Category: Economics

This is not a trick question, but what is the primary purpose of a retail (AKA commercial) bank?

 

Assuming it’s not been nationalised, like RBS and other 2008 basket cases, presumably the main function of a bank is to make money for its owners, i.e. the shareholders. Sure, the corporate mission statement might waffle on about helping customers through the key milestones on their life journey, blah, blah, blah, but if they don’t increase the shareholder’s value, they’re dead.

 

Australian retail banks have performed this task very well over the years. CBA’s share price and dividend history is shown below as an example, the other 3 major banks are not dissimilar;

 

 

That the dividends barely missed a beat following the minor difficulties in the banking world in 2008 is amazing. Of course, this masks a slightly inconvenient fact that they were supported by an implicit government guarantee of a bail out should one be required, allowing investors to remain calm and not rush for the exit like in other jurisdictions.

 

Gifts rarely come without an expectation of a quid pro quo, however. In the Australian case, the banks are expected to “do the right thing” by the public, by which we mean, “help the government”.

 

On the way up, when values are increasing and there’s a wealth effect to the public, or at least those exposed to the upside of property ownership, these two purposes (shareholder value and public service) are reasonably well-aligned.

On the way down, as property values decrease and regular members of the public start to experience financial pressure, the two purposes diverge. If the government of the day would like the bank CEOs to show some forbearance to those in distress or even take a haircut on the margin between borrowing and lending costs, the bank shareholders are going to suffer.

 

What might this mean in the short to medium term?

 

There’s a few factors at play currently which may provide us with an indication of how the next year or two might play out.

 

1. The Royal Commission in to the financial sector has unearthed some unpleasantness by most major institutions. There will be ramifications for the sector in terms of increased oversight and regulation.
2. Macroprudential restrictions on lending has resulted in a cooling of the housing market with prices down around 10% from the 2017 peak and perhaps, conservatively, 1 in 10 owner occupier mortgages being in negative equity (more, according to some sources).
3. A likely change of government in May and the possibility of the removal of some tax breaks for new owners of investment properties.
4. Costs of borrowing from overseas sources (currently about 60% of mortgage funding) has increased and looks likely to continue to do so, albeit mildly, during 2019.
5. A halving of the number of foreign (by which we mean Chinese) property investors buying in Australia since the peak in 2014.

 

Predictions are notoriously difficult, especially about the future, but this combination of factors suggest that the decline in values is unlikely to halt during the next 12 months.

Whichever flavour of government is in power, and let’s face it, there’s little difference between the two parties other than one group is more competent at being corrupt than the other, won’t really matter; neither of the major parties are going to enjoy governing during a -15% or perhaps -20% property crash.

The calls to “do something, do anything” are going to become deafening.

The professional economic troll, Stephen Koukoulas, and the “Chief Economist” of My Property Market (i.e. the only employee), Dr. Andrew Wilson, are already flooding social media with pathetic begging of the Reserve Bank to cut rates.

God only knows how many more vested interests will come out of the woodwork over the coming months. 

 

Bill’s Opinion

 

Obviously, the government is going to call in the favours owed. At the very least, banks are going to have to take a hit on margins. The banking regulator, APRA, may find itself under political pressure to ease the responsible lending restrictions that have been put in place and then banks will be “encouraged” to open the spigots again. Friendly State Governments may be under pressure to reverse restrictions on overseas ownership.

 

None, some or all of this might “work”. 

 

Regardless though, shareholders of the banks are going to take one in the chops.

 

….that Einstein probably never said?

Real estate agents are starting earlier this year.

Shame. You’ll be telling us next that divorce lawyers, journalists and politicians are having a hard time, and then we’ll really have to get the tissues out.

Falling prices, tighter credit and uncertainty ahead of a federal election and the final report of the banking royal commission mean a busier year for agents on the country’s eastern seaboard as they sell an increasing stock of homes on the market.

I’m not sure that statement is completely accurate; perhaps replace “busier” with “tougher”?

As several commentators on here have pointed out, in a falling market most sellers will rethink whether they really need to move. There’s a high degree of emotion attached to the perceived value of one’s house and the attitude that “it’s worth $x and I won’t take a penny less” can be deeply ingrained.

So therefore we may well see far fewer properties up for sale this year. Those who have to sell due to death, divorce or unsustainable debt will be the exceptions.

Something else will need to change too, although Eliza McGrath hasn’t spotted it yet;

Our first open [day] is on 19 January. Then we’re extending it to be a five-week campaign with the first auction on 16 February.

