The 7.25% assessment rate and the future.

The argument being made is more along the lines of - there are plenty of people out there who have plenty of capacity and haven't been participating - who might... ie the 1/3 or property owners who have no debt ..... AND there are plenty out there who have participated but still have surplus capacity - ie those who can still afford to get another property or two or three - and either category of potential participant may jump back in and arrest the correction

Added to that is an implication that foreign money may jump in as well. I would concede that is at least possible, though very unlikely. I would also ask...which market that will eminate from???...because it wont be China due to the outgoing money restrictions ( they cant get money OUT) and the local lending restrictions ( they cant borrow here)

And then there's the wage growth hail mary that the RBA is increasingly hanging its hat on... now maybe they are right- but I don't think so. They seem to believe that some wage inflation will get confidence and spending flowing again. I don't think they quite appreciate that 2 or 3 generations of Australians largely measure their wealth by the value of their properties, not the size of their pay packet - and that in turn drives confidence. Car sales prove this. ( or lack of) I think they are really misreading their constituency, so to speak

This is also true. Readers here just have to understand that prices cant go up forever. Debt needs to be repaid. Otherwise we have an incredibly fragile and dangerous situation. I would much prefer that they use an assessment rate reduction to a cash rate reduction if they want to arrest this decline and get the market to level out ... I dont want them to stimulate it though . Thats silly at this point. After all, what APRA is engineering by way of a P&I migration and forced debt reduction are also very important things that they need to see through. There is no sense in abandoning those goals. They are good for everyone in the long term. I just want them to take their foot off the brakes a little bit. No accelerator...just a little less brake. They can still get what they want but without creating quite so much collateral damage. It also leaves the RBA with some ( admittedly not much) powder should they need it down the track for some other calamity.

 

And - some of those arguing the above have also argued that loan volumes are in recovery . They use this as evidence to support an argument that the correction is slowing or over .... looks like that’s wide of the mark as well ...

Mortgage lending growth sinks to four-year low - The Adviser

 

Borrowing power analysis:

I agree that their analysis on excess borrowing capacity is overrated and probably wrong - analysis on this by the RBA is weak at best. They've used HILDA data and other proxies to make this assessment, so its not very rigorous (they can just ask banks to see the net surpluses of all loans submitted and get a bigger indication of how much people are borrowing vs ability).

Nonetheless, I definitely do think a lot Aussies have plenty in the tank. We're on PC, it self select advanced investors on this forum. Most are not in this boat though.

Rate cut analysis:

I definitely don't agree that RBA rate cuts won't promote the economy and the housing market (but I do think your analysis is on the ball as to whether it should be done or not and the dangers of it longer term). I really think this may be the danger too - that it artificially promotes values above a more stable figure (now) because of more money being pumped into the economy via rate cuts.

Different people will have mixed views on its impact and whether it's necessary. IMO rate cuts are far more powerful than people remember. Evidence points to it too - and I don't think the transmission mechanism from rate cuts to asset price rises is broken because of APRA. I believe the RBA's latest analysis has a 28% rise in nominal prices with a 1% rate drop (not sure how elastic and how it changes at lower rates vs higher rates).

Going further, I think an 0.50% cut is a turbo-charger to both housing markets, yield profiles, risk take-up, etc.

Not commenting on negative gearing changes (?), but I think an 0.50% rate cut is a +5-10% (at least) price changer. The equilibrium price of housing is likely too low if rates are approaching 3% (~0.50%+ rate drop).

The last time the RBA moved to cut rates 50 bps AFTER APRA borrowing power interventions on borrowing power - a mini decline was stopped in its traps (~3% or so) to a 15-20% surge in prices within 6 months. This has been reversed now. APRA have pulled the pin on IO restrictions. It's not a dissimilar environment to early 2016 again. Same prices, slightly higher incomes, but a lower cost of debt.



Credit growth figures:

It's not entirely accurate to say credit growth month on month figures show a continual decline. In fact, February 2019 had the first rise in credit growth figures month on month for the first time in 6 months (harshest part of the boom). I.e. the trend in continual decline in credit growth was broken. Nonetheless, overall credit growth figures are very weak at best.

March figures showed a fall, but I think this makes sense too - Australia's second biggest market showed pretty weak figures in Q1 and generally follows a cycle slightly behind Sydney.

 

Hold on - WBC and CBA and NAB were still gilding the lily with APRA at that time - they were still using actuals or actuals +20% . They didnt toe the APRA line right way ... well into late 2016 . And it’s also helpful to remember that at that time they were still doing 95% IO 10 years as well .... . Those lenders made up over 65% of total volumes at the time as well .... so we haven’t actually seen rate cuts in a period where all ADI’s we’re toeing the APRA line ...

So I dont think it can be reasonably argued that a 50 bpts cut today can or will do what it did back then .And liberty , pepper and bluestone - the last frontier so to speak - can’t go close to replacing or replicating what those big 3 were able to do with the previous 50 bpt reduction

 

This is all true. Nonetheless, 'actuals' were gone by all lenders by the time these cuts were introduced. The removal of it likely played a role in the initial decline shown in the charts.

A larger factor today than borrowing capacity is the overall access to credit certainly has changed since then, there's been regulatory hurdles put in place and a change in compliance/sentiment that makes loans harder to obtain. Statements, verification, living expenses, questions, risk sentiment, etc. That'll stem the overall growth I think.

But last time around when prices were at this level, incomes were 5% or so lower & there were ~100-200k less people in this city and unemployment was a bit higher - an 0.50% rate cut led to a 20% price appreciation from broadly similar to current price levels. I'm not saying it'll repeat to this level...but to suggest no recovery from this, I'm not so sure.

