It is always important to have doubt about one's own investment judgements. Certainty is easy -- and often wrong. It is not just that markets can remain longer than you can be solvent, as the economist John Maynard Keynes quipped. Often there are factors in markets that are completely unforeseen.
Most observers, including the Reserve Bank, IMF and the BIS, think Australia's property market is dangerously over heated and a danger to the economy. The residential property market is certainly large: about $5 trillion worth, approximately triple the value of the stock market.
But there is a view expressed in the AFR, which gives more of a historical perspective, that suggests nothing is simple:
"In the 1970s and again in 1988, Sydney prices jumped 80 per cent or more a year. Forty years ago, Harry Triguboff raised the price overnight of apartments at Blacktown, from $50,000 to $90,000. That is a boom.
Sure, this time might be different. Consumers are more indebted. There is more investor activity, and more offshore buying.
At June 30, Australia’s deposit-taking institutions (ADIs) held $1.225 trillion in residential term loans to households against a $5 trillion housing market. Of that, $413 billion was lending to investors, up 10.9 per cent in the year. And those supposedly nasty fixed-term loans were up 11.9 per cent.
The Reserve Bank, in the Financial Stability Report, did point to the loosening of lending.
The bank noted the larger discounts on advertised variable rates, the fees waivers, the up-front cash payments to borrowers and the increased bonuses paid to mortgage brokers.
But here is the bit missing in all the hysteria. To quote from the RBA: “reports from banks and other mortgage market participants suggest that, in aggregate,banks’ non-price lending standards, such as loan serviceability and deposit criteria, have remained.”
The effect of such heavy involvement of investors in the property market is another concern. That is relatively new. Investors are more likely to dump their property than owner-occupiers. The other assumption in today’s market is that investors are buying to cash in on capital gain with no thought of potential losses.
But these losses have not greatly materialised in property, and it has happened in the stock market:
"For many investors, it has been their housing investments that have held their value, and importantly their income, far better than many stocks.
At some point, the yields on offer will subside enough to discourage buying. Which is what happened in 2003.
In the meantime, the housing industry is looking to those investors, as well as owner-occupiers and offshore investors to underpin the surge in housing supply that Australia so needed.
Which brings us back to the risks of commercial property and apartment development.
The ADIs, largely the big four banks, hold $230 billion worth of commercial property exposures, up 7.9 per cent in the year to June APRA said.
Significantly, foreign bank branch exposure, though small, has jumped 60 percent in the past year.
Nevertheless, the RBA concluded that the near-term risk from commercial property is “modest”.
But the bank noted the risk in all the apartments, which are funded by foreign equity and largely foreign debt.
A collapse in this sector, outside of the RBA’s control or supervision, would reverberate across the market."
One of the reasons there is so much concern about the property market is that the sub-prime mortgage market in the US is thought to be "cause" of the global financial crisis. It was the trigger, but it wasn't the cause. The cause was more than $600 trillion of derivatives which were held off the balance sheets of the banks. These 'meta-money' securities created a level of uncertainty amongst the banks because nobody knew what it all meant.
That uncertainty led to the banks not trusting each other and the freezing up of the inter-bank lending market. The cause, in other words, was the debauch in the derivatives market -- and that debauch continues. The global stock of these noxious securities is now over $700 trillion.
Australian banks actually have a large amount of off balance sheet derivatives, mostly swaps. That is probably more of a danger to the economy than the property market. But you won't hear about that.