Big Four Aussie Banks Used Financial Crisis to Expand Control Over Mortgage Market

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“She broke wind without breaking stride. And that’s when I knew something funny was going on in Washington, DC.” That’s one of the lines your editor used to describe his disillusionment with public policy solving all the world’s ills. But first, the markets!

In case you missed it late last week, Australian’s are re-leveraging. While most other households in the Western world are dialling back credit-financed personal consumption, the opposite seems to be happening here. This conforms to almost exactly the same pattern we saw in American in 2006. But first the facts.

The Big Four Aussie banks used the financial crisis – during which their non-traditional lending saw their securistisation model fail – to expand their control over the Aussie mortgage market from 65% to 75%, according to JPMorgan analyst Scott Manning, via Richard Gluyas in last Friday’s Australian. The banks actually grew their loan book in residential housing by $75 billion in the last 18 months.

Does this leave the Big Four exposed to just one incredibly important asset class? Well at least two of the Big Four might lose some sleep over it at night. Commonwealth Bank has 65% of its loan book tied up in household mortgages, according to Eric Johnston in the Age. Westpac/St. George comes in second with 62% of its assets in the local housing market.

Because Australian house prices always and only ever go up, this is probably not a problem. But were house prices to go up less fast, or, gasp, even go down, well then it might be a problem. To keep it from becoming a problem, the housing industry must attract a constant stream of buyers and the banks must continue offering them credit. If not, look out below.

But let’s go to the way back machine and recall how it played out in America. The Greenspan Fed panicked in 2001 and lowered the Fed Funds rate 13 times in the next three year until it was just 1% in 2003. These dirt cheap rates triggered the first wave of the U.S. housing bubble: the extension of credit to the most marginal of borrowers in the economy (the subprime and ARM vintage loans that blew up the system in 2007).

However, as you can see from the chart below, the predatory luring of bad borrowing risks into the market (begun by the Fed, blessed by the banks, and bankrolled by the GSEs) was just the first wave of the boom in mortgage originations in 2004-2006. The second wave was refinancing. You can see that low rates attracted a huge boom in refinancing from existing owners to lock in low rates while they lasted.

Mortgage Bankers Association

Now comes double-barrelled perplexing news. Just over 37% of March mortgage lending was for refinancing purposes, according to housing statistics firm AFG. The last time it reached that level in Australia was in December of 2008 – another moment when Aussies feared spiking interest rates. The AFG data also show that the Big Four reduced mortgage lending by 82% in March while non-traditional lenders doubled their lending.

Hmm. What do you reckon is going on here? First the government gooses the market with the first home buyer’s grants. The marginal borrower is “brought forward” into the market to keep it going. Then, refi reinforcements are brought into fill the breach as the first buyer’s grant expires. Finally, the non-traditional lenders use the securistisation scheme at the AOFM to sell even more mortgages and keep the boom rolling.

Does this have all the elements of the conditions that led to the peak in U.S. home prices and their eventual collapse? Yes it does! Of course, the banks would never dial back lending would they? Even if their cost of capital is increasing, they wouldn’t dare pass that on to Aussie variable rate borrowers, would they?

Why bother with housing when the market is threatening to bust out over 5,000? Its double bubble, toil and trouble. We think markets are running out of credit and sentiment to make new highs. And any external shock makes the next few months highly susceptible to a big correction.

The libertarian show in Perth was great. Your editor explained that he first knew something was amiss in Washington when, after giving a speech on the floor of the House of Representatives, a future cabinet member in the Bush administration bustled past him, breaking wind without breaking stride. Right there on the floor of the House chamber.

We knew then even as a 16-year old that something was wrong. You’ll get a full report tomorrow. There are free thinkers in Australia and they understand that ideas matter. More on those ideas soon. Until then!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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85 Comments on "Big Four Aussie Banks Used Financial Crisis to Expand Control Over Mortgage Market"

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Joe
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So if the housing market goes pear shaped, so does the Australian banking system.
Isn’t that what happened in the U.S and U.K?
Isn’t this ‘expansion of the hold on the housing market’ by the four pillars of our commerce an expansion of systemic risk?
Anyone get the feeling a bigger house of cards than we previously had is the result of the GFC, or is it all OK as our banks are truly the most robust in the World? I know where my suspicions are.

Lachlan
Guest

House of cards now enormous with legions of engineers working round clock to hold up.

