zealand and Australia not far behind. Also flirting with a worrisome bubble are France, UK, Sweden, Norway.

IMF have also launched a new site to pull together all their data on world housing markets.

IMF's New Global House Price Watch

Why Australia is floored by sky-high house prices

A nice summary of the situation. Why Australia is floored by sky-high house prices

I find that many Australians don’t truly appreciate how expensive housing is in Australia. Two simple examples might shed some light on the subject.

Sydney dwelling prices, for example, are around 50 per cent higher than prices in New York, despite New York being home to more accumulated wealth than anywhere in the world.

We shake our heads at the US over their lending practices leading up to the global financial crisis, but banks in Australia routinely lend two or three times as much to couples who need support from their parents simply to make the deposit.

Have to point out a gem in the comments (unless it's satire, hard to tell sometimes)

John, June 13, 2014 10:01
You anarchists are really funny. So the economy is extremely fragile but you want the RBA to jack up interest rates to crash the property market so you can buy a house on the cheap ? So, so funny. Like most anarchists, yourself and Steve Keen haven't really thought this thru have you ? According to such geniuses, Australian Banks are so highly geared to property that if there is a predicted 30 to 40% fall in the value of property, the Big 4 banks will be bankrupt. In other words your funds will be frozen, not only by your Bank but by the government as well. So please enlighten us, trying as hard you can to keep a straight face, how are you going to actually to buy that cheap house if you can't access your savings, or do you just have a very very very big mattress ? …

You know it's over when the bulls are pre-blaming the bears for the fallout from the market correcting. Markets that don't get blown into bubbles by bull cheerleading of bad regulation don't run the risk of devastating corrections, do they?

Australian housing boom "doesn't have long to run"

The big hole in Australia's housing market

On a trend basis, growth in the value of loan approvals to owner occupiers slowed to 0.1 per cent in April (compared with 1.7 per cent in October) while for investors, growth slowed to 0.5 per cent (compared with 4.0 per cent in September). This should come as little surprise, though to the best of my knowledge it has received little emphasis elsewhere, and is a trend that we should keep an eye on. Low interest rates have encouraged owner-occupiers and investors to bring their purchases forward, but that eventually creates a void that must be filled. If it can’t be filled — and it is unlikely that anything can replace investor speculation — then loan approvals will tank and house prices, which are demand-driven, will inevitably follow suit.

Australia's neighbors are taking measures to cool their housing markets, but not Australia.

Australia’s Central Bank Not Interested in Targeted Steps to Cool Housing

But capital city home prices are up about 11% in the past year, according to the Australian Bureau of Statistics, largely driven by property investors. The sharp run-up has prompted the central bank to remind the public that property prices can also decline.

Ms. Ellis said house prices were expected to rise after the RBA cut interest rates repeatedly in recent years, reaching an all-time low of 2.5% last year. That response is “a natural part of the ‘transmission mechanism” of monetary policy, she said.

Ms. Ellis acknowledged that the rise in prices has been hard on new-home buyers. The percentage of new-home buyers in the market has fallen dramatically in the past year.

You know who it is really unfair to? Cash buyers. There is no "real" market for housing, as far as the central bank is concerned. No one who has saved up their money to pay all cash should be crazy enough to compete with a negatively geared investor working with leverage.

What happens if sellers refuse to lower their prices?

Vietnam's housing bubble is an especially over inflated. Average prices to average incomes are at a 25x multiple. 25! In contrast the median multiple (not exactly the same measure, but similar) in Vancouver is 10x. Sellers have not lowered their prices in the face of plummeting demand. Since 2010 they have been stubborn. The result? A Frozen Market. No thaw expected in Vietnam's frozen housing market

Dang Hung Vo said a paradox in the property market is that supply of high-cost housing units has overwhelmed demand, leading to high inventories and bad debts, while there is a severe lack of low-cost housing units. Only 1,500 condominiums were sold in Hanoi in the first quarter, according to property firm CBRE. While that’s a five-fold increase from the 279 sold in the same period two years ago, it’s still down from the peak in 2009, when more than 15,000 units were sold in the capital city.

China's Shadow Banking system estimated at US$4.4 Trillion

China's 'Shadow Banking' Sector Valued at $5.4 Trillion (Title is confusing, but context in the article supports the 4.4 number.)

A new report shows that China's "shadow banking" sector is now valued at 4.4 trillion US dollars. The Chinese Academy of Social Sciences report also warns of potential risks to the financial system.

