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  1. Cost of borrowing hits record 9.25% By Brian O’Mahony Friday, November 12, 2010 THE cost of borrowing for the country continues to hit record highs, peaking at 9.25% yesterday, despite pledges of support from Europe. a d v e r t i s e m e n t As the crisis deepened Nobel laureate Joseph Stiglitz, a former chief economist with the World Bank, said Ireland is in a "dismal" position and declared there is little chance that the Government’s measures to reduce the budget and bail out the banks will be a success. "The austerity measures are weakening the economy, their approach to bank resolution is disappointing," the Columbia University economics professor said in a Bloomberg Television interview in Hong Kong yesterday. Irish bonds have been in the grip of a major crisis for the past month, with influential economists here and overseas warning we will have to turn to the EU/IMF to bail us out. Morgan Kelly of UCD, who flagged the property bubble years before, said this week the country is bankrupt. Nicknamed ‘Doctor Doom’, Kelly warned that mortgage defaults would push the cost of the bank bailout up to €70 billion, against the Government’s projected €50bn cost. International bond prices are reflecting that concern. Investors are also unnerved by the German proposal to make bondholders take a discount on their holdings in the event of any restructuring in the eurozone. European Commission president Jose Manuel Barroso signalled the EU was ready to act should countries such as Ireland require assistance as bonds continued to soar. "What is important to know is that we have all the essential instruments in place in the EU and eurozone to act if necessary, but I am not going to make any speculation," Mr Barroso said at a G20 summit in Seoul. Greek Prime Minister George Papandreou saidhe hoped the markets will respond positively to Ireland’s attempts to deal with its financial situation. Mr Papandreou, whose own country is currently the recipient of €110bn of EU-IMF rescue funding, was addressing a meeting of international broadcasters in Athens on the Greek economic crisis. Back in Dublin, Finance Minister Brian Lenihan said Ireland won’t need external help to get out of its current difficulties. Asked to explain the persistence of the bond crisis given the Government’s pledge to slash €15bn over four budgets, Mr Lenihan said the markets do not believe the estimated cost of the bank bailout published by the Government in September. He relied on the NTMA for those figures and said that he accepted them as accurate. Rumours circulating on Wednesday that the IMF has been called in to help sort out the Irish mess added to market concerns, the Sydney Morning Herald said yesterday. Read more: http://www.examiner.ie/business/cost-of-borrowing-hits-record-925-136227.html#ixzz154zjWJpa
  2. How Australian Banks Are Highly Exposed to a Sudden Liquidity Shock 9 comments | by: Leith van Onselen November 09, 2010 | about: WBK The great Australian housing bubble debate is gathering momentum. In recent weeks, several international observers have released warnings that Australia's housing market is severely overvalued. For instance, in its latest survey of global house prices, the Economist estimates that Australia's housing market is 63% overvalued based on its analysis of “fair value” in housing, which is based on comparing the current ratio of house prices to rents with its long-run average (see below table). Meanwhile, in his latest quarterly newsletter to GMO investors, Jeremy Grantham again warns that the Australian housing market is an unmistakable bubble waiting to burst, although the speed of the decline is very uncertain. Outside of a handful of bloggers (including yours truly), Grantham's claims that Australia's housing market is a bubble has received strong objections from the mainstream media, banks, and economists who claim that Australia's housing market is underpinned by solid fundamentals, including a strong economy, high immigration and chronic housing shortages. One well known perma-bull, who has staked his reputation on the robustness of Australia's housing market, has even labeled Grantham's claims "sensationalist and spurious" and has asked "Mr Grantham to cease and desist from his hyperbolic jawboning", and offered him a $100m bet on the direction of house prices. For their part, Australia's two largest banks - the Commonwealth Bank of Australia (CBA) and Westpac (WBK)- both of whom are very large issuers of debt in global capital markets and have the most to lose from a housing bust, have recently released reports on why Australia's housing market is sound. The CBA's presentation, prepared as part of a global investor roadshow, received widespread condemnation for using dodgy data and self-serving rhetoric. Likewise, Westpac's report has been attacked in the blogosphere for down-playing the risks inherent in Australia's housing market (see here and here). The stakes were raised last week when the Reserve Bank of Australia (RBA) raised interest rates by 0.25%, which was quickly followed by a further 0.20% increase (0.45% in total) by Australia's largest lender, the CBA (the other banks are expected to follow shortly). The Opposition Treasury Spokesman, Joe Hockey, had earlier made the case that the Government needs to act to rein in unilateral interest rate rises and called for "...a mature debate about the future of banking here in Australia and the challenges around the world", as well as the establishment of another Financial System Inquiry to examine these issues. (The previous 'Wallis Inquiry' was completed in 1997.) With pressure building following the CBA's unilateral interest rate increase, the Government has now committed to release measures aimed at improving competition in the banking sector. Adding to the hysteria, these interest rate rises have come at a time when Australia's capital city house prices are starting to fall (see below table), whilst auction clearance rates are at two-year lows. Click to enlarge: The banks are vigorously defending their position arguing that their costs of wholesale funding are rising as cheap borrowings undertaken prior to the global recession need to be rolled-over at a higher rate. The chief lobbying group for the banks, the Australian Bankers Association (ABA), argues that bumper profits are needed to allay concerns of international investors about a potential housing bubble, and attributes worries about Australian house prices on overseas markets as part of the reason for any extra rate hikes by its members. According to the ABA's chief, Steven Munchenberg: Over the last few weeks, we've had a lot of international investors asking very detailed and probing questions about why it is Australia thinks it doesn't have a housing bubble... Bankers were grilled at length as to why investors should not be worried Australia has a housing bubble... [The Australian banks remain] very conscious of the risks of international investors becoming nervous about investing in Australia. Then in another article, the ABA chief elaborated further on the risks the banks face: The danger ultimately is that if we can't raise that money offshore, we can't lend it in Australia. And then what you get is credit rationing...You get people running businesses who can't get loans or renew their loans. You get people who can't raise money to buy their house, and that's a far worse situation...I can't honestly tell you that we need exactly 'this much' profit to keep those international investors happy so they keep putting money into Australia. But I can tell you that they want to see solid profits to do that. In a similar vein, the CBA Chief Executive, Ralph Norris, has defended his bank's actions whilst warning that political action against the banking sector could hurt their ability to raise funds offshore: The Commonwealth Bank chief executive, Ralph Norris, says the prized AA credit ratings of the big four banks could come under pressure from Canberra increasing regulation or pushing through controls on mortgage pricing. Speaking publicly for the first time on the interest rate furore engulfing his bank, Mr Norris said political fire directed at the industry was creating uncertainty among overseas investors. In the end, jawboning on interest rates and by us not moving on interest rates creates uncertainty in offshore markets, Mr Norris told Weekend Business. I've had a lot of negative comments from investors internationally in recent weeks that Australia does not look like a particularly business-friendly environment from the point of its politicians. Curiously, at the same time as denying the existence of a housing bubble, the CBA appears to be trying to escape the market they were part of creating, by reducing its exposure to mortgage lending: The Commonwealth Bank has been building up its domestic mortgage book at an anaemic rate while mounting a fierce argument that the nation has not suffered a housing bubble. Data from the banking regulator [APRA] suggests that Australia's biggest mortgage lender is increasingly averse to new lending, growing its home loan book at the slowest rate among the major banks. CBA's total mortgage lending grew by just 0.36 per cent in September -- the same month that chief executive Ralph Norris travelled abroad to assure investors there was no property bubble in Australia. The heart of the issue: Trillions in debt As discussed in my earlier article, The Great Australian Housing Bubble, the Australian banks have been willing enablers of Australia's housing bubble via their: 1. increased emphasis on housing lending relative to other forms of lending (such as lending to businesses); 2. which has been funded to a large extent by heavy offshore (foreign) borrowings. This structural shift toward housing lending is clearly evident by the below chart, which shows the dramatic rise in mortgage lending as a percentage of total credit. Click to enlarge: Regarding the banks' heavy offshore borrowing, consider first the below chart, which I have produced from Australian Bureau of Statistics (ABS) data, showing the breakdown of offshore borrowings by Australian depository corporations, split-out between short-term debt (maturing in less than 12 months) and long-term debt (maturing in more than 12 months). Depository corporations comprise banks (accounting for the overwhelming majority of foreign funding), building societies, credit unions and registered financial corporations. Click to enlarge: As you can see, offshore borrowings by depository corporations has exploded over the past 20 years, from around $50 billion in 1988 to nearly $700 billion currently. Currently, depository corporations have around $300 billion of short-term foreign borrowings maturing within 12 months, in addition