In The Australian Financial Review I examine why the major banks and AMP have unilaterally lifted interest rates on investment loans 0.27 to 0.47 percentage points — so much for "low rates for long" (click twice on that link to read the full column or AFR subscribers can access the direct link here). I conclude the banks are engaging in rationale margin expansion that will benefit all security holders to mitigate much higher equity capital buffers while also addressing (belated) regulatory concerns about unsustainable credit growth for speculative investment loans. In doing so, the majors have demonstrated their tremendous market pricing power, which fully befits four of the world’s largest banking oligarchs. I also revisit current housing dynamics and find that Aussie house price growth has re-accelerated at a staggering rate in 2015 contrary to many claims it was slowing. Specifically, national home values have jumped 8 per cent in the first seven months of 2015, which represents a 14 per cent annualised pace, Sydney and Melbourne home values have been appreciating at a stunning 23 per cent and 19 per cent annualised rate this year. And some editorial spruikers say this is nothing to lose sleep over! I conclude by reviewing impressive new housing valuation analysis produced by Dr Craig Shepherd, an economist with the $10 billion fund manager, JCP. Consistent with my own views, he finds housing valuations are enormously sensitive to the RBA’s cash rate. If we irresponsibly assume the cash rate never rises and remains at its current all-time low of 2%, national prices are indeed "fairly valued". But even given this crazy scenario the Sydney and Melbourne markets are still over-priced by 23 per cent and 24 per cent, respectively. If much more realistically the RBA’s cash rate normalises back to a still modest 3.5%,  Dr Shepherd’s research suggests Australian dwellings are currently 31% overvalued with Sydney and Melbourne home values 47 per cent above fair value. "By any historic measure that would certainly be considered an asset price bubble,” he says, In the context, I would encourage you to reflect on Dornbusch’s Law, which advises that “crises take much longer time to come than you think, and then happen much faster than you thought”. Click here twice to read the full column or AFR subscribers can access the direct link here. Chart below.

© Christopher Joye. 
|  Email : christopher.joye@smitrust.com.au  |

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