Banks, regulators in crisis talks about what happens in 6 months....

From what I can gather, there could be a lot of businesses (property investment is one category of business) where this may not be the case.

Look at all the Government assistance being provided to businesses.

As you say, ...

 

Last year they said 0.75 was the bottom.

 

Yeah and we also heard servicing changes are here to stay and every other line that is turned on it’s head when required.

I take everything with a grain of salt. The reality is they have the power and discretion to make changes as needed.

My guess is they will go lower and I’m also expecting an increase to servicing yet again. If they want to be fair then in the new world, HEM has to be adjusted simple as that.

 

Abit has changed since this thread started! Where are we now with all the deferrals?

 

Here are the last published stats Temporary loan repayment deferrals due to COVID-19, August 2020 | APRA

 

It also seems like a November drop to 0.10% cash-rate is now almost a certainty.

Seems like a strategic day to do this. Tuesday Nov 3rd just so happens to be Melbourne Cup AND presidential election (albeit we are a day ahead on that, but still, the media hoo-ha of Cup + Election will overshadow the news items on the 0.10% cash-rate, around 4pm of that day. Very clever).

Martin North had a recent podcast episode specifically regarding the impact of a 0.10% cash-rate on multiple macro-economic conditions as well as for retail/mortgage products. Definitely worth a listen:

Reading The Economic Tea Leaves [Podcast]

Some on here dismiss him as a perma-bear. I disagree; I think in general; he is quite balanced and leans only on hard-data to inform trends. He never makes 'predictions' as some think; rather he stresses that he uses the data to model 'scenarios' of varying severity which I quite like. However, his guests are a mixed bag of quality. Some are fantastic; data-driven; and astute. Others though... not so much!

 

Where does he get this hard data from? His surveys?

 

Do you not think it is counter-intuitive for the RBA to drop the rate in a manner that is intentionally drowned out by other news events? I figured the intent on dropping rates is to try to drive confidence and encourage more people to borrow. If they try to hide this drop it implies that the community wouldn't want it or that analysts might disagree with their rationale.

 

In a word, yes, I do think it counter-intuitive.
Listen to the full podcast. Towards the end, Martin goes on to suggest that it isn't a "supply" problem of credit we are facing, but rather a "demand" problem. You can't force folks to take out more debt if they really don't want to. At the same time, the reduction in RBA cash rate will hammer poor savers even further; Martin suggests this may see for some savers/Term Depositers to wander into higher risk/higher return asset classes. I tend to agree that there is a chance of this occurring. This could see for some folks push their $$$ into shares/stocks (because for mature or deposit-based-income folks; this is the lowest touch/highest return asset class e.g. ETF's/broad-based Index Funds); but investment property which is a higher risk than say a term deposit or bond; could see more $$$ try to pour into it too.

 

As far as I can recall, all RBA rate variations have been 25 basis points. Is this correct? Also, will a change of 10-15 basis points make much difference? (edit - typo)

 

That's correct, the 0.25% increments have been the traditional 'norm' but it is not a 'rule'. There have been a handful of times over the past couple of decades when the RBA made a move that was not 0.25%; but it is rare. The speculation is Nov 3rd will be a 0.15 reduction down to a 0.10 cash-rate.

The question on whether it will make a difference could be argued in a few ways. IMHO, I don't think it'll make a difference to encouraging new 'borrowers' (demand for debt); which is what the RBA would be hoping for. Instead, the 0.15 difference it'll make is a FURTHER nail in the coffin to savers; which could further spur them on to pursue higher-risk investment asset classes beyond TD's etc.

Sidenote: for those already with mortgage-debt and so long as your rental income yields remain good; then a 'passed on' 0.15% reduction to consumer mortgage rates will make a *slight* difference to them if they hold variable-rate products. It'll mean that the interest-only repayments reduce by a slither, each month. But given a year of this, and so long as that 0.15% reduction is re-invested back into the attached offset account, then incrementally the 0.15% reduction passed on to consumer variable loans *will* add up to a difference over time, for them.