Gavin R. Putland
Guest
“Because Australian house prices always and only ever go up [wink, wink], this is probably not a problem,” writes Dan. “But were house prices to go up less fast, or, gasp, even go down, well then it might be a problem.” And when might that happen? The answer will eventually appear in the ABS housing finance figures, but doesn’t appear in the ones released today. Let me explain… According to experience in Australia and other countries, a sharp fall in turnover in an overpriced housing market indicates the bursting of the bubble, and is followed, one or two quarters later,… Read more »
Gavin R. Putland
Guest

P.S.: The last link in the above comment doesn’t work, as the closing parenthesis is wrongly counted as part of the URL. Here it is again:

http://corporate.afgonline.com.au/news/APR10-MORTGAGEINDEX.html .

Don
Guest

Interesting article on China – is it a bubble?

http://www.theage.com.au/business/the-china-bubble-20100412-s34b.html

Biker Pete
Guest

Joe: “…is it all OK as our banks are truly the most robust in the World? I know where my suspicions are.”

Well, I know where my money is… . :)

Stillgotshoeson
Guest
Biker Pete
Guest

Selling one before it’s even completed, now, Shoes. Two interested buyers!~ :)

Different over here… .

Stillgotshoeson
Guest

So.. can a property bull explain to me how the FHOG were a good thing… I can’t seem to see the good in it…

http://www.theage.com.au/business/rates-pressure-hits-first-home-buyers-young-families-20100413-s54l.html?autostart=1

Don
Guest

Your properties are in demand Pete, let’s face it mining is up and booming again.

Heard from a concentrate filter supplier today (larox) that they have never ever had so many orders for new filters as they have on the books now.

Biker Pete
Guest
Shoes: “…can a property bull explain to me how the FHOG were a good thing… (?)” Probably not all that good for you, Shoes, since I recall you said: a.) You’re not interested in buying a house; b.) You have a good friend, who lets you have his rental at mates’ rates. There’s no doubt that in large cities, like Melbourne and Sydney, less-than-careful buyers may have paid too much, to get $14K. Smarter people shopped carefully, or built, scoring $21K. We saw a lot of that here in the West, where young families bought in regional centres, in great… Read more »
Biker Pete
Guest

Don: “…let’s face it mining is up and booming again…”

We don’t really think it has begun yet, Don.

(I expect a roar from the China-Must-Die bears here, but we find it hard to believe that scenario. Asia isn’t just China… . :) )

Don
Guest
Can’t say that is great news for small operating mines Biker. We cop all the stick, higher construction costs, higher salaries and contractor rates, decrease in new equipment availability and all the rest of the fun that goes with it. Not complaining mind you, in fact that plays into my hands for a project coming up – we have all this equipment sitting around doing nothing (long story) which they are refusing to let me get my claws on. Another month or two and there will be no choice but to use it. Oh boo hoo! Now we are just… Read more »
Biker Pete
Guest
Don: “…we have all this equipment sitting around doing nothing (long story) which they are refusing to let me get my claws on.” Sounds crazy, Don. We lost a kid with a four-year-degree who went north to sweep wharves at _twice_ the rate we were paying him. _Completely_ unskilled people earn far more than those with five or six years at uni. The wife of a mining engineer here (our tenant) was offered immense sums as an estimator. She hadn’t even expected to get work in WA. I think we may see _outrageous_ things happening here by early 2012, Don;… Read more »
Don
Guest

Good luck to people who can earn a good wage for sure, I just hope that they take the opportunity to either invest wisely or skill up as much as possible in that time to set themselves up for the unexpected or if hard times occur.

All the young engineers I have worked with over the last few years I have warned to be careful of taking on a job you are not ready for or will mess up due to inexperience, that sort of thing happens a lot and can really mess people up :(

Stillgotshoeson
Guest

Don..
“All the young engineers I have worked with over the last few years I have warned to be careful of taking on a job you are not ready for or will mess up due to inexperience, that sort of thing happens a lot and can really mess people up ”

I know exactly what you mean.. The company I work for takes on students for 6 to 12 months as part of their schooling.. some of them are very good.. some are quiet good and the rest as dumb as a box of hammers..

Stillgotshoeson
Guest

@Comment by Joe on 12 April 2010:

So when the housing market goes pear shaped, so does the Australian banking system.

:)

Steve
Guest

Lets face it the FHOG was just a silly policy
Biker Pete you had the perfect chance to sell when the sheeple were in force.

