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Grantham Calls Australian Housing Market a "Time Bomb"


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  • 11 months later...

I was reading the Sydney Morning Herald today, found a couple of interesting articles:

 

"Australians had up to 60 per cent of their total wealth tied up in real estate. This is one of the world's highest rates - more than double the US rate."

 

http://www.smh.com.au/business/bank-boss-questions-gearing-20110602-1fit2.html#ixzz1OBD1bCNR

 

"ANZ Bank has increased LVRs from 90 to 95 per cent on most of its loans over the last six months, RateCity data showed. Commonwealth Bank now offers up to 97 per cent on most of its home loans."

 

http://www.smh.com.au/business/banks-offer-bigger-loans-to-homebuyers-20110603-1fjvn.html

 

 

 

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I was reading the Sydney Morning Herald today, found a couple of interesting articles:

 

"Australians had up to 60 per cent of their total wealth tied up in real estate. This is one of the world's highest rates - more than double the US rate."

 

http://www.smh.com.au/business/bank-boss-questions-gearing-20110602-1fit2.html#ixzz1OBD1bCNR

 

Interesting observation. I wonder how they arrived at these figures and if there is a global database where one can compare the ratio of one country vs. another.

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Link to the transcript, hopefully the ABC will hang onto this one as it is definitely a keeper

 

http://www.abc.net.au/lateline/business/items/201106/s3234315.htm

 

That was good.  He says there is a shortage of housing.  I wish she would have asked him why the shortage has not impacted rents to the same degree as negotiated selling prices.  That's a question that can't be explained away by the "shortage" argument, because it simply asks why shortage drives one higher relative to the other.  I guess nobody gets bullish and bids up rent with cheap credit?

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Someone asked for a global survey -- http://www.demographia.com/dhi.pdf

 

Currently 30% of mortgages to owner occupiers are interest only with a further 10% being low doc loans. 50% of mortgages to “investors” are interest only with 10% low doc. Then you have the securitization machine at work too with AOFM (Australian Office of Financial Management) now buying RMBS directly from the banks. The program was extended from the current A$12Bn to another A$4Bn and it will leave A$3.5Bn of capacity under the current program. This is significant if you consider that by my estimate around A$50Bn of new mortgage debt was issued over the last 12 months.

 

AOFM-I was not sure whether I should laugh or cry when I read this http://australiansecuritisation.com.au/docs/20110323_ASF_Treasury_Letter.pdf

 

At the risk of seriously boring you, take a look at the highlighted sections of a very recent RMBS from one of the smaller banks below, of which AOFM took A5. Firstly loan seasoning averages under 4 years, which means in the context of the above these properties are overvalued. This then means the LTV ratios are out of whack, although it might look reasonable now. On average the LTV ratios are 64%, but the home is the denominator and if home values fall by 10% then the LTV jumps by 11%, if home value fall by 20% then LTV jumps by 25%, etc. 27% of loans are 10 year interest only loans. Also if you read the fine print then you will see that excess payments of A1-A2 cascades down (waterfall feature) to the lower tranches up to A4. If there is a shortfall then new notes is issued firstly at the A4 level to repay A1. The point being that if you read the fine print (actually it should be clear enough from the data below) then it is as clear as daylight that the last place you want to be is at the A5 level, because you are being pushed down in the capital structure the whole time. It boggles the mind when trying to understand why AOFM is buying in at this level, unless they are desperate to provide funding to the banks. Not a good sign. So you have government funding the banks and the latter is already in a precarious situation with at least 20% of wholesale funding coming from what looks to be mainly European banks. Funding is also short term in nature which a cursory glance at the debt maturity profile of the “big four” in Aus will confirm; all have the bulk of roll over under 5 years.

