Westpac 20bps Rate Rise Across the Board

here's a link with news of Westpac raising interest rates for both home owners and investors by 20 basis points in November.

Anyone want to speculate if other banks are likely to follow.

http://www.propertyobserver.com.au/...es-for-all-by-20-basis-point-in-november.html

 

So if this is to be the end of the boom with others to follow shortly then how long are we predicting to too see prices fall?

I have been working on a subdivison/renovation going to market end of November, I imagine by then this would not have caused much to happen.

 

I'm surprised anyone is surprised by this. This is one of those "blind freddy" moments where it was always a certainty. I wrote about this some time back, suggesting AMP's 1 giant leap of 47bpts a few months back was much closer to what all the other banks were going to be likely to do across 2 increments.

This morning - even some clever aggregators are making the call - this particular article refers to John Kolenda, who was the brains behind Aussie for many years http://www.brokernews.com.au/news/b...gator-says-expect-more-rate-rises-206787.aspx

Remember, the banks ROE pre APRA was approx 27% per dollar of capital. They make a profit of @ 0.4% per $1.50 of provisioned capital (which is the percentage they are required to set aside per $100 lent) Or at least that's what all the big guys at the majors have always told me - and it's definitely what NAB specifically outlined at their broker roadshow @ 6 weeks back. They went on to explain that with the requirement to move from 1.50 to 2.50 of capital per $100, if their profit stayed at 40 bpts, their ROE would be reduced to @ 16% .

That hurts bank profits - so in order to restore an ROE of 27% against $2.50 of capital their margin needs to increase from 40bpts to @ 69-70 bpts , give or take . That was the reason for the first 29-30bpts increases most banks imposed a few months back. But again - blind freddy could see that 29-30 wouldnt be enough. The banks are now offering really aggressive discounts to PPOR P&I debt, which will dramatically reduce their ROE across their books, so additional subsidies ( ie rate rises) were always going to be necessary - and with additional capital raising exercises also a requirement - Part 2 of the "lets hike rates" game was inevitible.

I've also said that rates will get higher again in 2018 as Australia's banks restructure funding arrangement to meet BASEL requirements, whereby funding structures have to migrate away from 90 day and 180 RMBS to longer term structures. When this commences in 2018 it will add an additional @ 30bpts or thereabouts... all at a time when servicing and LVR restrictions are already biting

The only really good news is that actual rates (what you and I pay- not what the banks now assess us at) may fall....as the RBA can now reduce rates without any prospect of the lower rates driving property prices- the changes to assessment rates has already demonstrably impacted borrowing growth so rate cuts wont change that - and rate cuts are actually really good news for your actual cash flow, even if they are useless for your borrowing capacity in the short term. If your reinvest the additional cash flow from the potential cuts, and use it to pay down debt - that will have a long term positive impact on your borrowing capacity - eventually . yet another shot across the bow from the market that (if you are an investor with ambitions of growing a portfolio) screams " Cash flow and debt reduction are king"

 

You're spot on about investors not simply being able to raise rents to cover any price increases on their end.

There is a big oversupply in the capital cities and even more coming - people looking to start earning rent and they'll jump at whatever they can get (especially if they're aware rents are falling).

There are investors who are positively geared and in a flat or falling rental market will absorb the cost and keep their rent down.

It makes me laugh when people claim altering NG or the CGT discount would end up hiking rents for tenants - the rental market price truly is supply and demand and right now the supply of housing is outstripping the number of tenants by a growing margin.

 

Q- I know there's about 30 odd other lenders aside from the Big 4 but where do they get their cash from, is it from the Big 4 or direct from the RBA?

 

That wouldn't be the case if investment variables were tampered with as some would leave the market, reducing supply side.

 

combination of retail deposits (if they are an ADI) + securitisation OR ( for non banks who are not an ADI and so don't have retail deposits - securitisation. Think brands like Resimac, FirstMac, etc. (Contrary to popular belief, Aussie is NOT a non bank lender. Nor was Wizard before it went under. They do not source their own funds or manufacture their own products. They use other peoples money. They are really, by definition - a white label lender. They take other peoples money and products and put their brand on it. Their funding has been provided at various times by RABO, Adelaide, Macquarie ( via PUMA) and others, and is now primarily funded by CBA. Their insurances, credit cards etc - all white labelled products. Flip your Aussie credit card over and check who really issued it to you )

So even our majors...those giant/behemoths we all think are uber safe - borrow the overwhelming majority of their funds via securitisation. In many ways they are no different to non bank lenders in that regard. Anyone who thinks the banks have enough money from retail depositors, to fund all the loans they offer, is misinformed.

