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Australia: The Land Down Under(water in mortgage debt), pt. Deux: Which Banks to Short?
As a follow-up to our piece on the Australian macro outlook (Australia:
The Land Down Under(water in mortgage debt), We looked into the
four largest Australian banks – Australia and New Zealand banking Group
Limited, Commonwealth bank of Australia, National Australia Bank
Limited, Westpac Banking Corporation. All the banks, except Commonwealth
bank of Australia, have ADR.
The banks are trading at very high multiples when compared with their
US counterparts. The current average price-to-tangible book value of
the four Australian banks is 2.5x against the current multiples of less
than 1.5x for US banks. The Australian banks are enjoying a premium
largely owing to lower charge-off rates, delinquency levels and the NPL
levels than their US counterparts. While the housing loans account for a
substantial portion of the total portfolio of Australian banks, the
housing bubble in Australia is yet to burst to result in defaults in
this sector. Also, the Australian banks have additional shelter from two
factors:
- The housing loans in Australia are recourse loans (borrowers are
personally liable to pay even after foreclosure) - The loans given in excess of LTV (Loan-to-value) of 80% have Lender
Mortgage Insurance which covers the losses of the lending bank
The average Texas ratio of the four Australian banks is 25% and
average NPL coverage ratio ( NPL+90 days past due to allowance for loan
losses) is 68%. While the NPLs and the past due loans of the Australian
banks have increased over the last year, a major portion of the increase
is coming from business loans and commercial property while the
delinquency rates in residential mortgage in Australia have remained
stable (except for Commonwealth bank where substantial increase has been
seen in the past due loans in the housing sector). The reported
delinquency rates for mortgage or housing loans in Australia for the
four banks are summarized below.
- Commonwealth bank of Australia – The total delinquent loans (1+ days
past due) remained at 3.0% in 1H10, equal to the level of 3.0% in 1H09.
However, owing to the aging of the some portion of the delinquent
loans, the mortgage delinquency (90+ days) rate increased to 0.77% in
1H10 against 0.45% in 1H09 while the mortgage delinquency (30-80 days)
rate remained stable at 0.86% and mortgage delinquency (less than 30
days) rate declined to 1.36% in 1H10 against 1.72% in 1H09.
The full analysis is available for download to subscribers below.
Subscribers are also urged to review the Macro outlook document as well.
Australian Bank Analysis ProAs excerpted from Australia:
The Land Down Under(water in mortgage debt:
A few minutes ago, I posted an
informational piece on Australia’s creeping protectionism in the form
of taxing multi-national mining companies in ”In
Australia, Tax as a Contagion“. This begs the questions, “Why is
Australia So Tax Happy as to Potentially Chase Away Investment in the
Down Under?” Well, the answer most likely is because it is actually
a ”Land Down Under(water in mortgage debt) and foreign export reliance.
We, at the BoomBust feel that the government is actually attempting to
take a proactive stance in meeting the consequences of what is probably
going to befall most export reliant countries which is why Brazil and
Chile are strongly considering following suit!
As an extension of the Chinese
macroeconomic discussion at BoomBustBlog throughout 2010, there may be
an “Asian Contagion” spreading as a result of a Chinese
investment slowdown. Those at risk
are the countries and regions that have supplied China with the
commodities necessary to build empty cities. While
the (comparatively, in terms of GDP) enormous Chinese stimulus package
from the first part of the financial meltdown in 2008 has generated
incredible growth in GDP and asset prices, the game appears to be over
for flipping 1000 square foot apartments in Shanghai. After the direct
hit taken to China, the picture looks very grim for Australia, where a
bursting Chinese housing bubble could drive industrial commodities
lower, sparking higher unemployment in one of the nation’s largest
sectors, and in turn pop their domestic housing and property bubble. In the near
to medium term, Australia is showing some major red flags.
»
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Reggie, I find your work outstanding!!
Maybe you know this blog...is an Aussie Uni Professor, but he is far better than Roubini.
http://www.debtdeflation.com/blogs/
Keep'em comin Reggie!!
Budd Fox - Steve Keen is a highly intelligent man and some of his work has been outstanding but DONT make investment decisions based on anything he says because his timing is awful (and he underestimates the lengths politicians and CBs will go to perpetuate folly):-
Professor Steve Keen setting off from Parliament House, Canberra, to Mt Kosciuszko on Thursday 15 April 2010.
The walk was initiated after spectacularly losing a bet on Australian house prices with Macquarie Bank Interest Rate Strategist, Rory Robertson.
Professor Keen claimed that, just as Japanese house prices had fallen 40% since its Bubble Economy burst in 1990, so too would Australian house prices. In October 2008, Robertson challenged him to a bet that this would never happen at a debate in the Parliamentary Library, where the loser would have to walk from Parliament House to Mt Kosciuszko.
Since then, Australian house prices have rebounded from their biggest ever quarterly fall of 3.8% in September 2008 to their biggest ever quarterly rise of 7% in 2010.