 

________________________

Class A1 (AAA) - $194m (matures December 2011)*

Class A2 (AAA) - $112m (matures December 2012)

Class A3 (AAA) - $100m (matures December 2013)

Class A4 (AAA) - $0m

Class A5 (AAA) - $306m

Class AB (AAA) - $35m

Class B1 (AA-) - $16m

Class B2 (N/A) - $8m

*Will split into two notes A1f and A1v.

 

 

Loan Pool Profile

Total no. of loans 4,420

Total value of loans (A$) 775,017,885

Current max. loan size (A$) 745,785

Avg. loan size (A$) 175,343

Max. current loan-to-value (LTV) (%) 94.0

Weighted-avg. current LTV (%) 64.9

Weighted-avg. loan seasoning (mos.) 43.5

Table 7

Loan Pool Characteristics

Current loan size distribution (A$) Value of loans (%)

Less than or equal to 100,000 8.8

Greater than 100,000 and less than or equal to 200,000 26.3

Greater than 200,000 and less than or equal to 300,000 30.9

Greater than 300,000 and less than or equal to 400,000 19.7

Greater than 400,000 and less than or equal to 500,000 7.8

Greater than 500,000 6.4

Current loan-to-value ratio distribution (%)

Less than or equal to 50 17.7

Greater than 50 and less than or equal to 60 17.9

Greater than 60 and less than or equal to 70 20.9

Greater than 70 and less than or equal to 80 25.7

Greater than 80 and less than or equal to 90 17.6

Greater than 90 and less than or equal to 95 0.1

Geographic distribution (by state)

New South Wales and Australian Capital Territory 24.0

Victoria 11.9

Queensland 17.1

Western Australia 8.9

South Australia 36.5

Tasmania and Northern Territory 1.6

Geographic distribution (metro/nonmetro)

Inner city 0.4

Metropolitan 80.0

Nonmetropolitan 19.6

Seasoning

Less than or equal to 6 months 1.1

6 months ? 1 year 13.4

1-2 yrs 12.9

2-3 yrs 18.7

3-4 yrs 20.0

4-5 yrs 16.6

Greater than 5 yrs 17.3

Principal amortization

Fully amortizing 72.6

Interest-only for up to 10 yrs. 27.4

Loan documentation

Income, savings fully verified 100.0

Partial verification of income savings or affordability 0.0

Mortgage insurers

Genworth Financial Mortgage Insurance Pty Ltd. 61.2

QBE Lenders' Mortgage Insurance Ltd. 38.8

_______________________________

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"The point being that if you read the fine print (actually it should be clear enough from the data below) then it is as clear as daylight that the last place you want to be is at the A5 level, because you are being pushed down in the capital structure the whole time."

 

This isn't correct.  A5 isn't pushed down.

 

A4 is a WAL extnesion protection tranche for A1-3 to ensure the buyers can control WAL for ALM purposes.  So the shortfall reference is driven by CPR/prepay speeds and not credit costs.

 

Think of it this way: If A1-3 was a more traditional amortizaiton waterfall trance paydown from principal loan repaymants vs the

A1-3 bullet structure with A4 extension protection/redemption fund trance structure, then the A5 trance would be in the same position under slow CPR speeds.  All that is hapening is that if prepays slow you shift the shorfall into a new A4 note allowing A1-3 to be payed out.  A5 still has the same $$ amount in-front of it and the same $$ supporting it.  This is why the monthly reports show the CPR and the collections in the redemption fund and the information memorandum show the target redemption fund amount by month.

 

Also note that any credit losses in the deals are shared pari pasu with any outstaniding A1-5 notes after protection is exhausted.  Mezzz eats then AB eats then losses shared on the other outstanding A notes.  So from a credit loss perspective A5 isn't disadvantage by the A1-3/A4 structure.  Also remember on the high LTV loans yo have to blow the LMI then excess spread and the mezz protection and AB before A1-5 gets nicked.

 

These deals are pretty strong deals really.  I wouldn't be betting against the AOFM holdings even though Australian house prices are overvalued.  The A tranches have lots of protection.

 

B2's might get nicked though.

