Overseas Investors & the Commonwealth Bank

Flattr this!

On Thursday September 9th 2010, the Commonwealth Bank released a document on the Australian housing market, to support a tour that its senior executives are making to meet overseas investors.  The press release for the document was as follows:

Australian Residential Housing

Sydney, 9 September 2010: Senior executives from the Commonwealth Bank of Australia (“the Group”) will soon be travelling overseas to meet with some of the Group’s offshore shareholders and other investors interested in Australia and the Australian banking sector.

In the light of recent commentary from a number of sources on the robustness of the Australian residential housing market, the Group (given its significant exposure to this section of the economy) anticipates that this will be an important issue for many of the investors it is scheduled to meet with.

In anticipation of these discussions, the Group has produced a presentation entitled “Australian residential housing mortgages: CBA mortgage book secure”. A copy of this document has been lodged with the ASX today. (Commonwealth Bank)

The document the press release refers to has a table (on page 4) comparing house price to income ratios in Australia with those from a number of coastal cities overseas–with the argument being that Australia’s relatively high house price to income ratios are a by-product of the fact that Australia’s major cities are all located on the coast. By the looks of this table, Australia’s house prices are comparable to those elsewhere–Sydney’s 6.2 ratio, for instance is below the 7 times ratio of its sister city in the USA, San Francisco.

So there’s nothing for overseas investors to worry about then? Not if these figures can be trusted. But can they?

Kris Sayce, of Money Morning is even more of a sceptic on Australian housing than I am, and his sceptic’s eye spotted the fine print to this table: notice that there are 2 data sources, Demographia and UBS. A quick check of the Demographia data (check Schedule 1 on pages 31-37) shows that all the non-Australian numbers in that table come from Demographia, but none of the Australian numbers come from there. Kris then published a revised table where the Demographia numbers for Australia are substituted for the ones shown above–which by inference have to come from UBS. Kris observed that:

In order to make their point, the CBA have used the Demographia numbers as a reference point for all the non-Australian cities, yet they’ve used the UBS numbers for the Australian cities.

Why on earth would the bank do that?

Simply because if they’d used the Demographia numbers it would draw exactly the opposite conclusion to the argument they’re trying to make. The fact is, they’ve conveniently grabbed the bunch of numbers that fits their argument and discarded the ones that don’t.

If they’d used the Demographia numbers for all the cities, including the Australian cities, the table would look like this:

Paints a slightly different picture doesn’t it? Actually, it paints a completely different picture. One shows an unsustainable bubble, the other shows a bunch of figures comparable to elsewhere in the world. (Kris Sayce, Money Morning)

I suggest that any overseas investors who attend presentations by this team ask them the following questions about this table:

  1. Why did you use UBS data exclusively for the Australian cities, and Demographia data exclusively for the overseas cities?
  2. Demographia’s numbers show the “median house price divided by gross annual median household income” (p. 7). How are UBS’s numbers calculated?
  3. What would the ratios be for the non-Australian cities, if the UBS methodology was applied to them?

I would be very interested in hearing  the answers to these questions.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
Bookmark the permalink.

163 Responses to Overseas Investors & the Commonwealth Bank

  1. Gamma_home says:


    First I definitely agree with you that the net foreign debt position (ie the cumulative current account balance) of Australia is a cause for concern. Australia has about $650bn of net foreign debt, which is over 50% of GDP.

    So I agree with you, but not quite in the way you are saying.

    A hedged foreign currency bond issue does not actually add to our net foreign debt, because the hedge cancels out the bond issue.

    For example, consider what happens if a domestic bank issues a USD bond. The bank sells the bond and receives the USD proceeds. If they then sell the USD for AUD, they will have increased our net foreign debt and will be running a long AUD / short USD position.

    However banks never do this. Instead what they (effectively) do is put the USD on deposit in the US money market and borrow the AUD (which they need for funding) in the Aussie money market. So the USD bond issue (a liability) cancels with the USD deposit (an asset) leaving our net foreign debt unchanged. And neither side has any (material) FX exposure.

