Is This Australia’s Sub-Prime Debt Shocker?
I doubt you need me to point out that Australian capital city home prices have dramatically increased since the mid to late 1990’s, especially in Sydney and Melbourne. The growth in property values has been primarily attributed to limited housing supply, and at the same time steady population growth, a more liquid loan market and cheaper finance.
So just when does a boom become a bubble? The answer: when the rational becomes irrational. This happened in Australian real estate some time ago – the moment when the average person, on the average income, couldn’t afford the average home.
Yet the property price party raged on. And on. And on. Not everywhere, mind you… while Sydney and Melbourne have been dancing on the ceilings, there’s been a real estate hangover in WA for the past few years, and Darwin is still in the midst of a significant property price contraction. And then we have the likes of Moranbah and Gladstone, where home prices completely collapsed.
Speaking of collapse, my opinion previously was that, in the absence of a black swan event (like a war, plague, hyperinflation, large-scale natural disaster, etc.), an Aussie capital city price crash was quite unlikely to occur. Instead, I preferred the thesis of a soft landing in the form of a small price jolt (say up to a 10% decline), followed by a substantial multi-year period of static prices.
However, if what I’m about to share with you is true, then my mind has changed and I believe a more substantial price correction (say up to 30% decrease in value), and maybe even a crash (>50%), is not just possible, it’s actually quite probable.
The game-changing information comes from UBS – an investment bank that completed a survey revealing that only 67% responded that their mortgage application (on their home loan application made in 2017) was “completely factual and accurate”. In other words, a third of those surveyed confessed to lying.
Furthermore, the study estimated that there is “roughly US$500 billion (A$657.95 billion) worth of factually inaccurate mortgages on the banks’ books in Australia.” That’s $657,000,000,000, or (at the current median house price) the equivalent of 562,733 Sydney houses!
Again, if this UBS study, and its associated forecast, are accurate, then the dodgy debt mentioned – which have been dubbed Liar Loans – is surely Australia’s equivalent of the US sub-prime debt crisis, and is just waiting for a spark to ignite it. That spark could well be the Royal Commission in the Australian banking and investment sector.
Should that Royal Commission find that the loan application process lacked integrity and recommends that lenders re-qualify their loans against more stringent standards, or make other prudential recommendations that cause lenders to reassess the quality of their assets, then it may be that lenders start demanding additional capital contributions on ‘Liar Loans’ that were initially approved on deceitful details and dodgy declarations. Where such money cannot be provided, loans may be called in, which will, in turn, cause a sudden spike in housing stock for sale, which in turn would put downward pressure on property prices.
Even taking the most conservative expectation from the upcoming Royal Commission, you have to believe there will be more checks and balances (read red tape) to qualify for a loan. That’s not necessarily a bad thing, but it will mean it will be harder and will take more time, to qualify for a loan.
Add to this:
- News that Sydney and Melbourne property prices are softening, fast
- News that mortgage stress is already biting (like the 1 in 10 households in Western Sydney who are reportedly finding it difficult to make their repayments)
- The likelihood that interest rates are to go up in 2018
- The so-called glut of apartments coming online soon in Sydney, Brisbane and Melbourne
- The cooking of the golden foreign buyer goose at the hands of State and Federal governments raising fees and duties for overseas buyers
- A new tax on vacant property
- Recent adverse changes to depreciation; and
- Labor’s policy of changing negative gearing rules, once in power
and you don’t need to be Nostradamus to predict headwinds coming for Aussie property.
What do you think though? Will it be doom, gloom or boom in 2018?
Finally, as this is my last article for 2017, I’d like to acknowledge the hard work and fine contribution made by my fellow worker bees here at PropertyInvesting.com. On behalf of us all, we wish you a very Merry Christmas and a Happy New Year.
Until we meet again, goodbye and God Bless.
– Steve McKnight