If the 2008 Global Financial Credit Crisis taught us anything, it’s that even though Australia might be geographically far from the rest of the developed world, when it comes to overseas economic stability we’re a little bit too close for comfort.
Now, as we enter 2012 with continuing uncertainty plaguing the beleaguered European market, concerns that our property markets could be vulnerable to the latest global banking turbulence are starting to surface.
According to a report from Robert Gottleibsen in Business Spectator, the International Monetary Fund believes that Australian house prices are overvalued by between 10 and 15 per cent, while The Economist magazine says it’s more like 50 per cent. Closer to home, Rismark’s Christopher Joye says our dwellings are not overpriced at all.
How will our banks react?
While it’s difficult to say whose right and whose wrong in this ongoing debate, the fact is we should be keeping a close eye on the reaction of local banks to the problems overseas.
If they choose to tighten their already stringent lending policies in the coming year, this could have a negative impact on house prices.
How do we know this?
Because that is one of the factors that lead to the decline in the housing markets across 2011, says Gottleibsen.
He adds, “Of course, closely related to the availability of bank lending is the level of employment. If there is a rise in unemployment and therefore a rise in problem housing loans, not only will it tighten bank lending, but it will also increase the supply of houses as people can’t keep up with their mortgages.
“The banks’ lending criteria is also closely related to the level of interest rates. If rates rise, banks become more cautious because people can’t afford to repay the loans. Urged on by our politicians, Australians have come to link Reserve Bank official interest rates with the level of home loan rates.”
Will the banks go their own way?
The problem now is that banks are in a position where they will most likely have to break this interest rate nexus in 2012 due to the tenuous position the rest of the developed world has found itself in recently.
“Historically, Australian banks have made substantial profits by borrowing money on the overseas wholesale market and using that money to fund about 40 per cent of our home loans,” explains Gottleibsen.
“European banks are headed for a substantial money squeeze and that may spread to the US, particularly if US state and local governments get into trouble. If that happens then Australian banks will have to either pay the going wholesale rate, bid up the local deposit interest rates to attract local savings or curtail their lending.”
Obviously, if our banks tighten their purse strings even more, there will be a flow on effect to the housing market as potential buyers have difficulty securing funding to purchase property.
What will the European banks do?
Then of course there’s the danger of European banks may withdraw funds from local businesses pulling out of Australia as they attempt to save themselves back home.
While the effect of this on our local businesses could cause a sudden jump in unemployment figures, however Gottleibsen suggests much of the resulting slack could be taken up by our ongoing mining boom.
It’s likely that Australian banks will attempt to entice customers into putting their money in term deposit accounts off the back of the continuing global share market turbulence and if they succeed, this could ease some of the pressure on interest rates.
The Asian influence could also affect our markets.
Aside from the banks’ influence on our housing sector, a decline in demand from Chinese investors for new apartment developments in Sydney and Melbourne could affect apartment prices in both cities.
Mainland Chinese buyers have driven a substantial portion of new apartment sales in Sydney and Melbourne until recently, but in the last month of 2011 Asian investment activity in the sector has halved.
If this were to continue, Gottleibsen says we could see a fall in apartment values by up to 10 per cent in the Melbourne and Sydney CBD’s, which would in turn flow on to the urban fringes.
“The greatest danger is that a sizeable proportion of the multitude of inner Sydney and Melbourne apartments that have been bought off the plan by mainland Chinese are not consummated and the Chinese simply walk away and accept the loss of their deposit,” says Gottleibsen.
“That will create a pall of unsold dwellings over the Melbourne and Sydney markets in much the same way as contracts reneged in the Sunshine and Gold Coast have affected property values.”
Overall, the message is clear. While we are in a more fortunate position than many other developed nations with regard to our banking sector, there is always the potential for some unknown factor to rock the boat and cause banks to get the lending jitters.
2012 will be an interesting year as the problems in Europe play out. However our banks are in a sound financial position and should be able to weather the storm even if interbank lending dries up for a few months overseas.
Fortunately their coffers are being bolstered by Australians who are stashing their cash as well as by their more cashed up balance sheets
Now may be a good time to top up your financial buffers while you can, even if you don’t intend to buy more properties.
Topping up your line of credit shouldn’t cost you anything, and of course you don’t pay interest on your unborrowed limits.
Wise investors use these lines of credit to buy themselves time. Maybe that’s what you need, just in case 2012 pans out to be a difficult time for Aussie banks.
If you want to know how much you can borrow why not speak to award winning finance strategist Rolf Schaefer Metropole Finance. Just click here to find out how much you could borrow.
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
NEED HELP LISTENING TO MICHAEL YARDNEY'S PODCAST FROM YOUR PHONE OR TABLET?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.