Everyone keeps saying we need to do something about the problem of property investors. Rubbish. Investors are not the problem, and they won’t be targeted by the RBA when they finally bring macro-prudential into effect.
I get the sense that investors are being set up to take a fall.
Like property investors are somehow to blame for imbalances in the economy, compromised bank balance sheets, the wallabies loss to Ireland…
The media is still running this angle. Macro-Prudential – the new tool in the RBA’s tool kit – looks like it’s coming. It could be any day now.
Macro-prudential should give monetary policy a bit more flexibility. A bit more nuance, subtlety and finesse. A better ability to target specific markets rather than just carpet bomb the entire economy.
And what’s the RBA going to do with this more ‘targeted’ approach?
Target investors apparently.
At least that’s how the media continues to sell it.
The popular narrative runs like this: Investors have gone mad. They’re buying anything on stumps and paying absurd amounts of money for it. They stretching themselves far beyond their means to buy uneconomic properties in the hope that prices will just keep on going up. These speculators are completely unprepared for softer market conditions, and will get wiped out at the slightest stumble in prices. What’s worse, as they go down, they’ll take the whole economy with them, plunging us in to miserable dark age.
Your wi-fi will stop working.
This is the line that a lot of the media and a lot of commentators who should know better, are running.
And when you’re running that line, macro-prudential becomes the proof you’re looking for.
Why else would the RBA want to introduce targeted regulations if not to put a straight jacket on those raving mad investors?
Well, there’s a couple of reasons actually, and these point us to what we can actually expect from the RBA.
The first very good reason is you want to rebalance bank lending in Australia. Bank lending has become much more heavily weighted towards housing lending in recent years – entirely at the expense of business lending.
In a way, it’s easy fruit for the banks. Assessing property values and a lender’s credit-worthiness is pretty straight forward. A computer can do it. Crunch the algorithm, maybe get a human to cast an eye over the output. Easy.
Business lending is an entirely different kettle of fish. How do you assess a business proposal? That takes skill and experience. Even then, there’s a lot left to chance. A lot of fantastic business ideas never get off the ground.
For the same return, the banks’ business arms have to work a heck of a lot harder and take on a lot more risk.
No wonder they’re just not bothering. The balance of bank lending in Australia continues to shift away from business lending towards mortgages. Here’s a chart I drew up a few weeks back:
The RBA could be justifiably pissed. We’ve made money the cheapest it’s been in 50 years, the least you guys could do is send some of it towards businesses – you know, the ones that actually employ people get the economy going.
To me that seems like a very good reason to lean a bit harder on the banks.
The other reason that might weigh in things is the threat that our risk-shy banks have overloaded themselves on housing. It sets up the threat of systemic risk – that if there was any shock to the housing market, the repercussions would be huge.
So far, the banks haven’t been convincing in defence of their lending practices.
Westpac’s Bill Evans was talking it up the other day though:
“Consider the ‘quality' of Westpac’s investment property portfolio. Investment property loans (IPLs) are 45.2 per cent of Westpac’s Australian mortgage portfolio.
- Compared to owner–occupier applicants, IPL applicants are older (75 per cent over 35 years); have higher incomes and higher credit scores.
- 65 per cent of IPL customers are ahead on their repayments and 90+ days delinquencies are 0.37 per cent compared to 0.47 per cent for the full housing portfolio.
- Westpac has an interest rate buffer approach to lending linking loan approvals to serviceability at a rate at least 180 basis points above the standard mortgage rate (5 per cent).
- All IPLs are full recourse and specific policies apply to holiday apartments and single industry towns.
Such lending practices, which are likely to be widely practised right across the Australian banking system, should fully allay the governor’s concerns…”
Well, sort of. But Evans defence here is all about what good credit risks investors are. They’ve got high incomes, and good repayment practices.
As I keep saying, INVESTORS ARE NOT THE PROBLEM.
But he says nothing about whether Westpac’s book is too heavily weighted towards housing, and nothing about whether a focus on the low hanging fruit of housing is crowding out business lending.
The other risk that the RBA might want to lean against is the threat of gluts developing in certain segments.
As I’ve written before, housing market ‘crashes’ only happen in markets with severe over-supply. So far we haven’t had those conditions develop in Australia.
So far…
But there does seem to be the possibility looming that we’re seeing some over-supplied segments – particularly in inner-city apartments in Melbourne and Sydney. It’s not panic stations yet, but the worse case scenario here is that a price collapse in these segments spreads through out the market.
I’d still rate it as a distant possibility, but monetary policy needs to be forward-looking if it’s to work at all.
