Australia Archives - Page 4 of 9 - the patient investor

August 22, 2014

Bank chiefs in last-ditch plea to David Murray on tougher rules | The Australian

From Richard Gluyas at The Australian:

THE four major-bank chief executives have each made an eleventh-hour appeal to members of the Murray financial system inquiry ahead of Tuesday’s closing date for final submissions, as concerns mount that the sector could be forced to hold even higher levels of bank capital due to the inquiry’s emphasis on resilience. The closed-door meetings with the inquiry panel members come as Steven Munchenberg, chief executive of peak lobby group the Australian Bankers’ Association, said the industry was “jittery” about the inquiry’s focus on balance-sheet resilience because more onerous capital requirements would affect the banks’ ability to lend and serve the economy.

I disagree. Banks with strong balance sheets are better able to serve the needs of the economy. Highly leveraged banks leave the economy vulnerable to a financial crisis and are more likely to contract lending during periods of economic stress.

The shrill outcry may have something to do with the impact on bankers bonuses. Incentives based on capital employed would shrink if shareholder’s capital is increased.

Bank shareholders on the other hand are likely to benefit from stronger balance sheets. Reduced default risk is likely to enhance market valuation metrics like price-earnings multiples. Reduced risk premiums will also lower cost of funding and enhance lending margins. And shareholders are also likely to benefit from enhanced growth prospects. Analysis by the Bank for International Settlements in the post crisis period shows banks with higher capital ratios experience higher asset and loan growth.

August 10, 2014

Australia’s Major Banks Say The Murray Enquiry Used The Wrong Numbers… | Business Insider

From Greg McKenna:

The AFR reports ….the Australian Bankers Association CEO Steven Munchenberg said the banks are “concerned that if some of the statements in the interim report – that Australia’s capital is middle of the road, that housing is a systemic risk – are allowed to remain unchallenged and are then taken out of context that is going to cause us a lot of future grief”.

Munchenberg says the Inquiry hasn’t calculated the capital ratios correctly.

“The approach was simplified and didn’t take into account the complexities and nuances of how capital is determined in Australia, including deductions required by APRA and some of the areas where APRA has adopted a more conservative approach, and as a result underestimated the amount of capital in Australia relative to overseas”, he told the AFR.

Forget the nuances and comparisons to the plight of other banks. Australian banks need to almost double their capital and adopt a more conservative approach to home mortgage lending if they are to withstand future shocks. 3 to 5 percent capital against total exposure doesn’t get you very far. The history of low mortgage failures over the last 3 decades, in an expansionary phase of the credit market, is unlikely to be repeated during a contraction.

August 4, 2014

Australia: Struggling economy to hit profits | InvestorDaily

From Miranda Brownlee:

A higher Australian dollar and slower economy are expected to result in subdued corporate earnings in the upcoming reporting season, according to Prescott Securities….. equity specialist Travis Adams said despite this, he still expects earnings per share growth across the market of around seven to eight per cent.

July 27, 2014

World wakes to APRA paralysis | Macrobusiness

Posted by Houses & Holes:

Bloomberg has a penetrating piece today hammering RBA/APRA complacency on house prices, which will be read far and wide in global markets (as well as MB is!):

Central banks from Scandinavia to the U.K. to New Zealand are sounding the alarm about soaring mortgage debt and trying to curb risky lending. In Australia, where borrowing is surging, regulators are just watching.

Australia has the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. The average home price in the nation’s eight major cities rose 16 percent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.

“There’s definitely room for caps on lending,” said Martin North, Sydney-based principal at researcherDigital Finance Analytics. “Global house price indices are all showing Australia is close to the top, and the RBA has been too myopic in adjusting to what’s been going on in the housing market.”

Australian regulators are hesitant to impose nation-wide rules as only some markets have seen strong price growth, said Kieran Davies, chief economist at Barclays Plc in Sydney.

…“The RBA’s probably got at the back of its mind that we’re only in the early stages of the adjustment in the mining sector,” Davies said. “Mining investment still has a long way to fall, and also the job losses to flow from that. So to some extent, the house price growth is a necessary evil.”

…The RBA, in response to an e-mailed request for comment, referred to speeches and papers by Head of Financial Stability Luci Ellis.

…The RBA and APRA have acknowledged potential benefits of loan limits “but at this stage they don’t believe that this type of policy action is necessary,” said David Ellis, a Sydney-based analyst at Morningstar Inc. “If the housing market was out of control and if loan growth, particularly investor credit, grew exponentially then it’d be introduced.”

What do you call this, David:

Reproduced with kind permission from Macrobusiness

July 14, 2014

Pickering: Australian housing “severely overvalued”

Interesting view from Leith van Onselen:

Business Spectator’s Callam Pickering has produced an interesting assessment of the RBA’s new research paper, which attempts to determine whether Australian homes are overvalued versus renting.

Like my analysis posted earlier, Pickering also concludes that Australian housing is significantly overvalued given the likely prospects for incomes and capital growth; although how he arrives at his conclusion is a little different:

My general view is that Australians are frequently ripped off when purchasing a home. A combination of poor housing policy… combined with housing supply restrictions… have resulted in arguably the most expensive housing stock in the world…

[The RBA] find that the decision to buy or rent is highly sensitive to one’s expectations regarding capital appreciation. Their base scenario assumes that house prices will continue to grow at their post-1955 average, during which time real house prices rose by 2.4 per cent annually. Under this scenario, housing is perfectly priced compared with rents.

