Again … Credit availability is not affordability

What a funny day it has been.

The largest home loan lender in Australia is acting like a child pretending the dog ate their homework while attempting to defend themselves against what seems to be the worst investor slideshow in history.

This isn’t helped by the same banks attempt to make the problem worse on a hourly basis. They seemed to have finally decided it is best not to approach investors at this time.

COMMONWEALTH Bank has pulled out of a CLSA investor conference in Hong Kong. The withdrawal came a day after the independent broker accused CBA of “self-serving rhetoric” in downplaying the threat of a housing bubble.

CBA’s deputy chief financial officer Michael Venter was due to attend the conference with two members of the bank’s investor relations team.

It is understood Mr Venter was to make a presentation, but a CBA spokesman denied this.

He said Mr Venter was not a presenter and had withdrawn because of other commitments that were unrelated to any debate about a housing bubble.

Ironically in the very same week that the worlds banking regulators are changing the rules in hope of a bit more prudence, the Oz Banks have come to the startling conclusion that the only thing that can save Australia from housing implosion is to start shovelling out easy credit again.

MORTGAGE lenders are returning to “reckless” practices last seen before the credit crunch, lending desperate homebuyers more than a property is worth in a bid to keep the market rising.

Next month, non-bank lender Mortgage House will offer a home loan equivalent to 105 per cent of the property’s value – the most generous deal since the global financial crisis kicked in three years ago.

The company also offers a 99 per cent loan-to-value ratio loan, which it launched last month, and says applications have been flooding in.

“Demand is really strong; people are finding it difficult to save substantial deposits” Mortgage House CEO Ken Sayer said.

But it’s not just the non-banks that are splashing the cash.

Last week, Westpac raised its LVR for new customers from 87 per cent to 92 per cent, reversing the cut it made back in January; while ANZ also last week raised the maximum LVRs from 95 per cent to 97 per cent for existing customers, and from 90 per cent to 92 per cent for new borrowers.

Commonwealth Bank has left its LVRs unchanged, at 97 per cent, but is trying to attract extra business by increasing its discount from 0.6 per cent to 0.7 per cent on loans taken out before the end of October.

With affordability at near-record lows, experts say banks have had to loosen their lending criteria or see potential buyers priced out of the market.

Well it is no suprise to us that some people think this is a very silly idea , and we note that Mish is one of them.

And then as expected we see a rebuttal from the usual suspects.

Indeed, this is the same defence used by Commonwealth Bank last week when it attempted to show investors why its exposure to the Australian property market is sound. This was released as a response to some concern that Australian houses are overheated and a major correction is imminent.

Taking into account geographic differences, the ratio of house price to income in Australia is not that much different to most other comparable countries Bloomberg reports Commonwealth Bank as saying.

Seriously we can’t go on, this is like a bad comedy.

As per usual we have to ask which random number factory CBA are getting their figures from. It is obvious to anyone with 10 seconds and a pocket calculator that the last sentence is utter rubbish.

The average income data from the ABS is here , it is two years old and due for revision but it says this.

In 2007-08, average (mean) equivalised disposable household income for all persons living in private dwellings was $811 per week.

And if travel down to page 58 you will find the Disposable household income
per week figure of $1366. So lets give that value a 5% YoY wage growth to give a value today of $1506/week or $78,312/year. The median price for a home in one of Australia’s major cities is anywhere between $430,000 and $600,000. Do we need to go on ?

It seems that we need to once again remind our readers that the Australian banks and economic “experts” seem to be confused between “credit availability” and “affordability”.

Just read the last sentence from the first quote block again.

With affordability at near-record lows, experts say banks have had to loosen their lending criteria or see potential buyers priced out of the market.

Affordability is the measure of a cost relative to income. It is not a measure of how easy it is to go into debt. Buyers are “priced out of the market” because prices are too high relative to incomes, not relative to the home loan they can receive from a lender with dodgy standards. Lowering credit criteria or shovelling incentives at people will do what it did last time. Create false short-term demand, push up prices that will then create an even bigger problem. What do we do next? Offer 125% LVR loans?

Lowering LVRs will in no way lead to more affordable housing, it will simply mean that more poor fools go into debt in the belief that they are on the road to riches while paying over-inflated prices for an asset that is already oversupplied.

Australian banks under the guidance of the RBA should be attempting to slowly deflate the Australian market to remove the massive systematic risk it now presents the country. It seems to have got so big now that the banks feel the need to constantly misinform and fudge figures to keep it going.

Lowering LVRs is utter madness, a little bit of sanity would help.

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  1. Good article. Only thing is that the way you quote and rebutt the article makes it look like you are disagreeing with it. But actually I thought the article was supportive of your views, and the author was clearly just stating facts eg.
    "With affordability at near-record lows, experts say banks have had to loosen their lending criteria or see potential buyers priced out of the market."
    That is simply stating a fact about what experts are saying, the author is not confusing affordability with debt availability, its the "experts" that are. You can tell by the author's language that they are skeptical about the banks action (ie. "reckless", "throwing cash", "bid to keep the market rising", "splashing the cash" etc).

    I did enjoy your analysis though! Just didn't want to see a good news article get bagged out like it was wrong.


  2. Economic Delusion

    Thanks Ashley…

    And we take your point.

    So to clear it up we in no way were disputing the article which was obviously highlight our point.

    We were simply arguing against some of the statements that were recorded in that article, where it seems once again supposed "experts" claim that handing out more debt somehow makes an asset more affordable.

    Thanks again for your feedback.