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BUBBLE: Is the Australian property market about to crash?

propertybubble

This important analysis is not what most Australians want to hear but urgently need to heed:

Australia’s residential property market (specifically land market) is vastly overvalued, driven by debt-financed speculation and the relative non-taxation of land rent. While land bubbles have been a continual feature of the Australian economy, what separates this cycle is the relative enormity of the boom in both land values and private debt. A smaller private debt to GDP ratio during the 1880s and 1920s was enough to produce two devastating depressions, including a number of recessions during the mid-1970s, early 1980s and early 1990s.

The question is often asked why housing prices are so high. Instead, the real question is to ask why prices are so low. The banking and financial system is ready to lend absurd amounts of debt to the willing army of “greater fools,” and has constructed an elaborate chain from mortgage brokers’ offices through to the business development managers (BDMs) at the banks in order to commit extensive fraud by manipulating loan application forms. This is the “six degrees of separation” Denise Brailey has uncovered. Consequently, the only determinant that prevents the banks from lending more credit is debtors’ ability to finance repayments out of current income. Only when it becomes difficult to finance repayments will the housing and land markets finally capitulate.

It is often claimed “this time is different.” It certainly is, but not for the reasons usually given: Australia has not experienced a land bubble of this magnitude in its history. 70% of adults own property, solvency of the FIRE sector is dependent upon ever-increasing capital values and the governments’ addiction to housing-related tax revenue and votes, it is none too surprising bubble deniers have been out in full force, asserting housing prices are based upon fundamental valuations. Also unsurprising is that all bubble deniers have conflicts of interest, and in an age of the secular equivalent of religious fanaticism and greed, facts and history are conveniently dispensed down the memory hole.

The only option left to policymakers is to continually kick the can down the road, hoping the bust does not occur on their watch. The result, as seen with the Rudd government’s additional First Home Owner’s Boost, was precisely that. This intervention restarted the debt machine, re-inflating housing and land prices to a new, higher peak in 2010. The overarching private debt bubble, which began in 1964, will likely come to an end once and for all when the government runs out of fuel to throw on the fire.

Discussion

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  1. Any young males with housing problems you are welcome to stay in my Bath House.

    Posted by Pissy Chryne | February 13, 2013, 17:34
  2. Manipulating loan applications? Your evidence for this???? The industry is far from white but brokers are regulated to the extent that this practice would not be common – if at all .. So where is your evidence?.

    Posted by Terry | February 14, 2013, 6:51
  3. IN 2002 John O’Donnell had been unemployed for about 18 months when an investment spruiker for a company called Streetwise approached him in his local shopping centre. He asked if O’Donnell wanted to “unlock” the equity in his $750,000 home to buy an investment property.

    Although O’Donnell earned no income and his wife Jill made just $23,000 a year, the couple was provided, via Streetwise, with a $500,000 loan against the family home to invest in a mooted property development.

    Soon afterwards the O’Donnells faced financial ruin. Streetwise had folded, the property the O’Donnells thought they were buying never materialised, and when they were unable to meet loan repayments, the lender who had ultimately provided the loan sought to repossess their home.

    Now the O’Donnells have become the face of Australia’s growing mortgage problem, seeded during the heady days of the last property boom.

    It is emerging that Australian lenders were engaging in many of the same imprudent, subprime-style lending practices seen in the US. However, unlike many cases in the US, local courts have been finding in favour of borrowers who have been stung by imprudent lending practices.

    The O’Donnells have had the $500,000 loan against their home cut by 75 per cent following unsuccessful Supreme Court action taken by their lender, Brisbane-based First Mac.

    This was because it was found that Streetwise — acting as a mortgage broker — had falsified O’Donnell’s income and assets to ensure the loan was approved.

    “This is not the sort of thing you would expect to happen in this country. I was not working at the time and we told them (Streetwise) that,” O’Donnell says.

    “Even a phone call by the lender to us or to our accountant would have told them that we couldn’t afford the loan. The banks are very strict at the moment but back then their lending practices were very loose, to say the least.”

