Citi thinks the outlook for bank earnings and credit growth has fallen behind the potential for residential property prices to take off at the hands of cheap money.
Looking across the Tasman to the dramatic turnaround in housing price growth in New Zealand, Citi reckons monetary policy here will drive the same outcome and bank investors should take note.
“The RBA’s almost singular focus on the currency will lead to the inevitability of what always happens when rates fall—asset prices go up,” Citi’s Brendan Sproules and Thomas Strong said. “Particularly housing.
“Certainly, the AFR’s Banking Summit gave credence to this view, with a broad acknowledgement that housing would accelerate. And as APRA noted with the ‘concentration risk’ in mortgages for the Australian banks, there are many implications here to be noted for bank investors.”
After a bumper week for bank shareholders last week at the hands of an improving picture for the economy and housing market, Citi’s analysts questioned the expectation among investors of sustained pressure on lenders’ top line from “a debtless recovery”.
“Some have moved expectations for house prices… but not for housing credit growth. To our mind, this seems a ‘slight’ disconnect”.
Citi pointed to the dramatic reversal in house prices in NZ which has followed a “messy” policy response. The Reserve Bank of New Zealand estimates for the residential market in 2020 swung from a decline of 7 per cent in August to growth of 10 per cent for the year in a revision from the central bank last week.
“As we discovered over in NZ… some central banks have taken the pursuit of a low currency a bit too seriously,” the analysts said.
“After misreading the tea leaves with what was happening in the local property market, in adding stimulus over and above what was required to shore up the economy, they have overlooked the fact that they are sending housing to the moon.
The analysis from Citi said NZ challenged the rhetoric in Australia that rates will stay low but credit growth will remain subdued.
Citi said the “messy” state of policy in NZ was a potential cautionary tale for local monetary policy. Louie Douvis
And with series of upgrades to the domestic outlook, Citi said a similar picture is emerging in Australia and questioned if the unprecendented suite of policy measures introduced by the RBA goes beyond what is required if the picture is improving.
“Levers are being pulled to extraordinary levels in order to manage global competitiveness, but appear at odds with the sharp positive revisions in domestic data.”
Citi’s conclusion about the implications for bank investors: “With a housing recovery positive for the revenue outlook, watch this space—2021 may look a little different than we think.”
