So the Australian banks are doing wonderfully well, giant profits, analysts and media reckon the outlook is getting better, and using Tuesday’s RBA rate rise as a justification for the outbreak of optimism, and yet the profit rise has come from falling bad debt provisions.
The only growth area has been housing credit, but that is now slowing. Business credit is slowly getting better, but growth is still negative as companies go offshore for funds, especially in US dollars, driven by the ultra low rates and the currency approaching parity.
Even after hedging to protect themselves against a fall in the Aussie dollar, the ultra low rates in the US (3% or so in the case of Telstra’s recent big issue in Europe), make it a no brainer to ignore the deals on offer from the local banks.
But that’s all ignored by local investors when looking at the prospects for the banks: the RBA sees the economy growing next year, along with inflation, so rates have to go up, and that means more bank lending.
Well, look again and examine yesterday’s building approvals, especially for private homes, a 6.6% fall in September, the sixth monthly fall, according to the Australian Bureau of Statistics.
The number of approvals in September is now back to levels in June of 2009 (when they were rising) and the September data confirms the building industry is slowing, without anything to stop it, both in the dwelling construction and in the non-dwelling sector.
The value of residential approvals, including additions and alterations, was down by 4.5% while non-dwelling building approvals fell 0.7% by value.
In total, the value of approvals was down by 3.2%, hitting a 15-month low.
Through the September quarter, the value of approvals was 16% lower than the average for 2009.
Where’s the growth in that for the banks, especially as the rate rise from the RBA (and more to come), will further depress demand for new homes and apartments (which will in turn boost inflation).
As a percentage of nominal gross domestic product (GDP), the value of building approvals (pending the release of September quarter GDP data early in December) is now almost certainly significantly below levels seen in the recessions of the early 1980s and early 1990s.
These figures do not include so-called engineering construction, which includes structures ranging from pipelines and ports to mines and bridges.
That’s the sort of work done by giants like Leighton Holdings’ various arms and competitors.
Engineering construction is being supported by the mining boom and will be boosted much more over the coming few years.
But housing construction is the single largest area of business for the banks, and with approvals falling, more and more of the business will have to come from financing existing home purchases.
But there the banks have been warned by APRA not to try and buy market share by cost cutting or lowering Loan To Valuation ratios.
The bank putting up their mortgage rates could be committing commercial suicide, by increasing the cost of loans (and restricted from protecting or buying market share), they are going to have to let business go, or refuse to finance prospective buyers.
And, finally, look at the outlook for the likes of Stockland, Mirvac, Australand, AV Jennings and other home builders and developers.
Then look at the suppliers, the likes of Boral (where a new CEO has built his strategy on recovery in housing here and in the US), Brickworks (which should get buy with its investment income), CSR (which is slimming to property, aluminium and building products), Fletcher Building (it has steel and other businesses that can offset the downturn) and a host of others supplying fittings (GWA, Reece and retailers like Harvey Norman and Alesco Corporation).
They all face increasingly tough times. The sale of its sugar division, at a time when prices are near record highs, could be an unfortunate move by CSR.
According to the ABS, Tasmania recorded a rise in dwelling approvals (1.0%) in September, while NSW (-1.5%), Victoria (-10.0%), Queensland (-2.3%), South Australia (-24.9%) and Western Australia (-2.0%) all fell, in seasonally adjusted terms.
Private sector houses approved fell 2.2% with falls in Victoria (-3.6%) and Western Australia (-10.7%), while New South Wales (8.1%), Queensland (0.5%) and South Australia (0.4%) rose.
The value of total building approved fell 3.2% in September in seasonally adjusted terms. The value of total residential building fell by 4.5%, while non-residential building fell by 0.7% following a rise last month.