    Two other borrowers stung by similar action have had their entire mortgages removed.

    Lenders are fighting back hard.

    First Mac, which has issued $9.5 billion in Australian mortgages since 2003, is now seeking to take the matter to the High Court, with a preliminary hearing scheduled for later this month.

    At the heart of the problem are so-called “low-doc” and “no-doc” home loans, which first appeared in Australia in the 1990s but which exploded into the market in the early 2000s. Those loans, which required borrowers to “self-declare” their income, were created for self-employed borrowers who were unable to prove steady income or who had not completed tax returns.

    However, those loans were soon being spruiked widely and low-doc loan-writing soared.

    According to researcher Datamonitor, low-doc loans in Australia more than doubled from $17.5bn to $37.9bn between 2002 and 2006 — when they represented 16.1 per cent of total housing lending.

    According to Fitch Ratings, low-doc loans comprise about 8 per cent to 10 per cent of every mortgage in the Australian securitised mortgage market. Fitch analyst James Zanesi says that proportion of low-doc loans is similar in the wider $1.2 trillion mortgage market.

    The Reserve Bank was unable to provide details for the size of the low-doc market when contacted by The Australian last week.

    The popularity of low-doc loans was driven by the mortgage securitisation process, imported from the US, and which took off in the early 2000s with Macquarie Bank leading the charge.

    By 2005 Macquarie boasted it had securitised more than $25bn in mortgages. The mortgage securitisation process provided five or six degrees of separation between the “lender of record”, or the lender listed on title documents, and the borrower.

    Under the process, financial institutions would issue hundreds or thousands of mortgages, then package these mortgages into funds and sell them to investors, charging the investors management fees.

    As has emerged in recent court cases, lenders regularly had no contact with borrowers.

    In a typical securitisation process, borrowers would deal with mortgage brokers — or “loan introducers”, as they became known — in applying for a loan. After a loan had been granted, borrowers would deal with a separate “mortgage manager” in making loan repayments.

    A so-called “service program manager”, such as Macquarie or First Mac, would deal with mortgage managers and organise the securitisation of loans.

    To allow such loans to be sold in investment markets, a trustee such as Perpetual became the lender of record for loans.

    The distance between borrowers and the ultimate lenders created breakdowns in the traditional relationship. Mortgage brokers had little incentive to ensure the veracity of information provided by borrowers; it wasn’t their money.

    In many cases, borrowers overstated their incomes to buy up in the booming property market.

    But more worryingly, it has been uncovered that amid that buoyant property market, and with mortgage brokers earning upfront commissions in the thousands of dollars, many brokers — or others in the securitisation chain — deliberately falsified the stated income or financial positions of borrowers.

    While brokers and others were engaging in improper, and in some cases illegal, behaviour, mortgage securitisers were also less concerned than lenders had traditionally been. The bulk of the mortgages would be sold to third-party investors not long after securitisation.

    In all of the major court cases it has been found that lenders failed to take simple steps such as calling borrowers to verify the income stated on their loan application forms.

    In the race to provide credit, big lenders such as Macquarie and GE Money spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements.

    In scores of emails, those lenders, and many others, told mortgage brokers that borrowers needed only to register an Australian Business Number “for one day” to secure low-doc or no-doc loans.

    One email from a Macquarie Bank business development manager to brokers says: “Why not try Macquarie for the below reasons . . . No docs — client only needs to be self-employed for 1 day or more . . . No assets and liabilities required, no income needs to be stated!!!”

    Macquarie Bank and GE Money declined to comment.

    The loose low-doc lending practices of the property boom are coming back to haunt the market. According to Fitch, low-doc loans are more than four times likelier to be in default than standard loans, with 5.5 per cent of all “prime” low-doc loans in default, compared with 1.26 per cent of all standard loans.

    The group tells The Australian low-doc loans are experiencing “considerable deterioration” and there is “no relief in sight”.

    Analysis shows the mortgage default rates in many of the funds securitised by Australian institutions — and since sold to investors in Australia and across the world — have surged in recent years.

