Over­seas Investors & the Com­mon­wealth Bank

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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.
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  • Gam­ma_home


    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?

  • speckie

    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.” 


  • speckie

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


  • speckie

    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.


  • bb

    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.



  • bb


    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?

  • justme

    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?

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  • ordi­nary_guy

    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.

  • bb


    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.


  • ger­ryt

    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???


  • 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.

  • Jack Spax

    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


  • Pacific Link Col­lege

    Thank you for this kind of post…i always look for­ward to read more like this. really help­ful.
    Mort­gages Bro­ker in Orange NSW Aus­tralia