to another $380 billion of longer-term foreign borrowings outstanding. Other things equal, this $300 billion of short-term foreign borrowings must be refinanced within 12 months just to maintain the current level of credit within the Australian economy (let alone increase it). Now consider the total value of Australia's residential housing stock split-out by equity and debt (see below). There is currently around $1.1 trillion of housing debt supporting $4 trillion of housing assets. Click to enlarge: Finally, consider the below chart, which shows three indexes starting at January 2000 representing the growth in residential loan assets, bank deposits and offshore borrowings. It also includes a ratio to compare residential housing loans and deposits. Click to enlarge: What should become increasingly clear is that the growth in Australian housing values has been funded, to a large extent, by foreign borrowings, much of it short-term. The key risk is that the banks' ability to refinance their borrowings rests with the willingness of foreign investors to continue to lend them money. When times are rosy, perceived risks are low, and credit is freely available - such as prior to the onset of the global recession - the banks are able to refinance their foreign borrowings easily and cheaply. But in times of heightened risk-aversion - such as when Lehman Brothers collapsed in the dark days of the global recession - foreign investors are less inclined to continue extending credit. This leaves Australia's banks, house prices, and broader economy exposed to a sudden liquidity shock. This is the pro-cyclical nature of modern, risky finance. During good times, asset prices become inflated by easy credit. But when circumstances sour, credit is pulled-back, causing debt-deflation. It is a matter of historical record that Australia's banks were saved during the global recession by the extraordinary measures undertaken by the Australian Government. The banks' inability to raise funds offshore at reasonable cost meant that, without the Government's support, their cost of capital would have risen dramatically, they would have had to immediately withdraw credit from the Australian economy, and might eventually have faced insolvency. Fortunately for the banks, the Australian Government and Reserve Bank responded swiftly by unleashing a raft of measures aimed at supporting both their ability to borrow funds as well as their asset base (i.e. home values). Measures undertaken to underwrite the banks' borrowings (liabilities) included: * The Government's Guarantee Scheme for Large Deposits (>$1 million) and Wholesale Funding, which functioned from 28 November 2008 until 14 March 2010; * The Government's Guarantee of Deposits <$1 million, which will remain in place until 12 October 2011; and * The RBA permanently relaxed the requirements on the assets that it accepts as collateral in exchange for loans provided to financial institutions (called 'repurchase agreements') [see here for a detailed examination of this measure]. On the asset-side, the Government successfully re-inflated the housing bubble through a temporary doubling of the First Home Buyers Grant to $14,000 for existing dwellings and $21,000 for new dwellings, as well as temporarily relaxing the restrictions on Australian home ownership by foreign citizens. These measures were not costless to the Australian taxpayer. The wholesale funding guarantee has racked-up $154 billion of contingent liabilities for the Australian Government, whereas the deposit guarantee has accumulated around $600 billion of contingent liabilities. For its part, the temporary boost to the First Home Buyers Grant cost taxpayers in excess of $1 billion. Of greater concern is that, although the Guarantee Scheme for wholesale debt and large deposits has expired, there is now the expectation that the authorities will support the banks when required going forward. Australia's too-big-to-fail banks are continuing to borrow heavily offshore under the cover of an implied government (taxpayer) guarantee that they expect will become explicit should foreign investor appetite for the banks' debt again fade. The banks know they have Australian taxpayers over a barrel. They might as well be saying: "provide us with your backing or we will restrict credit, crashing both the housing market and economy and, in the process, destroying middle Australia's main source of wealth". Where to from here? With deposit growth flattening, business lending already cut-back, and offshore borrowing becoming more difficult in spite of implicit government support, where will future house price growth come from if credit is constrained? One industry insider believes he has the answer: The big four [banks] are just starting to struggle to fund asset growth which has only been in residential mortgages. It all demonstrates that the fate of the housing market without further government intervention is way out of the hands of the RBA or any other regulator... However, vested interests are working on the solutions to make it much much worse. The scenario is that the Government will be lobbied to bring back the guarantee on wholesale debt. However, so that this is directed straight at the housing market, the government will extend the guarantee only to residential mortgage backed securities (RMBS). The Government will charge all issuers the same fee for the guarantee, a gesture at encouraging competition by allowing small and non ADIs access to funds. In return the Government will get some form of commitments to keep mortgage rates low or at least in line with the RBA rates - the gesture to appease the borrowers. Of course these actions will result in nothing more than a further inject of air into the balloon. We’ll all enjoy the temporary boost until the offshore investors realise that this is just another way of increasing Aussie Govt debt which is also increasing way beyond forecasts due to massive misallocation of resources and then suddenly... Bang! Interesting times down here in the land of Oz. Watch this space...
  3. Here is a joke that was doing the rounds about 7 years ago whats the differance between a civil engineer and a Dominos pisa ? A dominos pisa can still feed a family of four. Times have changed but offten cycles dont. to dismiss history and say that the housing and mining sectors are not a cycle of boom and bust is a bold point of veiw
  4. More competition or less debt? Posted on November 9, 2010 by Steve Keen As usual, I’ll be putting an argument that is contrary to popular opinion on the need for more competition I the banking sector. So to clarify the issue, here’s a quick poll: who thinks that Australia doesn’t have enough debt? Nobody? OK, now let’s discuss the “need” for more competition in the banking sector. The raging debate is missing the point–Hockey and the Coalition are right to go after the banks, but they’ve made a mistake in suggesting that the sector’s ills would be cured by more competition. In fact, we allowed too much competition in the 1980s, and again in the 1990s. The outcome, both times, was too much debt—firstly for businesses, and then for households. That’s the sector’s real problem, and adding a third dose of competition won’t fix it. One of Paul Keating’s monumental ‘achievements’ when he was playing the role of the ‘world’s greatest Treasurer’ was to let virtually unlimited competition into Australia in the form of foreign banks. The initial proposal was to let four in, but Keating’s ‘triumph’ was to successfully argue to allow sixteen to set up shop here. I thought nobody would forget what happened next, but since competition is once again being suggested as a panacea, maybe everyone has forgotten. Cut-throat competition for market share poured money into the hands of Ponzi merchants like Alan Bond and Christopher Skase. That “Bondy” went bust trying to sell beer to Queenslanders just about says it all about the people willing to lend him money. The end of that era of excess saw most of the foreign banking capacity in Australia collapse, leaving the market pretty much in the hands of the Big Four – not forgetting that one of the them, Westpac, came close to making it the ‘big three’ when it too nearly collapsed in 1992 with a then record $1.6 billion loss. After the collapse of Bond Corp, Qintex and others, Australia had virtually nothing to show for it beyond a string of expensive hotels along our shorelines and a mountain of business debt—the unwinding of which gave us “the recession we had to have”. The Business sector, which had gone from a debt ratio of 22% to 55% in just over a decade, began to rapidly delever to 40% of GDP by the mid-1990s. But that is starting to look like ancient history. The contemporary debate on banks is squarely focused on mortgage lending which, we are told, is uncompetitive. Give me a break. After the Wallis Inquiry in 1996, non-bank lenders were set free by their new ability to raise funds through the securitisation market. Aussie John Symonds and a throng of others began cutting margins on home loans to build volume, starting a race to the bottom that the banks, to a large extent, were forced to join. Back when “the recession we had to have” began, mortgage debt was a mere 17% of GDP. It began to rise right from that time—even though unemployment was exploding from under 6 to over 11 percent—and kept on rising to its pre-First Home Vendors Boost (FHVB) peak of 81% of GDP. Courtesy of the FHVB, it rose again to again to 87%, from where it is now falling. A large reason for this blowout was the competition for market share driven by the growth of the non-bank securitized lenders like Aussie Home Loans, Wizard, etc. I made a submission to the Wallis Committee in 1996, and walked away stunned when they told me that one of their key recommendations would be to allow securitized lenders into the Australian market. Shocked at how blithely the Committee was considering this, I wrote a supplementary letter to it the next day (July 12 1996), which in part stated that: The securitisation of debt documents such as residential mortgages does not alter the key issue, which is the ability of borrowers to commit themselves to debt on the basis of “euphoric” expectations during an asset price boom. The ability of such borrowers to repay their debt is dependent upon the maintenance of the boom… Should a substantial proportion of eligible assets (e.g., residential houses during a real estate boom like that of 87-89) be financed by securitised instruments, the inability of borrowers to pay their debts on a large scale… will be felt by those who purchased the securities, or by insurance firms who underwrote the repayment… there would obviously be a collapse in the tradeable price, and, potentially, the bankrupting of many of the investors… Of course, my