    In the two years to last month, defaults for loans held in Macquarie’s PUMA Mater Fund S-7 have ballooned from 2.66 per cent to 7.28 per cent. Defaults in Macquarie’s Master Fund S-2 have grown from 2.25 per cent to 6.82 per cent.

    About 90 per cent of loans in the Macquarie securitised funds were low-doc, says Macquarie spokeswoman Kristen Costandi. She says those levels of delinquency as a proportion of each fund were rising because those funds were shrinking. She declined to comment when asked why those funds were shrinking far more rapidly than the life of the underlying loans would suggest.

    In October 2008, amid the financial crisis, Wayne Swan announced the government would invest $4bn to shore up the residential mortgage-backed security market, but that figure has ballooned and in April last year the Treasurer increased the obligation to $20bn. The taxpayer-funded exposure to that market is now $14bn.

    According to government figures, the Australian Office of Financial Management has spent $405 million buying mortgages in two Macquarie Funds.

    An AOFM spokesman says no loans in those two recently created Macquarie funds are low-doc, and low-doc loans comprise only about 2 per cent of the federal government’s RMBS portfolio.

    Consumer advocate Denise Brailey, who runs the Banking & Finance Consumers Support Association, says she is dealing with more than 100 alleged victims of improper lending.

    She says borrowers who believe they have been affected should approach their lender for a copy of their loan application form, which they are entitled to by law, and check the income levels stated. Not being provided with a copy of the loan application form is a key indicator borrowers may have been subject to irregularities.

    “In every single case of the 100-plus I am dealing with,” she says, “the person has not been provided with a copy of their loan application form by their mortgage broker or lender.” She says borrowers are entitled to such information by law. However, banks and other lenders have “stonewalled” such requests.

    “Every time the borrowers receive the forms they are blown away,” Brailey says. “Incomes have been grossly exaggerated, false employment job descriptions have been entered or they have been stated as being employed when they’re not.”

    Judges have sought, in most cases, to restore borrowers to the position they were in before they were subject to unscrupulous practices. That means borrowers need to establish they have been subject to unscrupulous lending — often by establishing their income has been improperly stated — and that they have been financially hurt as a result.

    Brailey says she has been in contact with numerous lawyers considering class actions against suspect lenders and mortgage brokers; however, they are deterred by the fact those people facing the loss of their homes often have little money to pay for legal fees.

    She says one avenue for aggrieved borrowers is the Financial Ombudsman Service, which is funded by lenders and has acted as mediator between borrowers and lenders in many such cases, often reducing loans by hundreds of millions of dollars. Such mediation is free; however, Brailey says borrowers tend to receive substantially less favourable outcomes under that process than if they can fund legal action.

    Ombudsman Philip Field says borrowers subject to loan application irregularities, or “maladministration”, have been granted mortgage reductions of 25 per cent to 100 per cent, depending on a range of factors, including the losses incurred by those borrowers.

    Posted by Anonymous | February 14, 2013, 7:53
  4. It’s widespread unfortunately, Terry.

    http://www.theaustralian.com.au/news/features/the-motgage-sting/story-e6frg6z6-1226383950929

    IN 2002 John O’Donnell had been unemployed for about 18 months when an investment spruiker for a company called Streetwise approached him in his local shopping centre. He asked if O’Donnell wanted to “unlock” the equity in his $750,000 home to buy an investment property.

    Although O’Donnell earned no income and his wife Jill made just $23,000 a year, the couple was provided, via Streetwise, with a $500,000 loan against the family home to invest in a mooted property development.

    Soon afterwards the O’Donnells faced financial ruin. Streetwise had folded, the property the O’Donnells thought they were buying never materialised, and when they were unable to meet loan repayments, the lender who had ultimately provided the loan sought to repossess their home.

    Now the O’Donnells have become the face of Australia’s growing mortgage problem, seeded during the heady days of the last property boom.

    It is emerging that Australian lenders were engaging in many of the same imprudent, subprime-style lending practices seen in the US. However, unlike many cases in the US, local courts have been finding in favour of borrowers who have been stung by imprudent lending practices.

