Investors are a dirty word. In housing, that is. When is too much, too much? That’s the salient question about investment in property by investors (not owner-occupiers). It is an official “hot spot” worthy of great media attention as they warn of bubbles, with calls for possible regulatory action.

Macro-prudential controls were all the rage last year, but that was rejected by regulators who set a 10%-a-year growth limit for bank lending to investors. That is being exceeded by the banks, with the NAB ‘fessing up to a 12% growth rate in its first-quarter trading update last week. The CBA was silent in its reports to the ASX and the media and analysts yesterday, about how much lending to property investors grew in the six months to the end of December, but CEO Ian Narev said its investor lending rose 9.4% last year. But yesterday’s housing finance figures from the Bureau of Statistics triggered yet another bout of media bubbling on the issue.

There was a 2.7% rise in housing loans in December, after a fall of 0.4% in November. But lending to investors jumped 6% in December (to $12.6 billion), after the 1.9% drop in November. After you strip the re-financing of existing loans to owner-occupiers (taking advantage of falling market rates), lending to investors was $300 million more than lending to owner-occupiers ($12.6 billion versus $12.3 billion). Oops, cue more media bubbling. Lending to investors jumped almost 20% over 2014 — now that’s a boom, but only as boomy as 2011 — and I can’t remember the same fuss back then. Now what about that 10% limit from regulators? Well, APRA is checking all the banks right now, as it promised it would in its December statement. Here’s what it said:

“In the first quarter of 2015, APRA supervisors will be reviewing ADIs’ lending practices and, where an ADI is not maintaining a prudent approach, may institute further supervisory action. This could include increases in the level of capital that those individual ADIs are required to hold.”

Will the banks be punished? Will APRA bother to tell us? Will investor home lending start falling? — Glenn Dyer

We’re in the money. Fat profit, record profit, record dividend for the CBA: but, thankfully, owner-occupiers aren’t making it any easier for the bank and its competitors. According to analysts, in the six months to December, the CBA had to lend $40 billion in new home loans just to keep pace with customers repaying their home loans — which more than half of them at the CBA are doing at a rate faster than they have to pay. Banks hate it when customers repay their loans faster; means less interest income, and less profit. But don’t cry for the CBA (or the other banks). The minutiae in the bank’s half-year profit report reveals just how well it is run as a money-making machine — like its ATMs. The CBA’s net interest margin dipped 2 points to 2.12%, but in retail services, the profit heartland, the margin was 2.60% (in every $100 dollars) — up 3 points.

Banking is like retailing, but they have better margins than Woolies. The bank’s cost-to-income ratio fell to 42.2%, down 70 points. In retail services, the ratio fell 160 points to just 34.5%. The next time you hear a CBA boss moaning about costs, remember that. — Glenn Dyer

Now for the real profit. And looking at the CBA’s real profit (not the record $4.6 billion cash result in all the news stories), look at it this way. Total income for the six months was $11.727 billion (naturally a record), and the net profit before tax and impairment charges was $6.813 billion (another record), or 58% of total income, up from $6.397 billion in the six months to December 3013 (or 57.3%). In other words, that’s a gross profit of 58 cents in every dollar of income, against 57.3 cents previously. That’s the real measure of bank profits, along with another yardstick that has fallen into disuse these days among the media — the bank had a return of 1.1% on assets. One per cent is rarely achieved by many banks around the world in these days of low interest rates. It is the mark of a very well run, very, very profitable bank. The CBA has been doing it now for quite some time. Its return on equity was 18.4%. Seeing the official interest rate is 2.25%, and the 10-year bond yield is not much different to that, that return on equity figure tells us that the moaning and groaning from the CBA about the extra capital requirements of regulators, and the recommendations from the inquiry into the financial system, are all crocodile tears. Bankers wanking, really. This is a fat, rich bank that can easily find the extra capital in the next two years. — Glenn Dyer

Lower oil doesn’t mean higher growth. Take all forecasts with a grain of salt. For example, the International Energy Agency said this week oil prices would stumble along around current levels for much of the next two years (around US$50-$60 a barrel). But, a year ago, the IEA was forecasting oil at US$100 a barrel for 2015 and 2016. So be careful when assessing the accuracy of all forecasts, especially those from groups such as the IMF, World Bank and OECD. Remembering that, do what you will with the forecast overnight from Moody’s Investors Service, the ratings group, which said that lower oil prices won’t help the world’s major economies with two exceptions — the US and India, and that global growth won’t get a boost because of the economic stagnation in the euro area, slowing China, stumbling Japan, and recessed, isolated Russia.

Moody’s says the lower oil prices will give a boost to US consumer and corporate spending over the next two years. It increased its forecast for 2015 US growth in gross domestic product to 3.2%, from 3% in its last quarterly report. For 2016, it should stay around 2.8%. For the Group of 20 countries as a whole (including Australia), Moody’s expects growth of just under 3% for 2015 and 2016, mostly unchanged from 2014. That’s based on the assumption that Brent crude prices (the main global pricing indicator) will average US$55 a barrel this year, and rise to US$65 in 2016. Moody’s expects oil prices will remain around current levels this year, because demand and supply issues won’t dramatically change in the near term. Why a boost for the US? Well, oil is priced in US dollars so the fall in prices goes straight to consumers via lower fuel prices, and is not offset by weaker currencies, such as in Australia where the federal government and other economists continue to suggest consumers will spend their oil/petrol price bonuses. Maybe not. — Glenn Dyer

Wise India. Growth in India will be boosted because the country imports so much of its energy needs, and the impact will be felt across the economy, especially among poorer consumers. It will also help cut inflation. Moody’s forecast reads:

“For India, high inflation has been one factor constraining growth in recent years, which the fall in oil prices will alleviate. This will provide tailwinds to already positive conditions. We forecast GDP growth to rise to close to 7 percent in 2016, from 5 percent in 2014.”

With Moody’s forecasting Chinese growth to fall below 7% this year and hit 6.5% in 2016, India could grow faster than its biggest rival next year. Lassis all around, thanks! India’s central government has taken steps to end subsidies (as has Indonesia) by using the fall in oil prices to absorb the subsidies. Sounds grown up, but in Australia we are struggling to see the sense of the federal government’s lift in the excise rate (dropped by a nervy John Howard). Using the sharp fall in local prices to boost excise would help the budget revenue position and help energy conservation — after all, we had no trouble paying $1.39 to $1.59 a litre last year, didn’t we? — Glenn Dyer

Peter Fray

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