If the investment cycle still works and some say its broken, then we need to expect to see property prices to fall next year. This will then herald the start of a new cycle.
A few months ago industrial stocks were being hammered but the overall impact was cushioned by strong resource shares. Commodity prices were holding up because of the supposed strong future economic growth in China. That now has collapsed, by the way.
Many investment experts were still preaching the China story as the reason why Australia would be immune from the US credit crunch. At the time I explained that this rationale was fundamentally flawed because simple logic says if China's biggest customer slows then China will follow. Unless China develops infrastructure and their domestic market then they will follow and we are in trouble. Probably something between the two scanarios will play out and we will still have a soft ride ahead.
If US consumers stop spending at big retailers like Walmart, Walmart in turn will not order as much from their Chinese manufacturers, who won't need to buy as much steel from their Chinese steelmaker, who won't buy as much coal or iron ore from their Australian miners - and certainly not at the boom prices of previous years.
But they are building power stationsat a rate of two a week and that suggests to me that domestic demand will soak up a lot of chinese production.
So are property market may fall, but to a lesser degree than in the US, where 3 million properties have been repossessed and there are predictions of another 1 million to come.
The key Standard & Poor's/Case-Shiller housing index of the top 20 US cities came out last week and the results were ugly.
Home prices had their biggest annual drop in July. Average home prices were down 16.3 per cent for the year and more than 20 per cent since their peak in July 2006.
Las Vegas home prices were down 30 per cent, Phoenix by 29 per cent and Miami by 28 per cent. Almost one-third of US households will have negative equity in their homes by the end of the year.
It is very unlikely the Australian residential property market will plunge by anywhere near as much as in the US because we haven't been through a huge construction boom, borrowers haven't leveraged themselves to quite the same extent and we have strong immigration to underpin demand.
But - and it is a big but - the tightening of bank finance will have an impact on residential property values.
The banks are already starting to ration credit, making it more difficult for people to borrow. The banks are lifting their standards. We're starting to see the old-fashioned request for a 25 per cent deposit on a home loan and demands that mortgage repayments be less than 30 per cent of the borrower's income.
Tightening the criteria for home loans means fewer borrowers will be eligible.
There will be fewer potential buyers and less competition in the market.
On the other side of the coin, because of the fall in the sharemarket, more existing homeowners will be under pressure from their banks to boost the level of security behind their loans and may even be asked to sell their properties.
Fewer bidders combined with more homes on the market equals a softening of prices. That is all ahead of us.
At the top end of the market, the tightening of finance is already starting.
The Government support for the non bank lending may soften this credit squeeze by lenders.
Monday, December 15, 2008
Monday, December 08, 2008
Massive market opens for mortagge brokers to ease the pain.
over half the recipients of a recent survet said they were hurting under mortagge stress. The recent mortgage rate reductions would have eased this a little, but this shows how much mortgage brokers who can assist these homeowners are needed right now.
Clients are particularly looking for ways to reduce monthly finance costs and give them some kind of buffer should they need it in the uncertain times ahead.
More than half of the respondents admitted that their mortgage repayments were more than 30 per cent of their gross household income. This used to be the acid test for the maxium borrowing capacity, but these have been stretched to dangerously high levels in the past four years as competition with the banks against mortgage brokers hotted up.
And half of those were feeling mortgage stress. That's about 25% of the total mortgage borrowers.
The Problem is house prices
In the last decade, house prices in Australia had risen to almost nine times the average income. This is from 3 times the average income 40 years ago.
This had left borrowers at significant risk when interest rates rose sharply and house prices remained constant or fell.
The risk could be mitigated by the greater availability of land supply, the use of employment continuation insurance, shared equity mortgages or salary-adjusted mortgages.
But that is for new home buyers.
Mortgage brokers would do better focusing on the needs that already exist. The mortgage stressed homeowner.
Clients are particularly looking for ways to reduce monthly finance costs and give them some kind of buffer should they need it in the uncertain times ahead.
More than half of the respondents admitted that their mortgage repayments were more than 30 per cent of their gross household income. This used to be the acid test for the maxium borrowing capacity, but these have been stretched to dangerously high levels in the past four years as competition with the banks against mortgage brokers hotted up.
And half of those were feeling mortgage stress. That's about 25% of the total mortgage borrowers.
The Problem is house prices
In the last decade, house prices in Australia had risen to almost nine times the average income. This is from 3 times the average income 40 years ago.
This had left borrowers at significant risk when interest rates rose sharply and house prices remained constant or fell.