    The O’Donnells have had the $500,000 loan against their home cut by 75 per cent following unsuccessful Supreme Court action taken by their lender, Brisbane-based First Mac.

    This was because it was found that Streetwise — acting as a mortgage broker — had falsified O’Donnell’s income and assets to ensure the loan was approved.

    “This is not the sort of thing you would expect to happen in this country. I was not working at the time and we told them (Streetwise) that,” O’Donnell says.

    “Even a phone call by the lender to us or to our accountant would have told them that we couldn’t afford the loan. The banks are very strict at the moment but back then their lending practices were very loose, to say the least.”

    Two other borrowers stung by similar action have had their entire mortgages removed.

    Lenders are fighting back hard.

    First Mac, which has issued $9.5 billion in Australian mortgages since 2003, is now seeking to take the matter to the High Court, with a preliminary hearing scheduled for later this month.

    At the heart of the problem are so-called “low-doc” and “no-doc” home loans, which first appeared in Australia in the 1990s but which exploded into the market in the early 2000s. Those loans, which required borrowers to “self-declare” their income, were created for self-employed borrowers who were unable to prove steady income or who had not completed tax returns.

    However, those loans were soon being spruiked widely and low-doc loan-writing soared.

    According to researcher Datamonitor, low-doc loans in Australia more than doubled from $17.5bn to $37.9bn between 2002 and 2006 — when they represented 16.1 per cent of total housing lending.

    According to Fitch Ratings, low-doc loans comprise about 8 per cent to 10 per cent of every mortgage in the Australian securitised mortgage market. Fitch analyst James Zanesi says that proportion of low-doc loans is similar in the wider $1.2 trillion mortgage market.

    The Reserve Bank was unable to provide details for the size of the low-doc market when contacted by The Australian last week.

    The popularity of low-doc loans was driven by the mortgage securitisation process, imported from the US, and which took off in the early 2000s with Macquarie Bank leading the charge.

    By 2005 Macquarie boasted it had securitised more than $25bn in mortgages. The mortgage securitisation process provided five or six degrees of separation between the “lender of record”, or the lender listed on title documents, and the borrower.

    Under the process, financial institutions would issue hundreds or thousands of mortgages, then package these mortgages into funds and sell them to investors, charging the investors management fees.

    As has emerged in recent court cases, lenders regularly had no contact with borrowers.

    In a typical securitisation process, borrowers would deal with mortgage brokers — or “loan introducers”, as they became known — in applying for a loan. After a loan had been granted, borrowers would deal with a separate “mortgage manager” in making loan repayments.

    A so-called “service program manager”, such as Macquarie or First Mac, would deal with mortgage managers and organise the securitisation of loans.

    To allow such loans to be sold in investment markets, a trustee such as Perpetual became the lender of record for loans.

    The distance between borrowers and the ultimate lenders created breakdowns in the traditional relationship. Mortgage brokers had little incentive to ensure the veracity of information provided by borrowers; it wasn’t their money.

    In many cases, borrowers overstated their incomes to buy up in the booming property market.

    But more worryingly, it has been uncovered that amid that buoyant property market, and with mortgage brokers earning upfront commissions in the thousands of dollars, many brokers — or others in the securitisation chain — deliberately falsified the stated income or financial positions of borrowers.

    While brokers and others were engaging in improper, and in some cases illegal, behaviour, mortgage securitisers were also less concerned than lenders had traditionally been. The bulk of the mortgages would be sold to third-party investors not long after securitisation.

    In all of the major court cases it has been found that lenders failed to take simple steps such as calling borrowers to verify the income stated on their loan application forms.

    In the race to provide credit, big lenders such as Macquarie and GE Money spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements.

    In scores of emails, those lenders, and many others, told mortgage brokers that borrowers needed only to register an Australian Business Number “for one day” to secure low-doc or no-doc loans.