    Actually in reality, the USD deposit / AUD borrowing is done in one transaction (a cross-currency swap).

    But as I said this doesn’t mean that the net foreign debt is not a worry. It is not possible for the financial system to eliminate the $650bn FX position, by hedging it away. Just by it’s very existence, someone, somewhere must have that position – long $650bn AUD versus short foriegn currency.

    There’s are only 2 possibilities. Either Australian firms have issued debt in a foreign currency, or foreign firms are holding AUD denominated debt (or some combination of the 2). Either way, the AUD is vulnerable to a depreciation.

    Now Ric Battellino is claiming in the speech that bb posted earlier because most our foreign debt is denominated in AUD and that because the AUD is a floating currency, we are not vulnerable to a balance of payments crisis. But he does concede that it doesn’t mean there is no risk.

    He says large capital inflows / current account deficits have the potential to “undermine financial stability” if “credit is misallocated [until] eventually there is some form of a domestic financial crisis.”

    So have we used this capital productively? Well a large proportion has gone into residential housing, but not into creating many new houses (a productive investment) but mainly into bidding up the prices of existing houses.

    This is exactly the danger for the Australian economy. What happens if foreign investors start to worry about their investments? If they start to pull out of Australia, what happens to the currency and the banking sector?

    Might we be vulnerable to a currency and banking crisis, something like what happened to Sweden in the 90s?

  2. speckie says:

    More coverage of the CBA presentation in the Age
    and a good analysis of the presentation by David Llewellyn-Smith who also makes an interesting and ironic comparison between gile in the presentation and the CBA’s advertisements where a “sturdy and commonsense banker responds with steady incredulity … to fast and loose attempts to modernise his brand. He is the model of prudence, juxtaposed against faddish spin.”


  3. speckie says:

    Opps link was to SMH not age although there in print
    See also in the SMH


  4. speckie says:

    SMH gives some clue on how the ratios for Australia. Apparently they were calculated by UBS for the CBA.
    Article cites a UBS spokesman saying that UGS “conducted a ”bottom-up” analysis of Australian housing prices relative to income, based on deeper information compiled by the Australian Taxation Office.”

    The Demographia figures were based on Australian Bureau of Statistics income data.


  5. bb says:

    cyrusp @ 147

    Happy to do so.

    I try to avoid hyperbole articles from bulls and bears all pushing an agenda (it is just as painful to be wrong as a bear as it is as a bull, so there are lots of vested interests)

    Accordingly I always like to look at hard independant data.

    Below is an excellent link provided by the department of human services and housing (NSW). The data is colledcted from rental bond deposits, so there is no room to fudge the stats.

    I encourage you to download the spreadsheets. You can look at any dwelling type in any location. In the very short run (1-2 years) the data is lumpy and volatile and often gets misquoted by bulls and bears to prosecute their agenda. I prefer to look at 5 year averages to get the best guide.



  6. bb says:


    “So have we used this capital productively? Well a large proportion has gone into residential housing, but not into creating many new houses (a productive investment) but mainly into bidding up the prices of existing houses.”

    I have to disagree with you on this statement. The real risk is Over-investment in Industry (say housing) creating NEW and UNNEEDED stock…as the USA discovered in 2008. They also discovered it in 2001 due to over investment in technology.

    Buying and selling in a closed system (ie: a housing market with no new supply) does not consitute any NET investment at all.

    Or to put it another way, for every buyer there is a seller…where is the capital from the sale going?

    Or am i missing somwthing?

  7. justme says:

    I could really do with a summary at this point….
    I have been reading here for two years – I have done as much homework as my abilities can take in- I have followed the “logic” and varying analyses but I find myself increasingly lost as to “what’s next”? or maybe that is the point….despite these intelligent toussels perhaps no one has a real grasp on what’s next? if you do, I’d love a summary for the situation in australia re:
    house prices,
    and interest rates,

    I know that no one has a crystal ball but assuming the information presented on private debt, soverign debt crises (internationally), bailouts, aging boomers, and the winding up of stimulus packages is all correct – then where are we headed here in Australia?
    Any takers?

