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18 December 2012
Asia Pacific/Australia
Equity Research
Investment Strategy (Strategy)


Australian Equity Strategy

STRATEGY

Underweight banks in anticipation of job cuts,
payment shocks and declining house prices
The Consensus view is that banks are a "quaIity yieId" pIay. After all,
banks have sailed through very turbulent times post-financial crisis. They
have maintained their strong credit rating and high dividend yields, and
reduced their dependence on offshore funding. Further, policy makers seem
to have done a remarkably good job of keeping the domestic economy
insulated from deteriorating global macro conditions.
However, we believe that banks are only bond proxies to a point. We
are shifting to an underweight position on banks. Valuations are not
attractive, and there are downside risks to earnings and dividends as de-
leveraging risks intensify. We are particularly concerned about payment
shocks on interest-only loans (which make up roughly a third of the
mortgage book), as well as the effects of rising unemployment.
Risks are concentrated on over-geared housing investors. Leveraged
investors are struggling to make money because net rental yields of 3.2%
are well below mortgage rates of 6.4%. At most, investors can only afford to
be 50% geared. However, the data suggest that borrowers are 60%+ geared,
with a lot of this gearing on interest-only terms. Essentially, investors are
subsidising losses on their property portfolios out of wages, in the hope of
future capital gains. But their ability to keep doing this will be stretched if
house prices do not rise, and if payment shocks hit.
We are quite pessimistic about the prospect of house price inflation.
Housing is 20%40% overvalued by historical standards. Also, housing
demand is extremely low, because potential buyers are very concerned
about unaffordability and rising unemployment. If demand remains low
relative to supply, house prices could fall substantially. Average home equity
could fall disproportionately, making the re-financing of loans more difficult.
The over-gearing situation does not have to end disastrously. If the
RBA cuts rates deeply (e.g. to 1.5%), it could stabilise debt dynamics and
house prices, buying households time to work out their over-indebtedness.
However, the RBA does not seem to be contemplating deep rate cuts
despite the slowdown in train. Also, the lack of pass-through of RBA cuts is
becoming a problem.
Please note that this is an Australian equity strategy view, and is not
necessarily shared by the Credit Suisse Australian banks team.
Research Analysts
Credit Suisse Australian Strategy

Atul Lele
612 8205 4284
atul.lele@credit-suisse.com
Damien Boey
612 8205 4615
damien.boey@credit-suisse.com
18 December 2012
Australian Equity Strategy 2
Sector Focus: Banks
Introduction
The Consensus view is that Australian banks are bond proxies, and should outperform in a
falling yield environment. After all, they have sailed through very turbulent times post-
financial crisis. They have maintained their strong credit rating and high dividend yields,
and reduced their dependence on offshore funding. Further, Australian policy makers
seem to have done a remarkably good job of keeping the domestic economy insulated
from deteriorating global macro conditions.
However, banks are only bond proxies to a point. We believe that they have now become
too expensive, and too exposed to deteriorating macro conditions to remain a "quality
yield play:
Dividend sustainability is questionable considering how high payout ratios are, as well
as the downside risks to Australian growth, and the prospect of rising bad debts.
Leading indicators point to the unemployment rate rising substantially.
Households are under more financial strain than the official data suggest. It is not just
a slowing mining capex cycle that we need to contend with we must also deal with
household de-leveraging.
Moreover, we think that the RBA is now too far behind the curve to prevent a major
slowdown in 2013.
We are switching to an underweight position on banks (from neutral).
Valuations are not attractive
In our view, banks are looking slightly expensive for a benign credit growth outlook. They
look more expensive when we factor in the risk of sharp slowdown and rising bad debts.
Bank PEs relative to the market are slightly above long-term average. But the
Consensus is not factoring in a material rise in bad debts. Should bad debts rise,
earnings could fall substantially, and banks would look quite expensive.
Bank dividend yields are high relative to the market, and relative to bonds. However,
we note that payout ratios are pushing up towards 80% for the major banks the
highest they have been since the early 1990s crisis. Should bad debt charges double
(from a fairly low base), payout ratios would rise up towards 100% but these levels
would be considered by most commentators as unsustainable. Therefore, we need to
factor in the possibility of dividend cuts should the economy slow sharply.
Figure 1: Banks' VaIuation ReIative to Market Figure 2: Banks' Dividend Payout Ratios
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Banks PE Relative to Market Average +/- 1 S.D.


40%
50%
60%
70%
80%
90%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Banks' Dividend Payout Ratio Average +/- 1 S.D.

