COMMONWEALTH Bank’s global mission to reassure investors about the health of the Australian property market continues to attract attention, with fresh claims the bank had been selectively quoting data.

Online investment forums and housing blogs were alive with talk yesterday that an 18-page presentation used by the bank had replaced unfavourable housing affordability figures for Australia’s capitals with ones showing housing costs were not out of step globally.

One slide compared Australian housing affordability with several international cities, citing figures from US-based urban planning research house Demographia and investment bank UBS. It showed housing in Sydney and Melbourne was more affordable than in cities such as San Francisco, New York and Vancouver. But the slide used UBS data exclusively for the Australian cities, and Demographia data exclusively for the others.

A spokesman for CBA yesterday dismissed the claims, saying the information contained in the specific slide was prepared by UBS and the bank had no input into the numbers. A UBS spokesman said the investment bank 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 relied on Australian Bureau of Statistics numbers.

The CBA presentation is aimed at heading off mounting global concerns that the Australian property market is behaving like a bubble. Hedge funds have been circling local bank stocks betting the property market is overvalued and a collapse in prices will cause steep lending losses for banks.

US investment guru Jeremy Grantham recently said Australia had an ”unmistakable housing bubble” and prices would need to pull back sharply to return to trends. CBA said such views were based on incomplete analysis. It also pointed out that population growth and excess demand had been a key driver of price appreciation – factors unlikely to reverse in the near term.

Source: Story by Eric Johnston -The Age Melbourne

Borrowers are unlikely to get any respite from lower borrowing costs for the forseeable future as the big banks continue to replace tens of billions of dollars of cheaper-priced debt at much higher rates.

That was underlined by ANZ yesterday when it disclosed that the new long-term debt it is taking on is costing 20 per cent more than the average price across its $90 billion portfolio of borrowings that extend to the 2014 financial year.

ANZ told investors in London that while funding costs had dropped since the peak of the global financial crisis, pricing remained high and would continue to rise as the bank looked to replace another quarter of its long-term loan book.

Like its big four counterparts, ANZ has been paying as much as one full percentage point more than such debt was costing in the economic boom years before late 2007.

At the height of the crisis and when the federal government’s AAA credit rating was required to guarantee new bank lending, the industry was paying as much as double that to keep wholesale financing sources open.

That situation has eased and the big banks have been able to cut their reliance on government-guaranteed debt – and the price they pay to use it – by using their own AA credit ratings to obtain replacement funding as their borrowings have matured.

Banks have typically borrowed from domestic and overseas investors for two to three years but have been extending these times to about five years to lock in secured funding at fixed rates.

ANZ said yesterday that five years was now the average compared with 3.9 years in 2009, though this would come at a higher cost. At the same time, it had raised 70 per cent of its target of $25 billion for the 2010 financial year, which it estimates it will need to meet customers’ loan requirements in the next year or so.

But the high price of the debt will continue to feed through to interest rates on individual loans such as mortgages, personal loans and business credit, market watchers say.

According to figures compiled by BusinessDay, between now and September next year the banks need to replace long-term funding of the equivalent of $125 billion in pre-financial crisis terms.

Such an amount leaves little scope for loan rates to be eased with the banks looking at any opportunity to pass on higher funding costs to customers.

But after some banks’ controversial decisions of the past two years to increase the price of standard variable mortgages above the cash rate, the big four have kept their increases in line with the rises in official interest rates.

Story by Danny John – domain.com.au

The Reserve Bank of Australia (RBA) has warned lenders and borrowers to be prudent while giving an assurance that Australia does not have a speculative housing bubble on its hands.

Fears of a property bubble emerged after the Australian Bureau of Statistics house price index rose 20 per cent in the year to March.

But RBA head of financial stability Luci Ellis said in a speech that Australian house prices have recovered their small decline from 2008 to post increases of between about 12 to 15 per cent over the past year in capital cities, depending on the measure.

Ms Ellis said recent data suggested Australia does "not have a credit-fuelled speculative boom on our hands".