The risk could be mitigated by the greater availability of land supply, the use of employment continuation insurance, shared equity mortgages or salary-adjusted mortgages.
But that is for new home buyers.
Mortgage brokers would do better focusing on the needs that already exist. The mortgage stressed homeowner.
Wednesday, November 26, 2008
UK Northern Rock using 125% mortgage loans will be facing arrears trouble
Arrears on controversial home loans of up to 125% of the value of a property are driving Northern Rock's repossession rate. "Together" deals account for a third of the the Rock's mortgage book, but half of the number of mortgages in arrears and three-quarters of repossessions.
But Rock bosses told a committee of MPs they wanted to lead the way in helping people avoid losing their homes.
Buy-to-let specialist Bradford and Bingley was also under the spotlight. The two nationalised bank's management teams faced a Treasury Committee banking inquiry hearing.
High-value deals Northern Rock came under particular scrutiny over claims that the lender was "aggressive" in its repossessions policy.
This claim was strenuously denied by chief executive Gary Hoffman, although he warned that rising unemployment and falling house prices would increase the numbers in arrears. Northern Rock's Together mortgages - which offered loans of up to 125% of a property's value - were heavily criticised when the bank was nationalised. I believe you have inherited a shambolic organisation with a giant headache
John McFallTreasury Committee chairman about B&BMr Hoffman said that these mortgages had worked well in getting first-time buyers on the property ladder during the booming market. But now with some customers struggling to repay these mortgages, because they are often less well-off, Northern Rock's repossession rate has risen above the national average. Latest figures showed the proportion of Together mortgage customers in arrears for more than three months stood at 3.1%, whereas the industry average was 1.33%.
Mr Hoffman said he wanted the bank to lead the way in creating schemes to help people avoid repossessions, but the bank had to act in the same way as the rest of the industry. "We want to make sure customers stay in their home.
Repossession is a last resort," he said. Executive chairman Ron Sandler said only 1% of the repayment of the debt to the government was funded by repossessions, so there was no benefit in trying to push up the repossession rate for that purpose.
He said there would be no return of the bank to private ownership in the near future, with the economic situation making it more difficult. Buy-to-let 'closed' The Rock is doubling the number of staff dealing with arrears. The same trend can be seen at Bradford and Bingley (B&B), which has dominated the UK buy-to-let mortgage market in recent years.
Job losses at Bradford and Bingley will happen over timeB&B executive chairman Richard Pym said he expected the number of staff dealing with arrears inquiries to double, from the 200 employed in August, by the time arrears levels hit their peak next year. He added that the buy-to-let housing market was "closed". So many deals had been withdrawn that the market was completely different to a year ago. B&B, which had its mortgage business nationalised in September, has a £40bn loan book.
Some 60% of these mortgages are buy-to-let customers and another 20% are self-certified mortgages, which are common among people such as the self-employed. Mr Pym told the committee that at the end of September the proportion of borrowers in arrears on their mortgages stood at 3%, higher than the industry average.
One independent report suggested that, taking falling house prices into account, B&B could lose about £1.2bn.
The buy-to-let market is expected to be worse hit than the residential mortgage market. Mr Pym, however, said the recent cut in the Bank rate to 3% would have a "significant effect" in assisting landlords, assuming rents did not also fall dramatically. Job losses At the end of August, B&B had 3,100 staff, the committee heard.
This dropped by 1,700 following the transfer of the savings business to Abbey, and another 300 jobs went when business was closed to new mortgages. Mr Pym said it was "mindful of its obligations" to the community in West Yorkshire. Any further job losses would be phased, with 50 to 100 voluntary redundancies in the pipeline.
An agreement with the government means there will be no compulsory redundancies before 31 March next year. Yet he was unable to give a final level of job losses by the end of next year. Former chairman Rod Kent said the board was "deeply sorry" that the bank needed to be nationalised. Mr Pym said that there were only queues at four branches at the height of the crisis, and every customer who wanted to move savings could do so when the outflow of customers' funds reached £200m online.
Committee chairman John McFall, closing the session, told Mr Pym: "I believe you have inherited a shambolic organisation with a giant headache." Mr Pym confirmed he would step down from his job next summer, without any compensation, but having picked up a guaranteed cash bonus of £326,000 spread over two years.
But Rock bosses told a committee of MPs they wanted to lead the way in helping people avoid losing their homes.
Buy-to-let specialist Bradford and Bingley was also under the spotlight. The two nationalised bank's management teams faced a Treasury Committee banking inquiry hearing.
High-value deals Northern Rock came under particular scrutiny over claims that the lender was "aggressive" in its repossessions policy.