Source: Bloomberg, Datastream, IBES, Credit Suisse Source: Bloomberg, Datastream, IBES, Credit Suisse
The Consensus view is that
Australian banks are a
quality yield play
However, we think that
banks have become too
expensive, and too exposed
to deteriorating macro
conditions
Banks are slightly expensive
for a benign macro
environment. They look
more expensive when we
factor in a rise in bad debts
Banks' dividend payout
ratios are unsustainably
high considering the risk of
rising bad debts
18 December 2012
Australian Equity Strategy 3
Re-assessing the quality of the mortgage book
Since the financial crisis, analysts have been quick to point out a distinct change in
household borrowing and spending behaviour. The argument is that households have
chosen to spend and borrow less and inject more equity into their homes. Analysts usually
cite the sharp rise in the saving rate to 10% (from close to 0% in 2006), and recently
strong deposit growth as evidence that households have become more conservative in
their behaviour. Much of the cashflow generated from higher saving is supposed to have
flowed into mortgage repayment.
Echoing these arguments, the major banks now report that:
Mortgagees are on average four to nine months ahead on their repayments. They
seem to have spare cash, and even room to re-draw upon on their mortgages.
Average loan-to-value ratios for mortgagees are around 60%. Households have a
sizeable equity buffer against the risk of house prices declining, and banks have
reasonably good loan-loss recovery prospects in the event of foreclosure sale.
Many households have more than one income earner servicing the loan. Households
have some buffer against unemployment risk, because if one income earner loses
their job, the other should be able to continue servicing the loan.
These statistics are typically used to highlight the quality of the Australian mortgage book.
However, we question whether the loan book is really as strong as it is made out to be:
Whenever we hear about households pre-paying their mortgages, we must be mindful
of the definition of minimum payments. The longer the repayment period, the smaller
regular payments become. The average contractual maturity of a traditional mortgage
is 25 years but on a 25-year loan life, it is not difficult to be ahead on repayments,
assuming that households have borrowed within their means. Indeed, on standard
variable rate mortgages, with no pre-payment penalties, the natural tendency is for
households to pay off more principal when interest rates fall, as they tend to leave
their total debt servicing payments unchanged (i.e. they take the saving on lower
interest payments and automatically use it to pay off principal). Considering anecdotes
that the average effective maturity of traditional loans is much less than 25 years, the
more interesting question is why mortgagees are only four to nine months ahead on a
their repayment schedule. Interest-only loans further complicate matters, because they
lower the minimum payment threshold in the short term but raise it in the longer-
term. We believe that payment shocks on these loans could be quite problematic in
the foreseeable future.
Considering these complications, what matters, in our view, is not whether households
are ahead on their mortgage payments, but rather, whether they have gotten further
ahead over time.
Also, we note that every dollar that a household does not repay on their mortgage
accumulates. For a given level of interest rates, a lower repayment rate today would
only mean a higher loan balance to be repaid tomorrow, and higher interest payments.
Subject to penalties, some degree of prepayment may considered rational for
households, and therefore unsurprising.
The average mortgagee may have a home equity buffer of around 40% but the
average can be misleading. Even a 10%20% decline in house prices could start
wiping out the equity of more recent borrowers, that have benefited less from house
price inflation (or have even lost as a result of house prices falling).
It is possible that two income earners are now required to service debt (principal and
interest). Put differently, if one income earner were to become unemployed, the other
may not be able to continue servicing the mortgage. If this is the case, then Australian
households have become more exposed to unemployment risk not less.
In the following sections, we add a bit more colour to these arguments.
The Consensus view is that
Australian households are
generating cash and paying
down their mortgages post
financial crisis
However, we are sceptical
about this claim
Are households really ahead
on their mortgages, or have
the goal posts been moved?
Is the two-income earner
test really a safety net?
The average household has
a 40% equity buffer but
what about the marginal
household?
18 December 2012
Australian Equity Strategy 4
Principal matters
Many commentators define debt servicing as interest cover. However, we know (all too
well) from the financial crisis experience that the ability to pay back interest is not all that
matters in assessing housing affordability and financial stress principal repayment
matters as well.
In the national accounts, principal repayment is not accounted for in calculating the
household saving rate. Household saving is calculated without deducting principal
repayments, because principal payment is viewed as a choice about what to do with "left
over cash. The statisticians do not distinguish between saving in the form of cash, and
saving in the form of an asset. But for our purposes, the distinction matters a lot, because
principal payments are not strictly discretionary and indeed, are now a key determinant of
household free cashflow.
There are three ways that we can measure principal payments in Australia:
Back out actual repayments from system credit growth and housing finance approvals:
Housing finance approvals, net of re-financings are a proxy for net new lending. But
credit growth should be equal to new lending minus net principal repayments.
Therefore, the dollar difference between net housing finance approvals, and credit
growth should be equal to actual aggregate net principal repayments. We can divide
this number by the number of mortgagees to estimate the actual principal payment per
mortgagee. However, this measure does not distinguish between principal payments
financed out of income, and those financed out of the proceeds of asset sales.
Moreover, it does not distinguish between scheduled (minimum) principal payments
and excess repayments. Therefore, the tendency is for this measure of principal
repayment to overstate the regular repayment burden. Nonetheless, it does tell us
about what households are actually doing and specifically whether the repayment
rate is increasing or decreasing through time. Also, the data is granular enough to split
out repayments on owner-occupier and investor housing loans.
Simulation of minimum principal payments using a credit foncier model applied to
housing finance approvals: The credit foncier model assumes that households re-pay
the loan amount in a linear fashion. Regular payments are constant through time, and
sufficient to repay the loan principal and interest over the duration of the loan. Initially,
the principal repayment component of the loan is small, while the interest repayment
component is quite big. But as the loan reaches maturity, principal repayments
become bigger than interest repayments.
We can apply a 25-year credit foncier model to each months' housing finance
approvals, and aggregate the payments across loan vintages to calculate the
aggregate minimum principal repayment burden. We can divide this number by the
number of mortgagees to estimate minimum principal payments per mortgagee
(assuming a 25-year loan life). However, this measure makes a strong assumption
that loan repayment is linear, such that the profile of aggregate repayments through
time are really just a function of where households sit in the loan-life cycle. This
assumption may not be strictly correct. Households could repay their loans more
slowly than the minimum, as in the case of interest-only loans. Or they could repay
their loans more quickly than is required. Another possibility is that they could draw out
the term of the loan through re-financing. Notwithstanding these limitations, the
principal payment outcomes implied by the credit foncier model are still useful as a
reference point for our analysis.
In assessing the state of
household cash flow, we
often fail to take principal
repayment into account
There are three different
ways of estimating principal
payments in Australia
18 December 2012
Australian Equity Strategy 5
Responses to the ABS household expenditure survey. Every five to six years, the ABS
releases results from its household expenditure survey. In the survey, owner-occupier
mortgagees are asked to provide details about their weekly income and expenditure,
as well as mortgage repayments. The mortgage repayment data can be heavily
skewed by sampling biases but nonetheless, remains useful in understanding the
profile of actual regular principal payments (financed out of income, rather than the
proceeds of asset sales).
We use all three measures to better understand how principal payments are evolving
through time. The different indicators may not give us an entirely consistent picture of
repayment behaviour but we think they can be reconciled to tell a broadly consistent
story. Even in the differences, there is still valuable information to be gleaned.
Comparing credit aggregates to credit foncier
Across all loans, we can see that the measure of loan repayment derived from credit
aggregates and housing finance approvals, is consistently higher than the estimate
derived from our credit foncier model. This tells us that the average effective maturity of
loans is much shorter than the contractual maturity of 25 years. Indeed, on our estimation,
the effective maturity is closer to 1015 years.
The apparent prepayment may reflect households making regular excess repayments on
their mortgages. But it may also reflect households are repaying (or retiring) loans out of
the proceeds of asset sales.
Figure 3: Housing Finance Approvals & Credit Growth Figure 4: Household Principal Payments
-2%
0%
2%
4%
6%
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Net Principal Repayments
Housing Finance Approvals Net of Re-financing
MoM% Change in Housing Credit


