All Topics / General Property / Australia's subprime crisis

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  • Profile photo of Shane WShane W
    Participant
    @shanewebb
    Join Date: 2016
    Post Count: 17

    Hello all,

    I apologise if this has been posted elsewhere, however I am yet to find a suitable discussion.

    We all know about Americas Subprime mortgage crisis which lead to the GFC and millions of people losing their home in the USA.

    My question for discussion is – Could that happen in Australia?

    From my understanding, the subprime mortgage crisis was caused by banks lending to individuals with low credit quality, sometime with no income verification or security for the loan. These high risk mortgages were then passed on by the banks with a AAA risk rating and sold to millions of investors. All this was based on the assumption that house prices never fall – Safe as houses as they say.

    When the disposable income to debt ratio started to escalate in 2006 – House prices started to decline. This lead to borrowers unable to refinance their loans to pay for their mortgage repayments and rise in defaults. This led to a snowball affect of rising interest rates, mortgage defaults and collapse of the banking system. Property prices plummeted, the stock market collapsed and millions of people lost their jobs and home.

    Although the are many differences here in Australia, I can see some similarities:

    Low doc and no doc loans Some banks offer loan applications with low or no documentation. Nearly anyone these days is able to go to the bank and get a mortgage for their home. The bank is also known to push a maximum limit of money to the borrower. Perhaps many borrowers have mortgages far greater than they should.

    Current low interest rates Interest rates are currently at record lows. Which has benefited home owners significantly. They have been able to pay down their loans quicker – Or borrow more money than they could previously. What happens when interest rates start to rise as they inevitably will? What will happen to borrowers who over capitalised and now cannot afford their high interest payments? From what I have read – Borrowing money abroad is already starting to become increasingly expensive for our banks. They have absorbed these expenses so far, but it is only a matter of time until it is passed onto borrowers.

    The same belief – Our property market is safe Many investors are using LOC and capitalising on the belief that house prices will usually double in a 7-10 year period. What if it doesn’t? What will happen?

    LVR of 95% Some mortgages include a deposit of only 5% with the rest borrowed by the bank. These are high risk loans to the banks with increased interest payable.

    From my knowledge – there are many restrictions on our banks lending in which America did not have during the subprime crisis – Which helped us survive the 2008 crisis reasonably well. Is it enough? What could prevent a similar crisis in Australia?

    Keep in mind I am not a doom predictor – I am a beginning property investor seeking a informed discussion.

    Cheers

    Shane

    • This topic was modified 8 years ago by Profile photo of Shane W Shane W.
    Profile photo of Shane WShane W
    Participant
    @shanewebb
    Join Date: 2016
    Post Count: 17

    I would also like to state the following arguments against the possibility of a similar crisis here in Australia:

    No doc loans are no longer available? From my knowledge, since the GFC, no doc loans are no longer offered by the banks. Is this true? Have we learnt from the subprime crisis in the USA?

    Subprime lending reached a peak of around 20% in the USA, however in Australia, non conforming loans (subprime) represent only around 1% The lower prevalence of these non conforming loans in the Australian market protect us against a similar crisis.

    Our banks have a more conservative lending practice than the US during the subprime crisis Our lending practices didn’t ease as much as in the USA due to restrictions from the RBA.

    Profile photo of maccmacc
    Participant
    @macc
    Join Date: 2016
    Post Count: 14

    From what l’ve seen Australia’s nothing like the US in just about any possible way let alone on lending.
    We are so tightly ruled and over regulated here in every possible area not just money,it’s a nanny state.
    But anything’s possible and tbh l’m amazed our market hasn’t collapsed with over priced everything not only housing but to suggest Australia make even more rules and chains and restrictions on anything not just housing or Depps dogs, is just ridiculous, we’re already a laughing stock.

    As for our banks though,record profits no one else in the world as far as l know can even imagine, charges nobody else have even heard so nope they’ll be right you can bet your sweet bippy on that, at our expense.
    But you do wonder with everyday people and mortgages though also almost the highest in the world even for average living in suburbia.Add our cost of living also among the highest, our taxes on everything,also among the highest, forget wage tax that doesn’t even scratch the surface as if that wasn’t high enough, double that again with everything hidden,then add our debt ratio,also among if not the highest in the world.
    Then you do really gotta wonder about just what becomes of everyday people and their mortgages if things dump.
    The gov can’t even handle what , a 2 or 3% debt but the average Aussie is in hock upto their necks so there’s zero leeway.

    • This reply was modified 8 years ago by Profile photo of macc macc.
    • This reply was modified 8 years ago by Profile photo of macc macc.
    • This reply was modified 8 years ago by Profile photo of macc macc.

    macc

    Vic

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