What Bank CEOs Are Saying About the Housing Downturn

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Learn more at the Hartford.com/riskmitigation. The housing downturn is starting to bite, and Australia's biggest banks are feeling it. Australia's tumbling property market is set to fall even further with the nations big for banks warning while home values will recover next year. It won't be enough to make up for this year's losses. Of course, housing has softened, has prices peaked in March this year. Applications actually peaked last year. Welcome to the Bloomberg Australia podcast. I'm Chris Burke. This week we're looking at the worst thing outlook for the housing market, and what the bosses of our biggest banks are saying about it this owning season. I'm joined by Sydney-based finance editor Adam Hague to unpack what we learned about where house prices could be heading, how long the downturn might last, and what it all means for the bank's bottom lines. Adam, welcome back to the podcast. Thanks very much. It's great to be back. Adam, we normally refer to house prices as the great Australian barbecue stopper. I don't know about Sydney, but here in Melbourne, we're still some way off from lighting up the barbie. That hasn't stopped everyone from talking relentlessly about house prices, just in glumia tones than usual. Can you set the scene for us? What's happening in the housing market? Well, I totally agree with you. It's really on the front of everyone's lips. I mean, I was just out on Saturday night and there was fair amount of conversation about the softening in the market. I think really what this comes down to is a few things. We've already seen prices come down quite a bit. That's obviously clear. We're seeing a softening in auction clearance rates. There is quite a lot going on in the softening of the market. There's a few reasons why that's happening. I think it's important to look at those, but really you got things happening at the same time. The first of those is that interest rates have gone up. Three rises by the RBA early this year. That's set the scene for higher borrowing costs for a lot of people. Then you've had the tax changes that were announced in the May budget that have softened the appetite from property investors quite significantly. Then you have just that overall feeling of, well, if this is going to get a little bit worse, do I really need to sell my house? Why don't I wait and just leave it for a few months and see. Those three things coming together and this confluence of negative activity really, which is combining to make it a pretty poor outlook for the housing market. We've been writing about these things for some time, but last week it started to feel a bit more real. We heard from our biggest banks, CBA, WestPek and ANZ, and then just on Monday, we heard from National Australia Bank, what did we learn from the big four about where the housing market might be going? The mood sounded pretty downbeat. It was and clearly what they're seeing is a drop in mortgage applications and that's to the order of 10, 12, 15% down in that period from kind of the middle of May to now. All of the banks are saying, well, listen, we've already seen this decrease in activity of people wanting to apply for a mortgage at our banks, and they're also saying, on the one hand, there is Matt common, the CEO of CBA who's saying, hang on a second, like some of this is stabilizing here. Yes, we've seen a softening of activity here, but don't get too carried away. He's maybe putting a slightly brighter tone on things. Then some of the other leaders maybe making it slightly more of a negative forecast forward about what might happen from here, but this does come at a pretty tricky time for the economy, and as house prices slow and less mortgages get applied for, of course, it's bad for the banks in terms of their profitability. It does curb a big component of how banks make their money, and so you have to kind of see that in the one side of slowing credit demand is a tricky thing for banks to navigate. But meantime, these banks are still doing pretty well. They're still spitting out some pretty good profit numbers for the period that we've just been hearing about. Yeah, you're right. Common was painting. We're trying to paint a fairly more optimistic picture, I guess, than some. I mean, he made the point on his earnings call that national dwelling prices have fallen by approximately 2.8% since their March peak, but they've increased nearly 70% in the past seven years. So I guess that context is pretty important. But you know, you're right. This is stuff that affects their bottom line. On Friday, we also got some pretty nasty official lending data for property investors from our friends at the Australian Bureau of Statistics. Take us through what those numbers showed. Yeah, they showed more of this same picture, really. So new loans to home investors down more than 10% in the June quarter. And even more exaggerated those in New South Wales, which of course, where Sydney is, new loans there for home investors down more than 14% on the quarter. So clearly, there are pockets where this is more pronounced and some of the big markets are really feeling the downturn. But I think back to your point about the context of just how much house prices have gone up, which common was quite willing to articulate, he doesn't make a point. You have to understand where prices have come from. And we've had such a great boom for such a long time in the Australian housing market. So some softening off a peak is not necessarily something to get, you know, really worried about. The question from here is the extent to which prices continue to decline. And of course, you know, there are a few different views on that, but it's not necessarily the case that prices will continue declining at the rate that they have done over the last few months. I guess for investors, the question is how much will this affect the banks? We know CBA is the market leader in mortgages followed by WestPek. Does that necessarily make them the most vulnerable to our housing downturn or other other lenders that might be taking greater risks? Well, you are right. CBA has about 24-25% of the entire mortgage market of the country. So clearly, you know, any move either way for the housing market is going to have a big impact on its book. But to the extent