Weekend Musings: AFG, Turning bearish, Budget and Greece

Another weekend, another dive into what is rumbling around my thought box.

AFG Mortgage Index.

AFG’s latest mortgage report came out this week. Their overview of the lending market was fairly bearish.

AFG, Australia’s largest mortgage broker, has called on the Government to address weak consumer confidence, after figures for April showed mortgage sales fell by nearly 10% compared to April 2010. AFG processed $2.1 billion in mortgages in April 2011 compared to $2.3 billion in April last year and $2.8 billion in April 2009.

Month on month figures showed an even larger fall of 15.6% – but this drop in volume also reflects the impact of the extended Easter and Anzac public holidays. On a volume per business day basis, April was somewhat higher ($117 million) than March ($111 million), but both these figures are well below those recorded in previous years.

Mark Hewitt, General Manager of Sales and Operations says: ‘Falling property prices, rising interest rates, the increasing cost of living and the fear of a carbon tax and other levies are a toxic combination to consumer confidence. As people start to see their net worth eroding because of falling home and investment property values, they become even less likely to spend. The Government needs to address this problem in its forthcoming budget, and provide a circuit breaker to restore confidence among consumers that the underlying fundamentals of our economy are still strong.’

Although this sits well with what we have been hearing from other organisations I have been becoming slowly less confident about AFG’s data. I have talked about this previously and these issues continue to exist in April’s data.

Again you can see falling LVRs on rising loan amounts, yet the ratio of FHB, investors and refinancing remains relatively stable. The national LVR now stands at 49% on a $386K loan suggesting the average property being purchased through AFG has risen again to $787K. This is made more strange by the fact this is a long running trend in their data even as many other organisations claim property values are falling. I am yet to hear a decent explanation for this. Secondly I have noticed that overtime AFG has stated that their market share is rising. This would suggest that any increases in the volume and total value of loans sold overtime may not all be due to the property maket itself, but simply due to the fact that AFG are getting a bigger slice of the pie. However, even if that is the case the number of loans sold in April is certainly down on last year which leads to my second musing.

Bearish Housing “Experts”.

This week Leith posted about Louis Christopher’s words in SQM research’s lastest newsletter. That sentiment has been re-iterated by Mr Christopher again in an article on SmartCompany

Property prices may drop more than 5% during 2011-12, one property expert has warned, after new figures released by SQM Research show the number of listings added to the market grew by 3.9% during the past month, and by over 68% during the past year.

SQM managing director Louis Christopher says the data provides evidence there could be a price correction of more than 5% if the trend continues – especially in Melbourne where stock has doubled over the past year.

“I think we’re going to see downward pressures on Melbourne prices. Asking prices in Melbourne have stood their ground for a while, but that’s about to change. Given the amount of stock on the market, they’ll have no choice but to reduce their asking prices.”

“We will hold to our general view regarding a correction size. In the capital cities, we think there is the possibility of seeing corrections of between 5-10%”.

It seems however that Mr Christopher is not alone in his bearishness, some more bullish commentators are joining in. Last June Tim Lawless from RPData had this to say about his expectations for the Australian property market.

“Our view is that home value growth is likely to moderate, tracking household income growth which is likely to be circa 5 per cent over the coming year.”

However in his latest video about current market conditions his assessment is far less bullish.

I note that in the smartcompany article Mr Christropher states.

… there is no way this trend can continue and have prices remain at the same levels.

“There isn’t going to be a massive fall of something like 40%, but there is going to be correction. The amount of stock means buyers have no other choice than to make amends to their asking prices.”

He points out that even a correction of between 5-10% could prompt the Reserve Bank to take action, or force the Government to once again intervene in the market as it did during the financial crisis with the first home buyers’ grant.

Given how the debt dynamics of a collapsing housing market will effect the broader economy I think this is a fair assesment of when the government would be forced politically to do something, even if it is making claims about tightening the purse strings. Whether or not the RBA would follow suit is up for contention, and was the question H&H posed on friday. I also wonder whether or not new intervention by the government would work as effectively as it did previously given that people have already seen the effects of direct government intervention. Either way it is more “can kicking” on a housing market that looks like it definitely wants to find some lower plateau to rest on.

Swan’s determined ….

However until such as time as housing or some other “unseen shock” tests the government, Mr Swan seems very determined to stay on his surplus target. On Friday news.com.au had a piece on his latest words on the budget.

Strength over the economic cycle makes it imperative to bring the Federal Budget back to surplus in 2012/13, Treasurer Wayne Swan says.
Despite the economy stalling early in 2011, the outlook for the economy meant the Government had tightened its purse, which starts with the Federal Budget to be announced on Tuesday, Mr Swan said. Today, the Reserve Bank of Australia (RBA) said the economy contracted in the March quarter due to the impact of natural disasters, both here and abroad.