warnings were ignored in the general euphoria for “more competition”, and the rest is history: lending standards dropped as the old and new competitors fought it out for market share, debt to households ballooned, the bust in lending arrived, the securitizers failed and these new competitors were taken over by the big Four once more. Yet here we are again with people arguing that more competition will improve things. The numbers from the past decade and a half tell a completely different story. Even if you accept the general economics mantra that more competition is always good thing in product markets—which I don’t—the usual basis for that is the belief that more competition will mean higher output at lower prices. But the output of the banking sector is debt-based money: we may want debt to have a lower price, but do we really want more debt? Be careful also about wanting a lower price—in terms of the margin between the RBA’s base rate and the variable mortgage rate. One way price can be driven down in competition is by offering a lower quality product, and that’s certainly what happened as competition in the post-Wallis Committee era. Lenders replaced careful valuations with drive-by checks to see that there was a building on the block, and careful assessment of capacity to pay with “liar loans” and 30-minute online loan applications (see page 34 of this report by the Home loan lending practices and processes House of Representatives hearing back in 2007): CHAIR—We will ask Mr Warner for a comment on that. Also we would be interested in knowing is there an issue with the valuations of properties. Mr WARNER: … We do not have valuers going out doing asset tests on all loans that are undertaken by financial institutions. Some banks get their own either ex-managers to drive by to see if the actual house exists or we have a lower form of valuation being undertaken. These days it is getting to the point where you actually have the valuer who would not actually even see if the house or asset existed in the first place. You have a drive-by which is at best a cursory glance to see if there is a property on the lot that has been purchased. With lower quality valuations and many other cost cutting measures like this, the interest rate margin dropped. RBA figures show that headline variable mortgage rates which in the 1980s had been 400 basis points over the RBA cash rate, came down to less than 200bps through the period 2000 to 2008. So the big paradox for the dominant “we need more competition” argument in the current debate is why, if the banks have lent on much tighter margins, are they so profitable? The answer is to be found the rising volumes of credit extended from the mid-1990s to the present. Lending volumes are now 400 per cent of what they were in 1992. That would make sense if the economy and population had increased in equal measure, but they have not. The banks kept lending through the GFC, and Australian homebuyers kept up their frenzy of borrowing until March of this year, when the mortgage debt to GDP ratio peaked at 87 per cent. That figure is now coming down as householders deleverage. You might think that the banks should turn next to business lending, where there have been valid complaints that money for working capital needs is too hard to obtain. However this is add odds with the aggregate lending data for business – it peaked at 63 per cent of GDP in 2008, and has been coming down quicker than homelending. This is why Joe Hockey’s attack on the lack of competition is flawed—what we need is not more lending but less, and not a lower price but a higher quality. This is where both the opposition and government should be looking. Instead, Treasurer Wayne Swan is trying to kick along more lending by buying up RMBS issues, thereby playing the game both the banks and the non-banks want – to keep volumes growing. Further cut throat completion to grow volumes would be madness—we are saturated with housing debt and the long delayed deleveraging cycle will go on, whatever Wayne Swan does to give it a boost. What we need are methods to regulate the volumes of debt offered by the banks to stop this happening again, without putting upward pressure on the cost of households have to pay for it. That may sound like an economic impossibility, and it would be if “free competition” between banks were expanded. In fact there is nothing ‘free market’ about banking in the first place. Our big four banks are raising covering their shortfall between loans and deposits by borrowing vast sums abroad—equivalent to 40 per cent of mortgages in Australia—exposing the economy to future credit shocks, and all on the back of actual, and implied deposit guarantees provided willingly by the government. That is massive regulation of a positive kind for banks. It’s time to balance that with some less positive regulation—policies that regulate and control the volumes these state-underwritten entities can lend.
  5. Housing Slump Gathers Pace Monday 8th November, 2010 – Melbourne, Australia By Kris Sayce • Housing Slump Gathers Pace • 60 Second Market Wrap "Auction clearances dive on interest rate rises", reports today's Australian Financial Review (AFR). It states: "In Melbourne, the clearance rate dropped sharply to 61 per cent, the lowest turnover since mid-December 2008…" Ouch! It certainly isn't a sellers' market. And our friends at RP Data agree with us. Money Morning reader Duncan pointed us towards a comment by RP Data on its own Facebook page: facebook Source: Facebook As Duncan says, it's not really all that puzzling why there's an increase in the number of properties for sale "when conditions are not particularly strong for sellers." But it looks as though RP Data have already received some helpful feedback from Dale Morris who posted the following response: Source: Facebook We agree with Dale's last comment. Just as the mainstream economists failed to see the credit crunch arriving in 2007 and 2008 because they were blinded by bogus economic growth, so the property bulls have failed to see the coming housing collapse because they've been blinded by their own bogus spin. I tell you what, with the housing market hanging over the edge of a cliff by a single thread I wouldn't want to be on the wrong side of a $100 million bet on the next move in house prices. But, are we again jumping too soon with the housing crash forecast? According to Dow Jones Newswires last week, "Australian Government Examining Plans to Back RMBS Issuance – Sources". If you're not familiar with the jargon, RMBS stands for Residential Mortgage Backed Securities. As a quick primer, it simply means that a financial institution bundles up a bunch of mortgages it has written to home buyers and then flogs these off to investors who buy them in return for receiving the interest payments from the homebuyers. Prior to the meltdown of global markets two years ago, the big issuers of RMBS were the non-bank lenders. Because they don't have customer deposits to use as capital to fund loans, they've got to go out and borrow the money in order to lend it to home buyers. But when markets collapsed in 2008 and the appetite for risk followed suit, investors were less keen on lending money to the housing market. Especially considering what was happening to house prices overseas. Of course, the government came to the rescue and helped its buddies in the banks to not only stay afloat but to help them increase their market share too. The two following charts from the Reserve Bank of Australia's Statement on Monetary Policy provide a clear picture to this. The first shows the collapse in RMBS issuance from late 2007 onwards: reserve bank Source: Reserve Bank of Australia You can see that RMBS issues dropped from an average of around $12 billion during the previous two years to an average of around $4 billion since then. But as I say, that's when the government stepped in, putting your money on the line to underwrite Australia's major banks. The same banks the government is now involved in a verbal stoush with. reserve bank Source: Reserve Bank of Australia It's no coincidence that at the same time as RMBS issues slumped that the issuance of bonds by Australia's banks increased… by roughly the same amount. But it was a double booster for the banks as they also saw a massive increase in deposits as savers took advantage of the other taxpayer bailout, the deposit guarantee: reserve bank Source: Reserve Bank of Australia On that point, for the first time we heard some sense from a politician last night when we caught a few snippets of shadow Treasurer Joe Hockey's interview on Sky last night. To paraphrase, Hockey said it was a fairly rum deal for bank CEOs to complain about government interference when it was taxpayer money that saved the banks from going broke. He made the comment that wage earners on $50,000 a year were underwriting the banks to make sure the CEOs kept their jobs earning $50,000 a day. As I've said before, I've got little time for Hockey or any other pollie, but once in a while they do come up with something that makes sense… what he doesn't admit though is that if he had been Treasurer at the time, he would have done exactly the same thing as Wayne Swan – bail out the banks. The problem for the banks and the housing market is two-fold. Not only have they succeeded in bringing forward a whole bunch of buyers into the market who may otherwise have provided housing demand over the next three to four years, but they've also encouraged them to do so with jumbo-sized loans. Of all the fancy charts and tables in the RBA's Statement on Monetary Policy the most shocking was this one: reserve bank Source: Reserve Bank of Australia Perhaps you've seen the desperate attempts from the bankers and spruikers to argue that house prices have gone up not due to a speculative bubble, but rather because interest rates are now "structurally" lower (whatever that means) than they were twenty years ago. They claim mortgage sizes are bigger because interest rates are lower and therefore borrowers can borrow more. Therefore there isn't a bubble. Personally, we don't buy that argument. It's a speculative bubble regardless of what the bankers and spruikers claim. And furthermore, who says interest rates are "structurally" lower? Mainstream economists? The same mainstream economists who couldn't even predict the RBA's interest rate increase last week, but who suddenly have the power to predict what the overall "structural" interest rate is for an entire economy. Give me a break! But evidence of their nonsense is in the chart above. If it really was the case that borrowers had adjusted their borrowing higher thanks to lower interest rates then you could reasonably expect the proportion of household interest payments as a per cent of disposable income