0%
5%
10%
15%
20%
2000 2002 2004 2006 2008 2010 2012 2014
Actual Principal Repayments (% Disposable Income)
Minimum Principal Repayments (% Disposable Income)

Source: Bloomberg, Datastream, RBA, Credit Suisse Source: Bloomberg, Datastream, RBA, Credit Suisse
What matters is not so much the spread between the two measures but how that spread
has evolved. A rising spread could be a reflection of more principal payment out of asset
sales, or a faster rate of regular repayment. But a narrowing spread could indicate that
housing turnover has slowed, or that households are being forced to pay back more
principal, as a result of the loan life cycle.
Since the financial crisis, the spread between actual, and theoretical principal payments
has narrowed. In our view, this is partly a result of slower housing turnover but it
probably also reflects a slower rate of regular payment by households, as well as a rise in
minimum principal repayments.
Comparing owner occupiers with investors
If we do the same analysis just on owner-occupier loans, we get a slightly different picture.
Actual repayments (derived from credit aggregates and housing finance approvals) fell
after the financial crisis, but more recently have risen. Indeed, they have risen more
quickly than minimum principal repayments (simulated from a credit foncier model). This
may be evidence that owner occupiers are more aggressively repaying their loans, as the
banks have tried to highlight recently.
Contrary to popular belief, it
appears that the aggregate
repayment rate has slowed
post financial crisis
Owner-occupiers have lifted
their repayment rate
recently
18 December 2012
Australian Equity Strategy 6
Figure 5: Owner-occupier Mortgagee Principal Payments Figure 6: Owner-occupier & Investor Principal Payments
0%
3%
6%
9%
12%
2000 2002 2004 2006 2008 2010 2012 2014
Actual Principal Repayments (% Disposable Income)
Minimum Principal Repayments (% Disposable Income)


0%
5%
10%
15%
20%
1990 1995 2000 2005 2010 2015
Total Owner-occupier Investor

Source: Bloomberg, Datastream, RBA, Credit Suisse Source: Bloomberg, Datastream, RBA, Credit Suisse
The real issue is with investment housing loans. The actual repayment rate has shrunk
noticeably in recent years, masking the pick-up in owner-occupier repayments in the
aggregate data. In part, this is a reflection of slower turnover in the market with fewer
sales of investment property, there have been fewer loan repayments out of the proceeds
of those sales. But we also believe that the rising popularity of interest-only loans has
contributed a lot to this outcome. Most interest-only loans offer an initial 10- to 15-year
period of principal-free debt servicing, with a dramatic ramp-up in payments beyond this
horizon as principal payments are activated. According to RBA and APRA data, between
30%60% of new investor loans (i.e. flows) over the past decade have been interest-only
loans. Interest-only loan flows have been so significant, that in terms of the stock of credit
outstanding, more than a third of investor housing credit is now on "interest-only terms
(although where they generally sit in the loan life cycle is uncertain). The increased use of
interest-only loans over the past decade has probably depressed the actual principal
repayment rate, and will continue to do so until principal-free periods lapse.
Comparing credit foncier repayments with ABS survey data
We suspect that interest-only loans are not only distorting the profile of investor housing
loan repayments they may also depressing repayments on owner-occupier housing.
Figure 7: Owner-occupier Mortgagee Principal Payments Figure 8: Re-financing Activity
0
250
500
750
1984 1988 1992 1996 2000 2004 2008 2012 2016
Net Principal Payments Per Owner-occupier Implied by Credit Aggregates
Minimum Principal Payments Simulated by 25-year Credit Foncier Model
Principal Payments from ABS Household Expenditure Survey


0%
7%
14%
21%
28%
1990 1995 2000 2005 2010 2015
Re-financing Approvals (Annualized, % Owner-occupier Housing Credit)
Annualized MoM% Change in Owner-occupier Housing Credit

