Australian Housing - some dangerous trends re-emerge

Some articles in the press over the weekend are worrying in the sense that we have now seen the re-emergence of a 105% home loan to help new entrants into the market. Equally the article cited the increasing of acceptable LVR's at the majors suggests that with Housing Finance off so sharply from its recent high mortgage lenders are doing whatever they can to stimulate demand at a time when clearly Australians are rightly being more circumspect.

In another piece which is analogouos to the above the headline asserted that "Banks are 'lending into a housing bubble' research firm warns"

There is a lot of atmospherics globally at the moment about Australian house prices and the “fact” that they are a bubble. We have a lot of sympathy with the view but it is hard to see the catalyst for the nominal bust we are increasingly hearing about. Many argue that this "bubble" must bust because "all bubbles do" but with little else supporting these assertions other than some thinly sliced analysis. Gerard Minack of Morgan Stanley is not one of these thin slicers and in his recent paper basically said, among other things, that it can only be a big uptick in unemployment or investors forming the view that that housing investment is a dud investment after costs once capital appreciation slows or stops.


We agree with Minack on both counts but we then have a conditional probability issue. That is, what causes the causes that cause either the reappraisal in investors or the uptick in unemployment??? For unemployment in the current economic circumstance we would need  China to fall over while the rest of the world is still struggling but what are the chances of that? Possible, Yes, probable, not at the moment. As for investors that would require a cultural shift which is inherently unforecastable.

Certainly we know over the long term that there is a strong relationship between demand for housing finance and house prices (see chart). Housing finance is off sharply again and a straight line relationship would suggest prices to fall (nominal) in coming quarters. But history tells us prices fell in "real", inflation adjusted terms not nominal last time this happened in 2003. So what the banks are doing may well increase demand for housing by making it more accessible to new entrants and giving uptraders the ability to stretch a little further, thus supporting prices for the moment.

Source: ABS, RBA, Bloomberg and Spotlight

We continue to favour a small nominal fall over the next five+ years but a decent inflation adjusted fall. But if we really are going to pour fuel on the fire then we could be off by a long margin or we simply forestall the inevitable.

No doubt what the banks are doing is, at face value, dangerous however we bet they are banking on the historic precedent of low defaults based on the stigma of bankruptcy and the structure of the debt such that you remain personally liable as a safety net to their lending in Australia. If house prices fall banks don’t actually lose until they have to foreclose and then only if they can’t recoup outstandings and by the way anything above 80% is, in general, the mortgage insurers problem. It’s another of those conditional probability arguments that makes the loss given default so small as to make it remote from the retail bankers individual lending decision. However dangerous this may be for the macro economy.

History tells us that is a reasonable assumption but we wouldn’t bet gen y or the late gen x’s will care as much as their parents on what their credit score is or the stigma of bankruptchy. They are just as likely to blame the banks...its ok then!