to remain steady. As you can clearly see, this isn't the case. As a percentage of disposable income, the amount allocated towards the payment of interest has doubled since 2000 – from around 6% to 12%. Simply put, it's evidence of a speculative bubble. Buyers are prepared to pay over the odds for an asset, and are prepared to pay a higher debt servicing cost based on the belief that the asset will increase in value by more than the cost of servicing the debt. reserve bank Source: Reserve Bank of Australia So far many buyers have been lucky. Those that were already in the market prior to 2008 got a nice boost as the suckers bought in. But for those that were suckered in by the bribes, and for any over-leveraged borrower, time would seem to be running out. Since 2008 according to the chart above, house prices have risen by around 16% - give or take a point here or there. While that doesn't sound too bad, take out all the costs of buying, the interest payments already made… plus the costs of selling the house, they'd be lucky to break even… and then there's the cost of buying something cheaper (if they can) and the risks of buying in before the bubble bursts. What you're left with now are buyers committing more of their wages towards interest repayments than ever before. And that has come at a time when interest rates were at record lows. You can see again by looking at the chart above the impact a small move in interest rates has on borrowers. Think about it. Back in 2001 the RBA had the cash rate around 5%. And it was at roughly that same level from 1997 – 5%. At that time interest payments as a percentage of household income was just 6%. Today, with the RBA cash even lower, at just 4.75%, interest payments as a percentage of household income is now 12%, and with more interest rate rises on the cards, it's likely to get worse for borrowers. Now, there's also something else to consider. And that's the impact of income tax cuts which coincided with the increase in the ratio of interest payments. So that while disposable incomes have increased, this has potentially filtered through to an increase in household debt. In other words, more money in the pocket and a bigger loan with the bank. But that shouldn't be used as an argument or an excuse for thinking that there isn't a speculative bubble. Because don't forget that what the government gives with one hand it takes with the other. The Australian Federal burden has been largely unchanged over that period, around 30-35 cents of every dollar goes to the government. In fact you could argue that it has increased when you factor in GST and compulsory purchases such as private health insurance. And of course don't forget State taxes as well. The way we see it is that cuts in income tax rates – while welcome – have had the effect of making the consumer and borrower feel richer while at the same time slugging them for increased indirect taxes. So the net benefit of income tax cuts to the individual is virtually zero. However, it has led to a false impression of a wealth effect which has lulled many – mostly first home buyers – into taking out bigger and bigger mortgages and creating the environment for a house bubble that's on the verge of bursting. That's evidenced by the increase in interest payments as a percentage of disposable income. If borrowers hadn't leveraged up further then you would have seen the percentage drop as disposable income increased. But it hasn't its increased. And that tells you that borrowers are borrowing more and banks are lending more. Yet, when it comes down to it, the ability of borrowers to service this debt is no better today than it was twenty years ago. In fact, thanks to the speculative housing price bubble, and further interest rate increases, the ability of borrowers to service this debt is worse and will get much worse from here. Cheers. Kris Sayce For Money Morning Australia
  6. The global economy "isn't even close" to being out of the woods on sovereign debt, two speakers told an investment conference yesterday at the Toronto Board of Trade. Beat Guldimann, founder of Tribeca Consulting Group and former head of UBS Canada, and Alex Jurshevski, founder of Recovery Partners, distributed a co-written paper titled Sovereign Debt-Reality Finally Hits. A version presented recently by Mr. Guldimann to clients of Weigh House Investor Services reportedly "scared" attendees who heard it. Interest was similarly high yesterday at the Exchange-TradedForum2010 conference otherwise focused on ETFs. In recent decades, only two of 140 attempts at fiscal consolidation were successful, Mr. Jurshevski said, defining success as reducing the debt-GDP ratio by 10%. The two successes were New Zealand in the mid 1990s and Canada shortly after that. Every major sovereign state was hugely indebted after the Second World War but the current situation after the 2008 financial crisis is "very different," the paper says. "The prospects of growth in the major global economies are dim and the structural issues that need to be dealt with are so immense that overcoming them appears to be close to impossible." The current crisis is global, but both speakers are particularly concerned about the United States (and relatively upbeat about Canada and its banking system). Solving these problems will take more time than most electoral cycles permit, making it tough to maintain public support to keep needed austerity programs going. A canary in the coal mine may be the reaction of French workers asked to delay retirement until age 62. Too many nations are trying to do the same thing at the same time, Mr. Jurshevski said: using currency devaluation to make exports competitive, while trying to drive economies with soft currencies and strong current account balances. "Everyone can't devalue at once, but the problem is the U.S. government's policy of quantitative easing is based on exactly that." Five developed economies are dealing with aging populations, shrinking workforces, more retirees and an eroding tax base that makes it hard to dig out of the hole, Mr. Guldimann said. By contrast, emerging nations have much lower debt-GDP ratios and are almost absent of structural deficits. "They have already emerged and are in better shape demographically and fiscally." Mr. Jurshevski said it's arguable the United States is technically insolvent but no one is talking about changing how they do business. He believes there will be "several defaults by sovereign countries" in the next decade: perhaps Greece, other PIGS countries, Iceland or former members of the Soviet Union. Some German towns don't have the money to fix potholes because of the obligation to bail out Greece, so there are growing calls to leave the euro and return to the Deutschmark, Mr. Guildimann said. Cross-border flows of European sovereign debt are "absolutely staggering," Mr. Jurshevski said, pointing to $1.4-trillion flowing between Italy and the rest of Europe. Europe enjoyed 50 years of rich pensions and benefits because it didn't have to worry about security supplied by the United States, Mr. Jurshevski said. But U.S. debt has skyrocketed in the past three years and the Fed's attempts to solve the problem by printing more money are failing. The official list of insolvent U.S. banks is just 775 out of a total 7,900, but the real number is closer to 2,300, he said. "There's a sovereign debt problem in the U.S. as well because of this but the tonic the Fed is applying isn't working this time." Because more people don't trust paper money, many Americans are stocking up on silver coins and firearms, Mr. Guldimann said. In a Q&A, it was suggested Fed chairman Ben Bernanke has clearly chosen inflation over deflation but time didn't permit any investment recommendations. Read more: http://www.montrealgazette.com/business/fp/Sovereign+debt+outlook+grim+analysts/3726598/story.html#ixzz14IvYP8VG
  7. By Pedro Nicolaci da Costa WASHINGTON (Reuters) - The Federal Reserve is expected to announce a controversial new policy on Wednesday to buy billions of dollars in government bonds in an attempt to breathe new life into the struggling U.S. economy. The well-telegraphed decision would be aimed at pushing down borrowing costs for consumers and businesses still smarting from the worst recession since the Great Depression, though there are doubts about its effectiveness. With the U.S. economy expanding at only a 2 percent annual pace in the third quarter and the jobless rate seemingly stuck around 9.6 percent, the Fed has come under pressure to do more to stimulate business activity. Economists expect a new round of Treasury purchases to total about $500 billion over a six-month period and to be accompanied by a signal that officials, who have been divided over the wisdom of the move, might ramp up the operation if needed. "We expect the statement will express a willingness -- but not necessarily a bias -- to further increase asset purchases if warranted by economic conditions," said Michael Feroli, chief U.S. economist at JPMorgan in New York. The Fed is expected to announce its decision at around 2:15 p.m. ET. POLICY MADE IN USA FOR USA Markets have already seen sharp moves in anticipation of the Fed's expected resumption of bond purchases, which were first undertaken as a response to the financial crisis of 2007-2009. U.S. stocks and government bonds have rallied, while the dollar has taken a drubbing in advance of the decision. Stocks have also been supported by expectations -- now validated -- that Republicans, viewed as more pro-business by investors, would seize control of the House of Representatives and pick up Senate seats in elections on Tuesday that were largely cast as a referendum on the economy. As Republicans campaigned on a smaller government platform, Congress may be less likely to offer fresh stimulus spending if the economy sputters, leaving the Fed as the primary source of support. The Fed cut overnight interest rates to near zero in December 2008 and has already bought about $1.7 trillion in U.S. government debt and mortgage-linked bonds. With the prospect of a long period of ultra-low returns in the United States, investors have flocked to emerging markets, pushing those currencies higher. Emerging economies, worried about a loss of export competitiveness, have cried foul. "We are all under attack by the relaxed monetary policy of the United States," Colombian Finance Minister Juan Carlos Echeverry told investors on Tuesday. The Bank of Japan, which meets on Thursday and Friday, is also poised to launch a new round of bond buying. The European Central Bank and Bank of England also meet this week, but are not expected to make any changes to policy for the time being. DEBATING THE RISKS As things now stand, the U.S. economy is not growing quickly enough to put a dent in the