Given that fewer than 1 in 2 properties are selling at auction, it seems somewhat poor advice to her clients to chuck a bunch of cash at a marketing campaign and planning for an event that has a higher probability of disappointment than ever before in living memory.

Finance is getting harder to get,” McGrath says. “So getting a five-week campaign is more standard. Some people are asking for six weeks. They know from trying to buy themselves how hard it is to get pre-approval.

She’s not getting the hint, is she? The auction favours the seller only in a rising market, that power dynamic reverses on the way down.

A search for her on Google Images explains why. She looks like she is barely 30 years old. The last time the market was like this she wouldn’t have been potty trained.

Ren Hor Wong seems to have a better idea, however;

“Given the current market condition and low auction clearance rate, vendors’ confidence is low when it comes to selling,” chief executive Ren Hor Wong said.

“We see a surge in listings activity, but majority of them would not go to auction, and some probably don’t even want to go for a marketing campaign.”

Quite.

This is interesting too;

“So it’s imperative for agents to have a database of finance-ready buyers”

He might regret dropping that gem into the interview. He’s just told his competitors a good tip on how to survive this year, if they are clever enough to listen.

He’s got some other intelligent insights too;

Going off market also allows the seller to save marketing costs, a key for vendors at this low point in the market, Wong adds.

“When you can’t ask for a higher price in the market, next thing you want to do is to save money,” he says.

Smart thinking; drop the price and lower your sales costs.

Meanwhile, on Planet Millennial, reality hasn’t arrived yet;

McGrath isn’t sure what will come. The year is likely to start well, but it is hard to see further beyond, she says.

“We’ll have a strong start to 2019, like 2018 did, but it’s hard to say what’s after the first quarter, with the election coming up and the royal commission [final report],” she says.

I bet you won’t, Eliza, I bet you won’t.

Bill’s Opinion

For some time now, being an estate agent on the east coast of Australia required nothing more challenging than possession of a cheap suit, a driving licence and pulse.

Things have changed this year. There will be significant consolidation of agencies and a huge reduction in the number of agents employed.

The question is, what does one do as an alternative job if all your previous work experience consisted of handing out leaflets at open houses for the last decade?

The price of Uber journeys and dog waking services in Melbourne and Sydney are likely to reduce significantly.

One of the Australian Labor (sic) Party’s advisors on matters economic is a shy and retiring character by the name of Stephen Koukoulas, AKA “The Kouk”.

I don’t tend to waste spend much time on social media these days but, in between large meals and long walks, I came across this provocative tweet by the person who, should Bill Shorten become Australia’s next Prime Minister for the obligatory 18 month term, will be whispering sage advice to the highest office in the land;

If, like me, you aren’t a professional economist, you will be wondering why this claim simultaneously seems to make sense but also seems like it shouldn’t be correct.

We’ll explain why it’s wrong shortly, but first, let’s recall an old brain teaser that used to go around in the school playground in various versions;

Three friends decide to split the bill after a meal at a restaurant. The waiter says the bill is £30, so each guest pays £10.

“Later the waiter realises the bill should only be £25. To rectify this, he takes £5 from the amount to return to the group.

“On the way to the table, the waiter realises that he cannot divide the money equally. As the customers didn’t know the total of the revised bill, the waiter decides to just give each of the three friends £1 and keep £2 for himself.

“Each guest got £1 back: so now each guest only paid £9; bringing the total paid to £27. The waiter has £2. And £27 + £2 = £29 so, if the guests originally handed over £30, what happened to the remaining £1?

If you haven’t come across this puzzle before the explanation is here.

It’s a classic misdirection.

Which is precisely what The Kouk is doing with his tweet.

The explanation as to why his statement is incorrect can be found here in an excellent and highly-recommended free PDF of a classic and easily read lesson on economics for mere mortals such as you and I. Treat yourself to a quick education before opening the next festive bottle.

The mistake or misdirection Koukoulas is guilty of is, helpfully, described in the very first chapter. In it, Hazlitt re-explains Bastiat’s Broken Window Fallacy and the concept of “opportunity cost”.

The explanation is so precise and economic (pun intended) in its use of words that I won’t recreate it here, but hope you follow the link and see it for yourself.

Bill’s Opinion

It is almost inconceivable that a professional “economist” is not aware of this fallacy (the first in the book!).

I can think of three possible explanations; either The Kouk is playing a festive game of trolling OR he’s deliberately misdirecting his followers for some other reason OR he’s not a very competent economist.

Of course, economics is a pseudoscience anyway. For proof of this, one only need look at the history of the so-called “Nobel Prize” for the subject; it was created as an effort to lend the subject some scientific credibility.