Pawn shops, once banned, now US$11.83 billion dollar player in China's shadow banking system

China’s SMEs head for pawnbrokers as credit tightens

In such an environment SMEs often turn to family financing, underground banks and loan sharks to fund their operations. They are forced to pay eye-watering interest rates well into double-digits. By contrast, the average rate at a retail pawnshop is usually much lower. Step inside the retail unit of an upscale pawnbroker like Shanghai Hualian Pawn or Beijing’s Huaxia Pawnshop today and you’ll see the usual assortment of watches and jewellery that were common 20 years ago. But peer into an office behind the counter and you might well overhear negotiations for a loan in exchange for the keys to a luxury car or apartment deed. The average loan at a Chinese pawnbroker is about US$16,000 (RMB 100,000) versus US$150 in the US.

It's not just an unaffordability index, it's real quality of life being lost

Barbara Yaffe: Vancouver house prices pushed by apathetic politicians and offshore demand

Doug McCandless grumbles that a building project can drag on for two years: “The neighbourhood is held hostage to contractors coming and going, huge messes accumulating on site with no deadline in sight.”

A year ago, University of B.C. geography professor David Ley told the South China Morning Post’s Ian Young he was surprised Vancouver hasn’t seen a political pushback.

Of course, foreign buyers are a mixed blessing, boosting the economy as they make their property purchases. And for now at least, that’s more of a priority for government than any lack of affordability.

Seriously, is there ANY issue that isn't seen as real estate related in Australia?

Will Google Glass change the face of real estate in Australia?

In the last 20 years, technology has been a major driver of change in Australia’s real estate industry. But will Google Glass really make a difference to the way we see property?

Record gap between Canadian and U.S. house prices

Canada-U.S. House Price Gap Hits A Record High: BMO Is there a fundamental reason why Canadian prices would be 50% more expensive, or is it just offsetting cycles?

The graph from the article says it all.

Top calls on Canadian Real Estate from Bank Economists

"Boom times are over for Canada’s housing sector" Canadian real estate and housing boom may be ending, Scotiabank warns

Housing has generated a staggering $1.7 trillion in net new wealth for Canadians since 2000.

I find that claim a bit misleading. Because housing is priced at the margin (i.e, one person in a neighborhood of 100 houses sells for 10k more and suddenly collectively the neighborhood is a million dollars richer. Are they really? They can't all access that wealth through selling, as that would tank the market. Unless there is a real structural change, locally, say, a company headquarters moves into town.

If everyone accesses that wealth through refinancing, that's not real wealth either as you've still got debt on the other side of the balance sheet which is sticking around no matter what the price is when you sell. And if you sell and move up the street, overpaying by 10k to get back into the market, then that's not real wealth either, that's a shell game.

· That investment increased, on average, by 4.2 per cent between 2000 and 2012, almost double the GDP growth rate of 2.2 per cent, and accounts for almost 7 per cent of overall economic output, the highest among the G7 countries and double the rate of the U.S.

· Forty-five per cent of that boost to the economy comes from new construction, 37 per cent from renovation and 18 per cent from real estate transaction and transfer costs.

Did you know that inefficiencies in a system could constitute economic "boost"?

· The total spent to create all those granite-clad kitchens and Euro-style bathrooms, and boost the value of Canada’s housing stock, ...

UGH. There is only so much in wages that can be spent on shelter, over the long term. Granite or no granite. The rest is an economic sinkhole. Now, if you actually invested in efficiency, or healthfulness, that might come back as a return. Granite? Not so much. By the way, don't forget to seal those shiny new counters annually, or you will have to replace it a lot sooner than you think.

Australia Survey: 1 in 5 home buyers getting help from parents

19% of all buyers, 42% of all first time buyers.

Mum and dad help one in five home buyers

The report found parental assistance is most pronounced in NSW and in Victoria, but is hitting other parts of the country as well. “Affordability is a growing issue in Queensland as well, but it’s a problem across the board,” she said. Of the about 1,200 people surveyed, the report found more than 30 per cent felt they could not afford the mortgage repayments required to get into the market, a similar amount (32.7 per cent) had been renting for five or more years and 50 per cent couldn’t afford a home deposit.

And how many of these parents are dipping into their own housing equity to provide help? Refinances are rising and how scary is it that the money could be just turned back around into housing again. Bubbles are pernicious like that.

Chart of Housing Finance from RP DATA Blog
http://blog.rpdata.com/2014/04/housing-finance-data-february-2014/

These longer running bubbles are drawing more victims in. In the U.S. there was a bit of a generational wealth transfer due to the percent of downsizing retirees during the bubble. And banking shenanigans made asking parents for money less necessary. The dot com bubble that preceded the housing bubble had the advantage of smaller reach, hence a faster recovery from the resulting correction. The more players in the game at the time of the correction, the longer and harder that correction will be.

Globe and Mail's Canada House Price Correction Calculator

How badly would you be hurt in a housing market price correction?