unemployment rate. With 14.8 million Americans unemployed and factories operating well short of full capacity, some Fed officials see the risk of a vicious circle where consumers hold off on purchases in hopes that prices will fall, choking off economic growth. Inflation is well below the Fed's preferred range of between 1.7 percent and 2 percent. In the third quarter, core inflation, which strips out volatile food and energy prices to give a better view of the underlying trend, rose at a 0.8 percent annual rate, the second-slowest pace since 1962. Bernanke laid the groundwork for a further round of bond purchases by arguing the central bank was falling short of its twin objectives -- price stability and full employment. Further bond purchases, however, are viewed with a skeptical eye by many members of the Fed, and heated debate is expected. The Fed owns roughly 12.5 percent of all outstanding Treasury bonds and notes. If it were to buy $1 trillion more, as some economists expect it eventually will, the portion of its holdings compared with all outstanding Treasuries could jump to 27 percent. Some economists, and some Fed policymakers, worry further purchases could jeopardize the central bank's credibility if the impact proves small. There are also concerns the Fed's bloated balance sheet may set the stage for rampant inflation once the recovery gains traction. Kansas City Fed President Thomas Hoenig, who is concerned the Fed's easy money policies are prelude to yet another boom and bust cycle, said on October 25 that further easing would be "a bargain ... with the devil." (Additional reporting by Mark Felsenthal; Editing by Kim Coghill)
  8. Government borowing at 7.4% Me thinks this country is over its head
  9. Ireland’s cost of borrowing hits record high of 7.4% By Brian O’Mahony Wednesday, November 03, 2010 IRELAND’S cost of borrowing hit new highs yesterday as the cost of bonds passed 7.42%. a d v e r t i s e m e n t This is worrying news for the economy, but as the Government does not have to go back to the markets until January to raise funds, fears about our ability to repay our debts may have eased by then. Economist David McWilliams said on Today FM’s The Last Word programme yesterday that the current drift in the cost of bonds would rule out our going to the markets in January to raise money to fund next year’s budget. As things stand, the prospects facing Ireland is that it will be have to rely on the EU stability fund because it will not be able to pay the current crippling rates being demanded by international lenders to buy our bonds, he said. Antoin Murphy, professor of economics at Trinity College Dublin, said the bond market "vigilantes" are sending a message to Ireland to "get your house in order otherwise you are going to have to borrow from the European Financial Stability Facility and in that case, the power will be taken away from our own politicians." Ireland is not unique with both Greece and Portugal also under the cosh as investors also fear the pressures on their budgets could result in all three defaulting on their debt. The cost of insuring against a default on the debts of all three countries has also risen sharply. Those who have faith in the economy believe it will stem the surge in bond rates providing that the four-year budget package and the December budget make it clear the Government is serious about getting its house in order. Ironically commentators have said the identification of €15bn in budget cuts over the next four years added to concerns about our ability to work our way out of this crisis. Last week an EU summit agreed a proposal on a mechanism to resolve debt crises in the eurozone, which has also worried investors. The markets feel this could increase the likelihood of debt defaults in some countries. The Financial Times made Ireland’s funding plight its front page lead yesterday. It said the proposals emerging from the EU to force lenders to bear some of the pain if countries cannot payback their loans increased concerns about Ireland’s financial plight even further. This story appeared in the printed version of the Irish Examiner Wednesday, November 03, 2010 Read more: http://www.examiner.ie/business/irelands-cost-of-borrowing-hits-record-high-of-74-135269.html#ixzz14DqltmXw
  10. Bank Bubble Denial Spreads Wednesday 3rd November, 2010 – Melbourne, Australia By Kris Sayce • Bank Bubble Denial Spreads • Market News This Week ............................................................................................................................................................................. What was the October 14th 'Torrent Signal'? And why could it help you make a 137% average gain from stocks you buy and sell in 2011? The 'Torrent Signal' is revealed here. ............................................................................................................................................................................. Poor old Paul Bloxham, chief economist at HSBC Australia. In the space of a few days he's gone from being premium foie gras to plain old chopped liver. From being the toast of the town to just vegemite on toast. Last month you could barely turn the pages of the business press or avoid an interview with him on business television shows as the mainstream press went gaga over Bloxham's call that the Reserve Bank of Australia (RBA) wouldn't lift interest rates. This was a call against the consensus opinion among analysts that the RBA would lift rates. As it happens, the RBA didn't increase rates and the mainstream press had a new superstar interest rate predictor on their hands. He even went out on a limb to say that the RBA would increase rates at the November meeting – which it did. The only trouble is that a couple of weeks ago Bloxham changed his mind. He decided that the RBA would wait until December before raising rates. And perhaps the market took notice of their new guru. According to yesterday's Australian Financial Review (AFR) before the RBA announcement: "Swaps traders are betting there is only a 23 per cent chance that the RBA will increase its overnight cash rate target to 4.75 per cent, compared with as much as 60 per cent before September-quarter inflation data was published last week…" But then the RBA made the announcement that dashed the dreams of the mainstream press: "At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.75 per cent." Drats! Despite being an ex-RBA drone, and who the mainstream thought would have a hotline to the RBA Board, it turns out that Bloxham has as much idea about interest rate movements as anyone else – ie. none. Bloxham's fifteen minutes of economic fame is over. Now he'll be consigned back to the pack with the other analysts and commentators who singularly fail to wow the crowd with their interest rate predicting mumbo-jumbo. But really, the monthly interest rate circus is just a farce. And it always will be when you've got a handful of bureaucrats and so-called business leaders deciding what the price of money should be. Although one thing's for sure. The RBA and the major banks are helping out with making our housing price crash prediction come true. Borrowers that are geared up to the eyeballs, and who were suckered in by the Fairy Ruddfather's bribes have seen their mortgage repayments increase by over $500 per month since the RBA started jacking up rates again. Perhaps you don't think that sounds like much. But think of it this way. In annual terms it equals an extra $6,000. And more importantly, for an average income earner with an average mortgage it means that an extra $8,571 of before tax income needs to be re-allocated from saving or spending into paying off the mortgage. For the average income earner who earns around $65,000 who lives with a second income earner who earns around $48,000 that's an extra 7.5% of their gross income they need to free up. That would take their total annual repayments on a $350,000 mortgage (the average) to $30,264, or the equivalent of before tax income of $43,234. In other words, nearly 40% of gross income. But that's if they're lucky and didn't take the advice of the property spruikers who told them property prices always go up and that interest rates would stay low. Because according to the Commonwealth Bank home loan calculators, borrowers with the income levels I've mentioned above could now borrow up to $568,000 or an annual repayment of $49,116… or $70,000 of before tax income… or 62% of gross income. In net income terms, it would work out around 76% of income! Even more crucial than that is the obvious abject failure of Australia's banks to convince overseas investors that the domestic banking sector and housing market are safe. I mean, hasn't the Commonwealth Bank just completed a global tour spruiking the Aussie housing market, claiming that the income to house price ratios are nowhere near as bad as many claim? Seeing as the whole point of the tour was to get investors to buy the bank's debt for as low an interest rate as possible, it must surely mean the bank has failed to convince those investors about the security of the Aussie housing market. Higher interest rates means higher risk. International investors clearly view Australian banks and the Australian housing market as being a higher risk than the banks and the RBA would have you believe. The fact that Commonwealth Bank has had to increase mortgage interests rates by more than the RBA cash rate is proof the bank is being forced to pay out more than it would like on the debt it issues. Of course it's not just CBA that's in trouble on that score. If the report released by Westpac titled, "Australian housing: the bubble myth" is anything to go by, then Westpac is equally scared about what will happen when the supposedly mythical bubble pops. The bubble denying is spreading from bank to bank. First CBA, now Westpac… we'll wait for ANZ and NAB to take their turn… Anyway, we took the opportunity of the Melbourne long weekend to read through Westpac's report in full. Several readers picked up on something we wrote in Friday's Money Morning. We quoted from the report: "There is little evidence of excessive speculative activity by investors in recent years and we see little risk of disruption from investors selling properties – residential property has outperformed other assets and continues to offer a stable, secure source of income." Our comment was that the bank's economists must be mad if they think property offers a secure source of income. That hadn't the bank realised that 70% of property investors were losing money on investment properties. Some readers have claimed that the bank was commenting about the reliability of the income to the bank, not to investors. Not so. It's clear Westpac is referring to the income earned by investors. If you're in any