  8. Pingback: Tulip Single Late Picture

  9. ordinary_guy says:

    bb @ 104

    Look, I have to commend you on your optimism, but simple fact is you are looking through rose tinted glasses.

    So, to continue our discussion (if you are still reading this forum section).

    ‘In terms of debt distribution, you will see by the link below it has ensured we have not got a sub-prime situation in Australia. Please see linl below chat 10.11. No chnange in mortage costs for 15 years. It is impossible to conclude the housing cycle is purely credit driven.’

    No change in mortgage costs you say. So, by the RBA’s own statistics, our debt levels have risen exponentially, but our mortgage costs haven’t. Now, please tell me how this can occur in unison? Is it because we have negative interest rates? Is it because wages have kept pace with nominal debt levels? You also completely and obviously missed my comment’s point. You are taking averages to assume the entire population, which means you have learned nothing from the US experience in subprime. To say subprime, which is a reflection of debt servicability by a certain section of society has not changed by implying a statistic about the average is ridiculous. As I have pointed out, ‘subprime’ in the US included those on average incomes, without poor credit histories, but borrowed at high LVR’s. Are they classified as subprime in Australia? No. Non-conforming loans simply look at past credit history. New borrowers, without credit history (our typical FHO) is prime. Did you see what happened to non-conforming and even conforming RMBS pre-GFC? Take a look – the S&P data is available. Delinquencies started to rise at an increasing rate compared to interest rate rises. Non conforming deliqencies were at 17% pre the life saving rate cuts by the RBA. What have we done since – cut debt? No – we have loaded up on more debt. You can delude yourself with basic statistics from the ABS (which are based upon a flawed and far too narrow a sample set) and look at how the real world behaves.

    ‘No – I never said that. There are lags between costs and when they can be passed on by a business. The increase in price re-instated developer margins to a nomal level (a point you agree with by saying Stockalnd lost money on their land bank).’

    Sorry, what are you talking about? Does everyone buy land from a developer? So if I buy an inner city parcel of land in Melbourne, which has quadrupled in price over the past 10 years, and don’t buy it from a developer, what then? I simply cannot believe you can say that the price of land is too low, when people are knocking down perfectly good houses in inner city suburbs to build McMansions at a quarter of the land cost. Why? Because the bricks and mortar on the land are near worthless to the price of the land.

    “You are saying that land prices have risen SOLELY because of taxes and costs. I don’t really know where to start with that”

    No need to be narky chap. You were asserting that the raw price of land has not risen, and that the price of land has risen solely because of the cost of infrastructure and development to turn it into habitable land. No matter how you spin it, or be derogatory, its still ridiculous. Yes, we are now paying 1000% more to attach water to a property. Oh wait, what about those parcels of land that already have all facilities connected, that developers buy and build townhouses on. No, surely, the price of land has fallen right?

    ‘You may be surprise I talk to them almost every day. They tend to be impatient because
    – Opportunity cost of funds
    – Costs of borrow
    – Client demand
    – Fee struture of 2 plus 20 over 0 in some cases’

    You talk to them everyday really? You are either a large US pension fund (I doubt), a large US or international banker (maybe, probably not) or extremely wealthy in your own right.

    I would love to know which you speak to ‘every day’ considering there are only a handful of ‘institutional’ size HF’s operating in Australia. Maybe you have good frequent flyer miles.

    But by your other responses, I guess this is just a massive ruse. Lets go through your points:

    – opportunity cost of funds: so now you are telling me HF’s have a beta target and must beat cash? Sorry, score none for that one.
    – cost of borrow: tell me, how much do hedge funds actually ‘borrow’, in terms of gaining pure leverage via debt. If you say ‘lots’ then you out yourself again. In all the managers I have spoken to, none have ever cited ‘cost of funds’ or ‘cost of borrow’ to be one of their concerns. Maybe we are talking to different funds (yours sound more like IRR targetted P/E funds, but lets not split hairs).
    – client demand: what? So, as I pointed out, most funds have an initial 12 month lock and at least a 3 month notice period followed by probably another 1-2month funds withdraw period, pending ‘normal market conditions’ clauses. So, you are then saying if a HF doesn’t make its benchmark (which it doesn’t have) in a period, investors will simply redeem?
    – fee structure: well you got that one right. But then again you forget about high watermarks and the very poor previous years. You also base this all on the ridiculous assumption that Grantham, with billions under management, is sweating on his short positions on Aussie banks and worrying how it affects his overall performance, like his gone huge conviction short Aussie banks and it will impact overall alpha if he calls it wrong, and he will be in a mad rush to cover. Again, ridiculous.