You are right about Keen's timing. He will ultimately be proved right, just not yet. Watch the Aussies pull out all the tricks of the Yanks before we get our housing bust (we will absolutely get "downside" before the bust, just at a slower pace):
- Further stimulus targeted at housing
- Bank bailouts
- Govt. backed mortgages
When this starts, look for the AUD to go down to about $0.50c US. It will devastate the currency, this will be the price of "prosperity", so to speak.
Reggie is right about bank equity, but look for foreign bond holders to get bailed out (in weak AUD's).
No worries mates.....Academic's timing is always something that is not tradable...but his economic approach makes sense and has a contact with reality. I reckon that the Aussies will pull all the dirty tricks to keep the bubble afloat...
what's the time frame for implosion of this risk-unit country?
The China requirement for resources is not going to decrease. All of the hyperventilation about the China bubble is related to a slowing of growth, not a decline in GDP. The growth rate declines from 12% to 5% and that leads to how much less resource demand? I'd expect that it would still be increasing, BWDIK. As to the China real estate bubble, it may be there and it may pop. It may not have a real effect on the the overall increase in consumption. When you understand that the average wage for an URBAN Chinese worker is about 9 USD a day then you will recognize that they don't own these properties. They are still trying to buy a scooter. The folks in the countryside are likely further behind in income and material possessions. Sure much of the property investment will be seen as wasteage, but there are many potential users and it is not the same as in say Spain where 15% of the houses are not occupied.
I understand that the article is about Australia and predicts an implosion. Consider that the population there is relatively small and they do not have whole cities filled with layabouts as we find in the US. There is not a Detroit, Gary, Milwaukee, or Camden in the country. They generally do still work and unemployment is declining. They have not decided that the government is responsible for supplying an unlimited supply of dope, whores, and Cadillacs.
Consider this one LNG project and the amount of revenue it will generate for the citizens and the government tax collectors:
http://www.chevronaustralia.com/ourbusinesses/gorgon.aspx.
However they may be facing a many new sources of competition. Consider this Russian iron ore project that is just across the Chinese border:
http://www.nytimes.com/2010/06/10/business/global/10ruble.html?src=busln
Resources are certainly located where you find them. However my geologist friend once explained that oil is found by the minds of men and that applies to all resources.
I believe that there are shorting opportunities that are much better than Australia. I would suggest Mexico as it is a derivative of the sure to decline US economy. Maybe buy EWA and sell EWW.
The first dollar from Gorgon is 2015 - much must be spent before the first dollar rolls in, and in the mean time tax revenue actually drops because of the 'investment'.
My thinking is that the Chinese Economy will get sucked down the drain along with every other Country. Who in China is gonna be buying Flat Screens? Typical factory workers don't make anywhere near enough RMB/day to afford such items.
Asians and vacant real estate. This will all end very badly for them. Business lines to buy property. Buy all cash then refi and buy two or three more vacant units. Greater fool theory gone wild. Check the participation rate in speculation. Instead of incubating small businesses they dump money in non-performing assets.
How about Singapore? 3 year loans tied to SIBOR. You can buy a lot of RE with sub 3% rates.
I wonder how many of these houses in Australia are being purchased not simply for investment? China has many rich individuals who understand how fragile their system is politically. How many homes end up being the new residence of ex Chinese capitalists? When this bubble pops Australia can be this groups Canada. The Chinese government has warrants for thousands who fled with millions/billions less than a decade ago. Were it not for mainland China's use of the death penalty for financial fraud thousands would have already been sent back from Canada already.
Good work, Reggie. You have convinced me that a housing bubble is waiting to burst in Oz and the banks are good shorts. Keep posting mate.
How can any of us go short OR long on Aussie banks without knowing if the Aussie govt is going to bail them out? I'm starting to suspect that all those years studying Ben Graham and financials were totally wasted and I should've spent more time figuring political incentives.
The government will likely reinstitute the short selling ban on financial stocks. Yes, the government will bail the banks, but this will have an effect on AUD. See this link for more info:
How to Profit From the Coming Aussie Property Crash and Banking Crisis
Bailing out a bank doesn't necessarily bail out shareholders. It may keep the bank fro going bankrupt, but it may also allow (as it should) the equity investors to take the losses they risked when they bought the stock.
Thanks Reggie, I got my wish...wish you were available to provide loads of exhaustive research on every hunch and curiousity I have.
Wish I had some real money to trade with, I'd be all in with your picks and subscribe...
The lowest subscription is only $85, you can swing that.
so it is, I can, and will...thanks..
Reggie, spot on - The Aussie housing market is going to tank big time as soon as a the commodities boom stops.
Prices are astronomical in terms of disposable income. We have had a nuclear arms race of credit since the late 80's.
I have sold one, and have my second property on the market. Even now there are signs it is starting to slow drastically in Melbourne (+30% increase in the last 12 months)
Two further pieces of analysis worth considering for those that want to short the banks:
Profit coming aussie property crash and banking crisis [talkfinance.net]
Housing Crash Simulator [talkfinance.net]
Good stuff. Sending this on to some family members who need a good scare. Boo.