doubt you can read the full report by clicking here. The point I'm making here by bringing this up is that you should be under no illusion about how desperate the Aussie banks are to spruik and cheerlead for the property market. It's not their own income that the bank is keen to talk up, if anything the banks are trying to talk it down, instead the banks need to keep the myth alive that housing is not gripped by a speculative bubble. But aside from the usual bluff and bluster from the banks, there were a number of things that stood out from the report. First, compare and contrast these two statements from the report: "The notion that aggressive rate cuts and first home buyer incentives could have 'rescued' a falling market just as the bubble was bursting is not compelling. Speculative bubbles are famously resistant to policy moves both on the way up and on the way down." Now read this paragraph: "Importantly policy is also well-placed to deal with any shock if it were to emerge. Low public debt levels mean there is ample scope for fiscal stimulus if required. In addition, with interest rates near historical averages there is plenty of capacity for the Reserve Bank of Australia to apply aggressive monetary stimulus if a threat emerges." Er, so even though bubbles are "famously resistant to policy moves", don't worry because "policy is… well-placed to deal with any shock if it were to emerge." So, what's the difference between a "shock" and a bursting "bubble" then? Nothing apparently. They are the same. As the report again points out later on: "As such it is worth asking if there is a shock that could indirectly trigger a house price collapse? "Domestic policy shocks are unlikely to trigger a housing collapse. The 2008 episode showed us that it is possible for the authorities to reverse policy mistakes rapidly. Rates can be cut and fiscal stimulus can be applied." Of course, Westpac insists Australia doesn't have a speculative bubble, just high prices. Which the chart I'll show you in a moment will disprove. Every man and his dog knows that the banks and the housing market were bailed out in 2008 and 2009. And no amount of denial by Westpac can ignore the fact that Australian housing is in a speculative bubble… as evidenced by a chart Westpac uses in its own report: westpac Source: Westpac Apparently the US and UK housing markets were in a bubble, but Aussie house prices (the dark line) aren't. Even though Aussie house prices have continued to soar while US and UK prices have sunk. But the best proof of the speculative nature of owner-occupiers and investors and their attitude towards price growth is the following amazing chart: westpac Source: Westpac According to this chart, as of this year around 40% of loan applications for owner-occupiers are interest only, low doc or non-conforming. Low doc and non-conforming speak for themselves, but interest only provides more proof of the speculative nature of housing. There's no reason to take out an interest only loan unless the borrower either can't afford the extra repayment for a principal and interest loan, or they're banking on the value of the house increasing and either selling before the interest only period ends, or getting a re-valuation on the house and withdrawing equity (increasing debt). But look at the right hand side of the chart… almost 50% of investor loans are interest only, and when you add in low doc and non-conforming you're looking at 60%. Again, why would you take out an interest only loan unless there was the belief that the value of the property would rise? Whichever way you stack these numbers, and whatever spruikers claim, the simple fact is that Australia is mesmerised by the belief that property prices only ever go up. So much so that they're prepared to pay thousands of dollars each year in interest on the punt that the house price will rise. For an owner occupier taking out the average sized mortgage that means an interest bill over $27,000. However things may not be looking so good for the 'house prices always go up' theory. According to our pals at RPData,"Affordability improves as Australian capital city dwelling values flat-line." We'll try to remember to use that line the next time one of our share tips goes down, "Don't worry about it, the affordability has improved!" But in terms of trying to pull the wool over your eyes Westpac has come up trumps with the charts it has presented on page twenty-one of its report. The bank goes to some lengths to claim that first home buyers are actually doing quite well out of their property purchases and that they've built up a nice bit of equity in their homes – equity that can only be released by selling the house or by borrowing it from the bank. The chart we liked the most was this one: westpac Source: Westpac The aim of this chart is to prove that thanks to rising house prices, FHBs that borrowed 90% of the house value now only have around an 81% debt compared to the higher valued home. Talk about massaging the numbers. For a start, given the chances that FHBs are more likely to be the ones that take out an interest only loan, any "equity" they've supposedly built up will have been gorged by the interest repayments… interest payments to banks like Westpac. But secondly, using an inflated house price to argue that LVRs are now lower because house prices have risen does nothing to counter the argument against a house price bubble. If anything it confirms the unsustainable growth of house prices, especially when you compared Aussie house prices to US and UK prices as shown on the previous chart. Sure LVRs may be lower, but for most that's only a paper profit – one they'll never have the chance to cash-in on. Once the FHBs start getting into trouble thanks to increased interest rates, that equity will soon prove to be worth nothing, and FHBs will find their first home buying experience to be the worst decision they've ever made. Thanks to the RBA and CBA, the pin and the housing bubble have edged just a little bit closer. Cheers. Kris Sayce For Money Morning Australia
  11. "The RBA board were very clear after the last meeting; Quote: If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target. The RBA is still fighting the beast of inflation; Quote: CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term. So when last weeks figures were released; Quote: The CPI rose 2.8% through the year to September quarter 2010 Inflation fears won. The RBA considers the economy otherwise relatively stable. I still think the most likely course for the economy is the housing/construction bubble coming to an end in the near to medium term. The natural consequence of this is a 'rush for the exits' for the million or so investors losing money on property. When that happens, look to the RBA and the government to try to reignite the bubble. The Reserve will lower interest rates quickly and the government will spend more money on stimulus packages. Overseas experience suggests that this probably won't work once the reality sets in that we do not become wealthier by buying and selling houses to each other at ever increasing prices."
  12. Leave poor old Swanie alone. he is just doing his job , have you see Repo Men? Any way the up side is that maybe just maybe Australia will not be wiped out completly in the comming storm.
  13. Swan slams CBA's 'cynical cash grab' By online business reporter Michael Janda and staff Updated 19 minutes ago The country's largest home lender will lift its rates on variable home loan accounts by 45 basis points to 7.81 per cent. The country's largest home lender will lift its rates on variable home loan accounts by 45 basis points to 7.81 per cent. (ABC News: Giulio Saggin, file photo) * Related Story: What you'll pay after RBA rate rise * Related Story: Reserve Bank surprises on Cup Day * Related Link: Infographic: track official interest rates * Related Link: Statement from RBA governor Glenn Stevens The Commonwealth Bank has been the first to react to the Reserve Bank's interest rate hike, raising interest rates by 45 basis points. The Reserve Bank announced this afternoon it would increase rates by 25 basis points, taking the official cash rate to 4.75 per cent. CBA announced to the share market just before 4:00pm AEDT that its standard variable mortgage rate would be rising to 7.81 per cent per annum on Friday November 5. That will add $88 a month to a $300,000 standard variable mortgage on a 25-year term, according to CBA's own mortgage calculator. However, its deposit rates are only rising in line with the RBA's 25-basis point increase. Federal Treasurer Wayne Swan says he is disappointed with the Commonwealth Bank's move. "This is a cynical cash grab by the Commonwealth Bank - there's no other way to look at it," he said. "I think Australians deserve a lot better, especially on Melbourne Cup Day, than to have this sort of cynical decision from the Commonwealth Bank." The Federal Opposition's treasury spokesman, Joe Hockey, says the Reserve Bank's increase could have been avoided if the Government cut back on stimulus spending. "The Government now owns these rate increases," he said. "It's done nothing about banking competition and it's done nothing to put downward pressure on interest rates. "Australians should be understandably angry about this." Funding costs Major bank chief executives have consistently repeated warnings that higher funding costs mean home loan interest rates will need to rise relative to the official cash rate. CBA chief executive Ralph Norris has been one of the most vocal. In August, CBA reported a 20 per cent rise in its full-year profit to $5.7 billion. The CBA's group executive for retail banking, Ross McEwan, says the bank's funding costs have increased 1.35 per cent since the financial crisis, while it had passed on 1.04 per cent to home loan customers before today's increase. JP Morgan economist Helen Kevans says today's extra increase by CBA, if matched by the other major banks, will all but guarantee the Reserve Bank can stay on hold in December. "As we have seen, some of the commercial banks have out-hiked the RBA today, so that will do some of the heavy lifting for the RBA," she said. ANZ and Westpac say their rates remain under review following the decision, while NAB has no official comment at this stage. Hmmmm a negitive for house prices
  14. Perths claim to fame is that it is the most isolated city in the world. It has a extremely poor harbour and because of that was second best to Albany which posses a fine harbour. Once gold was discovered in coogardie and than calgoolie the perth harbour was improved and so the place boomed and boomed. I went to a mining town Mount Parmer the gold was long played out and the place completly abandoned. It was hard on my thinking to understand the transiant way of change.