When you come to understand where the money we all borrow, actually comes from - and how loan products are actually manufactured and funded, you begin to realise it was always just a matter of when, not if, lending slowed.

ADI = Authorised Deposit taking Institution ie they have a banking licence and are governed by APRA.

 

Don't those former rentals become owner-occupied thus leaving the ratio of renters/houses the same though?

For example, rates spike, some investors sell out, former renters buy those homes (reducing number of renters and rental stock at the same time)...?

 

Before recapitalisation Westpac was at $1 capital held for every $77 lent out, which a few people pointed out was a worse position than Lehman Brothers before they collapsed.

Read an article on it that had Westpac going under if the default rate rose by only a small amount.

Not sure where their ratio is at right now after raising more capital but the idea that Australia's banks are "unquestionably strong" is laughable.

I think the Genworth story tells the tale: http://www.macrobusiness.com.au/2015/10/genworth-ceo-disappears/

"According its March accounts Genworth carries $316 billion dollars in insurance in force yet it only carries $2.738 in regulatory capital, disgorging a shocking leverage ratio of 115.4x."

So the banks have been using Genworth for LMI and Genworth is carrying pocket change to cover all those defaults that come with falling prices. Meanwhile certain areas of the country are on risk watch lists and require higher LVRs.

 

There will be all kinds of debates about "what about this " and "what about that" - but APRA has clearly decided to take the risk bull by the horns and that means just one thing - big, easy , go for it credit is over. In its place will be ; still relatively easy, but more restrained and less capacity friendly credit.

 

I know of people in Canberra whose rent has actually gone down too, and they've still gone and bought somewhere.

 

1. Less likely

2. From the last APRA increase in June, most credit union only increase for NEW ONLY ...not existing ( Beside Me bank and CUA etc...ie beside the bigger credit union which is more like a bank now these days....)

3. Credit unions rate for loans below $700k has a lower starting base already.

 

One thing I hope WBC doesn't do is just price steeper discount ie 1.6% to make up for the 0.20% increase.

Makes existing customers discounts look bad.

 

immigration is a biatch...

 

Many get it from securitisation (ie issuance of notes/bonds to investors).

No one gets funding from the RBA (except short term/emergency funding). The banks fund their loan books through customer deposits and debt. They mostly borrow money from overseas bond investors and they lend us back the money. The difference in interest (Net Interest Margin or NIM) is what's critical to their profitability.

 

Westpac risk shares with Genworth. I believe it's a 60/40 split or thereabouts

 

You are going to see all kinds of fun and games as the banks work both sides of the fence over the next little while - they have to play a game of trying to retain shareholder value whilst also fundamentally restructuring their capital requirements and de-risking themselves to satisfy local regulators like APRA and international regulatory frameworks like BASEL. Expect the winners to be be Owner occupiers and the losers to be investors - for now at least, until APRA gets off their backs....if they ever do.

Much like the RBA had to play a delicate game of getting rates down to lower the dollar and fire the economy whilst also creating no asset bubbles (and who might privately admit over a beer that they should probably have invited APRA on board at the beginning of the rate cutting cycle rather than 2 years later, helping to achieve this outcome softly rather than via what is now increasingly becoming a rather inconvenient and severe adjustment)

And much like politicians who don't want to have the serious discussions about both sides of the coin - they only want to discuss spending cuts without seriously discussing the revenue elephant.

And much like balding men who don't really want to admit that last outpost atop their head is becoming a comb over ..... anyway I digress

We all know deep down that restructure is necessary. We all know the good times dont run forever. In the end - something always have to give.

Australian banks might WANT things to remain business as usual - after all they and the markets have become very used to juicy profits. There's also no doubt that property investors ( including many on here) who have become used to fairly easy credit environments and the associated juicy profits they create , and who are now realising credit's central role in their success, WANT business as usual as well. No group ( banks , markets or investors ) wants to accept the reality until it is forced upon them, but local and international regulatory requirements mean the game has changed.. like it or not.

None of needs to be doom or gloom. None of this means the sky will fall. 20 bpts , 40bpts , lower borrowing capacity and in some cases lower LVR's does not a chicken little Australian property market make, but it's time to recalibrate and prepare for the new norm.

 

i dont know how wbc gets away with this after reading this article:

http://www.smh.com.au/business/mark...-hopes-grow-for-rate-cut-20151014-gk9j7c.html

 

WBC's confidently gambling that the other big banks will follow suit. Otherwise it's suicide.