    One email from a Macquarie Bank business development manager to brokers says: “Why not try Macquarie for the below reasons . . . No docs — client only needs to be self-employed for 1 day or more . . . No assets and liabilities required, no income needs to be stated!!!”

    Macquarie Bank and GE Money declined to comment.

    The loose low-doc lending practices of the property boom are coming back to haunt the market. According to Fitch, low-doc loans are more than four times likelier to be in default than standard loans, with 5.5 per cent of all “prime” low-doc loans in default, compared with 1.26 per cent of all standard loans.

    The group tells The Australian low-doc loans are experiencing “considerable deterioration” and there is “no relief in sight”.

    Analysis shows the mortgage default rates in many of the funds securitised by Australian institutions — and since sold to investors in Australia and across the world — have surged in recent years.

    In the two years to last month, defaults for loans held in Macquarie’s PUMA Mater Fund S-7 have ballooned from 2.66 per cent to 7.28 per cent. Defaults in Macquarie’s Master Fund S-2 have grown from 2.25 per cent to 6.82 per cent.

    About 90 per cent of loans in the Macquarie securitised funds were low-doc, says Macquarie spokeswoman Kristen Costandi. She says those levels of delinquency as a proportion of each fund were rising because those funds were shrinking. She declined to comment when asked why those funds were shrinking far more rapidly than the life of the underlying loans would suggest.

    In October 2008, amid the financial crisis, Wayne Swan announced the government would invest $4bn to shore up the residential mortgage-backed security market, but that figure has ballooned and in April last year the Treasurer increased the obligation to $20bn. The taxpayer-funded exposure to that market is now $14bn.

    According to government figures, the Australian Office of Financial Management has spent $405 million buying mortgages in two Macquarie Funds.

    An AOFM spokesman says no loans in those two recently created Macquarie funds are low-doc, and low-doc loans comprise only about 2 per cent of the federal government’s RMBS portfolio.

    Consumer advocate Denise Brailey, who runs the Banking & Finance Consumers Support Association, says she is dealing with more than 100 alleged victims of improper lending.

    She says borrowers who believe they have been affected should approach their lender for a copy of their loan application form, which they are entitled to by law, and check the income levels stated. Not being provided with a copy of the loan application form is a key indicator borrowers may have been subject to irregularities.

    “In every single case of the 100-plus I am dealing with,” she says, “the person has not been provided with a copy of their loan application form by their mortgage broker or lender.” She says borrowers are entitled to such information by law. However, banks and other lenders have “stonewalled” such requests.

    “Every time the borrowers receive the forms they are blown away,” Brailey says. “Incomes have been grossly exaggerated, false employment job descriptions have been entered or they have been stated as being employed when they’re not.”

    Judges have sought, in most cases, to restore borrowers to the position they were in before they were subject to unscrupulous practices. That means borrowers need to establish they have been subject to unscrupulous lending — often by establishing their income has been improperly stated — and that they have been financially hurt as a result.

    Brailey says she has been in contact with numerous lawyers considering class actions against suspect lenders and mortgage brokers; however, they are deterred by the fact those people facing the loss of their homes often have little money to pay for legal fees.

    She says one avenue for aggrieved borrowers is the Financial Ombudsman Service, which is funded by lenders and has acted as mediator between borrowers and lenders in many such cases, often reducing loans by hundreds of millions of dollars. Such mediation is free; however, Brailey says borrowers tend to receive substantially less favourable outcomes under that process than if they can fund legal action.

    Ombudsman Philip Field says borrowers subject to loan application irregularities, or “maladministration”, have been granted mortgage reductions of 25 per cent to 100 per cent, depending on a range of factors, including the losses incurred by those borrowers.

    Posted by Macca | February 14, 2013, 7:54
  5. in the 20 years to 1985 median house prices averaged 3 times the average annual wage. in 2010 they were 8 times – successive government policies have contributed to this climb in housing unaffordability

    Posted by the insider | February 14, 2013, 9:30
  6. Although there is a link at the top, I really do think that it would be prudent for this article to more clearly state its source.

