Blind Freddie Could See There Was A Bubble

A report from the Australian Associated Press. “Weaker house prices in Sydney and Melbourne have continued to drag down the national market, with a 0.5% drop in September marking 12 months of consistently falling prices. CoreLogic’s national hedonic home value index showed a broadening of the housing market correction, with national values down 2.7% since peaking 12 months ago, and regional markets also slowing. ‘While the housing market downturn is well entrenched across Darwin and Perth where dwelling values remain 22.1% and 13.2% lower relative to their 2014 peak … Sydney and Melbourne are now the primary drag on the national housing market,’ CoreLogic’s head of research, Tim Lawless, said.”

“Sydney’s annual loss has tipped over 6% for the past 12 months, while Melbourne has dropped 3.4%. ‘Not only are these among the largest annual falls across the capital cities, but considering [they] comprise approximately 60% of the national value of housing … [they] have a substantial drag down effect,’ Lawless said.”

The Sydney Morning Herald. “Bank investors on Friday delivered a verdict on the interim report of the royal commission into financial services – it could have been worse. After the initial relief that Commissioner Kenneth Hayne suggested the banking industry didn’t need a raft of new laws and regulations, it just needed to obey those already in place, investors began to realise that the outcome could be the same. AMP economist Shane Oliver warns the royal commission is one of several factors that augur poorly for the property market.”

“‘Tighter bank lending standards, particularly around tougher income and expense verification and total debt to income limits; poor affordability; rising unit supply; falling price growth expectations; and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors are pushing prices down in cities which have seen strong gains since 2012 ie Sydney (which saw prices rise 72 per cent over the five years to its August 2017 high), and Melbourne (which saw prices rise 57 per cent over the five years to its November 2017 high),’ Oliver says.”

“There is little doubt that the royal commission represents a strong structural headwind for the banking industry and the housing market. If develops further, there will be plenty of housing damage.”

The Australian Financial Review. “We are discussing the early months after John Fraser took up the job as head of the federal Treasury, returning – at the insistence of then prime minister Tony Abbott – from a successful career in merchant banking in Britain.”

“Fraser’s preference for blunt speaking over bureaucratic restraint made life occasionally uncomfortable for the government. Just a few months into the job he ruffled feathers when he contradicted Joe Hockey about the state of the housing market. Fraser backed the Labor Party’s case that there was a housing ‘bubble,’ despite Abbott and Hockey insisting that house price increases were a good thing.”

“‘I was right about that,’ Fraser says now. ‘Blind Freddie could see there was a bubble.'”

From Ten Daily. “It’s no secret why Australians are struggling to buy a home: house prices have skyrocketed and wages have stagnated. Property expert Robert Klaric told ten daily that it’s harder to get mortgages from the banks to purchase property than ever.”

“‘Whether you’re an investor or a homeowner, the banks are scrutinising every loan application, so not everything is just being approved as it was a couple of years ago,’ he said.”

From Mortgage Business. “According to UBS’ Australian Banking Sector Update on 19 September, which involved an anonymous survey of 1,008 consumers who took out a mortgage in the last 12 months, 18 per cent stated that they ‘don’t know’ when their interest-only (IO) loan expires, while 8 per cent believed their IO term is 15 years, which doesn’t exist in the Australian market.”

“The research found that less than half of respondents, or 48 per cent, believed their IO term expires within five years. The investment bank said that it found this ‘concerning’ and was worried about a lack of understanding regarding the increase in repayments when the IO period expires.”

“The Reserve Bank of Australia (RBA) earlier this year revealed that borrowers of IO home loans could be required to pay an extra 30 per cent to 40 per cent in annual mortgage repayments (or an additional ‘non-trivial’ sum of $7,000 a year) upon contract expiry. The central bank noted that the increase would make up 7 per cent, or $120 billion, of the total housing credit outstanding.”

“According to the RBA, 2020 is the year that most of the 200,000 at-risk IO loans will reset.”

“UBS’ research, which was conducted between July and August this year, revealed that more than a third of respondents, of 34 per cent, ‘don’t know’ how much their mortgage repayments will rise by when they switch to principal and interest (P&I) contracts.”

“More than half, or 53 per cent, estimated that their repayments will increase by 30 per cent once their IO term ends, while 13 per cent expected their repayments to rise by more than 30 per cent, which is the base case for most IO borrowers. ‘This indicates that the majority of IO borrowers remain underprepared for the step-up in repayments they will face,’ UBS stated.”

“Further, nearly one in five respondents to the UBS survey, or 18 per cent, said that they took out an IO loan because they can’t afford to pay P&I.”

“‘With a lack of refinancing options available and the banks reluctant to roll interest-only loans, these mortgagors will have to significantly pull back on their spending, sell their property, or [they] could potentially end up falling into arrears,’ the investment bank stated.”

“UBS also found it concerning that 11 per cent of respondents said they expected house prices to rise and planned to sell the property before the IO period expires. ‘This is a risky strategy given how much the Sydney and Melbourne property markets have risen, and have now begun to cool,’ the investment bank said.”

“Overall, the top two motivations for taking out an IO loan, according to UBS survey participants, were ‘lower monthly repayments gives more flexibility on my finances’ (44 per cent) and ‘to maximise negative gearing’ (43 per cent).”