Source: ABS, Bloomberg, Datastream, RBA, Credit Suisse Source: ABS, Bloomberg, Datastream, RBA, Credit Suisse
We can see this in the spread between ABS survey responses and the output of our credit
foncier model. For the available history that we have, the ABS survey responses seem to
be consistently lower than the minimum payments estimated from our credit foncier model.
This could be due to:
Re-financing efforts. Re-financing makes mortgages new again and effectively
lengthens the maturity of the original loan. Households with newer mortgages tend to
repay principal at a slower rate than households with older mortgages, simply because
of where they sit in the loan life cycle. Re-financing can occur without a housing
transaction but quite often households re-finance their loans when they change
But investors have slowed
their repayment rate,
masking the pick-up in the
repayment rate of owner-
occupiers
Interest-only loans and
slowing property turnover
have depressed the
repayment rate for housing
investors
18 December 2012
Australian Equity Strategy 7
homes. The renewal of the mortgage has the effect of drawing out the term of the
original loan and lowering the repayment rate. But on the other hand, over our sample
period, housing has become more expensive to turnover. As households have
migrated to bigger, or more expensive homes, they have taken out bigger loans,
requiring bigger principal repayments. It is an empirical question as to whether the
effect of the lower repayment rate is bigger or smaller than the effect of increasing the
loan balance. But suffice to say, it is possible that re-financing has depressed principal
repayments in the ABS survey relative to our credit foncier model.
Interest-only loans. In our view, it is unlikely that the unusually low level of principal
repayments in the ABS survey can be explained entirely by re-financing. This is
because on our estimation, too much maturity extension would be required from too
few mortgagees. We note that the re-financing rate is fairly low between 5%10% of
loans per annum, and the limited re-financing activity that does occur would have to
lengthen the average maturity across all owner-occupier loans significantly to 35 years
(from a contractual maturity of 25 years) just to bring credit foncier payments down to
the level suggested by the ABS survey. And even if the average household is on the
minimum repayment schedule, there must be households who are behind schedule, or
not paying principal at all, because we know that there are households who are ahead
on their mortgages.
In our view, average repayments have probably also been depressed by the increased
popularity of interest-only loans even among owner-occupiers. Indeed, according to
RBA and APRA data, interest-only loans have made up between 10%30% of owner-
occupier flows over the past decade.
Re-financing and interest-only loans have played a material, and indeed, necessary role in
helping households to manage their finances. To illustrate this, consider the findings of the
200910 household expenditure survey. According to the survey, owner-occupier
households:
Had 1.8 income earners on average, earning $2,238 per week, supporting one
dependent child.
Paid $407.18 of income tax per week, and $79.34 per week in superannuation and life
insurance contributions.
Spent $1,271.86 per week on goods and services.
Repaid $136.03 per week of mortgage principal, and $321.92 in interest.
In aggregate, these households saved $21.67 per week. However, it would not take much
of an increase in weekly principal payments to drive households on average into a
negative cash flow situation. Even an increase in payments to our credit foncier minimum
of $240 per week would cause households to experience cash flow problems. In other
words, but for unusually low principal payments from re-financings and interest-only
mortgages, households may not have been able to break even in 200910. But equally,
the resetting of payments to a higher level once principal-free periods lapse could cause a
significant negative shock to household cashflow, causing them to either pare back
spending, or default on their mortgage. We note that household finances look precarious
in this scenario even with more than one income earner servicing the mortgage.
Now statisticians at the ABS caution analysts about using the household expenditure
survey data to calculate saving. So the possibility of household saving turning negative
(but for unusually low principal payments) could be easily dismissed as noise. Put
differently, it is a necessary, but not sufficient condition to show that household saving
could have been negative. What we really need to show is that the household cashflow
situation has deteriorated through time, increasing the likelihood of financial stress.
Re-financing and interest-
only loans have depressed
the repayment rate for
owner-occupier housing
Owner-occupiers are quite
sensitive to changes in
mortgage terms (e.g.
payment shocks)
18 December 2012
Australian Equity Strategy 8
Household discretionary cashflow is very low
To construct a timely measure of owner-occupier discretionary cashflow, we:
Assume that in 200910, the average owner-occupier household had two income
earners earning the average weekly ordinary time wage. We map out the profile of
household labour income through time using the wage cost index.
Use the 200910 household expenditure survey to benchmark weekly consumption.
Specifically, we focus on non-discretionary expenditure items such as food, utilities
transport and healthcare. We back-cast and extrapolate nominal non-discretionary
spending from 200910 using CPI data (as the volumes purchased of these items
should not change much through time).
Calculate an estimate of weekly principal payments using a combination of the
different measures used in our earlier analysis.
Also calculate an estimate of weekly interest payments backed out of credit
aggregates and published standard variable mortgage rates. For what it is worth,
these estimates are very close to the estimates published by the ABS in the household
expenditure surveys.
Deduct from labour income, taxes (at an average 20% rate), superannuation (at an
average 9% rate), non-discretionary spending, interest and principal payments to
arrive at a measure of discretionary cashflow.
Figure 9: Owner-occupier Mortgagee Free Cashflow Figure 10: Owner-occupier Free Cashflow & Saving Rate
15%
20%
25%
30%
35%
1990 1995 2000 2005 2010 2015
Discretionary Cashflow (% Income) Average +/- 1 S.D.


-10%
0%
10%
20%
30%
40%
1990 1995 2000 2005 2010 2015
Owner-occupier Mortgagee Discretionary Cashflow (% Income)
Household Aggregate Saving (% Disposable Income)

