In the past few years, a significant amount of economists and practitioners have warned of a potential hard landing in the Australian housing market, as property prices have been growing at unsustainable rates with first-home buyers having difficulties saving a significant deposit to get a foothold in the market. According to the Australian Bureau of Statistics, the total value of residential property in Australia is now exceeding 7 trillion USD, by far the economy’s largest asset. As there are no ‘vehicles’ to short the Australian housing market as during the US subprime crisis, two alternative ways to short the property market was through either going short the Australian Dollar or short the banks. Prior the Covid19 crisis, banks’ mortgages were equivalent to approximately 80% of the country’ GDP, with most of them piled into the top 4 banks (Commonwealth, WestPac, ANZ and NAB).
Even though house prices were starting to decline significantly in 2018 and the beginning of 2019, with investors speculating that it was the start of the ‘hard landing’, the reversal in the global stance of monetary policy (from quantitative tightening to quantitative easing) combined with the surge in Chinese liquidity have generated strong support for the Australian property market in the past year. This chart shows an interesting co-movement between China excess liquidity (6M lead), which we compute as the difference between real M1 money growth and industrial production, and the Australian housing market. It seems that the downside risk in the Aussie property market should remain limited as money growth keeps accelerating in China.
The table below shows that the cost of an average house in the UK (and its regions) is ten times bigger than the average Salary based on ONS House price index. London comes first of the league with a House-price-to-salary ratio of 14.18, which is not surprising after ONS showed earlier this year that London property market is 25% above the 2007-2008 peak.
This morning, Bank of England Governor Mark Carney announced new measures on mortgages in order to ‘control’ the potential bubble in the housing market that UK is experiencing at the moment. Even if he mentioned that the threat ‘is not imminent’, the BoE is still concerned about the level of debt of UK households. Therefore, he came up with a couple of measures:
1. The BoE introduced a cap on mortgages: banks cannot hold more than 15% [in their portfolios] of the number of new residential mortgages that equal or exceed 4.5 times the borrower’s annual income. The Treasury will ban all applicants that are asking for a loan superior to 4.5 times their annual income through the Help to Buy Scheme.
2. The committee also suggested that lenders should stress test if borrowers can cope with a three percentage point rise in interest rates within the first five years of the loan.
Cable rose significantly after the announcement and reached a high of 1.7039 during London trading session. It was quite a surprise as the market was expecting the British pound to ease against the US Dollar (and the Euro) after Carney’s (kinda) dovish tone before the Treasury Select Committee a couple of days ago. The 2-year UK yield is down 10 bps to 0.837% (compare to 10 days ago), and the implied rate on the short-Sterling March 15 contracts eased 3-4 bps.
EURGBP is trading back below its 0.8000 level as EURUSD keeps fluctuating between 1.3600 and 1.3650. The next support on EURGBP stands at 0.7980, followed by 0.7960.