Mr Swan said the Government had to pull back on spending to restrain pressures on prices in the economy. “We still have a very strong economy in the medium term,” Mr Swan said today. “That is why in this Budget we have to come back into the black in 2012-13, to get the Budget back into surplus.

“We have got a very strong investment pipeline, we have got strong job creation, we have a low unemployment rate which will go lower and of course we have this massive mining boom and a very high terms of trade.”

“(We need) to maximise all the opportunities that are going to flow from that in this Budget. We have to make sure we spread the opportunities from the boom right around the country,” he said. He said the Government had to share the bounty from the mining boom, with programs to increase skills and the number of jobs in the economy.

Obviously you will need to remove the vomit from your mouth once you have read that. In the context of how the government handled the RSPT those words are laughable. However it certainly does make it clear that no matter what happens in the short term the government believes that they are about “crowd out” the private sector so they are going to close the coffers. I certainly do not believe that the floods and cyclones in Queensland have caused the current economic malaise. In my opinion it is private sector debt that is causing the issues and a sudden removal of government expenditure is going to have a vastly larger effect than many commentators are suggesting. But we will see, as I said recently steering the economy away from credit driven growth to resource backed investment was never going to be a smooth transition. However I really don’t get the feeling that government and the RBA are on the same page on a lot of this.

Greece

Which leads me to Greece, one of the ultimate examples of what happens when the government that sets fiscal policy and central bank that sets monetary policy aren’t reading from the same book. I have spoken quite a bit about Greece in the past, one of my latest posts was this one. I have long believed that the macro-economic architecture of Europe is broken and ultimately it would lead to one group of countries having to leave the union. I am not sure if it is just bluff to get a better deal or an actual plan, but it looks like Greece could be considering steps to do just that.(h/t Naked Cap)

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area’s finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Greece’s economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens’ intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece’s possible exit from the currency union, a speedy restructuring of the country’s debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union — regardless which variant is ultimately decided upon for dealing with Greece’s massive troubles.

Greece’s economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens’ intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece’s possible exit from the currency union, a speedy restructuring of the country’s debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union — regardless which variant is ultimately decided upon for dealing with Greece’s massive troubles.

I note that everyone is now denying everything, but this does show just how politically fragile the European debt monster still is. There is far too little information contained in either of these articles to make any real assessment of what Greece is actually up to. You would think however that the recent experiences of Ireland and Iceland would be playing on the minds of the Greek government. Is defaulting on the Euro debt and resurrecting the Drachma really going to be any worse than sticking around for Euro Austerity?

Maybe we are about to find out.

Enjoy the rest of your weekend.

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Comments

  1. Deus Forex Machina

    nicely tied together DE…

    dealing with the last issue first the greek thing has me worried, as SoN pointed out today the fingers of instability in the global economy are growing and as the Greek situation gets toward its climax of either pseudo-default, outright default or eur exit our policy makers seem strangely complacent

    as for swanny and his sunning outlook for growth to get him back in the black and the rba’s, apparent, sanguinity about household troubles and retrenchment I think they are both making our economy less stable

    and hows about those AFG numbers??? even a really good statistician would be hard pressed to explain those

    cheers DFM

  2. Sandgroper Sceptic

    I think Swan’s media lines of mining boom, return to surplus in 2013 will either be ditched (GFC II prevented us from being able to return it to surplus) when the crisis hits or they will have an early election so never really have to come up with a surplus budget. If Labour plans to return to surplus then the really hard budget is next year, if deleveraging or disleveraging is gathering apace his tax revenues will be falling and spending pressures will be up due to automatic stabilisers. In that light the carbon tax is actually more about plugging a revenue hole than helping the environment.

    Forecasting a turning situation is very difficult and Treasury will likely be off the mark to the downside.

  3. Hi DE

    Can I suggest this definition of a mortgage from wikipedia:

    “A mortgage is the transfer of an interest in property (or the equivalent in law – a charge) to a lender as a security for a debt – usually a loan of money. While a mortgage in itself is not a debt, it is the lender’s security for a debt. …”

    In other words with an LVR of 49% on a mortgage of $386k, wouldn’t that make a loan of $189k? (as the mortgage is the lender’s security, not the debt itself).

    • Dave .. That makes complete sense and explains exactly why this data seemed to be travelling in the opposite direction to other credit data.

      You are a genius.

      Thank you very much.

  4. If the Greek Government decides to default or forces restructuring of their debt it will cause a panic and hit hard government debt everywhere. This will likely be a GFC II triggering event. If other troubled countries decide to follow in their steps it will be GFC squared. Under such circumstances I’d be surprised if our Government would be willing to go deeper into expensive debt to rescue our falling housing market. If they do, it will be an act of utter stupidity.