 

Here is the latest AOFM holdings if your interested:

 

www.aofm.gov.au/content/_download/rmbs/rmbs_data_20110523.xls

 

Note that AOFM holds all the smaller players which is a policy decision to allow the smaller lenders to compete against the big 4 who effectively control something like 80% of the residential lending market.

 

The guys that will get hurt out of this Australian housing bubble are the over extended home owners and then the LMI providers.

 

Spin

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That sounds very similar to saying that when you push out the maturities on the Greek debt by 5 years and keep principal and interest payments the same you don't have a default.

Let's not get bogged down in the details though. 14% of Aus GDP is made up of construction and related and 7% is mining. The former is clearly supported by extreme pricing (affordability ratios) and credit (household debt levels) and the latter by China. Behind all that you have significant issues; for the former, short term funding risk of the Aus banks and European banks being a main source of funding for the Aus banks which itself are in a precarious state and then for the latter (China), you have various red flags of which the most important is the signs of a property bubble in China where construction and related makes up at least 50% of GDP.

Now in the midst of this you are prepared to wade in and take up the offer on an instrument with a 1% or 2% spread? No thank you. 

At the end of the day the answer lies in a question. If the current household debt levels and affordability ratios in Australia do not indicate that the housing market is in bubble territory then at what levels will it?

 

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  • 3 months later...

Found an interesting blog from Steve Keen discussing what might happen to the Australian banks:

 

Since real estate loans are worth roughly 7 times bank Tier 1 capital—up from only 2 times in 1990—it wouldn’t take much of an increase in non-performing housing loans to push Australian banks to the level of impairment experienced by American banks in 2007 and 2008.

 

http://www.debtdeflation.com/blogs/2011/04/11/this-time-had-better-be-different-house-prices-and-the-banks-part-2/

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It is starting to get interesting.  Arrears rates are on the rise albeit from a low rate

 

http://www.scribd.com/doc/66629323/Report-Aussie-Mortgage-Delinquencies-Sep2011

 

and clearance rates are stuck at around 50% with property prices beginning to slide despite the best efforts of the spruikers

 

http://afr.com/rw/2009-2014/AFR/2011/09/30/Photos/db5d0ebe-eb04-11e0-a6db-abb2c1b5de7c_rpdata.pdf

 

cheers

Nwoodman

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  • 2 weeks later...

This is an awesome statistic:

 

Australian Tax Office statistics from 2008-09, analysed by AAH, showed that after landlords took in $24 billion in rental income, they claimed $30 billion in losses, allowing them to write off about $6.5 billion in taxes.

 

Read more: http://www.smh.com.au/business/housing-group-wants-tax-breaks-addressed-20111003-1l4sb.html#ixzz1b3JglADB

 

 

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Interesting accounting rule:

 

1. Accounting rules that allow Australian banks to revalue their loan books so as to reduce the capital set aside and take on fresh mortgages when the value of existing collateral goes up – a self reinforcing feedback loop as home prices bubble upwards! The higher home values go, the more credit can be created out of thin air to bid up, yes, you guessed it, the rising home values.

 

http://baobab2050.org/2011/02/12/australian-banks-on-unstoppable-path-to-insolvency-bailouts/

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Interesting accounting rule:

 

1. Accounting rules that allow Australian banks to revalue their loan books so as to reduce the capital set aside and take on fresh mortgages when the value of existing collateral goes up – a self reinforcing feedback loop as home prices bubble upwards! The higher home values go, the more credit can be created out of thin air to bid up, yes, you guessed it, the rising home values.

 

http://baobab2050.org/2011/02/12/australian-banks-on-unstoppable-path-to-insolvency-bailouts/

 

thats sickening. .. its nothing short of institutionalzed white collar fraud, imo.

 

william black is right:

 

http://www.nakedcapitalism.com/2011/04/william-black-why-arent-the-honest-bankers-demanding-prosecutions-of-their-dishonest-rivals.html

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