Source: ABS, Bloomberg, Datastream, RBA, Credit Suisse Source: ABS, Bloomberg, Datastream, RBA, Credit Suisse
In contrast to what the national household saving rate would suggest, our measure of
discretionary cashflow for owner-occupier mortgagees is actually still low by historical
standards. It fell very sharply just prior to the financial crisis as wages failed to keep pace
with rising debt servicing costs and basic living costs. Since this time, cashflow has only
recovered moderately, despite generally low interest rates, again because wages have
failed to keep pace with the basic cost of living, and principal payments have remained
onerous. In our view, this indicates that the cashflow situation for mortgagees is still tight.
Worst still, a number of households appear to be ill-equipped to handle payment shocks
as interest-only loans reset.
It does not pay to be a leveraged housing investor
In calculating household discretionary cashflow, we have not taken into account non-
labour income. HILDA survey data suggests that owner-occupiers have relatively low cash
balances and deposits (e.g. of around $8,000 per household in 2010), and relatively small
stock holdings (or around $10,000 per household in 2010). So we are comfortable
excluding capital gains, dividends and interest income, as these items are not material
(especially now that returns are falling).
The cashflow situation for
owner-occupiers has only
improved modestly since the
financial crisis
18 December 2012
Australian Equity Strategy 9
A potential problem in our analysis occurs from the exclusion of rental income on
investment housing. According to the HILDA survey, around 26% of owner-occupier
mortgagees also have an investment property with a median value of $420,000 in 2010.
The rental income on these properties could be quite substantial.
However, we believe that net of debt servicing and maintenance costs, households are not
really earning that much from their investment properties. Indeed, the data suggest that on
average, they may even be losing because of excessive gearing, high borrowing rates and
extremely low net rental yields. The fact that net income on investment property is so low
suggests that many households are relying on capital appreciation to make their
investments worthwhile. But in a flat-falling house price environment (please see section
below for further details), this is problematic. Worse still, many investment properties are
encumbered by interest-only loans, meaning that they are susceptible to payment shocks
in the coming years.
Estimates of gross rental yields on property vary between 3.7%4.25%. Based on RBA
and ABS data, the rental yield is 3.7%, whereas based on RP Rismark data, it is closer to
4.25%. Net of other costs of home ownership (e.g. depreciation, strata, council fees and
maintenance costs), the net rental yield could be 0.5%1% lower than the gross. Let us
suppose that the average net rental yield on property is around 3.2%.
This rate of return is well below the standard variable mortgage rate currently around
6.4%. So for a leveraged investor to breakeven on their property purchase, the most they
could afford to gear is 50% (3.2% divided by 6.4%). However currently, households with a
mortgage have gearing levels that are considerably higher than 50%:
According to the HILDA survey, investment properties are roughly 60% geared.
According to RBA data, households on average are 62% geared. In aggregate,
households hold roughly $4.2 trillion worth of real estate assets, and owe $1.3 trillion
worth of mortgage debt. Across all households, home equity appears to amount to
$2.9 trillion and the gearing ratio appears to be 31%. But these statistics fail to take
into account the concentration of mortgage debt. Historically, a third of households
have a mortgage, a third own their home outright, and a third rent. It is reasonable to
assume that of the one-third of properties rented out, some are owned by leveraged
investors. Effectively 50% of households are encumbered by a mortgage. Therefore of
the $4.2 trillion of real estate assets held by households, only $2.1 trillion of assets are
owned by mortgagees. And netting off $1.3 trillion of mortgage debt, it appears that
leveraged households only have $800 billion of home equity. Put differently, the
effective gearing level is around 62%.
Figure 11: Rental Yields & Mortgage Rates Figure 12: Actual & Break-even Household Gearing
0%
5%
10%
15%
20%
1977 1982 1987 1992 1997 2002 2007 2012 2017
Rental Yield on Residential Property
Standard Variable Home Loan Rate


0%
20%
40%
60%
80%
1977 1982 1987 1992 1997 2002 2007 2012 2017
Actual Leverage Ratio Breakeven Leverage Ratio

Source: Bloomberg, Datastream, RBA, Credit Suisse Source: Bloomberg, Datastream, RBA, Credit Suisse
Overall, it appears that gearing is 20% too high. Investors have a natural tendency to de-
leverage because net of interest costs and other expenses, they are actually losing money
on their properties and this is before taking into account principal payments and likely
payment shocks from resets on interest-only loans. Effectively, households are using their
Investor housing is not
generating positive carry
Investors are over-geared
considering that net rental
yields are well below
mortgage rates
Investors can only subsidise
losses on housing for so
long.
18 December 2012
Australian Equity Strategy 10
wages to subsidise their housing investment in the hope that capital gains will be
significant enough to eventually generate a return. However, in an environment where
house prices stagnate or even fall over an extended period of time, this behaviour
becomes unsustainable. The risk is that at some point, investors will stop subsidising their
properties when they hit cashflow constraints. Potentially, as payment shocks hit, they will
have to sell their properties in order to de-leverage.
The RBA seems unsympathetic to mortgagees
This situation does not have to end disastrously. It is possible for the RBA to alleviate
some of the stress on mortgagees by aggressively cutting interest rates. To eliminate the
20% overgearing, the RBA must bring down the mortgage rate by 20% to 5.3% from 6.4%
currently. 110bps of cuts to the standard variable mortgage rate are required. However,
we know that in this easing cycle, banks are on average only passing on 75% of every rate
cut. Therefore, in order to bring down the mortgage rate by 110bps, the RBA would need
to cut the cash rate by almost 150bps.
Figure 13: RBA Cash & Mortgage Rates Figure 14: RBA Cash Rate & 2-year Treasury Yield
0%
3%
6%
9%
12%
1992 1997 2002 2007 2012 2017
Spread RBA Cash Rate Standard Variable Home Loan Rate


0%
3%
6%
9%
12%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
RBA Cash Rate 2-year Treasury Yield

Source: Bloomberg, Datastream, RBA, Credit Suisse Source: Bloomberg, Datastream, RBA, Credit Suisse
However, this would bring the cash rate down to 1.5% well below what the RBA, and
bond market investors are currently thinking, and certainly well below previous
"emergency levels. The RBA generally does not believe that the Australian economy is
facing hard landing risks. Indeed, officials have repeatedly stated that the housing market
is likely to recover in response to easing delivered so far picking up the slack from the
ailing mining and mining capex sectors.
But we do not think that the housing market is recovering, because easing to date has
been relatively ineffective. Moreover, things could get worse as unemployment rises.
Therefore, for the time being, the RBA seems to be behind the curve, and is not dealing
with the de-leveraging pressure that many households face.
House prices are falling
Another way out of the overgearing problem is for borrowers to re-finance their loans, draw
out their mortgage, and lower their principal repayment rate. If they are on interest-only
loans, borrowers could attempt to extend the principal free period. Hopefully households
would end up refinancing at considerably lower interest rates, such that the slower rate of
principal repayment would not cause their outstanding loan balances and interest
payments to materially rise.
However, borrowers may find it difficult to re-finance if global credit market conditions are
tight. Also, they may struggle to get re-financing if house prices are falling and if their
equity base is diminishing.
The Consensus view is that Australia has a housing shortage supporting house prices.
Population growth and replacement demand suggest that the theoretical rate of household
formation is around 175,000 homes per annum. But housing starts are running at only
150,000 per annum. In theory, there is a shortage of housing at the margin.
Stress will rise if house
prices do not increase, and
payment shocks hit
The RBA could help to
alleviate the stress on
households by cutting rates
deeply
However, the RBA does not
seem to be contemplating
deep rate cuts, and banks
are impeding the
transmission mechanism
Falling house prices could
exacerbate re-financing
risks
18 December 2012
Australian Equity Strategy 11
Figure 15: Population Growth & Building Approvals Figure 16: CBA/HIA Housing Affordability Index
0
50
100
150
200
250
300
0
75
150
225
300
375
450
1960 1970 1980 1990 2000 2010 2020
YoY Change in Population (LHS) Building Approvals (RHS, Smoothed)


40
60
80
100
1985 1990 1995 2000 2005 2010 2015
CBA/HIA Housing Affordability Index Average +/-1 S.D.