Mr. Reggie,
Been waiting and waiting to hear from you and to intern. I already got six pack beer too...n lookin at the picture,,got u a cigar too....whenever you get time, would luv to hear from you.I can start from comin monday, just tell me where to b,,,,
cheers!!!
Email me again.
Pathetic.
NAB also has a mortgage exposure in the UK, with Yorkshire & Clydesdale their trying to offload.
Since the time I left Oz (2001), housing has more than tripled in the inner city Melbourne area. Wages are up by approximately 30% over the same period. Granted that the population has also grown, it's very unlikely that "greater fools" are immigrating at previous levels.
The Melbourne Mega bubble is full of Indian and Chinese hot air. Total speculation without the fundementals. Everything we heard in the US before the pop is being amplified over there with the added "it's different here".
As I mentioned in other posts, Australia is relatively new to the credit consumer lifestyle. Credit cards were for the rich, now they're for the poor.
Right you are. Most people in Australia are now, unfortunately, drowning in mortgage debt. The great citizens of the land down under sold out for what they were fed as "prosperity" by leveraging balls-to-the-wall style.
I disposed of my final piece of Aussie real estate in December last year. Timing perfection, an exact double in price since 2004. That, is obscene. It shouldn't happen. But, you can always count on more idiots in a frenzy.
All bubbles pop, this one will be no different. If the mining sector takes a hit, the whole thing starts to unravel. Simple really, shame they can't see it down there.
I'm still holding onto a property in the inner fringe of Melbourne I bought off the Housing Commission back in 1999 for $170k. A 23 yo RE agent driving a BMW told me it was worth $1M without brinking an eye. In fact he was so damn sure of himeself, he kept answering his bluetooth cell phone in mid conversation while raising his index finger at me. Really felt like smashing the punk.
Take the money now.
Yeh, no kiddin. Mommy and 2 siblings live in it and it's the house all six kids grew up in.
sell it and buy it back after it defaults
take the money, rent them a palace if you have to get them out, take the money...
i survived a relationship with a turkish girl a couple of years ago. she was a morgage broker and was lamenting that there was essentially no mortgage system in turkey, that you had to pay up to 80% of the value of a home before buying. interesting. but what was more interesting was this. she was from a relatively wealthy family there. i asked her how the wealthy classes kept stores of value in such a high inflation environment. besides holding foreign denominated assets, she said that they all own property that they rent out, because rent can continually be adjusted upwards with the inflation rate...
Inflation and rent are only loosely related. Take the USA, for example. Apparently, according to Shalom Bernanke, we have "inflation" in the broader economy. Yes, gas has gone up, basically more than double, in a year. Food has gone up.
However, there are vacancies EVERYWHERE. I negotiated LOWER rent with my landlord, and will do so again this year. It is far more related to supply/demand in real estate specifically, then general inflation. You want to raise my rent, I'll move.
That used to be the case, mcguire. Not anymore. Although there is serious amount of transactions taking place via buy in cash, over the last 2-3 years, there has been increasing amount of mortgage activity taking place in Turkey, a country where half of the population is under 30 years old.
The #1 reason is lower int. rate 12%/pa high by western standards (certainly by the US where 30 yr running <5%), people still pay 12% for 10 year mortgages with anywhere from 10 to 25% money down.
Hope that helps..
Rent adjustment can also be limited by law, depends on the country, not to forget that real estate can't move and can be taxed without possible 'evasion'...
awesome stuff reggie.....hey what about canadian banks and as per the canadian housing bubble.....which to short here??
Great work Reggie as always. No doubt about a bubble here in Oz. i have just sold my place in Melb for a ridiculous amount to a chinese buyer and am going to rent for a while. Heaps of Chinese buyers here. It reminds me a bit of when the Jap's were big Oz property buyers in the late 80's just before they, and we, went bust! The Australian housing bubbles has been fuelled by the Chinese stimulus as the Oz economy has become nothing more than a highly leveraged chinese derivative. If the China bubble bursts that is what wil pop the property bubbles here.
Just a word of cuation before getting too agressive on the shorts (although i agree with you). Unemployment rate here just dropped to 5.2% and interest rates (RBA) at 4.5% and Australians will stop paying / buying everything else before they start to default on ther mortgage. Id watch retail to see if that slows significantly as a clue to mortgage stress.
Oz banks should trade at premiums to US banks (casino's) though. Very well regulated (see APRA) compared to US. My concern for Oz banks is the wholesale funding requirements. Thats getting more and more expensive for them in chaotic offshore credit markets.
Happy shorting!
Maybe there's a way to short the entire City of Vancouver. Home prices there are astronomical - a 2% hike in mortgage rates would wipe the owners out.
The joke is that Vancouver is empty. All those high rises are owned by absentee Indian and Chinese investors who sit around and flip them all day.
Anyone know how true this is? It's a beautiful city, but the housing bubble there is reaching the stratosphere. It's truly a thing to behold.