Rate cuts have always been power boosters. Going back:
- Rate cuts post GFC from 7% to 3%, leads to a 20% price appreciation in 09/10
- Rate rises at end of 2009 through 2010 from 3% to 4.75%, leads to a 4% price fall over the next 18 months
- Rate cuts from 2012 back down to 3% and lower progressively down to 2%, leads to a MASSIVE 42-60% price boom from 2012-2015.
- Rate cuts in early 2016, a 20% price boom

If you want to map it closely...every single time they do this, house prices in Sydney rises. It also makes sense. More and more money pumped in creates asset price inflation.

I'm definitely not saying there'll be a 20% rise again. You're right in saying credit was looser through all those periods and that played its role too.

But the comment that no one believes 0.50% will lead to a price recovery? History does not back that comment up.

 

@euro73 - you've been suggesting that rates will be cut well before most. If I recall, literally 12-18 months ago now. Now everyone else appears to have moved into this view.

Curious - do you think they'll cut rates (not whether they should, you've made some great comments above on this)? If so, when & by how much?

 

12 -18 months ago it seems bleedingly obvious to me , but increasingly I’m inclined to feel that a relaxation of the assessment rate would be a more effective route .

But if that is ruled out and of the RBA does act , I would think 50 at a minimum and perhaps even up to 75bpts. What’s the use of 25? It would seem to me to be kinda useless .

I would have said up to 100 a few months ago , but that would have been based on getting 60-70 passed through to borrowers. Now that cost of funds spreads have contracted by @25-30bpts , I’d be more confident 90-100% of any rate cuts were actually passed on to borrowers .... so 50 of 50 would likely be passed on , or 75 of 75. This may mean they will only consider drip feeding 2 x 25 bpts reductions over the next few months...

Ultimately I’m hoping the rumours of a modest relaxation of assessment rates happen , and the RBA keeps some powder dry - but really , who knows ? their rhetoric at the moment seems almost delusional so maybe they are in denial and won’t do anything . The media seems to be talking up rate cuts quite a lot recently though...maybe they know something we don't .

 

Even the banks CEO's are with me on this....


https://www.smh.com.au/business/ban...d-effect-nab-s-chronican-20190502-p51jdy.html

ANZ says 7.25pc buffer has to go

 

No surprises there. Banks only ever care about their best interests. Lower assessment rates translates to growing loan book.

 

They can just increase rates if they want bigger profits. Are memories so short that we have forgotten the number of out of cycle rate increases applied in recent years?

The banks will make big $$$ with or without an APRA pull back. They are saying the economy wont move forward without it....

anyway... never a dull moment in Australian property or finance eh.

 

With dwindling market share and competition from non-banks how can they increase interest rates?

Assessment rates need to be lowered for sure but in a timely fashion and not as a knee jerk reaction. Besides, the rate is not a big damper for FHBs which ALP seems to be targeting. The next 6 months will be interesting to say the least.

 

I think NAB's comment definitely is with you on the assessment of what rate cuts will actually do now (little impact). If the assessment rate were to drop, i would think the RBA would cut rates first (giving more room for assessment rate buffer too + actual real monetary stimulus). Some of the discussion from others seems to suggest it is an alternative option. I think they are probably overestimating the impact of an assessment rate change on general economic conditions (very little IMO). From my credit experiences, the credit process is super slow and struggling...more so than peoples actual serviceability. RBA seem to be on this view too. Also the impact of an assessment rate change on credit growth IMO wouldn't be very much if everything else is left the same (vs a rate cut which would likely spur on demand IMO).

 

The assessment rate is insane at 7.25% - it'll never get back there in most of our lifetimes through any reasonable course of action anyway.

 

You are pulling our legs, surely? HOW? They have already done it more times than I can remember .... pick any one of those multiple examples and your question will have been answered

Hint - they did it most recently just after the Royal Commission wound up... ie just a couple of months back

The majors have been providing over 50% of total lending to the market at a bare minimum, for decades. At times its been 80% . So thats 4 lenders controlling a large amount of the market, with the other 40+ lenders sharing the scraps between them... Of those 40 + "others", the "non banks" with good calcs can provide adequate funding for maybe...and I mean maybe ... 3-4% of the needs of the market. You have to appreciate that Liberty, Pepper and Bluestone cant fund the $300BN + books of Westpac or CBA, for example- even if everyone wanted to refinance there. Firstmac, who are the single largest non bank lender, have a $10 Bn book.... you'd need 30 Firstmac's to swallow 1 x CBA loan book or 1 x WBC book . Im not sure you are fully appreciating the size and scale of their market dominance.

You also have to remember that brokers gave massive amounts of leverage away after the GFC when they abandoned the non bank sector and gave the banks more than 80% market share in the 2-3 years that followed. Some of it has been clawed back sure .....but the cold hard truth is that the majors still have the majority of the market captive. In order to get back to the pre GFC balances you'd need brokers and consumers to make a concerted and deliberate effort to migrate very large volumes of business away from the majors to the 2nd tiers and non banks over a period of 2 or 3 years to get to a point where the majors genuinely feared competition again...

Until that happens, they'll continue to do as they please with rates , independent of royal commission pressure, political pressure or media pressure . Bet on it

Just take a look at ANZ's results this week. Loan book DOWN. Profits UP ... share price UP ( well, not today... but you get what I mean)

 

exactly - so not in my lifetime....

 

I thought the RBA learned during the dying months of the Howard campaign that they can't control imported inflation with something as daft as interest rates...?

 

@Redom your one of the favorite posters on here so I’m very glad you backed out of this one with a follow up comment! Haha

Of course this is what they “believe”. Reminds me of a certain Shaggy song.

“You cut credit so people couldn’t borrow...It wasn’t me, House prices plummeted when you did it...it wasn’t me.