Source: ABS, Bloomberg, Datastream, Credit Suisse Source: Bloomberg, Datastream, Credit Suisse
However, notwithstanding the theoretically high rate of household formation, home sales
are currently sitting close to 20-year lows. It appears that demographics are not a
sufficiently strong driver of housing demand rather unaffordability, de-leveraging
pressures and concerns about job security are weighing on potential homebuyers.
Often, market commentators point out that housing affordability indices are not that far off
their historical average. For example, the CBA/HIA measure of housing affordability,
based on interest cover is very close to its post-1985 average. Therefore, the argument
goes that further (minor) rate cuts should succeed in boosting affordability and housing
demand. However, we believe that interest cover-based measures of housing affordability
are misleading, because principal matters a lot as well:
Housing affordability calculated on a house price-to-wage basis is still exceptionally
high by historical standards. On this measure, housing is roughly 40% overvalued.
Debt service cover is still very low by long-term historical standards roughly 20%
below average. We calculate debt servicing obligations as interest payments on a new
housing loan, plus principal repayment calculated using a 25-year credit foncier model.
Even if rates are cut, it is very hard to lift this measure of affordability, because rate
cuts do not reduce principal payments.
Figure 17: House Price-to-wage Ratio Figure 18: Debt Service Cover
1.2
1.4
1.6
1.8
2.0
2.2
1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 2019
Log (House Price-to-wage Ratio) Average +/- 1 S.D.


1
2
3
4
1960 1970 1980 1990 2000 2010 2020
Debt Service Cover Average +/- 1 S.D.

Source: Bloomberg, Datastream, Stapledon, Credit Suisse Source: Bloomberg, Datastream, Stapledon, Credit Suisse
In addition, first home-buying incentives have changed across the country, negatively
impacting housing affordability. In major states, first homebuyers are no longer entitled to
the Federal government's $7,000 grant. Instead, the grant has been replaced by more
generous incentives (up to $30,000) that are restricted to new home purchases. When we
take into account the fact that new homes make up less than 10% of the market, weighted
for eligibility, first homebuying incentives have been more than halved.
Housing demand is
unusually low considering
rate cuts delivered so far,
and strong population
growth
18 December 2012
Australian Equity Strategy 12
We believe that low housing affordability is deterring potential homebuyers from making
purchases. Therefore, it is unsurprising that the participation of new entrants in the
housing market is very low. Compounding this problem, it would not make sense for
existing investors take on more gearing and more property exposure, because they are
already finding it hard to make money. Therefore, there is a distinct lack of momentum in
the market to keep the bubble going.
Indeed, we suspect that momentum is sufficiently weak to drive house prices down.
Historically, the ratio of home sales (a proxy for housing demand) to building approvals (a
proxy for housing supply) has been a reasonably good leading indicator of house price
movements. Currently, the demand-supply balance is very low roughly 30% below its
long-term average. This suggests that at the margin, the housing market is oversupplied.
The oversupply is consistent with house prices falling 10%15% over the next year.
Figure 19: Home Sales & Building Approvals Figure 20: House Prices & Housing Demand/Supply
0
8
16
24
0
25
50
75
2000 2002 2004 2006 2008 2010 2012 2014
Home Sales (LHS) Building Approvals (RHS)


2
3
4
5
-16%
0%
16%
32%
2000 2002 2004 2006 2008 2010 2012 2014
YoY% Change in Real House Price (LHS)
Home Sales-to-Building Approvals (RHS, Led 9 Months)

Source: ABS, Bloomberg, Datastream, Residex, Credit Suisse Source: ABS, Bloomberg, Datastream, Residex, Credit Suisse
Figure 21: Victorian Home Sales & Building Approvals Figure 22: Victorian House Prices & Demand/Supply
0
20
40
60
0
50
100
150
1985 1990 1995 2000 2005 2010 2015
Victorian Metro Sales (LHS) Victorian Building Approvals (RHS)


1.0
1.5
2.0
2.5
3.0
3.5
4.0
-21%
-14%
-7%
0%
7%
14%
21%
1986 1990 1994 1998 2002 2006 2010 2014
YoY% Change in Victorian Real House Price (LHS)
Victorian Home Sales-to-Building Approvals (RHS, Led 1 Year)

Source: ABS, Bloomberg, Datastream, REIV, Credit Suisse Source: ABS, Bloomberg, Datastream, REIV, Credit Suisse
Figure 23: National Inventory of Homes for Sale Figure 24: Melbourne Inventory of Homes for Sale



Source: SQM Source: SQM
Unaffordability and
unemployment risk are
weighing on demand
Contrary to popular belief,
the housing market is
marginally oversupplied
18 December 2012
Australian Equity Strategy 13
The oversupply seems to be most heavily concentrated in Melbourne. Indeed, SQM
research data suggest that the inventory of homes for sale in Melbourne is currently well
above where it was in the financial crisis.
We also believe that oversupply will become problematic in mining cities such as Brisbane
and Perth. So far, the evidence is that these markets are holding up well but we believe
that this reflects relatively shallow job cuts in the mining sector to date. Should the pace of
job cuts gather more momentum, we could see the housing dynamics in these regions
take a turn for the worst.
Figure 25: WA & Qld House Prices & Commodity Prices Figure 26: Perth Inventory of Homes for Sale
-50%
0%
50%
100%
1990 1995 2000 2005 2010 2015
YoY% Change in Mining Capitals' House Price Index
YoY% Change in Non-rural Commodity Price Index (Led 1 Year)