But as I’ve argued frequently it is unreasonable to assume that future house price growth will match past gains…

The sensitivity of their analysis to various price growth assumptions is contained in the graph below.

Structural shifts in the Australian economy resulting from an ageing population and a declining terms of trade, combined with the Chinese economy slowing, will weigh on income and price growth, while high levels of indebtedness should place a speed limit on potential growth.

The most interesting scenario considered by Fox and Tulip is the scenario where real house prices grow at the rate of household income growth (denoted in the graph by “HHDY”). This scenario is perhaps a little optimistic (the risks to income growth are on the downside) but it approximates our current reality… Under this scenario, housing is overvalued by around 20 per cent…

[The RBA research] using plausible assumptions for price growth, suggests that housing is severely overvalued in Australia and many Australians are getting ripped off.

Spot on and well argued.

Reproduced with kind permission from Macrobusiness

June 27, 2014

Bank of England throws egg all over RBA, APRA | | MacroBusiness

Of all of the financial systems in the world, Australia’s is most similar to the UK. Of all of the restrictive housing planning systems in the world, Australia’s is most similar to the UK. Of all of the house price boom and bust cycles in the world, Australia’s is most similar to the UK. The Bank of England also practices inflation targeting though its cap is 2%. The UK and Australia share a similar economic model reliant upon external borrowing to fund consumption and low export-to-GDP ratios but the main difference is that the UK economy is a more diverse mix of value-adding sectors with a much higher contribution from manufacturing.

But today there is one very new difference. The UK has announced it will henceforth practice macroprudential regulation to control its housing cycles and prevent them from hollowing out the economy…..

March 4, 2014

A Century of Policy Mistakes | Niels Jensen

In A Century of Policy Mistakes Neils Jensen describes the demise of Argentina over the last 100 years.

A century ago Argentina ranked as one of the wealthiest countries in world, behind the United States, the United Kingdom and Australia but ahead of countries such as France, Germany and Italy. Its per capita income was 92% of the G16 average; it is 43% today. Life in Argentina was good. It enjoyed the benefits of one of the highest growth rates in the world and attracted immigrants left, right and centre. Boom times galore.

Argentina’s wealth was based on agriculture, but also on its strong ties with the UK, the pre-World War I global powerhouse. Equally importantly, it understood the importance of free trade and took advantage of the relatively open markets which prevailed in the years leading to the Great War. Most importantly, though, it benefitted from, but also relied upon, enormous inflows of capital from the rest of the world. All of this is well documented in a recent piece in The Economist which you can find here.

Neils identifies three main causes:

An over-reliance on commodities;
Failure to invest in education; and
An increasingly closed, inward-looking economy.

It occurred to me that, apart from education, Australia has made the same mistakes.

March 4, 2014

A Century of Policy Mistakes | Niels Jensen

In A Century of Policy Mistakes Neils Jensen describes the demise of Argentina over the last 100 years.

A century ago Argentina ranked as one of the wealthiest countries in world, behind the United States, the United Kingdom and Australia but ahead of countries such as France, Germany and Italy. Its per capita income was 92% of the G16 average; it is 43% today. Life in Argentina was good. It enjoyed the benefits of one of the highest growth rates in the world and attracted immigrants left, right and centre. Boom times galore.

Argentina’s wealth was based on agriculture, but also on its strong ties with the UK, the pre-World War I global powerhouse. Equally importantly, it understood the importance of free trade and took advantage of the relatively open markets which prevailed in the years leading to the Great War. Most importantly, though, it benefitted from, but also relied upon, enormous inflows of capital from the rest of the world. All of this is well documented in a recent piece in The Economist which you can find here.

Neils identifies three main causes:

An over-reliance on commodities;
Failure to invest in education; and
An increasingly closed, inward-looking economy.

It occurred to me that, apart from education, Australia has made the same mistakes.

October 1, 2013

Crawling, not walking, to non-mining led growth | MacroBusiness

Leith van Onselen quotes the latest JP Morgan report on the Australian economy:

…risk of a recession is “inevitably higher now than usual; the economy has built up vulnerabilities over time that have been masked by the continued growth in output and national income… the downside of avoiding recession is that Australia has carried these excesses through a succession of growth cycles”.

Households are particularly at risk from expensive house prices and high levels of household debt. Which brings me back to the unnecessary risks bank regulators are taking by condoning low bank capital ratios of between 4.0% and 4.5% of total credit exposure. Risk-weighting of bank assets provided a smokescreen, inflating perceived ratios to around 10%, while encouraging over-exposure to (low risk-weighted) residential mortgages.

September 3, 2013

GM and Toyota may follow Ford’s lead and shut plants in Australia – Quartz

Nandagopal J. Nair writes:

The biggest drag is is a strong Australian dollar, which is making local manufacturing uncompetitive compared to imports. Over the past 12 months the currency has traded about 30% above its three-decade average. Its strength has pushed up manufacturing costs, making Australia the third most expensive country to do business in, according to the IMF.