90 seconds at 9 am: Aussie clampdown

Stocks and bond yields fall on rising risks in Europe and China; US data positive; Australia clamps down in housing 'investors'; NZ$1 = 77.1 USc, TWI = 77.6

10th Dec 14, 7:32am by David Chaston

Here's my summary of the key issues that affect New Zealand overnight with news of a clampdown on mortgage lending to residential property investors in Australia.

But first, stocks fell around the world, while haven assets from Treasuries to the yen (and curiously the NZ dollar) advanced amid concern that tighter lending rules in China will slow growth and early elections in Greece will trigger political turmoil.

In the US however, the number of job openings rose to a near 13 year high in October, wholesale trade grew more than expected in October, and a couple of December confidence measures were also up more than expected, all painting a positive economic picture.

But back across the Atlantic, its deja vu. There is a new Greek political crisis (new elections have been called after fury they balanced their budget), the Russians are selling assets to prop up its sinking currency, and the market expects the next ECB bond sale to be a fizzer.

And things are less than positive in China too after their government took some necessary action. They are working to reduce the growth of opaque local-government debt, but these actions caused a tumble in riskier bond prices and fuelled their stock market’s biggest fall in five years.

Reinforcing the risks, S&P warned late yesterday that the credit cycle may be turning in the Asia-Pacific region amid soft economic prospects, weak credit conditions, and a build-up of debt in the region. Lower growth prospects in China are at the heart of this re-evaluation.

In Australia, the Australian Prudential Regulation Authority (APRA) has told banks to rein in excessive lending to housing investors/speculators, especially in Sydney and Melbourne. It says more than 10% of lending to this sector is too risky, and it will step up oversight of the mortgage market.

At the same time the Australian Securities and Investments Commission (ASIC) has launched an investigation into interest only loans. ASIC's probe will look at the conduct of banks and non-bank lenders, and how they are complying with important consumer protection laws, including their responsible lending obligations. Interest only loans as a percentage of Australian banks' new housing loan approvals reached a new high of 42.5% in the September 2014 quarter.

This clampdown will likely give the Reserve Bank of Australia more room to cut their benchmark policy rates sooner.

The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne.

In New York, UST 10yr bond yields fell sharply on all this re-emerging risk and are now at 2.20%.

The oil price has stabilised overnight at US$63/barrel and the Brent price is at US$66/barrel.

The gold price however has jumped significantly and is at US$1,230/oz level.

Meanwhile our currency has regained yesterday's fall. We seem to be a beneficiary of risk-off setting by investors these days, a complete turnaround from a year ago. But lets wait to see how markets react to this morning's Fonterra payout announcement. We start today at 77.1 USc, 92.7 AUc, and the TWI is at 77.6.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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9 Comments

by Simon | 10th Dec 14, 9:39am 1418157560

Just came across this article that hints that AU will be scraping neg gearing of investment property as it causes a 'systemic risk' and 'encourages speculation'.

http://m.afr.com/p/business/financi...m_inquiry_david_murray_5dHl40DhOh6TgI63mtl3IO

Maybe this is why the auck investors are still trying to talk up the market, time to off load some of their biggest cash flow neg properties to unsuspecting FHB's before NZ follow suit.

by cowboy | 10th Dec 14, 1:19pm 1418170787

it doesn't do any of that but what it does do, is allow normal people to enter into the property market, because the investment risk can be offset against their wage revenue.

This increases the number of small holders looking at personal support and finance, and no just being sheep regularly fleeced for their government.

by Boatman | 10th Dec 14, 11:19am 1418163570

Good on the Aussies , at least they have the political will to stop self destructive activity .

I have been saying for years that losses on investment property should be Ringfenced , and not be offset against other income .

ITS EVEN WORSE IN NZ where we have Working for Families , and people were manipulating their income lower and getting WFF through offsets on investment properties losses .

This type of rort was a disgrace ( although I gather it has been stopped now )

by Spinach | 10th Dec 14, 12:01pm 1418166119

So the big sell in negative gearing is that it reduces your tax payment and this offsets the loss which you accept until you redeem the property for a gain and keep the difference.

What is not very well explained in this is that largely all that you have achieved in doing this is to reduce the tax take to the government in favour of handing it in interest payments to, most likely, an offshore corporation who hand out impressive salaries before they contribute to anything else.

Can anyone explain how this is preferable to paying tax on income generated, allowing provision of services directly to the benefit of those around you?

by cowboy | 10th Dec 14, 1:17pm 1418170657

negative gearing is available in all investments and businesses

by Spinach | 10th Dec 14, 2:20pm 1418174401

True dat, just asking how it is considered that handing bucks to the bankers is preferable to it landing in the tax tin, if only that there is a lower dollar value involved. For example, could it not be engineered that the two amounts were so similar as to render negative gearing a null pursuit and enjoy the benefit of the funds for public use rather than corporate export?

by Simon | 10th Dec 14, 2:32pm 1418175148

If you neg gear you are inferring that the business intention is to make money through capital gains.

IRD should fire a shot across the bow and tax someone who has a) bought a property that has only even returned a cash flow loss (often set on an interest only loan so losses are maximised and maintained during the ownership of the property), and b) sold (or otherwise realised a gain through using as security) that property for a capital gain, even if many years later.

People try to justify it by saying that it will eventually produce a profit (as principle is paid down), but this is not true once the opportunity cost of tying up your money paying down the pinciple is taken into account (i.e you'd get more cash flow from a bank deposit, hence it's illogical business to buy a property yielding net 4% or less, unless the intention is for capital gains).

by Andrewj | 10th Dec 14, 12:58pm 1418169523

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

http://www.telegraph.co.uk/finance/oilprices/11283875/Bank-of-America-s…

by Boatman | 10th Dec 14, 2:00pm 1418173255

Here's a story to watch unflod about CONTAGION RISK a-la 1987 ?

Lets hope not .

The Greek Stock Market all but collpased this morning , its biggest fall since the Banking crash of 1987 !

Some Greek Banks lost 28% of their value in a few minutes , which could see their collapse .

So we could ignore this and say the Athens market is small in the Euro context , but the Thai stock market was the smallest in Asia in 1987 .