The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Saturday, September 11, 2010

UBS analysis of Australia's banking and housing markets

UBS has recently produced a very thorough report on the Australian housing and banking markets. This is a follow-up to all of the hedge fund interest in these two sectors, which I have now covered in detail here.

I understand that a lot of the economics content was supplied by their outstanding chief economist, Scott Haslem, and his team. Scott arguably called Australia's resilience during the GFC better than any other local analyst.

I have copied in some of the more interesting UBS charts below and will provide some quick commentary. The first chart shows UBS's estimate of pent-up housing demand--they reckon the underlying shortage is circa 180k and growing quickly. This is similar to estimates supplied by other banks.

The next chart illustrates the relative mortgage product mix between Australia and the US--a well known story: we have little-to-no subprime or Alt-A exposures.

This chart demonstrates the larger relative residential (business) lending exposures that CBA/WPC (NAB/ANZ) respectively possess. This is a mixed blessing. On the one hand, CBA and WPC have generated very strong cash-flows from their residential businesses. On the other, they are being targeted because of these exposures. This explains the presentation CBA released to the ASX on Friday defending their very secure residential mortgage holdings, which I previously covered here.

The next two charts show the enormous differential between the population growth rates in Sydney and Melbourne and new land sales in those cities over time.

This table illustrates the extraordinary share of housing costs accounted for government charges and levies, particularly in NSW. RP Data-Rismark estimate that the median cost of a house in Sydney is about $605,000. After all the costs of production, there is little juice left for developers producing homes in high risk/low-amenity areas.

The following chart reinforces this for greenfield developments and highlights a point that was first made in my 2003 report to the Prime Minister: the cost of land is an increasingly significant component of the marginal price of a new home in our biggest city, Sydney.

The next chart tells us that greenfield development is awfully expensive in NSW while the marginal costs of producing homes is sometimes equal to or greater than their market clearing prices (the NSW numbers are not quite right--the median house prices is $605k not $650k).

The remaining charts focus on Australia's very low mortgage default rates by lender and the distribution of LVRs. I want to highlight only two.

This chart is worth thinking about. It shows us the share of Westpac's borrowers that are ahead or behind their scheduled-balance repayments. As I have mentioned here before, many Australian borrowers actually pay down their mortgage debt more quickly than they are required to due to the fact that it is not tax deductible and therefore expensive.

To finish off with, this fascinating chart shows us the extraordinarily low losses realised by CBA on its residential mortgage book, which is the darkest line, since 1982 (I have presented similar data before). Observe that losses were tiny even during the 1991 recession. In contrast, less productive (;-) personal and business lending have been much riskier activities.