Wednesday, September 13, 2017

The Spectacular Australian Housing Bubble

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

The report describes the system as a “classic mortgage Ponzi finance model”, with
newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.
“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”
LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.
“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

Another report, this time from UBS's Evidence Lab analysis, states that only 67% of respondents stated their mortgage application was "entirely factual and accurate" in 2017, down from a response rate of 72% last year. 25% of participants said their application was "mostly factual and accurate," 8% said it was "partially factual and accurate", while 1% "would rather not say." Another question in the survey asked respondents to compare the mortgage process against previous experiences. Here 46% of respondents stated it was easier to get a mortgage approved than previously, compared to 17% who said it was harder. These responses indicate that "despite recent macroprudential policies...and the fact that mortgage approvals remain at record levels implies that there is little evidence mortgage underwriting standards have been tightened through the eyes of the consumer."

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