When a Big 4 bank CEO pushes all his chips in, it’s the ‘house’ that will always win!

From the above article:

Andrew Irvine has a simple way to sum up his new plan to commit at least $60 billion of financing over the next five years to tackle Australia’s housing crisis.

“We’re going to go big,” he tells Chanticleer, just a week out from delivering NAB’s [National Australia Bank] full-year results

“Building homes is being held back,” he says. “It’s being held back by complicated rules, by slow approvals, by poor co-ordination, not enough tradies, all leading to high costs. There are simply not enough homes being built to guarantee access to housing for all Australians.”

This is quite the statement. I mean, even today, the US is arguably about 15-20 years behind in terms of constructing new houses to keep up with population growth. Construction has been lagging since the global financial crisis.

And now it’s Australia’s turn.

The question now becomes: is it simply a matter of someone throwing enough cash at it to solve this?

Even more importantly, is now the time to actually be doing this?

We shall cover this in today’s newsletter. With luck, you’ll appreciate what a little knowledge can mean for you when it comes to your biggest financial decisions.

Time to find out if Andrew Irvine knows his timing.

This really is a story about timing. So much that I read in this article simply reinforces this fact.

For starters, to hear a CEO of one of Australia’s biggest banks say “We’re going to go big” is just the type of hyperbolic and bombastic talk that we witnessed at this time during the last 18.6-year real estate cycle.

It is one of the reliable indicators for determining your timing that you can rely upon.

The other thing to point out here is the sums involved.

As we move towards the peak of the cycle the numbers quoted by people such as NAB CEO continue to get higher and higher.

$60 billion is a very large number for a country the size of Australia.

This is divided between $30 billion over the next five years for up to 55,000 first home buyers tapping the federal government’s 5 per cent deposit scheme and $30 billion for housing supply, including commercial real estate development projects that are primarily aimed at the residential sector.

The latter will include traditional build-to-own projects, built-to-rent, student accommodation, land lease and community housing and, as scale builds, modular housing projects.

In other words, the bank has decided to increase its exposure and lending to the residential market by 20%.

This is just so typical of this time of the cycle.

Not only are we seeing yet another bank increasing its credit creation for the purposes of residential home construction, but thanks to the Australian government’s 5 per cent deposit scheme for first home buyers, can you see that accessing this same credit becomes easier too?

Easy credit, right on time.

However, it’s the details of this new initiative that trouble me. And it’s because of precisely how NAB intends to help fund it.

The biggest banks in Australia basically keep their loan books on their balance sheets. They rarely indulge in “originate and distribute” like all regional US banks do with their mortgage books.

This term relates to the business practice of bundling up their loan book and then selling it as an asset to Wall Street hedge funds.

Instead, NAB has come up with a different solution. From the above article.

But where the bank believes it can turbocharge its push is by supplementing the power of the bank’s balance sheet with third-party capital from superannuation funds, sovereign wealth funds and other large institutional investors, who Irvine says are keen to put money to work in Australia.

“That’s the real innovation here, that is why we think we could actually do even more.”

Did I mention hubris is a hallmark of this late stage of the cycle yet?

What we have here is a model that will rely on tapping third-party capital, loan syndication, and creating strategic partnerships at portfolio and loan level.

The simple fact that the superannuation industry is being courted for involvement means we are all involved in this. We are talking about your retirement funds being used for this purpose.

For mine, this is like adding fuel to the fire. While it is fine on paper to be using the global wholesale market for credit it comes with additional risks. Risk, it should be said, that is never mentioned whilst land prices continue to move higher.

NAB have said they don’t believe these changes will change its risk appetite (calling bullsh*t on this) but one can’t help but think they have a vested interest in this working. And here is why.

It’s getting harder and harder for the traditional largest banks in Australia to continue to drive revenue growth higher.

The easy out it seems is to go all-in on the residential sector, right when the government has basically reached its absolute limit on just how much help it can offer first home buyers.

The problem? We have been here before.