This claim was strenuously denied by chief executive Gary Hoffman, although he warned that rising unemployment and falling house prices would increase the numbers in arrears. Northern Rock's Together mortgages - which offered loans of up to 125% of a property's value - were heavily criticised when the bank was nationalised. I believe you have inherited a shambolic organisation with a giant headache
John McFallTreasury Committee chairman about B&BMr Hoffman said that these mortgages had worked well in getting first-time buyers on the property ladder during the booming market. But now with some customers struggling to repay these mortgages, because they are often less well-off, Northern Rock's repossession rate has risen above the national average. Latest figures showed the proportion of Together mortgage customers in arrears for more than three months stood at 3.1%, whereas the industry average was 1.33%.
Mr Hoffman said he wanted the bank to lead the way in creating schemes to help people avoid repossessions, but the bank had to act in the same way as the rest of the industry. "We want to make sure customers stay in their home.
Repossession is a last resort," he said. Executive chairman Ron Sandler said only 1% of the repayment of the debt to the government was funded by repossessions, so there was no benefit in trying to push up the repossession rate for that purpose.
He said there would be no return of the bank to private ownership in the near future, with the economic situation making it more difficult. Buy-to-let 'closed' The Rock is doubling the number of staff dealing with arrears. The same trend can be seen at Bradford and Bingley (B&B), which has dominated the UK buy-to-let mortgage market in recent years.
Job losses at Bradford and Bingley will happen over timeB&B executive chairman Richard Pym said he expected the number of staff dealing with arrears inquiries to double, from the 200 employed in August, by the time arrears levels hit their peak next year. He added that the buy-to-let housing market was "closed". So many deals had been withdrawn that the market was completely different to a year ago. B&B, which had its mortgage business nationalised in September, has a £40bn loan book.
Some 60% of these mortgages are buy-to-let customers and another 20% are self-certified mortgages, which are common among people such as the self-employed. Mr Pym told the committee that at the end of September the proportion of borrowers in arrears on their mortgages stood at 3%, higher than the industry average.
One independent report suggested that, taking falling house prices into account, B&B could lose about £1.2bn.
The buy-to-let market is expected to be worse hit than the residential mortgage market. Mr Pym, however, said the recent cut in the Bank rate to 3% would have a "significant effect" in assisting landlords, assuming rents did not also fall dramatically. Job losses At the end of August, B&B had 3,100 staff, the committee heard.
This dropped by 1,700 following the transfer of the savings business to Abbey, and another 300 jobs went when business was closed to new mortgages. Mr Pym said it was "mindful of its obligations" to the community in West Yorkshire. Any further job losses would be phased, with 50 to 100 voluntary redundancies in the pipeline.
An agreement with the government means there will be no compulsory redundancies before 31 March next year. Yet he was unable to give a final level of job losses by the end of next year. Former chairman Rod Kent said the board was "deeply sorry" that the bank needed to be nationalised. Mr Pym said that there were only queues at four branches at the height of the crisis, and every customer who wanted to move savings could do so when the outflow of customers' funds reached £200m online.
Committee chairman John McFall, closing the session, told Mr Pym: "I believe you have inherited a shambolic organisation with a giant headache." Mr Pym confirmed he would step down from his job next summer, without any compensation, but having picked up a guaranteed cash bonus of £326,000 spread over two years.
Monday, November 24, 2008
Big homes become hard to sell and finance
The new stimulas that flooding the Australian property market is not flowing up to the top of the market.
Melbourne house values are down about 2 per cent across the board over the past few months, but recent rate cuts and additional first-home buyer support, will make that sector more buoyant than other parts of the residential property market, valuer WBP says.
For example, Narre Warren, a typical first and second-home owner's suburb in Melbourne, has a very strong market in properties priced below $320,000, while the market from $320,000 to $500,000 is weaker.
WBP also says recent valuations in the blue-ribbon suburbs of Camberwell and Balwyn suggest the market has fallen between 10 and 15 per cent for properties priced at more than $1million, while those below $500,000 are less affected.The prestige sector, after being immune to 12 consecutive rate rises, is not faring well amid cuts to executive bonuses, a volatile share market, corporate profit downgrades and the increasing pressure of margin loans.Knight Frank Research, in its annual review of the prestige residential market released this month, says all these factors will affect prices.
The prestige sector generally held up well over the 2007-8 financial year. But even though it feels like ancient history now, sales volumes started falling in the first two quarters of 2008 in most capital cities, as the hit to family wealth started to befelt.In Melbourne, there were 44 sales of more than $5 million each, totalling $294 million for the 2007-8 financial year.
