The 2008 financial meltdown was a stark reminder that the financial system required regulation. If allowed to run wild, the events of 2008 will just keep reoccurring. Bankers will become greedy, taking on more risk for the possibility of higher returns.
One such area in which banks took on more risk was in the form of mortgages. Leading up to 2008, US banks were lending to almost anyone. If you wanted a house you pretty much got it. The fees and mortgage responsibilities were pushed aside.
Banks even approved mortgages to individuals who they knew couldn’t repay their loans. That’s why house prices in the US are relatively low. They’re low compared to Australian property prices, anyway.
It is almost impossible for first time home buyers to purchase anything close to the city. The worse markets are Sydney and Melbourne, with house price-to-income ratio’s bordering on ridiculous. Melbourne has house prices at median multiples of 9.7. This means the price of an average Melbourne house is 9.7 times higher than the average median income.
How can first home buyers be expected to put up a deposit for a loan in light of this?
Housing prices rose 11.4% throughout Australia from the start of 2015 to the end of September. Melbourne housing prices alone increased 9.9%. And it doesn’t seem to be slowing down. The Reserve Bank of Australia (RBA) doesn’t seem to be lifting rates anytime soon. What does this mean?
If interest rates are low then mortgages are cheaper, and vice versa. Therefore, if mortgages are cheap, more Australians will demand homes. And if something is in high demand, prices go up — simple.
Banks are ramping up risk… again
I alluded to before the idea of it becoming harder and harder for first home buyers to purchase homes. However, what I should have said was it’s becoming harder for first home buyers to afford homes. There’s a big difference. Afford and buy are not the same thing. If I take out a $400,000 loan to buy a house, I’ve bought the house. But I may not be able to afford the house.
What I’m getting at here is that banks are loaning money to those who cannot pay it back. Just to give you the sheer risk that banks are taking on: a 24 year old average income earner was loaned $6.5 million by a certain lender.
She was encouraged to invest in a highly volatile market (property). The area in question was in the little mining town of Moranbah, Queensland. She bought 10 properties with hopes of flipping them to the influx of potential miners.
Surely this was an isolated incident? Nope. Reporter Ross Coulthart uncovered many more banks doing the same thing. Coulthart notes:
‘It raises a question mark about the rationality of lending practises and why thousands of investors are looking at bankruptcy because they can’t get tenants into their investment apartments or residential homes.
‘The investors bought their properties during a peak in the market, some were $600,000 or $700,000 for ordinary buildings, but now some are worth just $100,000.’
Whether the investment paid off is not the point. What concerns me is the banks’ ability to think that this was a ‘safe’ investment. Lives are ruined because of these occurrences, and it seems banks are equally responsible in this destruction.
Jonathan Tepper, who predicted mortgage bubble bursts in both Ireland and the US, says Australia is next. Tepper went undercover, teaming up with a hedge fund manager, to see how easily lenders were approving mortgages. The hedge fund manager, John Hempton, said:
‘The further west I went, the more irrational it felt. Lots and lots of supply and prices that bore no resemblance to construction cost and income of people around there.’
The two focused on Sydney’s western suburbs. Many mortgage brokers they met repeatedly told them to lie when submitting their applications. They were even told to lie about deposit amounts and income earnings. ‘We asked if the bank would call our employer, and both reputable and disreputable brokers said banks rarely verified payslips,’ Tepper said.
Hempton added that documents were also sometimes checked by Indian call centres. According to Hempton:
‘The banks have always said their underwriting is of high quality. We just went around and this was not the story we were told. We were coached on how to get things through bank.’
Source: Variant Perception
The chart above shows the percentage of mortgages which make up the total amount of loans. It’s scary to think that Australian mortgage make up more than 60% of loans. The scary part isn’t even the amount. It’s the information about acquiring loans uncovered by Tepper and Hempton.
What this could boil down to is a housing market crash for Australian properties. Or this is what Tepper is predicting anyway. And, if he’s right, there will be both happy and distressed individuals. Those who can finally afford a home; and those with assets worth significantly less.
Junior Analyst, Money Morning
PS: The Australian market is still down for the year. Amid all the pessimism, it’s becoming harder to pick winners. Staying on top of market news can also be tiresome. As soon as you think you’re up to date, something new gets reported. Some people just don’t have the time or knowledge to analyse every company in detail.
Thankfully, Money Morning’s Kris Sayce is here to help. Kris has written a report, ‘The Five Best ASX Stocks for 2016’, to point investors in the right direction. In Kris’ report you’ll learn why retailers are set for a revival. He also lets you in on a sneaky way to play the Australian property market.
If you want to find out the above and more, pick up Kris’ report today. To get your free copy, click here.