Cautious Australians Ignore Rate Cuts as Housing Sags
The Reserve Bank of Australia's 125basis points of interest rate cuts since November have failed tospur demand for mortgages, deepening concern one of the world'scostliest housing markets will extend its record decline.
"Prices have started to come down, and we haven't but seenthe normal reaction to lower interest rates," said Shane Oliver, head of investment strategy at AMP Capital InvestorsLtd., which manages nearly $100 billion. "Attitudes towardshousing have changed, so in the past, there was sort of a solidconfidence that house prices only rise, and conclusively as before long asinterest rates come down you'd see a pretty quick response,whereas this time around the response has been a lot slower."
"It is a very dangerous idea to think that dwelling pricescannot fall. They can, and they have," RBA Governor Glenn Stevens said in a speech in Sydney yesterday. "Now it has to besaid that the housing market bubble, if that's what it is, seemsto be taking quite a long time to pop - if that's what it isgoing to do."
The deposit share of Australian bank funding has climbed to53 percent, allowing lenders to "be selective about accessingglobal wholesale funding markets," the RBA said in minutes ofits most recent board meeting released July 17.
What happened in the last easing cycle
That's what happened in the last easing cycle, when thecentral bank cut its benchmark rate from 7.25 percent inSeptember 2008 to 3 percent in April 2009. House prices surged21 percent in the 15 months to June 2010, according togovernment data, boosted as well by increased handouts to firsthome buyers of as much as A$21,000.
The slowing housing market isn't stopping offshoreinvestors from piling into Australian mortgage-backed debt,seeking assets in an economy that's expanding for a 20thstraight year.
Commonwealth Bank of Australia, the nation's largest bank,is the third-biggest seller of covered bonds globally in 2012,accounting for 4 percent of the market, according to datacompiled by Bloomberg.
The equivalent of $34
Australian lenders have issued the equivalent of $34.8billion this year of the securities, which are typically ratedAAA and remain on the bank's balance sheet, the data show. Thenation's government passed laws in October allowing covered bondofferings for the first time.
Australian covered bonds sold in Europe, where thesecurities were invented in the 18th century, yield an average62 basis points more than government debt, according to a Bankof America Merrill Lynch index. That compares with spreads of106 basis points on notes sold by British lenders and 619 onSpanish covered bonds, the gauge shows.
Westpac Banking Corp., the nation's second-biggest lender,priced 1 billion euros of seven-year covered bonds to yield 55basis points more than the benchmark swap rate on July 2. Eurocovered bonds due in five to seven years offer an average spreadof 144 basis points, the Merrill Lynch index data show.
"The positive sentiment currently surrounding Australiancovered bonds always needs to be considered against mostinvestors being very then aware of the housing pricedevelopments in Australia," said Leef Dierks, head of coveredbond innovation at Morgan Stanley in London. "Provided no softlanding can be achieved, the price declines might dampen demandfor mortgage-backed debt going forward."
Smaller lenders are as well returning to offshore fundingmarkets with RMBS issues, leading the busiest three months ofsuch issues since the second quarter of 2007.
Resimac Ltd., which issued Australia's first residentialmortgage-backed security in 1988, and Members Equity Bank Ptyled $670 million of U.S. dollar sales last quarter, according todata compiled by Bloomberg. The two lenders say they're planningfurther offerings during Brisbane-based Firstmac Ltd., whichmanages A$5 billion of mortgages, is considering its debut sale,according to company executives.
Offerings of residential mortgage-backed securities, wherethe home loans are parceled up and removed from the seller'sbalance sheet, peaked at A$59.7 billion in 2006 earlier slumpingafter the U.S. subprime collapse, according to data fromStandard & Poor's.
Government reports since the RBA's latest decision havepainted a mixed picture of the economy: retail sales rose bymore than twice the pace forecast and consumer confidencestrengthened, during the unemployment rate increased in June andhome-loan approvals unexpectedly sank.
Powering the Australian economy is the biggest resourceboom since prospectors set off a gold rush in the 1850s. Thelatest bonanza -- for iron ore, coal and natural gas -- isbringing investment projects the government estimates to beworth A$500 billion. The nation's unemployment rate, at 5.2percent last month, is lower than 8.2 percent in the U.S. and11.1 percent in the euro area.
"Australian householders remain firmly in de-gearing mode,hence the subdued credit growth and house prices that we're nowseeing," said Chris Viol, a credit analyst at UBS AG in Sydney."At the same time with the advent of new funding sources like coveredbonds, the result has been an improvement to Aussie banks'wholesale funding profiles. This is music to rating agency andcredit investors' ears."