Finance Market Update - 8 November 19
In this fortnights update we think about if we are we at the start of a boom or bounce. With property prices are on a tear upwards and no signs of slowing, trouble could be brewing, at least for the big banks and developers.
Bounce or boom
Back in May in a finance market update I said, “the boom might be back if we see two specific things happen” and both of these things have happened.
Now the question is, are we in a start of another boom, or a bounce before another correction?
If we are heading into a boom it is possible property prices will exceed that of 2017 peak levels. The reason for this is that the orderly 10% drop we have seen over the past year or so was manufactured by APRA but did nothing to diminish the addiction or incentives property buyers have, so buyers will return in force.
This is already playing out with uncommonly high clearance rates.
Further, with each cash rate cut there is a direct correlation to asset price inflation, particularly property, as the RBA’s own internal research showed, which we talked about in March, and still holds true. So now that we have seen 3 rate cuts and have at least 1 more to come, that will continue the growth in property prices.
One could even argue that property prices could increase 10%, 20% or even 30% higher than the 2017 peak levels, but at those prices something would have to give.
And if we are addicted to property, then like the addicts that we are, when our drug of choice is cheaper and more easily accessible, we binge. In this example our drug of choice is credit.
Credit is also the driver of property prices in the short term, as we have talked about before and seen played out since the last five-year boom when credit was flooding the streets, compared to when it dried up during the royal commission.
It might pay to remember most addictions end badly.
Often in dire property downturns the canary in the coal mine, so to speak, is when property developers start collapsing.
Half-way through this year the sizeable developer Ralan Group went into voluntary administration leaving about 3,000 apartments worth billions of dollar in doubt of completion and about half a billion owing to creditors.
They won’t be the last.
As times, liquidity, off the plan sales and bank loans get tough developers dream up very compelling offers to entice the would-be property owner or investor into putting down their deposit. These can include frequent flyer points, paying council rates and substantial discounts, all of which are usually marketed in glossy brochures that should include the slogan - buyer beware.
Especially when there are cases like Mascot Towers or Opal Tower playing out.
The ultra-paranoid could argue Australia is in the midst of one of the biggest property bubbles in any developed nation, based on data from income, debt and ancillary property services, but let’s refrain from talking about bubbles for now.
Banks moved the goals posts too far
The big banks are going through an extreme balancing act, weighing income on one side, and costs on the other.
In ANZ’s 2019 full year financial results stated their annual cash profit was down 7% to $5.9 Billion, and the mortgage settlements drop by $17 Billion which is a huge 30% drop.
The reason for such a decline is because they have been moving the goals posts.
What I mean by that is how ANZ, or any lender, changes their criteria on who they give a loan to. Such as the change in assessment rates, or living expense verification, or use of the HEM benchmark, as well as internal credit decisions.
Westpac also released their annual results recently which showed a decline of 15% cash profit, a fall of $14.7 billion in home lending (19.5%) and squeezed net interest income (/margin a.k.a. NIM) down 1% which translated into $16.9 billion in lost income.
An unsurprisingly dampened result given the market and costs they and the other banks face, but the CEO said this was deliberate, essentially admitting they have moved the goal posts.
The NIM as we have discussed before is the bank essentially balancing the cost they pay for funds to how much they can make in lending out the funds. A real-world example of this from the recent Westpac results is that after reducing their mortgage rates their income went down by $114 million, but they also reduced the rate paid on deposits (cost of funds) which earnt them back $64 million.
Interestingly they are partnering with a core banking technology start up founded by an ex-CEO of Barclays in 2016 which promises 10x better experiences for customers. For now, what that looks like is that Westpac will overlay a new tech layer which other fintechs can tap into to effectively rent out the banks banking license and offer those kinds of services.
We know the big banks are being attached at all sides and that competition should result in better outcomes for customers.