Source: ABS, Bloomberg, Datastream, Credit Suisse Source: SQM
If house prices really do fall by 10%15% over the next year, this has a disproportionately
large impact on home equity. The average home-owner with a mortgage has a gearing
ratio of 62%. Therefore, every 1% decline in house prices causes roughly a 2.6% decline
in the home equity of mortgagees. A 10%15% decline in house prices would cause a
26%40% decline in home equity. As substantial a decline as this is, it would not
completely eliminate home equity for the average borrower. But even though the average
borrower may not be wiped out more recent homeowners, with considerably less home
equity might be. This would make it harder for them to re-finance, especially if they are on
interest only loans. Therefore, the risks of default are higher when payment shocks hit.
Figure 27: Home Equity of Mortgagees Figure 28: House Prices & Home Equity
0
1,000
2,000
3,000
4,000
5,000
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Home Equity of Mortgagees Real Assets Mortgages


-40%
-20%
0%
20%
40%
60%
1977 1982 1987 1992 1997 2002 2007 2012 2017
YoY% Change in Average Home Equity per Mortgagee
YoY% Change in House Prices

Source: ABS Bloomberg, Datastream, RBA, Credit Suisse Source: ABS Bloomberg, Datastream, RBA, Credit Suisse
Unemployment is rising
The risk of substantially higher unemployment exacerbates all of the de-leveraging risks
we have just mentioned. In our view, the worst of the job cuts is yet to come.
Over the past few months, the labour market seems to have been quite resilient to
negative sentiment, and external shocks. It seems that consumer and construction sectors
have managed to pick up some of the slack from deteriorating mining and financial
services sectors.
House prices could fall
10%15% over the next
year, implying a 26%40%
decline in home equity
Labour market weakness
could exacerbate de-
leveraging risks
18 December 2012
Australian Equity Strategy 14
However, all leading indicators point to weakness in the labour market over the next year:
Job advertisements are declining, pointing to a reduction in aggregate hours worked in
the next few months.
Reported spare capacity is rising, consistent with a substantial rise in the
unemployment rate.
Figure 29: Aggregate Hours Worked & Job Ads Figure 30: Unemployment Rate & Capacity Utilization
-75%
-50%
-25%
0%
25%
50%
75%
-9%
-6%
-3%
0%
3%
6%
9%
1985 1990 1995 2000 2005 2010 2015
YoY% % Change in Aggregate Hours Worked (LHS)
YoY% Change in ANZ Job Ads (RHS, Led 3 Months)

72%
76%
80%
84%
88% 0%
3%
6%
9%
12%
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Unemployment Rate (LHS)
NAB Capacity Utilization (RHS, Led 6 Months, Inverted)

Source: Bloomberg, Datastream, Credit Suisse Source: Bloomberg, Datastream, Credit Suisse
We are suspicious about the hiring activity that has gone on in certain sectors. For
example:
The spurt in retail and wholesale employment probably reflects the short-lived
recovery in retail sales earlier in the year (which was partly driven by stimulus). Going
forward, we would not expect consumer sectors to be aggressive hirers, because
spending growth has since slowed, and employment is a lagging indicator of spending.
Indeed, if house prices really do fall 10%15% over the next year, we would also
expect to see retail sales growth fall, and consumer-driven sectors shed jobs.
Construction sector jobs rose in 4Q. That said, the bulk of the increase in construction
jobs came in Victoria, which just so happens to have the weakest housing market
conditions. We do not think that the construction sector will continue to add to
employment. Indeed, if building approvals fall away, we would expect construction to
be a drag on employment.
Figure 31: Employment by Sector Figure 32: Employment & Retail Sales
-100
0
100
200
300
400
2005 2006 2007 2008 2009 2010 2011 2012 2013
Mining & Construction Retail, Wholesale, Finance & Property
Cumulative jobs created since 2005


-6%
0%
6%
12%
-3%
0%
3%
6%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
YoY% Change in Employment (LHS)
YoY% Change in Retail Sales (RHS, Led 3Q)

Source: ABS, Bloomberg, Datastream, Credit Suisse Source: ABS, Bloomberg, Datastream, Credit Suisse
All leading indicators point
to rising unemployment
We are sceptical about the
recent resilience of the
labour market data
18 December 2012
Australian Equity Strategy 15
Figure 33: Retail Sales & House Prices Figure 34: Non-residential Construction & NAB Survey
-16%
-8%
0%
8%
16%
24%
-6%
-3%
0%
3%
6%
9%
1998 2000 2002 2004 2006 2008 2010 2012 2014
YoY% Change in Real Retail Sales (LHS)
YoY% Change in Real House Prices (RHS)


-20
0
20
40
60
-60%
-30%
0%
30%
60%
1990 1995 2000 2005 2010 2015
YoY% Change in Private Non-residential Building (LHS)
NAB Survey Capex Outlook (RHS, Led 3Q)

Source: ABS, Bloomberg, Datastream, Credit Suisse Source: ABS, Bloomberg, Datastream, Credit Suisse
Also, we are yet to see major job cuts in commodity-driven sectors. In particular, we would
expect to see cuts in the mining capex space. This is because capex and employment are
highly correlated, and current levels of mining capex are not sustainable. Indeed, on our
estimation, miners now have a sizeable 20% funding gap to plug given that profits have
fallen dramatically, and capex has ramped up significantly. In our view, it is unlikely that
profits will rise dramatically because of sharply higher commodity prices. It is also unlikely
that miners will raise more capital to fund capex spending. Therefore, it is most likely that
miners will cut their capex, which would result in substantial job losses.
Figure 35: Mining Capex, Profits & FDI Figure 36: Mining/Construction GDP & Hours Worked
100
1,000
10,000
100,000
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Mining Capex Mining After-tax Profits + FDI


-20%
-10%
0%
10%
20%
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
YoY% Change in Mining & Construction Hours Worked
YoY% Change in Mining & Construction Real GDP