But 60 per cent of these were in 2007, with a 34 per cent fall in the value of sales in the first two quarters of 2008. The suburbs of Brighton and Toorak recorded the highest volumes in this price bracket, with nine sales of more than $5 million in each suburb.
In the entry-level prestige sector, the value of properties sold for the year was $2.17 billion, but that was down nearly 32 per cent in the first part of 2008. Knight Frank makes the distinction between entry-level prestige property, between $2 and $5 million, and top-end prestige property above $5 million.
In Sydney, it says, there are two distinct prestige markets. The first is mainly owner-occupied -- suburbs such as Woollahra, Vaucluse and Point Piper in the east, and Mosman, Manly, Neutral Bay, Cremorne and Hunters Hill in the north.The second is the beach areas of the upper north shore and around Palm Beach and Avalon.
A large proportion of these are second homes or luxury weekend retreats for those in Sydney's financial services industry.Prices for prestige residential property in Sydney actually rose 4 per cent over 2007-08 year, as measured by the Knight Frank Prime International Residential Index. But again, all the growth was in 2007, with a slowdown in the first half of 2008. Knight Frank expects the very top of the market -- the $10million-plus bracket -- will remain stable, and says trophy properties, which are usually waterfront or have harbour views, will always be in demand.
Areas with a high proportion of second or holiday homes, and entry-level prestige properties will be in for a tough time.More second homes are likely to hit the market, and entry-level prestige properties values will fall, as has already happened in suburbs more dependent on the financial sector for purchasers.
Melbourne house values are down about 2 per cent across the board over the past few months, but recent rate cuts and additional first-home buyer support, will make that sector more buoyant than other parts of the residential property market, valuer WBP says.
For example, Narre Warren, a typical first and second-home owner's suburb in Melbourne, has a very strong market in properties priced below $320,000, while the market from $320,000 to $500,000 is weaker.
WBP also says recent valuations in the blue-ribbon suburbs of Camberwell and Balwyn suggest the market has fallen between 10 and 15 per cent for properties priced at more than $1million, while those below $500,000 are less affected.The prestige sector, after being immune to 12 consecutive rate rises, is not faring well amid cuts to executive bonuses, a volatile share market, corporate profit downgrades and the increasing pressure of margin loans.Knight Frank Research, in its annual review of the prestige residential market released this month, says all these factors will affect prices.
The prestige sector generally held up well over the 2007-8 financial year. But even though it feels like ancient history now, sales volumes started falling in the first two quarters of 2008 in most capital cities, as the hit to family wealth started to befelt.In Melbourne, there were 44 sales of more than $5 million each, totalling $294 million for the 2007-8 financial year.
But 60 per cent of these were in 2007, with a 34 per cent fall in the value of sales in the first two quarters of 2008. The suburbs of Brighton and Toorak recorded the highest volumes in this price bracket, with nine sales of more than $5 million in each suburb.
In the entry-level prestige sector, the value of properties sold for the year was $2.17 billion, but that was down nearly 32 per cent in the first part of 2008. Knight Frank makes the distinction between entry-level prestige property, between $2 and $5 million, and top-end prestige property above $5 million.
In Sydney, it says, there are two distinct prestige markets. The first is mainly owner-occupied -- suburbs such as Woollahra, Vaucluse and Point Piper in the east, and Mosman, Manly, Neutral Bay, Cremorne and Hunters Hill in the north.The second is the beach areas of the upper north shore and around Palm Beach and Avalon.
A large proportion of these are second homes or luxury weekend retreats for those in Sydney's financial services industry.Prices for prestige residential property in Sydney actually rose 4 per cent over 2007-08 year, as measured by the Knight Frank Prime International Residential Index. But again, all the growth was in 2007, with a slowdown in the first half of 2008. Knight Frank expects the very top of the market -- the $10million-plus bracket -- will remain stable, and says trophy properties, which are usually waterfront or have harbour views, will always be in demand.
Areas with a high proportion of second or holiday homes, and entry-level prestige properties will be in for a tough time.More second homes are likely to hit the market, and entry-level prestige properties values will fall, as has already happened in suburbs more dependent on the financial sector for purchasers.
Monday, October 13, 2008
Bank lending will end the credit crisis
The head of the International Monetary Fund (IMF) says he hopes the actions taken by governments will be powerful enough to persuade banks to start lending again, and that he IMF is ready to lend to any country that needs help.
Speaking at the G20 meeting in Washington, Dominique Strauss-Kahn says this would bring an end to the credit crunch.
