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We have been reading the RBA’s latest piece of art over the last day or two. The latest financial stability review (available here). As mentioned in this article, the RBA seems relatively happy with the state of the economic nation at the moment.
We however noticed a few things that needed a bit more discussion.
The peak in approvals for high-LVR loans was associated with the surge of first-home buyers over the first part of 2009, at a time when housing loan interest rates were around historically low levels and government grants had been temporarily raised. The entry of such a large group of new borrowers with little housing equity was an unusual development, but although housing interest rates have increased by around 150 basis points over the past year, liaison and available data suggest little evidence to date of worse loan performance among this group than earlier cohorts of first-home buyers displayed.
The report doesn’t actually mention the number of loans that were issued in this period, but just so you are aware exactly how effective those grants were you can compare that quadrant with the demand for owner-occupier finance graph found on page 5 of this ABS report As we have spoken about before, the government was very successful in stimulating a short-lived period of very high demand for first home buyer loans; and at the peak of that demand the FSR shows that the banks where issuing up to 1 in 4 of them with an LVR of greater than 90%. Just so you are clear these were no small loans, in fact they were continually record breaking, as report by AFG at the time.
The RBA however has decided this fact can be brushed aside claiming that we haven’t seen large numbers of defaults so everything must be fine. Lets ignore the fact that these people have had a large government stimulus package and period of 50 year low interests rates that only disappeared very recently.
But it gets worse.
In contrast, the value of non-performing housing assets has continued to rise but remains fairly low. Some of the major banks attributed the increases in early 2010 to rising interest rates, which suggests that their effect outweighed that of the improving labour market. Non-performing housing assets are mainly classed as ‘past-due’ rather than ‘impaired’, implying that they continue to be well collateralised – an unsurprising result given house price gains in recent years.
This seems quite odd, given that non-performing and impaired loans have been rising at a time of historically low interest rates and government hand-outs. The report seems to basically fob this problem off, claiming that it doesn’t really matter because housing prices have risen so the banks will get their money back in the case of rising defaults. We assume that means that they aren’t worried about the Queenslanders and Western Australians who have seen near-zero growth over the last 12 months, and the strong downward trend that seems likely to deliver negative YoY growth as of the September data release. ( This is also mentioned in this article )
Call us paranoid, but it seems the government may have “sub-primed” the economy and the RBA is ignoring the risk based on the “faith” that housing will not fall in price, and that first home buyers have not indebted themselves into oblivion.
Worried ??? A little !!
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