Don
Guest
@Shoes – There is nothing worse than sweeping up the mess after some disastrous engineer or manager has been in and done their worse. One place recommissioned a multi-million dollar leach plant based on incompetent advice which proceeded to fail miserably. Cost them 10’s of millions in unnecessary maintenance, reagent costs the whole works for absolutely no benefits whatsoever :( I have even come across a case where a process engineer used the brilliant point to try to win an argument of “well I have been to Uni and you haven’t”. My blood pressure just rises writing that rubbish, needless… Read more »
Biker Pete
Guest
Steve: “Lets face it the FHOG was just a silly policy Biker Pete you had the perfect chance to sell when the sheeple were in force.” Spoken like a highly-experienced 25 yo yet to leave the nest, Steve. Sadly, your attachment to the bedroom of your childhood and the dream of a Sydney McMansion means there _is_ no perfect time for you, lad… . :) Joe/Shoes: “So when the housing market goes pear shaped, so does the Australian banking system. :) ” Yep. I’d have thought that would be fairly obvious. Of course nothing else will be affected: jobs, shares,… Read more »
Biker Pete
Guest

Shoes: “…some of them are very good.. some are quiet good and the rest as dumb as a box of hammers…”

I’ll bet it’s the _quiet_ good ones who think _you’re_ as bright as patent leather, Shoes.

Don
Guest

You just can’t help yourself can you Biker? Please please please don’t start this again :(

Biker Pete
Guest

Don: “You just can’t help yourself can you Biker?”

Just _quietly_ enjoying the irony of two dumb-as-hammers comments, Don.

No, I’m out. Said my bit!~ :)

Ross
Guest
Shoes, more like … when the Australian banks become insolvent the Australian housing “market” will follow. APRA informed the banks two days ago there would be no special pleading on capital rules. That local pleading in itself tells you how little intellectual capability you need to run a bank. As I have said before why would all those countries other than Canada and Australia that have forced a reversion to long term housing debt-income ratio justifiable prices let bank wholesale funding be risk priced any differently for provincial ponzi operators when the money is all to come out of the… Read more »
Stillgotshoeson
Guest
Comment by Don on 14 April 2010: “I have even come across a case where a process engineer used the brilliant point to try to win an argument of “well I have been to Uni and you haven’t”. My blood pressure just rises writing that rubbish, needless to say he was a first grade &*$^$#&@%@#&.” most process engineers imho opinion are not engineers, they are merely students of taylorism (time and motion studies. If you were to fit a rotary switch to the panel of any equipment with a 1 to 10 marking, not connected to anything, and tell a… Read more »
Ross
Guest

10 out of 10 for that one shoes. Such observed process engineering behaviour gets even more extreme in a service industry

US report on small business sentiment not good …

http://www.bloomberg.com/apps/news?pid=20601103&sid=anLmjO4Dpguk

Kohler on residential housing at Business Spectator today is finally laying down the cards of those that feed him.

Stillgotshoeson
Guest
@Comment by Don on 14 April 2010: You just can’t help yourself can you Biker? Please please please don’t start this again :( Does not bother me.. not sure if you have noticed but I have BP’s posts.. no need to. The staunch property bull, that for a couple of years that I can see from older posts, has now changed his view that there may in fact be a problem in the property market… Even in his beloved state of WA with the mining boom he has still considered selling some of his property… He has admitted that the… Read more »
Don
Guest

You have both won – here are your ribbons/trophies/pats on the back, congratulations and well done. Let’s just move on now :)

Steve
Guest

Yes highly experienced Biker,
Highly experienced enough to know not to buy when people in their droves are buying, that doesnt take a rocket scientist to work that one out my friend

Biker Pete
Guest

Don: “You have both won – here are your ribbons/trophies/pats on the back, congratulations and well done.”

Easy to manage, thanks, Don. Everyone here is happy: Shoes is happy. Steve is happy. I’m happy. We’re all _winners_. We’re all in a happy place!~ :)

Steve
Guest

When you loose an argument why do you always use the tool of Sarcasm???

Pete
Guest

Shoes, you’re a little further ahead than just 1…

Biker Pete
Guest

Pete’s happy!~ :)

Biker Pete
Guest

Steve: “…loose(ing) an argument…” is a little like freeing a bear from its misery, Steve. Once the bear is loose, it’s a happier bear(!) ;)

peterg
Guest
I resent that Biker pete, I am not a winner, I am a self confessed loser, but I am happy too though. It is the lucky country after all. and to change the subject , Ross – re Kolher’s – quoting the spectator “Meanwhile the housing loan approvals data shows that demand is not being boosted by easy credit, but rather by population growth and overseas buying. ” population growth – will we want immigrants in a depression (will they want to come?), will they be welcome? overseas buying – why do people buy here? is it political stability, a… Read more »
Biker Pete
Guest

Yes, I _know_ you are happy, 89.