But he has warned that the global financial system is near to meltdown, saying the IMF has been calling for co-ordinated action on the crisis for some time.
Mr Strauss-Kahn says the crisis is not limited to advanced economies and the IMF is ready to lend to any country that needs help.
"The fund has asked for weeks, if not for months, for more co-ordination in action, arguing that in such a crisis that it was impossible to look for domestic solution," he said.
"Action taken in some countries without coordination with other countries can hurt more than it helps."
The G20 group of leading economies has agreed to coordinate efforts to respond to financial turmoil in world markets.
The group says it will use all means available to ensure the stability of the global financial system.
In a joint statement the group emphasised the need for nations to communicate to ensure that benefits to one country do not destabilise other economies.
Speaking at the G20 meeting in Washington, Dominique Strauss-Kahn says this would bring an end to the credit crunch.
But he has warned that the global financial system is near to meltdown, saying the IMF has been calling for co-ordinated action on the crisis for some time.
Mr Strauss-Kahn says the crisis is not limited to advanced economies and the IMF is ready to lend to any country that needs help.
"The fund has asked for weeks, if not for months, for more co-ordination in action, arguing that in such a crisis that it was impossible to look for domestic solution," he said.
"Action taken in some countries without coordination with other countries can hurt more than it helps."
The G20 group of leading economies has agreed to coordinate efforts to respond to financial turmoil in world markets.
The group says it will use all means available to ensure the stability of the global financial system.
In a joint statement the group emphasised the need for nations to communicate to ensure that benefits to one country do not destabilise other economies.
Saturday, October 11, 2008
Global wave of rate cuts could not save the stockmarkets
The dramatic Australian official interest rate cut this week by the RBA was followed by smaller cuts by central bank around teh World, but has had little effect in confidence in the world's stock markets as shares have repeatedly fallen all week to make this week the worst for 21 years on Australian Markets.
Mr Mortgage said that the interest rate reductions would not solve the banks liquidity problems or the trust between banks that they will be repaid on funds advanced.
With so many failing institutions in the US and Europe the problem will take to work through.
Mr Mortgage said that the interest rate reductions would not solve the banks liquidity problems or the trust between banks that they will be repaid on funds advanced.
With so many failing institutions in the US and Europe the problem will take to work through.
Wednesday, October 08, 2008
PM supports banks not passing on the full rate cut
Kevin Rudd supports tha banks not passing on the full cash rate reduction of 1% by the RBA yesterday.
According to Mr Mortgage there was an expectation by the RBA that the banks would not be in a position to pass on the full reduction, and that in his opinion was the reason for the anticipated 0.5% reduction being doubled to a 1.0% rate cut. So the mortgage belt should as a whole be well pleased with the outcome.
Where this will be enough to kickstart home buyers into making offers on homes in the near term remains to be seen.
I suspect that further cuts will be required to give new home buyers the confidence to move forward in this he feels.
Mr Rudd says he supports the banks' decisions this time, he has also urged them to pass on further cuts if conditions improve.
"As financial markets stabilise we expect the banks also to pass through the rest of the interest rates over time."
However, Mr Rudd conceded that his defence of the banks' position not to pass on the full cut to borrowers may be unpopular.
"My job, and sometimes it's going to be very unpopular, is to argue in defence of the stability of the Australian banking system," he said.
"That means making sure we get these decisions right."
Mr Rudd said "despite worsening global conditions there are strong grounds for Australia to remain optimistic about its economy but there must be a balance between a strong banking system and relief for borrowers."
According to Mr Mortgage there was an expectation by the RBA that the banks would not be in a position to pass on the full reduction, and that in his opinion was the reason for the anticipated 0.5% reduction being doubled to a 1.0% rate cut. So the mortgage belt should as a whole be well pleased with the outcome.
Where this will be enough to kickstart home buyers into making offers on homes in the near term remains to be seen.
I suspect that further cuts will be required to give new home buyers the confidence to move forward in this he feels.
Mr Rudd says he supports the banks' decisions this time, he has also urged them to pass on further cuts if conditions improve.
"As financial markets stabilise we expect the banks also to pass through the rest of the interest rates over time."
However, Mr Rudd conceded that his defence of the banks' position not to pass on the full cut to borrowers may be unpopular.
"My job, and sometimes it's going to be very unpopular, is to argue in defence of the stability of the Australian banking system," he said.
"That means making sure we get these decisions right."
Mr Rudd said "despite worsening global conditions there are strong grounds for Australia to remain optimistic about its economy but there must be a balance between a strong banking system and relief for borrowers."
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