Yesterday, I connected the end of the carry trade and stress on Australian bank margins. The point was that the withdrawal of global liquidity wasn’t just affecting emerging markets in our interconnected global financial system. Australia is feeling it too, even though the Reserve Bank of Australia is on hold. Now let’s look at the household side of things for a quick second.
The sources of stress on Australian housing
Here’s a blurb from the Financial Times that encapsulates the problems borrowers are having:
Maggie Lu is one of thousands of borrowers hit by a credit squeeze, which has abruptly ended Australia’s housing boom and poses a risk to one of the world’s most successful economies.
“I got pre-approval for a mortgage last year but couldn’t find a house we could afford before it lapsed,” said the mother of two, who wanted to move from her Sydney apartment into a house.
“Prices are falling but now my bank will only agree a mortgage worth A$170,000 [US$120,000] less than the level agreed last year. So we are stuck.”
As I mentioned yesterday, house prices are now going down in many Australian cities. The FT talks about tighter credit more generically as well as unaffordable prices. They zero in on prices , citing people balking at sky-high prices as central banks raise rates. But the RBA isn’t raising rates. And prices have been sky high for quite some time in Australia. So, that narrative doesn’t fit at all here.
Yesterday, I put the blame on a lack of lending in the buy-to-let part of the market. You need a catalyst for these things to happen. And in an economy in which the most recent quarterly growth rate was a prodigious 3.4%, the big changes are credit growth and global liquidity.
First, on the credit front, as I mentioned yesterday, restrictions on investment buyers may have been partially lifted, but the impact of those restrictions is still filtering through. As in the US, the buy-to-let part of the market has added a huge slug of demand to the housing market, bidding up prices.
Second, there is the liquidity factor I mentioned yesterday. The Australian Dollar is near two-year lows versus the US dollar as rates go higher elsewhere, particularly the US. That is sucking deposits out of Australian banks as investors seek yield. And so, Australian banks, lacking deposits, need to go to money markets for funding. The spiking rates there are passed through to mortgage rates.
That’s it pretty much. This is not about the RBA raising rates or people being priced out of the market – just the opposite. After all, the RBA is on hold and property prices are falling. Instead, it’s a liquidity and credit growth-driven problem.
Outcomes
If the Aussie dollar continues to fall, you will see pressure continuing. But because of the overhang of household det in Australia, prices only have to fall so far before people get trapped.
Maggie Lu can’t buy a house because she can’t get a loan for the cash amount she could last year because prices are falling. I don’t think that’s a big problem. She can still buy a house. After all, they now cost less. Lenders are just rolling back their mortgage levels to what the market will bear.
The problem is for the existing homeowners, especially investors and those with variable rate mortgages. As mortgage rates go up, they will face a cash squeeze and you could see defaults. It’s when the defaults happen that you have a problem.
We’re still in the beginning stages here. As with the crisis in emerging markets, this can go a lot of ways. But it bears watching.