It’s these concerns that are weighing on the RBA’s mind I reckon. And I personally reckon we’ll see more geographic targeting than investor targeting once macro-prudential comes into the light.
Any day now.
Watch this space.
Jarad says
Am I the only investor who wouldn’t be too fussed about a decent price correction? It would be a great chance to do some shopping and boost the current portfolio. It would also be interesting to watch as it happened and what a a great opportunity for people to reassess their thinking and what they are doing with their life. Maybe it is just me…
Felicity says
My experience of business lending has been very much in line with what you’re saying, Jon. Without lots of property equity behind you, forget it. They’re not interested in lending you anything until you’re in such a good position that you probably don’t need it anyway.
John from Perth says
If the government wants more business investment they need to create the right conditions. They have been doing the opposite. The government is closing down the car manufacturing industry, spending our taxes overseas putting our defence industries out of business. The recent taxes levies and increases and talk of further tax increases and spending cuts result in reduced consumer purchasing power and suck confidence from the economy. Labour’s mining tax has put a shiver down all ,mining investment and Labour were hell bent on red tape and regulating business into oblivion and that’s still having an effect on confidence. If there was money to be made in business lending the banks would lend the money. The real worry is that Liberals are anti Australian business and are spending our taxes overseas while overseas funny money is being used to buy our farm and realestate.
Tom says
Good one again Jon.
You touch on a subject that has been gnawing at the back of my mind.
The Chinese Government is awash with the US Monopoly Money – You need more? You just print more!!! It’s not called a “Fiat Currency” for nothing. (‘Fiat’ = Latin for ‘wish’!!!)
They know that it is worthless, in and of itself and that the US economy is on the way down, like its Empire – unimaginable debt is its albatross. Also, QE will inevitably come back to bite its derrier!!!
But the big Chinese expansion plans depend on continued exports to keep their economy surfing. They have to find ways to invest their USD earnings without killing the golden goose.
They are offering ridiculously low interest rates to their entrepreneurs, who then buy up ‘REAL’ assets which will provide both security and cash flow for many years to come, buffering the Chinese economy against the inevitable slow down at home. Meanwhile, they are signing “Free Trade Agreements” which include concessions, allowing Chinese workers access to overseas jobs – the thin edge of the wedge!!!
They are not stupid. In fact, they are VERY astute; and they can afford to think “Long Term”.
We are hearing of China’s empty, new towns, in which housing is intentionally kept vacant.
Call me a ‘Cynic’, or a ‘Conspiracy Theorist’ if you will, but with the proliferation of their “Shoe Box” apartments in Melbourne and Sydney, are they intentionally setting up that “Surplus Stock ” scenario here, to force down our market prices, facilitating their future purchase of our more traditional housing and its land, at more favourable prices?
We started out as a colony of Britain, sending all our produce back to fill the coffers of “The City”. Now we are heading to become a colony of China, sending our wealth to Bejing. Our own Governments are so engrossed in their own Party Political ‘Election Cycles’, that they ignore the nation’s long term prospects and welfare.
Julia tried to bring some ‘future’ thinking into Cabinet decisions; but look what happened to her!!!
The Big End Of Town soon drummed up destabilisation in her party’s ranks and brought in puppets who would return control of the nation to them – as they did when Gough & Rex threatened to “Buy Back The Farm”, taking our mineral resources out of their hands.
al says
Tom – it IS monopoly money …this is long and short STORY of HIS-story – not female ie: Lizzie had a view long ago ..the apology ‘up front’ for ‘ad infinitum’ verbose “Yaking” my head off … its on the last post of Jon’s very late – so its as it is .+.1 gods grace is the war sleight of hand later .”small book starts here” …
re ” Jenny” . but it seems? – they DO see your view and ‘live’ (your) ‘the nett equation’ as on “their own version of the other side“ and they do accept/take the power that you note and by there/by a or allows that – double headed coin that gives them the platforms to direct all those – “response ability” = to others, make ‘us’ have the “ability to respond” as they see /call it
‘elsewhere’ ie: … ‘we are choosing’ from lower down’ (ie, “it’s not for us”) ‘as we have all responsibility for these others issues’, BALD as brass nuts – “tiered monopoly” owners of the (whole world) it’s the corporate/gov’ts – game board ? – they have the six sided dice – everyone else has five sided dice /rolls every year = + tax (is ‘natural’ as part of the game) “modern “monopoly of lords past? .. is our future” – as was our past then, now our more recent in-corporated(?- bored)- board’s game – a Disney tool that re-inspired (or that we were
re-anointed/confirmed again = ‘re-deceived’) as a whole new huge rising wave of mass conscience-ness with all their very subtle re-manipulations.
