Monday, November 8, 2010

RateGate builds

There were a bunch of stories out yesterday and this morning about how rate rises have sucker-punched the housing market for Sydney and Melbourne I, II. See also Delusional Economics for some good graphs on inventory and a scary take.

After one result only, it's a little early to tell how much damage is done. But there are growing reasons for concern.

First, RateGate has arrived at what was already a moment of softening housing activity following the FHBG ramp. So we are developing some momentum to the downside.

This blogger will observe that in stringing out their own responses to the CBA rate jump, the other three big banks are stringing out the damage to sentiment.

There is also something of an unknown in how the punters will react to Joe Hockey's ongoing campaign. The Shadow Treasurer is on an outrageous political winner, but in keeping the bank issue on the front burner, there is going to be ongoing uncertainty about where exactly interest rates are headed. That's another reason to reconsider an investment.

Both the government and the bankers seem pretty close to panic, which is feeding into generalised regime risk.

And the bubble meme in the press just won't die.

Finally, despite the fact that the debate remains obsessed with interest rates, there is a growing sense that the Invisopower! preventing discussion of the real problem of offshore bank funding is also waning.

The failure of the Rudd and Gillard governments to use a rational and transparent policy framework like a Wallis Inquiry to address flaws in the Australian financial system exposed by the GFC is coming home to roost.


Pallbearer said...

This from the Australian Bankers Association

Upshot is, if banks don't make huge profits by charging high rates and charges, foreign investors whom account for 1/3 funding of all Aussie house mortgages, may lose confidence and reduce funding, much to the detriment of Australian house prices.

Banks et al, are certainly doing a good job of shooting themselves in the foot at the moment.

However with QE2 and the inevitable fiscal incontinence, I'm sure cash will continue to leak out of the US and come our way, at least for the time being.

Anonymous said...

David, could it be that Joe Hockey is looking for the political double whammy? On one hand he concurs with the populist bank bashing approach. Yet he knows full well that may inevitably lead to foreign lending support for the banks vanishing and the subsequent nightmare that follows. How can he lose?

It'd be nice to see some detailed analysis. There are suggestions that bank profits have remained no greater than 1% of assets for the last 10 years and profit growth achieved entirely by asset (namely mortgage lending) growth. In that case, it's a bit rich to be bashing banks over their 1% yield when many of the noise makers (overleveraged investors) expect no less than three times that amount.

Pallbearer said...

I think a Return on Equity is a better way to look at their profits.

"Across the big four, the return on equity (ROE), a measure of profitability on shareholders' investment, is around 15.9 per cent - better than the previous year but still four per cent below pre-crisis levels, Mr Dickinson said on Wednesday."

Now compare that to another utility service provider that is about to float.

"Also the return on equity was something like 5%, you can get 6% risk free in the bank, why bother with the hassle of investing in QRN?”

Considering your statement Anonymous, that banks profits are 1% of assets doesn't really stack up, when banks are able to pay fully franked dividends of over 5% to shareholders.

Anonymous said...

Pallbearer, analyse it any way you like..... ROE, ROI, ROCE, EBITDA, you completely missed my point.

The whole sorry tale about the banking sector and this super profits, gouging debacle has been forced upon us by years of unproductive residential lending. Bank bashers keep complaining about growth in bank profits without looking at their own contribution to the problem.

They don't complain when asset values grow by 2-300% over, in some cases, five years. By your ROE analysis the average punter who took out a 95% LVR resi loan any time during the last 10 years has yielded returns that would make the banks look anaemic. Yet they squeal.

Don't get me wrong, I'm no apologist for the banks. One of the majors cut deposit rates by 1% three weeks ago, costing me a bomb. Thankfully no exit fees there but unfortunately, no public outrage either.

Pallbearer said...

Thanks for the clarification, Anon. I concur.

Just thinking, just bad timing on CBAs part, quiet on the news and political fronts. Westpac seems to have not even registered with the media, despite as u say, slashing deposit rates and announcung job cuts.

Must have a better PR firm.