Mortgage Markets – Uncertain Times

The US sub-prime led credit crunch has turned out to be much more insidious than the market first judged, or at least wanted to believe.

Global financial heavyweights such as Citibank, Merrill Lynch and UBS et al were all surprisingly left holding the proverbial parcel when the music stopped.

All suffered large losses and one group in particular, Bear Stearns, which was first to ring alarm bells more than six months ago back in August, had a fire sale of bonds to offset its losses.

Citibank followed suit and took a market hammering after revealing an AU$11.2 billion loss earlier this month due to its sub-prime related exposures.

A number of these groups have since turned to the increasingly influential and powerful global sovereign funds to source capital.

The majority of industry commentators predicted early on that the pain would be drawn out as the complex nature of how some of the related securitised assets were packaged-up and sold made it difficult to gauge the exact damage to be wreaked.

The consensus however was that problems would continue to surface as a result of the US sub-prime collapse and the market’s recalibration of risk.

However the market needed hard evidence and was reluctant to believe the unprecedented cheap debt and China/India fuelled global growth of the past several years was at risk of ending.

Reality is often a bitter pill to swallow and this is evidenced in the slow but sure retreat of the local equity bourse over the past month.

The market set a new record of consecutive daily falls in January as global jitters abounded over whether or not the US economy was hovering on the brink of a deep and dark abyss.

Meanwhile after almost 30 years of single digit and mostly benign levels of inflation in many OECD countries, the nightmare of many an economist and cash bearing citizen could be returning.

Under the stewardship of the new breed of global financial Tsars, which began under the deity-like tutelage of Alan Greenspan, inflation had been kept under raps.

However as major economies, such as the US look to stave off recession, they run the risk of over stimulating the economy.

What does this mean for the mortgage market?

Consumers are being forced to come to grips with a new reality of higher interest rates.

Will this hinder the housing market in Australia?

Perhaps in pockets, but the high demand that is still being seen in many capital cities and the relative scarcity of new dwellings in some areas has seen home buyers continue to pay high prices to secure their desired residences.

Outlook

The market is likely to require a few more rounds of interest rate rises before any real damage is done, despite the obvious housing affordability issues in the market.

Meanwhile, newly appointed Treasurer Wayne Swan was criticised by the Federal-Opposition for ‘allowing’ the major banks to increase their residential lending rates outside of any action by the reserve bank.

The banks argued the recalibration of the market meant they had to pass on these costs.

Despite these increased costs, the evidence suggests that banks will dominate new business in the home lending market.

The abundant market uncertainly will continue to create an environment favouring banks in the eyes of consumers at the expense of their non-banking counterparts.