….forget your perfect offering,
There is a crack, a crack in everything,
That’s how the light gets in.
To borrow an over-used adjective from the good Doctor Wilson (he’s a doctor of property! No, really!), predictably, the various completely unbiased non-vested interests have called the bottom of the Sydney housing price crash.
Everywhere one looks there are gushing articles about the green shoots of recovery in the clearance (successfully sold) rate at auctions, or the simply wonderful news that the Reserve Bank of Australia, RBA, is so bullish about the economy that they may consider lowering interest rates from the current historical lows and now the sniff of a suggestion of a hint that the Australian Prudential Regulation Authority, APRA, may ease the current safety checks on lenders that ensure loans can still be repaid if rates were to rise to above 7%.
In the words of Winston Wolfe, “let’s not go sucking each other’s dicks just yet, boys“. Let’s have a sober look at the facts, shall we?
Auctions – sure, the published rate is creeping above 50% but look at the volumes; half of the previous year. Also, the auction clearance data is about the most easily-manipulated and therefore least believable of all housing data points in Australia.
The RBA – haven’t actually lowered rates yet and anyway, if they did lower the cost of borrowing, does that signify confidence in the economic trend or perhaps the opposite? Also, how much of these banks’ mortgage funding is procured at domestic rates versus the (rising) international rate? Anyone? Bueller?
APRA – haven’t changed their policy yet. They simply are considering it.
Bill’s Opinion
Sentiment is difficult to measure. In fact, given that most of the data points for sentiment are likely to be heavily skewed by the vested interests of those reporting them, I’d suggest completely avoiding any newspaper or similar media commentary.
In this internet age, we can become our own data analysts with very little effort. Transactions such as lending volumes (a lead indicator) and house prices relative to previous levels (a lag indicator) are published frequently and have methodologies we can apply a reasonable level of trust to.
These two metrics are about as solid and tangible as we need to determine when that mythical beast, the market top or bottom has arrived.
What, therefore, is our updated “Are we there yet, Mum” index telling us this month?
Hmmm.
Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
Update;
This just popped up on my Creepbook for Business timeline, just to prove my point;
Thanks Elvis, is that financial advice you’re offering?
I suspect the increase observed in banks’ implied spreads in 2017 in this needlessly complicated bulletin https://www.rba.gov.au/publications/bulletin/2018/mar/developments-in-banks-funding-costs-and-lending-rates.html – and the likelihood this trend continued throughout 2018 – is somewhat of a fly in Mr Pressley’s ointment (who, by the way, should have called his enterprise “Propertylogy” which sounds far more credible than his clown-speak moniker)
That’s a great data point, thanks Mike.
So, about 25% of the big four banks’ mortgage funding is from overseas?
Y’know, that place where interest rates are rushing….
Elvis has left the building.
APRA’s change to the sensitised rate will make a difference, although I haven’t caught up with what the new rate is. It will be obviously be lower and therefore beneficial. The ASIC responsible lending case against Westpac will also provide some useful clarity – and my bet is that it will be beneficial. Consumer loans attached to business lending have had a major shakeup and will be subject to some process improvements and these will help during the year. All the banks are improving their processes, with a view to restoring the growth rate and overall velocity of credit.
The banks are keen, or even desperate, to lend and if you use ANZ as the best capitalised (less charitably, most overcapitalised), expect that supply will be there.
While I consider myself to have much to learn about financing, in particular at a macro level, one of my learnings has been that supply of capital will find a market – It will generate its own demand. It will increase its risk, with increasing recklessness, until it finds its outer risk bound. And then we learn again.
I’ve no doubt there will be some positive factors and the banks are, of curse, keen to do business.
However, articles like this “ding ding” are not supported by the hard metrics we’re tracking on the Are We There Yet, Mum index: https://www.linkedin.com/feed/update/urn:li:activity:6536747162976473088
My hypothesis is that prices are lagging lending by about two months. When the RBA figures are above 0.4% for a solid quarter, maybe the bottom really is in.
Did you hear John Hempton on the Jolly Swagman podcast? A little overreach in his recession and likely response calls but insightful about the lair loans issue.
To add to this; Hempton states the received wisdom has been 7 x salary is the maximum people could borrow. In 2016, he found it was closer to 10 x.
The proposed APRA changes are that affordability needs to be proven for 2.5% above current rates, so today that would mean about 6.5%. Not a huge difference from the 7.25% limit really.
Will it result in bigger loans? Sure.
Will it move the margins? Remains to be seen, especially if the brokers who were pushing 10 x salary borrowing are being targeted.
It becomes a battle between the two forces of a reduced volume of liar loans and slightly larger loans, perhaps resulting in little change? Reducing the possible salary multiplier has the more material impact according to my calculations.
Agree. The positive facets are all some time off and are possibly smaller in effect. Later this year for most. And any enabling technology changes may never get done so that shareholders get their short term dividend heroin.
I also think that there is a psychology to being in property, and once the price stabilises, people will move. But they need to be enabled.
The banks have no other growth strategy, now that wealth is toxic and/or sold. Asia is too hard, corporate lending isn’t profitable enough and comes with chunky risk. They have to get home loans right, and in volume.
Whither from here?