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Money Comment: There are spooky signs of risk in the property market — and the banks are ignoring them

10:46  13 october  2017
10:46  13 october  2017 Source:   abc.net.au

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Fully half of Westpac's loan book consists of interest-only loans, so why are the banks not more concerned about what could happen next?

There are signs our frothy housing market , combined with rising interest rates, could have serious consequences for our economy. This week: the big banks front a parliamentary review but remain blinkered on the risks of the many interest-only loans they ’ve funded.

There are signs our frothy housing market, combined with rising interest rates, could get ugly.© ABC News: Michael Coggan There are signs our frothy housing market, combined with rising interest rates, could get ugly.

I'm not normally a fan of Parliament hauling private sector executives before them and asking thorny questions.

But when the Australian House of Representatives did so this week with the big banks, it was both useful and instructive.

And, to be perfectly frank, terrifying.

Let's start with Westpac chief executive officer Brian Hartzer.

First, he confirmed the little-known but startling fact that half of his $400 billion home loan book consists of interest-only mortgages.

Yep, half. Of $400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40 per cent interest-only.

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There are spooky signs of risk in the property market — and the banks are ignoring them , via @ConversationEDU http Sign up, tune into the things you care about, and get updates as they happen. Never miss a Moment. Catch up instantly on the best stories happening as they unfold.

That is a comment that is either staggeringly stupid or completely disingenuous. Read more: Banks shouldn't underestimate the risk of concentration in the housing market . Vital Signs : don’t count your economic chickens before they hatch.

Mr Hartzer went on to make the banal statement: "We don't lend to people who can't pay it back. It doesn't make sense for us to do so."

This chart shows you how much Australia's major banks will lend, based on your income

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There is risk in every single real estate transaction. Ignored comment . Unhide. The reason condos are preferred is that they are real property with greater rights of ownership. To limit risk in this market , my preference would be to buy into an established condo without tax abatement, high % of

There are signs our frothy housing market , combined with rising interest rates This week: the big banks front a parliamentary review but remain blinkered on the risks of the many interest-only loans they ’ve funded. That is a comment that is either staggeringly stupid or completely disingenuous.

So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?

Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money.

There are top managers like Mr Harzter acting on behalf of shareholders.

Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages.

And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders.

Those folks may well want to make loans to people who can't pay them back as long as they get a big payday in the short term.

ANZ chief executive officer Shayne Elliot repeated Nr Hartzer's mantra, saying: "It's not in our interest to lend money to people who can't afford to repay."

Recall, this is the man who on ABC's Four Corners said that home loans weren't risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting).

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To find out more about Facebook commenting please read the Conversation Guidelines and FAQs. 401(k) at risk ? They say that market will end badly once its key underpinnings — low rates, tame inflation and historically low volatility — head quickly in the other direction.

Core Principle 8 notes that “ banks should have a credit risk management process that takes into account As the property market cratered Lehman reacted by selling assets but not as aggressively as it After a few moments of dead air Mr. Cox repeated his comment that the Board had a serious

That is a comment that is either staggeringly stupid or completely disingenuous.

Messers Harzter and Elliot must take us all for suckers.

They have made a huge amount of interest-only loans, at historically low interest rates, to buyers in a frothy housing market, who spend a large chunk of their income on interest payments. This certainly looks troubling. It may not be US sub-prime, but it could be ugly. Very ugly. To put it in context, there appears to be in the neighbourhood of $1 trillion of interest-only loans on the books of Australian banks.

I say "appears to be", because reporting requirements are so lax it's hard to know for sure, except when CEOs cough up the ball, like this week.

Uncorrelated? Really?

The big lesson of the US mortgage meltdown is that the risks on these mortgages are all correlated.

If a few people aren't paying back an interest-only loan, that is a fair predictor that others won't pay back their loans either. Yet it seems Australian banks are a decade behind the learning curve. The Reserve Bank cautions that one-third of borrowers don't have a month's repayment buffer. And where are interest rates going to go from here? Up. It is just a question of when.

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Banking panics in the past two centuries occur when depositors withdraw more money than they need for consumption “The problem with [focusing on microprudential rules] is it ignores systemic risk .”–Franklin Allen. (3) It is too late for a change in FRB policy to prevent another property market crash.

Once they realize there ’s nothing supporting them , they start to drop,” says Jack Ablin, chief investment officer for BMO Private Bank . But history shows that when investors get hopped up on debt to buy stocks, that’s usually a sign of a market top. In 2000, for instance, margin debt as a

And when that does happen — or when the interest-only period on loans (typically five years) rolls off and principal payments start having to be made — watch out.

We should all remember that the proximate cause of the US mortgage meltdown was borrowers with five-year adjustable-rate mortgages (ARMs) that had huge step-ups in repayments and needed to be refinanced to be serviceable.

When the market couldn't bear that refinancing, defaults went up. Then the collapse of US investment bank Bear Stearns, then Lehman, then Armageddon.

Australia's large proportion of five-year interest-only loans — turbocharged by an out-of-control negative-gearing regime — looks spookily similar.

It's one thing for borrowers to do silly things. When it becomes dangerous is when lenders not only facilitate that stupidity, but encourage it.

That seems to be what has happened in Australia.

And APRA's "crackdown" and the Reserve Bank's warning may be far too little, way too late.

We might stumble through this. I hope we do. But if so, it will be because of dumb luck, not good institutional and regulatory design. And definitely not because of good corporate governance.

Whatever happens, we should learn those lessons.

BIS says Australia's 55-year house price 'upswing' the longest in the world .
The long-term rise in Australian house prices since the early 1960s has been the most sustained property market upswing in the world in recent decades, research finds.Researchers at the Switzerland-based Bank for International Settlements have analysed long-run trends in house prices across 47 countries, as part of a paper exploring how interest rates affect the price of real estate.

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