    Posted by Disillusioned | February 14, 2013, 10:05
  7. Dean Mighell will have no problems has resigned feb 28th.will scamper with thousands of dollars that you stole over the years.you apparently need a break more like a bullet.

    Posted by jimmy | February 14, 2013, 10:30
  8. You’re only five years late on this (or longer).

    Howard laughed off the bubble about a decade ago claiming he didn’t hear people complaining about rising house prices. Rudd inherited the peak and panicked when the bubble burst during the ‘GFC’ by throwing money at anything with a pulse. Every pollie fears declining property prices on their watch and rising unemployment follows.

    The Aussie housing market will resemble relatively closely what has happened in Ireland and Spain since the bubbles burst there. This is the largest property bubble in Australia since the 1880s and could well be larger. It has been driven by loose credit and non-existent lending standards. Only greater fools can pay to buy into this market.

    Perhaps the only bubble bigger in the last decade has been in iron ore (and coking coal). When industrial commodities tank it is officially game over.

    The elephant in the room is not government debt or deficits but private debt – specifically mortgage debt. When that bursts we’ll have one jolly depression on our hands and there will be no government surpluses to be seen. Just look at the Victorian state government who didn’t foresee declining stamp duty revenue… game over man, it’s game over!

    Posted by The Truth | February 14, 2013, 11:04
  9. Tell the Valuers and speculators
    to bugger off and let the overpriced market settle. This has
    all been the project of the Howard/Costello government feeding their mates

    Posted by Argus Tuft | February 14, 2013, 22:54
  10. Low interest rates feed into higher asset values – housing and stocks. The relatively expansionary monetary policy of the Reserve Bank is likely to underpin asset values. The Reserve Bank foolishly increased interest rates because Rudd and Swan talked up the economy as overheated in early 2008. Just a few months later, they were pumping billions back into the economy to stop the contagion of the global financial crisis and the Reserve Bank had to reduce interest rates much more than if they had left them alone. It was incredibly unfortunate that the 2004 – 2007 Howard Government had run a relatively loose fiscal policy based on surpluses being underpinned by high taxation rather than spending restraint. When the revenue fell, the expenditure programs continued and were augmented by a spooked first term government that swallowed Treasury advice (the same advisors that had indicated a tightening was needed a few months earlier were now recommending a spending binge to prevent recession).

    I hate these people who play games with other people’s livelihoods to test the validity of their econometric models so they can fine tune them. Their fraudulent behaviour is only matched by the climate scientists who draw conclusions from the statistical noise in the climate records.

    Posted by Giuseppe De Simone | February 14, 2013, 23:12
  11. Housing bubbles don’t “burst” – it is an illiquid market. Rather than bursting a balloon with a pin prick, imagine squeezing the opening to slowly release the pressure.
    This is what happens to house prices, a long, slow decline.
    Bursting bubbles like a liquid equity market is entirely the wrong analogy.

    More likely, is a protracted period of stagnation in the property market, with prices going nowhere, or falling slowly relative to inflation.

    Posted by LeftRightOut | February 18, 2013, 11:04
  12. Surprise, surprise…..

    Posted by Anonymous | February 18, 2013, 14:34
  13. I am sure the ALP and Libs will continue to import enough immigrants to put a floor under property prices and breed out the pesky locals. It is a pity our kids and grandkids will be living like battery hens as a result.

    Posted by fap fap | February 20, 2013, 12:51
  14. Yahoo, bubble bursts. Any commentator give me a clue as to when 3 beddies in Manly, ocean or harbour views, will be on the market at $100K? Just a general date ‘cos I’m cashed up and hot to buy. Or should I wait until they hit rock bottom at $50K and I can have two? Answers anyone?

    Posted by JakartaJaap | February 21, 2013, 19:36
  15. Oops, no answers. Was it something I asked?

    Posted by JakartaJaap | February 24, 2013, 0:53
  16. Come on you boom and gloomsters! When will the bubble burst?…When will blue chippers like Manly be available to working (and saving) stiffs like me? I needs to know.

    Posted by JakartaJaap | February 25, 2013, 2:00

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