that they are the biggest, they can, you know, weather the storm a little bit better. I think you've got a lot of dynamics going on. If you look at A and Z bank, for example, you know, they've been trying to kind of come back up after a few years out in the relative wilderness to try and claw back a bit of that market share. And of course, it's a tricky time to be doing that, especially at a time when Macquarie have been very aggressive in gaining market share. They've come from a very low base up to, you know, around 7% of total market share recently. So there are a lot of competitive dynamics still going on between these four or five big, big banks in the market. And I think the expectations are that those competitive dynamics will only get stronger and fierce are over the next kind of six months or so. Because if we're in a protractive period of a downturn with prices, it does put pressure on margins. And therefore, banks have to be quite deliberate about what they're going to do. Are they going to offer some, you know, some bonuses to get people in? in and try and go after a bit more on the volume side, or are they gonna compete a bit tighter on prices? So certainly a very competitive market and that looks set to continue. - Indeed, and just looking at the investor angle again, how is this all playing out in the bank's share prices? - Yeah, I think we've seen it, Chris, haven't we really since the budget in the middle of May when you saw a really quick rapid response to the share prices and some of these bank stocks came off? You saw a little bit of a rebound then, but last week was a pretty poor week. We'd had a good few weeks of a run up in bank stock prices and then last week we did see quite a meaningful pullback given all this commentary that was coming out about the angst in the market. So I think that's a reflection of some of these stocks having done pretty well, but you've also got this situation in the Australian stock market where it's a relatively defensive market, so in other parts of the world, we've had a lot of jitters around the artificial intelligence trade and a lot of investors have been a little bit worried about that, so Australia is a market that tends to benefit when that happens and people had been buying bank stocks kind of as a defensive play there in their global portfolios. So yes, we've had a bit of a pullback in some of these bank shares, but given they're coming off some highs, some of them. We might be having a break, but the news never switches off. That's why with IG trading, you can trade around the world, around the clock, including weekends. Switch to the multi-award winning platform that continues to be Australia's number one for FX and CFD's 17 years and counting. Visit IG.com to switch in minutes to IG trading. 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What is there making soon when it comes to the housing market? - Yeah, I think they're quite aligned, Chris. And the RBA really is saying that, listen, there are three reasons for what's happening here. It's to do with rate rises. It's also a reaction to the rapid growth that we've seen in previous years that we've talked about with houses. But also those tax breaks for investors that are being wound back in this budget proposal. All those three things are kind of combining to soften the housing market. And in a sense, this is monetary policy tightening that's working as they intend it to. So they're trying to bring down aggregate demand in the economy. And of course, this is what they're trying to do by raising interest rates. The question here is, is how the RBA plays it in terms of the upside risks to inflation because they clearly see and Kent, Chris Kent was very clear on this in his comments that it's very much to the upside to quote him in terms of the risk to inflation. So how much further house price softening and house activity softening can are they willing to tolerate before it starts to become a concern for them. At the moment, this is what they expected to see. And it seems to be going in line with how they're forecasting. - Yeah, it was also interesting, a comment again last week. He kind of almost sought to take the temperature down a bit regarding our obsession with house prices. He warned that he pretty much warned that long-term improvements in our living standards depend much less on house price gains and our existing wealth than on lifting productivity and investment. So what are analysts saying? How bad can things get for the bank's mortgage lending businesses? Is this likely to be a temporary problem for them or do you think we're looking at something more sustained? - I mean, there's no shortage Chris out there of forecasts for house price declines from here to go a further five plus percent down over the next six to 12 months. So clearly expectations for prices to continue to decline are there. I think really for bank stock investors and for people who own these banks in their superannuation portfolios or looking at these banks, they still offer pretty good value and they're still playing fairly strong dividends in this market. So there's a lot of appeal still for these bank stocks. And I think the analyst community and some in the analyst community are a little bit more bearish on some of these banks, but the overall tone from investors, they're still willing to pick up as we get pullbacks in these bank stocks, they're willing to pick these back up at slightly cheaper valuations. Because no one's painting a picture of an economy that's in any way collapsing. It's slowing in the way that we would expect after three interest rates from the RBA this year. It hasn't been pushed over the edge and it's not too gloomy a scenario. So I think in that situation, you know, some of these banks' stocks can still do relatively well. - If you found today's conversation insightful, be sure to follow the Bloomberg Australia podcast wherever you listen. And for more on Australia's finance sector, including the latest reporting from Adam Hague, head over to Bloomberg.com. This episode was recorded on the traditional lands of the wereundry people and radical peoples. It was produced by Paul Allen and edited by Ainsley Chandler. I'm Chris Burke and we'll see you next week. - Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person, how you need it. 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