  5. RBA will lower interest rates first, with states stimulating the housing market via grants and tax concessions.

    Then, when that doesn’t work, the Fed govt will come in with RMBS purchases, printing, etc…

    My 2c

    • > RBA will lower interest rates first, with
      > states stimulating the housing market via
      > grants and tax concessions.

      The determining factor will be unemployment. With most of the economy (obviously except for mining) doing it tough I’d be surprised if it stays at the current level. If Steve Keen is right with his et al. credit impulse hypothesis, and I believe he is, we should have higher unemployment in a few months time. If there’s no taxable income tax incentives can’t help and it all depends on credit demand which may disappear.

      > Then, when that doesn’t work, the Fed
      > govt will come in with RMBS purchases,
      > printing, etc…

      The US Fed has been printing like hell so far to no avail.

      • I think if the GDP figures come out positive they wont be dropping rates they will be raising them.

  6. DE re the AFG numbers

    I don’t think that the AFG numbers with decreasing LVR’s and increasing loan size is explainable by one thing or is saying that the risk in the mortgage originations is decreasing. BTW I disagree with Dave.

    Firstly this is broker originated data. Brokers don’t get paid unless they make loans and are very resourceful in seeking out the products of the day to fill their monthly quotas. To some degree this is very different employees working directly in banks even if the receive volume bonuses.

    Looking at average figures can be very misleading when you may have a bar belled book of different types of loans especially in relation to LVRs.

    I notice that refinance loans is still averaging around 37% which may have been the norm in Australia over the last 10 years but is very high by international standards. Are brokers seeking out more and more of those baby boomers with large “equity mate” and refinancing with large cash outs but still maintaining low LVRs at current valuations? This can also explain the shifts up in loan size. I’ve seen loans that I’d put in the reverse mortgage bracket that are termed simply as refinances as well.

    Also in case we at MB have not noticed, the broker industry has turned a lot of attention to self managed super funds. There are now many lenders that accommodate mortgages to SMSFs but at low LVRs, at least for now. This part of the industry is primarily driven by brokers.

    Maybe my thoughts help explain the possibilities and perhaps why its a little dangerous to try and draw conclusions from average figures

    Nevertheless very good work DE and thanks for at least asking the questions that the MSM will not

    • “Are brokers seeking out more and more of those baby boomers with large “equity mate” and refinancing with large cash outs but still maintaining low LVRs at current valuations?”
      If that were the case then AFG’s refinancing percentage would have risen. It hasn’t risen. It’s clear from AFG’s data that LVRs are falling and the values lent on are rising. We know that savings have been growing. Maybe those savings are being used as bigger deposits. They still remain as private sector savings even if spent.

      • Armand Tamzarian

        Whatever the cause/mechanism what events occured in 2011 that caused it? i.e. what is different now?

  7. Did Tim Lawless say “Unemployment has moved beyond capacity”? Despite nearly 1.8m people either unemployed or underemployed? And this is set to rise as the government withdraws funds from the private sector at the same time as the private sector de/dis-leverages.

    Anyone else think the government will have a hard time actually producing a surplus?

  8. > This is made more strange by the fact this is a long running
    > trend in their data even as many other organisations claim
    > property values are falling. I am yet to hear a decent
    > explanation for this.

    I copied table 1 and 3 from their pdf report and calculated the avg. property value over the past 13 months. As you can see from the last column below it was quite stable until Dec 10 and then took off quite rapidly. A possible explanation is that they changed their lending practices and are chasing higher value borrowers i.e. with higher deposit and buying more expensive properties. This would be consistent with the downtrend in their total numbers.

    This is not inconsistent with the falling median price since, as many reports say,
    the top end has really slowed down which may have caused a slight downward shift in monthly samples of sold properties.

    From Table 1 and 3
    MONTH Year LVR Avg. Property Value
    Mar 2010 62.50% $598,400.00
    Apr 2010 63.30% $597,156.40
    May 2010 63.20% $610,759.49
    June 2010 61.60% $612,012.99
    July 2010 62.40% $592,948.72
    Aug 2010 63.00% $592,063.49
    Sep 2010 63.00% $601,587.30
    Oct 2010 64.50% $589,147.29
    Nov 2010 64.20% $590,342.68
    Dec 2010 63.20% $599,683.54
    Jan 2011 54.90% $664,845.17
    Feb 2011 53.20% $718,045.11
    Mar 2011 49.90% $781,563.13
    Apr 2011 49.00% $787,755.10

  9. The drop in LVR seems to have occurred at the start of the year. A good explanation could be a loss of low value high LVR purchasers or a shift to more expensive markets, especially if were talking about averages instead of median values.
    Also if your using equity rather than a deposit it means your effectively borrowing 100% of the loan.