Ottawa home prices are down 2.5 per cent on a year-to-date basis, according to the Teranet – National Bank National Composite House Price Index. Montreal is off 1.0 per cent, Quebec 1.2 per cent and Halifax 2.6 per cent. “The next markets that will crack are the Prairies outside of Alberta,” said Mr. Rabidoux, president of market research firm North Cove Advisors Inc.

link to the calculator

 As you play with the % downturn buttons, note that bubble corrections tend to be shark-fin shaped. Like this chart of the Dow Jones

China's money supply rose 12% last year. That's low for them, and credit is scarce.

Reform is hard. As Credit Dries Up, Smaller Companies in China Feel the Pinch

At first glance, it seems extraordinary that anyone in China would have trouble finding credit, given how much money is already sloshing around the country. China’s broadly measured money supply passed that of the United States in August 2009, and it has been soaring ever since. China now has two-thirds more money than the United States, swirling through an economy that is a little over half the size of the United States’.

The central bank has been gradually pushing up open-market interest rates, in the hope that competition will start playing a greater role than political influence in deciding who can borrow money. That policy could help small and medium businesses obtain loans in the long term, but it has had the short-term effect of pushing up borrowing costs.

A guide to South Africa's economic bubble and coming crisis

A guide to South Africa's economic bubble and coming crisis

Unsecured loans, or consumer and small business loans that are not backed by assets, are the fastest growing segment of South Africa’s credit market and are essentially the country’s own version of subprime loans. Unsecured loans have grown at a 30 percent annual compounded rate since their introduction in 2007, when the National Credit Act was signed into law. Unsecured lending has become popular with banks because they are able to charge up to 31 annual interest rates, making these riskier loans far more profitable than mortgage and car loans in the low interest rate environment of the past half-decade. The unsecured credit bubble is estimated to have boosted South Africa’s GDP by 219 billion rand or U.S. $20.45 billion from 2009 to mid-2013.

Like U.S. subprime lenders from 2002 to 2006, South Africa’s unsecured lenders target working class borrowers who have limited financial literacy, which has contributed to the country’s growing household and personal debt problem. A 2012/2013 report from the National Credit Regulator showed that South Africa’s 20 million citizens carried an alarming 1.44 trillion rand or U.S. $140 billion worth of personal debt – equivalent to 36.4 percent of the GDP. In addition, household debt now accounts for three-quarters of South Africans’ disposable incomes.

Sadly, they seem to have stopped updating the data behind this widget, but for an illuminating chart, here is the old Clicks and Mortar from the Economist for South Africa.

Interestingly, house prices don't look alarming at relative to average incomes. Since this isn't a graph based on the median, it's possible that income disparity AND a credit bubble are making this chart look rational. South Africa's income disparity is among the highest in the world.

Foreign buyers buying and demoing habitable homes in violation of rules

Outcry over house demolitions breaching Foreign Investment Review Board rules

But Mr Raimondo said: “There’s certainly heritage-featured homes that are quite habitable that are being bulldozed for huge French provincials selling for multi, multi-millions, three million.

“It may well be that some of that doesn’t comply with the FIRB rules.

“It’s been going on for some time now.’’

He said it was “obvious the majority of buyers in a certain area (are) doing this”.

Chinese, Canadians, U.S. and Singapore big buyers of Australian Real Estate

Locals priced out by $24b Chinese property splurge

Wealthy Chinese buyers have purchased $24 billion of Australia housing in the past seven years, and over the next seven years an additional $44 billion will be spent on residential property, Credit Suisse estimates.

Chinese top the list of foreign investors in Australian residential property. Chinese top the list of foreign investors in Australian residential property. There was $17.2 billion worth of approved residential property investment coming in from overseas in the year June 30 2013, down from $19.7 billion in the previous period, according to the Foreign Investment Review Board.

Foreign money is roughly 5% of the entire market. Deutsche Bank economist pins high costs on low interest rates and domestic buyers. But first time buyers appear to be feeling the squeeze.

First-time buyers in February comprised less than 10 per cent of all mortgages processed by mortgage broker AFG for the first time since June 2010.

The article goes on to list the ways foreign investment could be avoiding FIRB approval.

Moving money from Shenzhen to Hong Kong on the black market

Inside China's Underground Black Market Banks

“We have a relative in Hong Kong who does business in Mainland China,” one of the Zhous said. “Once a week, he visits us to pick up Renmenbi for his import business, and in return he maintains a pool of Hong Kong Dollars for us across the border. He is family, so we trust him. We all avoid the official exchange rates, and everyone is happy.” Unless a client makes an extraordinarily request, this exchange involves about $500,000 per week, though it could be up to fivefold that amount if it is a public holiday, like during Golden Week in October.