    ‘Now I’m convinced you do not know what you are talking about. Do you know the difference between a naked and covered short. Please look it up.’

    How about you look up whether naked shorting is permitted on financial stocks in Australia. Hint : look at the ASIC website. Also another hint : covered shorts must be reported by the pb/custo to ASIC. So, again, in fine print, if Grantham is shorting Aussie banks, please explain how he is doing it? Why is it not showing up in the ASX’s records? Please don’t try and fob me off with another glib comment when I provie you with data to prove your error.

    ‘Pease tell me where I made such an assetion. If not, please retract.’

    You whole, entire basis for why Australian house prices are where they are is because there is a shortage between demand and supply. So, I ask you, in the most basic premise, if 450,000 people can’t find somewhere to live, then where can they?

    Its often the obvious questions that make such statements look ridiculous in the light of day.

    ‘Check out the rent data from goverment sources. NSW rents up +45% in five years.’

    I look forward to seeing your data. Please also post some about Melbourne, and post some of how the gross yield on property, still below 5%, means there is a housing shortage.

  10. bb says:


    No change in mortgage costs over 15 years as % gross income (please read the chart). This is possible if the increase in debt is in the hands of people with higher income (which the RBA has stated time and time again). If you do not beleive in the chart or data I suggest you talk to the ABS. I would love to hear their response.

    You has painted me to beleive that a one year movement in house prices (in Melb) is soley based on costs. I never said that. But today, no developer is making money developing…so price = cost.

    I have no intention of telling you where I work. But I have spent much of my career offering advice to these instos. Based on their current behaviour, they need it again.

    I am aware naked shorts are illegal. But if you can cover them within T+3 (ie: deliver the stock), they can be executed. This is why your table showed very small short positions.

    I never said there are 450,000 living on the street. You clearly can not find this comment, so I expect an apology.

    Rent data..knock yourself out.


  11. gerryt says:

    Hi Steve,

    This brings to mind the key question or the elephant in the room – Why are Aussie house prices still up there ??

    Why have we not followed the USA or Europe on real estate prices? Our markets and banking systems are similar. I don’t believe the line that the mining industry is propping up the whole economy. The Aussie banks are currently sitting on BBBbillions of commercial property mortgages that are below valuation. And similarly for some residential mortgages.

    What is holding this all up there???


  12. Steve Keen says:

    Hi Gerryt,

    The First Home Vendors Boost held them up–or rather reversed the fall that was taking place back in 2008 by encouraging Australians to take on about $100 billion more in mortgage debt than they were on trend to take on from mid-2008. I’ll put together a post on this after the next set of ABS house price figures come out, but I’ve done quite a bit of research on this topic for a brokerage research firm recently.

    In my conclusion to that document, the one thing that I didn’t consider that could cause the bubble to continue was banks reversing their recent trend to reducing their LVRs–which they then subsequently did. Westpac went back to 92% maximum LVRs, having reduced from 92% to 87% earlier in the year; the C/W is apparently at 97%, up from 92%.

    This increases gearing and hence the amount of money that bidders can bring to an auction, but it’s also a sign that they simply couldn’t do enough business at the lower LVRs. It was described as “an act of desperation” by a contact in the banking sector whom you might otherwise have expected to be gung-ho about property prices.

  13. Jack Spax says:

    “D’oh” – looks like they didn’t believe our presentation -Ralph Norris.

    “Damn, and its our turn to lift rates above the RBA”

    Interesting blog from Tasmania


Leave a Reply