Source: Bloomberg, Datastream, Credit Suisse Source: Bloomberg, Datastream, Credit Suisse
Taking into account all of these considerations, we suspect that we could see 100,000
150,000 job losses over the next year, and the unemployment rate could easily rise to 7%
from 5.2% currently. Indeed, the unemployment rate would rise substantially even without
major job losses, because of strong population and labour force growth.
Rising unemployment is likely to continue weighing on housing demand. Moreover, it is
likely to add more pressure to over-leveraged households, as many of these households
are dependent on multiple income earners to service their loans. In a worst case scenario,
rising foreclosures could also add to the supply of housing at the margin, further
depressing house prices.
The worst of the job cuts
may still be ahead of us
18 December 2012
Australian Equity Strategy 16
Investment conclusions
We are underweight banks because:
Valuations are not attractive.
Earnings and dividends have downside in an environment where unemployment is
rising, house prices are falling, and de-leveraging pressures are intensifying. We
suspect that bad debts could rise considerably, rendering current dividend yields
unsustainable.
The RBA does not seem to be acting sufficiently quickly to deal with de-leveraging
risks. ndeed, the banks are making the RBA's task more difficult by not fully passing
on rate cuts.
We are particularly concerned about the ability of households to continue servicing their
debts in lieu of payment shocks on interest-only loans. Contrary to what the national
accounts might suggest, the cashflow situation for mortgagees is quite tight, and the
vulnerability to payment shocks or unemployment risk is quite high.
Risks are quite concentrated in the investor housing space. Top-down analysis suggests
that investors in the housing market are struggling to generate net income because rental
yields are so far below borrowing rates, and gearing levels are higher than what they
should be. Therefore, it seems as though investors are subsidising losses on their property
portfolios out of labour income, in the hope of future capital gains. However, we are quite
pessimistic about the prospect of house price inflation particularly from such an
overvalued starting point. On the contrary, the most recent data suggest that housing
demand is extremely low relative to "fundamentals and marginal supply, because
potential buyers are very concerned about unaffordability and rising unemployment. If
housing demand remains low, house prices could fall substantially. The risk of house
prices declining is significant because it means that the equity of borrowers could fall
disproportionately, making it more difficult for investors to re-finance loans as payment
shocks hit.



We are underweight banks
because of unattractive
valuation, and deteriorating
macro conditions
18 December 2012
Australian Equity Strategy 17


Disclosure Appendix
Important Global Disclosures
Atul Lele, CFA and Damien Boey, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed
in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation
was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of 0ecember 10, 2012 Ana|ysts' stock rat|ng are def|ned as fo||ows:
Outperform (O) : Tre sloc|'s lola| relurr |s expecled lo oulperlorr lre re|evarl oercrrar|over lre rexl 12 rorlrs.
Neutral (N) : Tre sloc|'s lola| relurr |s expecled lo oe |r ||re W|lr lre re|evarl oercrrar| over lre rexl 12 rorlrs.
Underperform (U) : Tre sloc|'s lola| relurr |s expecled lo urderperlorr lre re|evarl oercrrar| over lre rexl 12 rorlrs.
*Relevant benchmark by reg|on. /s ol '0rn 0ecemoer 20'2, Japanese rar|ngs are oaseo on a srocks rora| rerurn re|ar|ve ro rne ana|,sr's coverage un|verse which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attr active, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rar|ngs are oaseo on a srocks rora|
return relative to the analyst's coverage universe whi ch consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings
are oaseo on a srocks rora| rerurn re|ar|ve ro rne average rora| rerurn ol rne re|evanr counrr, or reg|ona| oencnmark; /usrr alia, New Zealand are, and prior to 2nd
Dcrooer 20'2 u.$. ano 0anao|an rar|ngs uere oaseo on {'j a srocks absolute total return potential to its current share price and (2) the relative attractiveness of a
srocks rora| rerurn porenr|a| u|rn|n an ana|,srs coverage un|verse. For /usrra||an ano heu Zea|ano srocks, '2-month rolling yield is incorporated in the absolute total
return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and
7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were
oaseo on a srocks rora| rerurn re|ar|ve ro rne average rora| rerurn ol rne re|evanr counrr, or reg|ona| oencnmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Ara|ysls' seclor We|grl|rgs are d|sl|rcl lror ara|ysls' sloc| ral|rgs ard are oased or lre ara|ysl's expeclal|ors lor lre lurdarerla|s ard/or
va|ual|or ol lre seclor re|al|ve lo lre group's r|slor|c lurdarerla|s ard/or va|ual|or:
Overweight : Tre ara|ysl's expeclal|or lor lre seclor's lurdarerla|s ard/or valuation is favorable over the next 12 months.
Market Weight : Tre ara|ysl's expeclal|or lor lre seclor's lurdarerla|s ard/or va|ual|or |s reulra| over lre rexl 12 rorlrs.
Underweight : Tre ara|ysl's expeclal|or lor lre seclor's lurdarerla|s ard/or valuation is cautious over the next 12 months.
*/n ana|,srs coverage secror cons|srs ol a|| compan|es covereo o, rne ana|,sr u|rn|n rne re|evanr secror. /n ana|,sr ma, cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (54% banking clients)
Neutral/Hold* 39% (48% banking clients)
Underperform/Sell* 15% (43% banking clients)
Restricted 4%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Cred|l 3u|sse's po||cy |s lo updale researcr reporls as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer
to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and
analytics/disclaimer/managing_conflicts_disclaimer.html
18 December 2012
Australian Equity Strategy 18
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Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the
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Important Regional Disclosures
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As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important
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NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
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Credit Suisse Equities (Australia) Limited. ........................................................................................................................ Atul Lele ; Damien Boey
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18 December 2012
Australian Equity Strategy 19
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Australian Equity Strategy 2012 12 18 - Underweight banks in anticipation of
job cuts, payment shocks and declining house prices.doc