 

The market's not always rational. That being said I hope he / and you are right...I'm looking to buy my PPOR in Syd, I don't want to be heading into another boom. Sigh...

 

Martin North? lol.

Anyhow, back to reality: the RBA will most probably cut by 15 basis points in November...from 25 basis points to an OFC of 10 basis points.

More importantly, however, the RBA last week signaled that it would ignore inflation over the next few years too.

The Federal Government has also recently announced that it will loosen bank lending policy.

So...we already have rates available around 2%...and the RBA and Government have recently both indicated that they will provide further monetary and fiscal stimulus.

Art isn't my strong point so I can't draw a picture...but perhaps it's best if investors focus on the numbers (reality) and forget about Martin North et al...who from memory has never made a good call in terms of property prices.

 

I really don't understand how funding works at the bank / government level. With low rates driving less deposits from savers does this not affect c1 capital? Or is it there capital? Pretty sure something like that is what deposits are and APRA requires lenders to have a certain amount for every dollar loaned right?

 

Yes....But at present people are saving aggressively. This can be a accelerated loan repayment, offset or actual savings. The bank is required to assess various degrees of capital based on its type (secured mortgage, business, OO, investor etc). Its capital reserves include cash, bonds and treasury securities and other permitted types. This is monitored daily. Treasury have also made billions available to lenders under special loans which dont count.

At present lenders have capacity to lend more and why so many are offerring $3K cashback deals.

 

Actually at 2pm Melbourne/Sydney time ie daylight saving time.

 

As banks cost of funding continues to fall, will be interesting to see what happens to lending rates. Are we at rock bottom already or is there further to go?

Part of the answer might be commercially driven - I.e. if credit assessment becomes a bit easier, will lenders start to chase growth again and begin to compete harder for new volume?

Interesting to compare rates available in the UK (base rate of 0.10%):
Compare The Best Fixed Rate Mortgages | moneyfacts.co.uk

How does 1.38% 2yr fixed sound?

 

Fixed rates arent as directly tied to the RBA rate.
And with a LVR of 60%? Not that attractive.

 

But directionally they are linked. Also, there’s a wide spread between fixed and variable in many cases in the Aus market.

60% LVR depends on where you’re at with your PPOR/investments. Plenty of borrowers are inside that threshold.

In the business/corporate lending space, pricing grids tied to LVR aren’t anything new.

 

Here's how (I think) it will go...

- The banks will keep the deferrals going under guidance with a view to keep non-performing loans in the system. These loans will be categorised 'anomaly' and moved into their own securitised tranche...a list of special "virus affected" assets. You know... the loans that would've been fine if the government didn't shut the economy down (but were always junk loans)

- The RBA will provide funding through creation of reserve deposits. They will require the banks to transfer assets as security to receive these reserves (aka QE).This will be done under the guise of the virus..its a pandemic, we have to do what we have to do, this is unprecedented!

- The banks will say to the impotent RBA I'm not giving you my good assets , **** off mate. Then the banks will offer the non-performing assets as security, the RBA (ugh alright guys - fair enough) will swap reserves for these rubbish assets. The bank gives the RBA the junk loans and receives the free funds for doing so. The RBA balance sheet increases (public debt)..we all now own a bit more tax payer funded junk (were all in this together remember - don't forget it)

-The bank takes the reserves and creates new loans with them, generally, as securitised products (home loans).Yes, the only game in town, this is what they do with it...again.

- The RBA now owns the junk, the bank keep lending with the QE virus reserve money and create non pandemic loans to people who reefed out their super . All continues.

In this scenario, if ANZ say have 300 million in bad loans, ANZs balance sheet (security) goes down 300 million, their reserves (liquidity) are credited 300 million, and the RBA debt goes up 300 million. ANZ then lend out 300 million at the market rate and fire a few more people, close a few more branches and talk about the post corona era..

Banks win, fire sales are avoided, the market doesn't crash and Martin North does a few more angry videos about "Ún- natural acts"