"It would not be desirable for the current situation to turn into one," she said in a speech.

"It will therefore be important for lenders to remain prudent in their standards.

"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."

She told a residential property conference housing prices have been under upward pressure in Australia, with most short-term drivers coming from the demand side following the increased first home-buyers grant, low interest rates and lower than expected unemployment.

"The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices," she said.

"Some of that pick-up in construction does seem to be happening."

She said the supply of housing was always going to be quite "sluggish".

"But whatever the causes, the ability to add to supply is falling short of this higher rate of population growth, despite some pick-up recently," she said.

"Naturally that is putting upward pressure on housing prices."

Ms Ellis said it would be "desirable" for the supply of new dwellings to become more flexible than it had been to date because extra people need somewhere to live, and both house prices and rents could rise.

The more that housing prices rise, the more some people might feel they must stretch their finances to buy a home, she said.

Another concern was that if too much of the response to faster population growth comes as faster growth in housing prices, this could be "built into people’s expectations".

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment, or worse," she said.

She also said fewer households had bought their homes without debt.

Across the mortgage market, lending standards were now a little tighter than they were a few years ago and the fraction of low documentation loans was now lower than it was two years ago for both owner occupiers and investors, she said.

As well, only a minority of recent home loan borrowers started with a loan to value ratio above 90 per cent, she said.

Ms Ellis also revealed the RBA has been carefully watching lending standards in the important first-home buyer market segment.

"First-home buyers have long faced greater risk than more established home owners who have more equity in their home," she said.

"But as far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."

AAP

The string of interest rate rises since October is not deterring borrowers from taking out variable rate housing loans, leaving mortgage holders potentially more exposed to higher repayment costs.

The Reserve Bank, in its quarterly Statement of Monetary Policy released today, said fixed-rate housing loans now account for only about 2 per cent of total – the lowest ratio in a decade.

”This share has been well below its decade average of 11 per cent for almost two years, with the result that the share of outstanding loans at fixed rates has declined substantially,” the RBA said.

Fixed loans mortgage borrowers in the market fell to 4.8 per cent of the total in 2009 from as high as 19.4 per cent in 2007, separate data from the Australian Bureaus of Statistics data and RateCity research show.

Fixed-rate loans, which currently charge an interest rate about 1.5 percentage points higher than standard variable rate loans, demand larger fees for providing borrowers with certainty about monthly costs.

Variable rate mortgages, while offering more repayment flexibility, expose borrowers more directly to Reserve Bank interest rate changes. The RBA has lifted rates six times out of its past seven monthly board meetings – including earlier this week – adding about $300 per month to total repayments for those borrowers holding a typical $300,000, 25-year variable rate mortgage.

Borrowers flocked to the certainty of fixed-interest mortgages during the last cycle of rising interest rates, with the ratio rising to 22 per cent a month over the six months to March 2008.

The average three-year fixed rate mortgage rate was 9.42 per cent in August 2008, according to RateCity. That compares with 7.38 per cent for a standard variable rate today.

”There are still a lot of people out there, still paying these high interests rate for fixed loans,” said RateCity consumer advocate and spokeswoman Michelle Hutchison.

Being locked in also meant those borrowers missed out on tumbling rates over the past two years when the RBA drove its key cash rate to 50-year lows in a bid to avert a sharp economic slowdown.

Outlook changes
Interest rate futures pointed to a rate cut this morning for the first time since August of 2009 as fears unleashed by the sovereign debt crisis in Europe forced central banks reconsider the case for a global slowdown.

As of Friday afternoon, the market was rating the possibility of a rate cut in June by the central bank at a 6 per cent chance – a reversal of previous months when the outlook has been consistently pointed to the prospect of rates to rise in coming months.

The turmoil in financial markets – including steep plunges on Wall Street overnight – has also trimmed the prospect of further rate rises in coming months.

Credit markets are pricing in a cash rate for the RBA of 5 per cent within a year from a current 4.5 per cent.

czappone@fairfax.com.au