  15. Let me give you the benfit of my experiance, Perth is just another mining town. Wealth from the mining the machines and labour are all comming to and from Perth. The other income earners are agriculture, tourism and education . To say other wise is to show a profound lack of understanding.
  16. Yer Bardon and I are both wrong! Perth is a drinking city. With a mining problem!
  17. Perth was nothing untill the gold rush and it is mining that is the grease for the wheels, who are you to correct me? :angry: I have lived in Perth for half a century , How long have you lived in Ausralia? And the thing you can not get a grip on is this "the world is comming of Peak Credit"
  18. "From RPData's press releases, Perth has had 11 months of falling house prices, and is now sitting at -0.3% year on year ending in September. For the last quarter it hit -5%. August figures have been revised up. And note that due to the hedonic index used by RPData, these number's aren't as useful as you might hope. Using just monthly changes you get a 8.8% year on year drop in September (as opposed to -0.3%, a massive difference). It's also important to note that the most recent figures are indicative, and are generally based off half of the final data. On average they have been off from the final value by about 1%." Yes and dont forget that Perth is a mining town.
  19. More On The Australian Housing Bubble Decrease Font Size Increase Font Size Print Print Buzz up! Oct. 20, 2010 | Filed Under: EWA , CNZLX , Jacob Wolinsky Jacob Wolinsky Follow 70 following * Profile & More Articles * Author Website * feed More about EWA: * Guru Trades * 10-Year Financials * DCF Calculation * 10-Year Valuations * Insider Buys new Writers Compensation Program - Writers Wanted Columnists Wanted Submit Articles Click here to find out more! More on the Australian housing bubble…. See previous article here. As with the American housing market, the Australian housing market is also under the radar of most economists. Most people do not realize how overpriced houses are in Australia. A similar problem with overpricing the houses in this market occurred in US market. The Australian economy is thought to be on an upswing but that may not be enough to promise that the housing market will not fall through. Predictions are running wild that the housing prices will continue rising steadily and over the next three years At that point, things will start to fall rapidly. The Australian housing market is headed towards that bubble. Contrary predictions are that everything will be just fine. The economy may be taking some hits, but the resilience of the homeowner finances will prove to have staying power. Though the housing crisis seems similar to that of United States, the difference is that the owners in Australia do not have the assistance that has been given to some of the homeowners in the US who were given refinancing assistance because the home was overvalued. Australian homeowners will have to repay the full amount of the loan. One of the challenges that the Australian mortgage lenders is being able to keep lending. Covering the credit for the loans to the homeowners may be a problem and that caused a reduction in the number of loans being given. One aspect that will affect that change is that unemployment must go down for the lending to go up. This is another similarity to the US housing market. The devastation of the economic crises that have hit international markets is causing problems all over the world. Australia has been one of the developed economies least affected by the global financial crisis. However, there are indications that this might be coming to an end. Research reports have indicated an increase in housing prices in the three prime areas in Australia. Those areas are Melbourne, Adelaide, and Sydney. The average increase for the three areas is about 9%, especially in Melbourne. The increase for Melbourne last year was over 25%. The Australian government requested reports that would show housing supply and affordability reform. These reports would be a great indication of what the true situation is. However, these reports have not been produced. The Australian market may have some variation on the housing mortgage crisis but like the US crisis, only time will be able to reveal the true situation. If you are still not convinced see picture below:
  20. We havent even started the Great Depression . Its gona get tough. Its all comming together Peak Oil , Peak Credit It will be worth while to see people not unlike Bardon have their believes crashed and smashed. Leaving them stunded as they try to reform thier thoughts
  21. Quote "You really do like to make general inaccurate sweeping statements dont you.?" Now is just possible that it is you Bardon who is making the inaccurate sweeping statements?
  22. Friday, October 22, 2010 Previous editions Ireland:Most places will have a fine and dry day with sunny spells. Most places will have a fine and dry day » Share Developers will be made finish off ghost estates By Juno McEnroe Friday, October 22, 2010 DEVELOPERS will be forced to finish and clean up ghost estates after a survey found more than 100,000 dwellings are lying empty, incomplete or were planned but never built. a d v e r t i s e m e n t As the extent of the problem was revealed for the first time, it has also emerged that boom-time builders did not leave cash bonds to finish off many of the 2,800 estates littered around the country. Planning Minister Ciarán Cuffe also admitted a previous government policy of tax breaks to boost development during the boom had been "naive". Asked whether Fianna Fáil’s policies during the boom were to blame for the debacle, Mr Cuffe admitted: "It was at best naive to expect that blanket tax designation of entire counties would raise all boats. We know that now. Everybody knows that now." The survey found: * There were plans for 180,000 housing units on the "ghost" estates surveyed, but just over 78,000 have been completed and occupied. nNo work has begun on 58,000 planned homes, while another 23,000 dwellings are lying empty. * Around 20,000 houses and apartments are unfinished, half of them nearly completed and the other half just begun. * In the greater Dublin area, just over 21,000 of around 50,000 dwellings are complete and occupied. * In ghost estates in Cork, only 8,300 out of 20,600 are finished and occupied. The survey also highlighted thousands of incomplete roads, footpaths and lighting in housing estates nationwide. An expert group, chaired by John O’Connor, of the Housing and Sustainable Communities Agency, and which will include Government, the National Asset Management Agency (NAMA), banking, construction and planning representatives, will advise local authorities on the completion of estates. It will have its first meeting in the coming weeks. Housing Minister Michael Finneran said a key to resolving unfinished estates was making empty homes available for social housing. "Landlords, builders, developers and banks are all sitting on properties that they cannot sell, that they cannot either rent out or they don’t want to. Some of the properties will end up in NAMA." However, suggestions that many of the empty housing would have to be bulldozed were dismissed. The Labour Party’s housing spokesman, Ciaran Lynch, said the figures read like a Domesday book for the end of the Celtic Tiger. "What is clear is that people who bought homes in these estates are living through a hell that has come about as a result of a Government that saw housing policy simply as a means of delivering bounty to their pals in the construction and investment community, rather than providing homes for people who need a place to live," he said. Fine Gael housing spokesman Terence Flanagan accused the Government of putting off real solutions by creating another taskforce. He said many of the estates were a danger to residents. "Thousands are left living in ghost estates with dangerous conditions such as open sewers and water contamination. "Homeowners who purchased their home in good faith deserve better." This story appeared in the printed version of the Irish Examiner Friday, October 22, 2010 Read more: http://www.examiner.ie/home/developers-will-be-made-finish-off-ghost-estates-134262.html#ixzz132lC6fsf
  23. Thursday, October 21, 2010 Previous editions Ireland:Most places will have a fine and dry day with sunny spells. Most places will have a fine and dry day » Share National price of houses hits 2002 levels By Conall O Fátharta Thursday, October 21, 2010 AVERAGE national house prices are at 2002 levels, falling by a further 1.3% in the third quarter of 2010. a d v e r t i s e m e n t Click here to find out more! The latest permanent tsb/ESRI house price index shows that house prices have fallen 36% since the peak at the end of 2006. Last quarter’s fall of 1.3% is the lowest quarterly reduction since the second quarter of 2008 (April-June inclusive) and compares to a reduction in the second quarter of this year of 1.7%. The fall in average national house prices in the first nine months of this year was 7.6%. This compares with a fall of 11.7% in the first nine months of last year. The year-on-year decline (quarter three 2009 to quarter three 2010) was 14.8% and compares to a reduction of 17% year-on-year to the second quarter of 2010. The average price for a house nationally in the third quarter of this year has fallen below €200,000 to €198,689, compared with €233,137 in the third quarter of last year and €311,078 at their peak. Commenting on the figures, general manager with Permanent tsb Niall O’Grady said it might be too early to say house prices had reached the bottom. "This is the second successive quarter indicating that the pace of decline in house prices is easing. However, as the market remains very quiet, it may be premature to conclude that we have reached the bottom of the cycle just yet," he said. Dublin house prices fell by 1.2% in the third quarter of 2010. This compares with a reduction in the second quarter of 3.5% and a reduction of 10.3% in the first quarter of this year. The reduction in the first nine months of 2010 was 14.6%, and compares with 17.2% in the same period 2009. The year-on-year decline in Dublin (quarter three 2009 to quarter three 2010) was 21% and compares with a reduction of 24.6% year-on-year to the second quarter of this year. The average price for a Dublin house in the third quarter of 2010 was €238,986, compared with €242,000 in the second quarter House prices outside Dublin fell by 1.2% in the third quarter of this year. This compares to a reduction in the second quarter of 0.8% and a reduction of 3.5% in the first quarter of 2010. The reduction in the first nine months of 2010 was 5.4%, and compares with 10% in the same period 2009. The year on year decline Outside Dublin (quarter three 2009 to quarter three 2010) was 11.2% and compares with a reduction of 14% year-on-year to the second quarter of 2010. This story appeared in the printed version of the Irish Examiner Thursday, October 21, 2010 Read more: http://www.examiner.ie/ireland/national-price-of-houses-hits-2002-levels-134092.html#ixzz12zbVsOQ8
