no rapid credit growth = no rapid price growth

Just read this over at Somersoft. was posted by euro73. i thought it was a good post so reproduced it.

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"There's about as much chance of a property price boom as there is of snow falling on Pitt Street on Christmas Day. The era of easy credit is done. So endeth the era of easy growth. One hand does not clap!

Sure, there may be some increases in prices, and some people will claim any couple of consecutive months of slight prices rises and clearance rate improvements as a victory for the recovery and growth bulls, but before they dance their merry dance of delusion and start drinking the capital growth cool aid again, I would remind them to pay close attention, and then take another look and pay even closer attention, to the comments that people who decide whether or not they will lend you money, are making...

“Australia is unlikely to ever again see the housing boom that sparked a massive rise in personal wealth across the country in the past decade and a half. Huge jumps in prices are unlikely to happen in future, meaning that good old fashioned money management principles of debt reduction will become the norm. For investors it means they need to start looking for better cash flow opportunities since the days of buying and holding for capital gains and instant equity are over”
Westpac Chief Executive Officer Gail Kelly

“We won’t see pre-GFC credit growth anytime soon, nor pre-GFC price growth. This is the new norm, and we are not running the business on the hope that the subdued lending or funding environment will end anytime soon” ANZ Chief Executive Officer Mike Smith. August 20, 2012

“The reality is that banks are being asked to raise capital in a world where capital is becoming increasingly scarce, and more expensive and that has a direct impact on the price and availability of credit for Australian customers.”
CBA Chief Executive Officer Ralph Norris. December 19, 2011

"As everyone knows, dwelling prices rose a great deal over the decade or more from 1995, and not just in Australia. The global dwelling price dynamic had a lot to do with financial factors - there is little doubt that as finance for housing became more readily available, dwelling prices accelerated. We expect this to stabilise due to constraints in credit supply over coming years” RBA Governor Glenn Stevens July 24, 2012

“I regard us as at a peak in wholesale borrowing, not even in percentage terms but in dollar terms. Australian banks will only be able to grow in line with what they are able to bring in on the customer side through deposits. We will not be able to go with an upswing in credit. In my view, Australian banks, for a long time, will only be able to buy the asset side of their balance sheet dollar for dollar with what they bring in on the customer side.”NAB Finance Director Mark Joiner October 3, 2012

Five years after funding started to get tight. Five years of flat property prices across Australia. Five years of data that defies capital growth bulls and clearly identifies a trend we like to call "No rapid credit growth = no rapid capital growth", yet there is still a chorus of cool aid drinkers. Now I'm not suggesting ZERO growth, and I don't for a moment read the bankers comments as that either. What I'm suggesting is constrained growth, and what the banks appear quite clearly to be saying is .....

Money is harder to get. Money costs more to get. We have less of it available than we used to have available and we dont think we can get a lot more of it like we used to be able to in the good old days of the 90's and noughties, when anyone would give us money at ridiculously low margins , and we could use it for creating all these cool new loan products called lo doc, no doc, non gen savings, no deposit etc. We cant do that stuff anymore, because those buggers in the Northern hemisphere spoiled the party, so the good old days are over for good...or at least until Europe and the US stop kicking the can down the road, take some tough love decisions and get their debt under control. Cos otherwise, the best we can do is try and bring in retail deposits and scavenge and compete for wholesale funds offshore. Oh, did we mention that even if we manage to get the funding offshore, it's harder to get and its much more expensive than it used to be, and we can only get it for squeaky clean AAA rated mortgages so we only want squeaky clean AAA rated borrowers? Pretty sure we did... but in case you didnt hear us, you cant say we haven't tried teaching you this with the rate cuts we haven't passed on and the rate hikes we decided you owed us. Funding costs baby! But what we have decided not to tell you quite as directly is that we have started to credit ration...kinda. We cant ever really tell you that directly because as individuals you are reasonable but as a mob you are idiots and you'll misunderstand and panic. But if you can keep a secret, thats what we are doing- quietly and gently, but doing it nonetheless. We are doing it by squeezing servicing calcs and reducing the "fat" - things like cash out for example. Tightening policies here and there and everywhere. Slowly, incrementally. Basically, without spelling it out to you as if you are idiots needing a finance 101 lesson, we are telling you as plainly as we can that we wont/cant/shall not/will not/are unable to invent and fund new innovative products like we used to be able to ( lo doc, 90/10's. 95/5's, 100% loans etc) that allow us to be lending more and more people, more and more money, year after year, so don't expect property prices to do much for a decade or more. Instead, we will cross sell more products and buy all the wealth/financial planning businesses, cut broker comms, increase rates etc- to maintain our margins and continue to dominate the market

But I digress - the moral of the story is, the kinds of people spruiking big growth must have a way to make money grow on trees - cos the banks are saying they wont be forking it out. Cool Aid is unlikely to help them. It will be slow and low for many years yet.

So in response to your comments about a boom or a rental collapse- wont happen. The boom wont. And there wont be a rental collapse because there are other things to consider for a renter who becomes an owner; things that you arent accounting for when you only consider rent v interest repayment as the only criteria to become an owner. Firstly, owners generally pay debt down on a P & I basis, not an I/O basis, so costs are dearer than you're allowing for. Secondly, renters generally dont pay for water, rates, landlord insurance etc . And finally, rates are at very low levels but history doesnt favour them staying here very long - so someone who cant afford 7-8% rates shouldnt be buying just because we have once in a generation low rates."