it’s a spiked drink ‘game’ ‘playing’ on mass conscience-ness, a ‘re-legion’ as if accepting their mass prescription of the original ‘bit – coin’ that could achieve re-seeding the (our new version of a prior) perpetual ‘religious world experiment’ – as it has been noted and is considered
…there is ‘nothing to money’ – except a ‘religious re- assembly’ of previous legions otherwise ‘believers’ in ‘god’ gave previous prescriptions of otherwise worded and stylized Popes before our current ‘Dopes(?) proposing of milk and m/honey assured us if we $$money$$ followed ‘them’ we would prosper and have equal benefits rights as long as we played their rules of the game – remembering their idea for a new game was, their ‘masses pasta’ idea, they were the bank, and did re-invent promote/provide the first of world handed ‘safe money idea’ otherwise how c/would ‘anyone play the game’ to get “what they” properly? truly needed -with no problems?! – with this system when tiering the god of money – gold became everyone’s
archangel and “His-story” ? was slid from an analogy onto a real living reality on “mass scale” as the dice game of ‘the poor’, mass poor became the game practice at home, mono-op-oly – idea – creators (shares in it?) said, its ‘fun to play’ unconditional-ly ( mass) fullyconditioned
generations into an institution of collective amnesia default, the almost complete seduction of entire species hypnotized by an unjust ‘religion’ that has false conquered/divided and tiered all “original human races” that had a first principle to share all necessary resources ensure the very survival of their own tribe/species, now we are so full of our capacity‘to be excessive’ –eg; Mr.Crusoe finally self-exploding is very as if – close to the reality of our new worldly order of $ conquistadors, perhaps saving 1 main difference is it Banks only perhaps ?
Matter of time before the $ pyramid inverts its own prime construction illusionary weight and (?) tragically(?) ‘just flops’ left or right, so to speak?) and (if needed) new paradigms are ‘point-if fi-cate-d’ into a real-ity in a new – ‘re – legion’ of heirs and graces.?
Or is there time to revive all original investigations such as the woman attempted as No.1 truly pissed off as follows …sad but true the eyes that knew the crud was being served saw it as this lone woman said … what the franking crap are you lot up – she smelled rat poo big !!!
i do not think the banks are prepared to stand the gold up – its not for anyone else as a dice game was a far better diversionary tactic and still not many people remember or plain know?
Early history[edit]
The history of Monopoly can be traced back to 1903,[2] when an American woman named Elizabeth (Lizzie) J. Magie Phillips created a game through which she hoped to be able to explain the single tax theory of Henry George (it was intended as an educational tool to
illustrate the negative aspects of concentrating land in private monopolies).
Her game,The Landlord’s Game, was self-published, beginning in 1906.[3] A series of variant board games based on her concept were developed from 1906 through the 1930s that involved the buying and selling of land and the development of that land.
Origin[edit]
By 1933, a board game called Monopoly had been created which formed the basis of the game sold by Parker Brothers, beginning in 1935. Several people, mostly in the Midwestern United States and near the East Coast, contributed to the game’s design and evolution, and this is when the game’s design took on the 4×10 space-to-a-side layout and familiar cards
were produced. The original version of the game in this format was based on Atlantic City, New Jersey. By the 1970s, the idea that the game had been created solely by Charles Darrow had become popular folklore: it was printed in the game’s instructions and even in
the 1974 book The Monopoly Book: Strategy and Tactics of the World’s Most Popular Game by Maxine Brady.
1936–70[edit]
In 1936, Parker Brothers began licensing the game for sale outside of the United States. In 1941, the British Secret Intelligence Service had John Waddington Ltd., the licensed manufacturer of the game in the United Kingdom, create a special edition for World War II prisoners of war held by the Nazis.[4] Hidden inside these games were maps,compasses,
real money, and other objects useful for escaping. They were distributed to prisoners by Secret Service-created fake charity groups.[5]
for myself when paying rent on Bond Street and all other Blue ribbon blocks gave me the craps as my brother always landed them with cash to splash and i paid his bloody rent more often than not he never coped any of mine as I could not buy anything after paying his rent first or second time round – life became a mirror he owns 3-4 houses and I own none – pay rent as if reality was scribed nearly 40 years ago … was it fate or prediction way back then – something is peculiar in life when monopoly ruled my future as if “very oddly pre-revealed and his too”? fate or not Monopoly sat on my pace and Lizzie tried warn us all!
Charles says
The government is so of corruption. The politicians have plenty of investment properties they fork out 6 billions a year to push up the housing price by negative gearing, they are cutting budget by some millions targeting the poor. RBA can do only that bit.