  24. Why Fitch is Wrong About Australia’s Banks by Kris Sayce on 14 October 2010 Hogwash! There’s a few other words we could use, but that’ll do for now. The boys and girls at Fitch Ratings have given Australian banks the all-clear. According to Bloomberg News, “Australia Can Handle Worst Mortgage-Loan Defaults, Fitch Stress Test Shows”. Well that’s alright then. Bloomberg reports that: “Banks would see a maximum A$10 billion ($9.9 billion) of losses in the third year of a severe mortgage stress scenario and mortgage insurers would lose a little more than A$7 billion.” OK, what about the first and second years? Anyway, Fitch used three stress-test scenarios: “Fitch is testing… mild stress, with mortgage defaults of 2.5 percent and a 20 percent drop in home prices; medium stress with 6 percent defaults and 30 percent decline in prices; and sever stress with 8 percent defaults and a 40 percent price slump.” Let’s not kid ourselves on where we think the housing market is heading. We’ll ignore the “mild” and “medium” stress tests because those are nothing more than McDonald’s cheeseburger-sized blips en route to the Eagles cheeseburger-sized housing crash: Not your editor eating a 5lb cheeseburger Source: Eagles Deli, Boston I mean, do the numbers. The estimated size of the Australian housing market is $3.5 trillion. Which is helpfully inflated by around $1 trillion of mortgage debt. Those are pretty big numbers by anyone’s standards. It means you’ve got a loan to value ratio (LVR) of about 28%. So if we take the value of Australian housing and apply the severe collapse in prices as modelled by Fitch, the total value of the Australian housing stock will fall to just $2.1 trillion. And the LVR will increase to just under 48%. Of course, that’s based on the entire housing market. But as the property spruikers are keen to tell us, about 30% have a mortgage, about 30% of people rent, and about 30% of people own their home outright. So, we’ll adjust the numbers. Trouble is, it makes the result even worse, and we’re not even factoring in the super-leveraged investment property mortgages where paper profits are used as a “deposit” on an additional investment property. But if we just look at the 30% of owner-occupiers with a mortgage, that puts the value of their properties at a total of $1.05 trillion. And according to the latest numbers from the Reserve Bank of Australia (RBA), residential mortgage debt stands at $672 billion. That’s an LVR of 64%. More than twice the LVR than if you look at the mortgage position across all properties. Now, if we assume a 40% drop in house prices as modelled by Fitch, you’re looking at the total value of the housing stock owned by those with mortgages falling to just $630 billion. In other words, that segment of the market, those with mortgages, would be in negative equity. Now, of course that assumes owner-occupiers don’t sell, or if they do then the buyer is buying with a similar amount of leverage. And, considering that so much of household wealth is tied-up in the family home, the effect of those without mortgages selling into a falling market shouldn’t be discounted either. If all you’ve got to live off in retirement is the equity in your home, odds are you’ll want to bail out while there’s still some value left in it. But if we take Fitch’s numbers and say that 8% of this segment of the market defaults, that works out to around $53.8 billion of housing that the bank is left in the lurch with. $53.8 billion of housing that it would need to sell into a depressed housing market. A housing market that has just fallen by 40% mind you. How are they going to do that we wonder. And considering a bank such as the Commonwealth Bank [ASX: CBA], currently holds around a quarter of all Australian mortgages, that puts its potential liability at at least $13.4 billion. Even if you assume mortgage insurance will mop up say $5 billion, you’re still looking at the CBA holding $8 billion worth of property and defaulted mortgages. And here’s the thing. You’ve got to remember that people’s behaviour changes under such extreme stress. Anyone can do some sober back-of-the-envelope analysis today when the markets are booming and flowers are blooming. But all that goes to pot when the fit hits the shan. Think about it this way. In late 2008 the Australian housing market didn’t collapse. It didn’t fall by 10% let alone 40%. Yet how did the banks behave? What condition did the banks find themselves in during a time when the value of their biggest asset didn’t fall? That’s right, the banks went crawling and begging to the Australian federal government for a bunch of taxpayer handouts. Handouts that prevented each one of them going bust. Never forget this… If it wasn’t for the Australian government guaranteeing the deposits of every dollar in a savings account, Australia’s banking system would have collapsed. If it wasn’t for the Australian government guaranteeing the wholesale debt issued by Australian banks, Australia’s banking system would have collapsed. If the Australian Office of Financial Management hadn’t agreed to use taxpayer dollars to buy residential mortgage backed securities, Australia’s banking system would have collapsed. And if mortgage funds – such as Commonwealth Bank owned Colonial – hadn’t frozen redemptions on those mortgage funds, Australia’s banking system would have collapsed. That’s why I tell you that the so-called stress test by Fitch is hogwash. We dare say it’s based on fancy computer models. Computer models that are based on various inputs. Perhaps they’ve factored in job losses and higher interest rates too. But there’s one thing no fancy computer model can accurately predict, and that’s human behaviour. When people are put under stressful conditions they may do and act in ways that no-one could possibly imagine. I mean, even in non-stressful conditions people do things that defy logic. But there’s something else which we dare say the brain-bods at Fitch haven’t considered. And that’s the Ponzi nature of the banking system. Banks exist on the basis that the supply of money into its vaults will constantly increase. As long as more money is created it means more money will be deposited and therefore it can use that as capital to create even more money. The problem arises when the flow and creation of new money stops – deflation. If a bank such as the CBA has lost several billion dollars on mortgages, it has to cover that money from its own pockets to make sure depositors are made whole on their deposits. And, if property prices have just fallen 40%, even if there are people who are prepared to borrow, they’re going to need to borrow less as property is cheaper. And of course, not forgetting all those defaulters – 8% of borrowers – who are no longer credit-worthy. Ask any business what the impact on their revenues would be if 8% of their customers were suddenly not in a position to buy from them anymore. We doubt that they’d just shrug their shoulders and not worry about it. That’s why it’s important to consider how banks really work. This is where we get back to fractional reserve banking. Remember how people swarmed the banks in the UK and the US to withdraw their deposits as soon as there was a whiff of trouble at the banks. Well, take a look at the latest Commonwealth Bank annual report. The CBA records in its balance sheet that it holds $374 billion of “deposits and other public borrowings.” Yet, if you look in the Assets column you’ll see the bank holds just $10.1 billion of cash and liquid assets. And if you drill down further you’ll see that the CBA holds just $3.09 billion in “Notes, coins and cash at banks” in its Australian vaults. In other words, it tells its customers that their cash is available when they want it, yet less than one cent on the dollar is sitting in the CBA’s vaults. So, run it past me again. If Australia’s property market collapses by 40%, according to Fitch, this will only have a negligible impact on the banking system. Yeah right. In the Utopian world of the ratings agencies they seem to believe that individuals will just grin and bear it. That there won’t be a run on the banks, people will continue taking out new mortgages to buy up all the cheap properties, and the government won’t need to put taxpayer dollars on the line again to bail out the banks. As we said at the start, that’s utter hogwash. You saw the panic that consumed the bankers, the government and the bureaucrats in 2008. And you saw how individuals reacted both here and overseas – they panicked too. We wrote yesterday about Black Swan events. Events that are unpredictable. Well, it’s likely that the housing market will collapse as a result of an unpredictable event. Whether that’s something that causes a rise in unemployment or something else – we don’t know. But what we do know is that an analysis of the Australian banking system and its exposure to the housing market can’t be analysed in isolation. The housing and banking collapse will have a major impact on other sectors of the economy and that in turn will feedback to impact the housing and banking markets. As much as the pointy-headed graduates who fill the corridors of the ratings agencies, the banks and government bureaucracy believe that they can model for and avoid a collapse of the banking industry, the fact is they can’t. The very structure of the Australian housing and banking system means that it is ultimately destined for collapse. Reports such as the one from Fitch, only succeed in spinning the tired and stale old yarn about Australia being different. It isn’t. It’s exactly the same as everywhere else. The only difference is that most people haven’t figure that out yet. Cheers. Kris Sayce
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