Let’s begin the day looking at Bank of Queensland’s (ASX:BOQ) $91 million first-half loss. People who think housing can never crash in Australia (because it’s a cultural thing, you know) will be quick to point out that the bank got hammered on commercial and residential property in Queensland. It’s a local thing. All real estate is local, just like all politics, right?
Well, not quite. It’s true that there’s no such thing as a national real estate market. There’s our little neighbourhood in St Kilda…there’s the Gold Coast…and there are the thousands of other little neighbourhoods and pockets of houses. The economics of each neighbourhood are different. There are many markets, not one.
But to paraphrase Tolstoy, every real estate market is different in its own away, but they are all alike (and unhappy) in one important way. Real estate may be local, but mortgage finance is national. The concentration of mortgage finance in a small number of banks is how local disruptions in the real estate market are transmitted across the country until you have a national problem.
Take Bank of Queensland, for example. Its losses are concentrated in the Gold Coast. Even the most hard-headed of housing Pollyannas would concede prices there are falling. But losses in one market are going to lead to lower lending everywhere. The bank will be forced to raise its loan loss provisions and grow less quickly (or contract) in places like Victoria and New South Wales.
And remember BOQ is not even one of the Big Four. Smaller banks can’t compete with the Big Four. They have fewer sources of funding and less margin for lending error. That’s why the Big Four banks have actually increased their share of mortgage market to over 85% since 2008. The risk of falling house prices is now heavily concentrated in a small number of very large banks, banks that must weigh risk aversion in lending versus the need to grow earnings.
There are two final points we’ll make on this – before the reflexive defenders of the housing market start flooding our inbox and cramming our message boards with their passive-aggressive gibberish. First, houses are so damned expensive and unaffordable in Australia that we suspect a lot of people are barely making ends meet.
To be sure, our suspicion is highly subjective and non-scientific. But there are external signs that confirm it. Credit ratings agency Fitch reports that late payments on mortgages began jumping in late 2011. Granted, the jump in arrears was small, from 1.52% to 1.57%. But the jump wasn’t even on marginal home loans. It was on so-called “prime” residential mortgages.
Mortgage stress does not discriminate based on race, gender, or class. The housing affordability problem is a problem at the top end of town AND for the battlers. It’s a problem any time you have to borrow huge amounts of money to get into the market and bank interest rates have decoupled from the cash rate set by the Reserve Bank of Australia.
In fact the decoupling of bank interest rates from the RBA’s bogus price of money is already being used as an excuse by some developers for poor financial performance. Property developer Stockland’s (ASX: SGP) shares fell nearly 4.5% yesterday. The company’s Managing Director Matthew Quinn said housing affordability in Australia is a “major issue“.
He also said that business is down for him because of Australian banks. He said that the weak sales trend will continue and that a recovery is “likely to be slow unless we see a reduction in bank interest rates to improve affordability and buyer confidence.”
So there you have it. It is the banks that are to blame for the lack of buyer confidence. It’s funny how no one ever blames the banks for rising house prices. But they should, which brings us to our second and final point. The whole country is over-invested in housing.
Greg Canavan did a good job of connecting Australia’s poor productivity performance in the last 10 years with its housing bubble. Aussie banks participated in the global credit boom by creating their own very profitable little housing bubble. Business investment and productivity growth were neglected.
The result is that house prices are unaffordable, mortgage delinquencies are rising, prices are falling, risk is concentrated in the banks, and the country is headed for a giant reckoning with the idea that higher house prices are a “cultural thing”. They were a “cultural thing” in the UK, the US, and Ireland. And they still fell when the credit expansion ended and prices became too high for the punters.
The investment bubble in housing has had real economic side effects. The banking sector simply poured too much money into one asset class. The inevitable happened. It will happen again, only this time it will be a correction. The correction is not a “cultural thing”. It’s an “economic thing”.
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From the Archives…
Gold Money: A Once-in-a-Generation Buying Opportunity
2012-03-23 – Greg Canavan
A Question Australia Might Have to Answer
2012-03-22 – Joel Bowman
Australian Tax: Running Government at a Profit
2012-03-21 – Nick Hubble
China: Why All Feasts Must Come to An End
2012-03-20 – Satyajit Das
Greg Smith – A Former Goldman Sachs Insider Finally Speaks Out
2012-03-19 – Eric Fry