So you should be. You have far, far more than The Average Bear…
… and you have numerous talents, admired by many… and your family is held in high esteem by many.

So why paint yourself as a loser? Yer in God’s Own Country, mate!
Resent all you like. Just think… you could be in the US, or the UK… :)

Stillgotshoeson
Guest

“Yes, I _know_ you are happy, 89.

So you should be. You have far, far more than The Average Bear…
… and you have numerous talents, admired by many… and your family is held in high esteem by many.

So why paint yourself as a loser? Yer in God’s Own Country, mate!
Resent all you like. Just think… you could be in the US, or the UK…”

Hey, In a short period of time… you might think you are in the UK or the US..

Biker Pete
Guest

Shoes: “Hey, In a short period of time… you might think you are in the UK or the US…”

You already do. Having lived in two countries in 42 years, you know the world, Shoes. Now you live here in groupthinkland, surrounded by bears, you’re The Rising Star, the Premium Bear. Congratulations! ;)

Yeah, sorry Don. Can’t resist a punch-up, especially when outnumbered!~ :)

Stillgotshoeson
Guest

Comment by Biker Pete on 14 April 2010:

Yeah, sorry Don. Can’t resist a punch-up, especially when outnumbered!~

Trouble is… the post was not about YOU ;)

Biker Pete
Guest

Shoes: “Trouble is… the post was not about YOU ;)”

Just responding to my my comment, right? ;)

Stillgotshoeson
Guest

No just. as it is a forum where people can express opinions, and I, being a bear expressed mine… just you and your thin skin and ego (poor combination on a forum)
If I wanted to highlight it to/about you I would have put the little @BP in there like I do any one else I wish to highlight my post too… I actually made aeffor to delete your name from it.. ;)

Biker Pete
Guest

Shoes: “Hey, In a short period of time… you might think you are in the UK or the US…”

And when you think your adopted country is down the shi**er, just let me know so I can send you a few bob to help ship you further east, back home to enzed, son… .

Knew I’d _eventually_ find a Kiwi I didn’t like… . :)

Stillgotshoeson
Guest

Shoes: “Hey, In a short period of time… you might think you are in the UK or the US…”

again… just my opinion…

Not a New Zealander :)
Don’t work for ENZED…… :)

You really have to stop taking thinks personally.. Rest of us have moved on from the pettiness…
I obviously was right in a previous post that I said you can’t change…

Pete
Guest

The dinosaurs couldn’t change either Shoes. I wonder if they thought that the good times would last forever? Is that an asteroid…?

prozak
Guest

This comment thingy requires an “ignore user” button.

Biker Pete
Guest

Shoes: “…stop taking thinks personally…”

Cute, from a bloke who publishes his ‘score’ online.

Happy Keen Day, folks. Day 1 of the Long Trek.

The real score?

Australia 1
Steve Keen 0

Stillgotshoeson
Guest

“Keen notes that Roberston may one day have to follow in his footsteps. “My call was always over the longer term—when house prices fall, they fall a lot slower than share prices. The government has simply delayed the inevitable by engineering this latest bubble.”

Key sentence….

The government has simply delayed the inevitable by engineering this latest bubble.

Ross
Guest
To drag us out of residential property for a moment. Taking a start date of May 08 that I track. The ASX’s XPJ index (REITs) is today -50% on that start date and this is the ASX’s worst performing index, at the other end is the banking-excluding finance XXJ index which is leading the ASX at +6% over that same period. How do these rationally coalesce in a “market” economy? Was REIT an “irrational exhuberance” in 08 now corrected? Are current REIT prices sustainable for those leveraged into them? And wasn’t it REIT that brought Westpac to the point of… Read more »
Ross
Guest

I meant to say XXJ as being banking excluding REIT – haven’t seen dyslexics posts for a while – I need company here!

Biker Pete
Guest

“The government has simply delayed the inevitable by engineering this latest bubble.”

Yep. Rudd and Swan also buried billions of tonnes of valuable resources before the election, to later be ‘discovered’, ensuring Australia stayed afloat when the NH sank into the mire.

Comparing a _real_ economist with an insatiable media hound with a bad hunch is a little rich… . :)

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