Interesting stuff and not without a precedent. Most bullish commentators say that comparisons to Oz now and Ireland 14 years ago are not valid. As someone who worked in real estate in Ireland during the height of the boom and then during the bust, I can tell you the comparisons are very valid and slightly scary. There were very little sub prime mortgages issued in Ireland, but there was lots and lots of very high debt to income mortgages available, up to 10 times income was not uncommon. In addition, the bank of mum and dad came to the help of many marginal borrowers because mum and dads property value increased dramatically in the early 2000’s. All of this in a relatively low interest environment in what was a booming economy, low interest rate due to being in the euro zone. Does this all sound familiar? The other thing people may not know is that the market was on the slide before the black swan of Lehman Bros came about. Before then banks started to slow down lending and before to long there were very few qualified house buyers. It was the lack of buyers that killed the market. The very few sales that occurred were by the marginal seller ie death, divorce etc, there were very few repos or openly bank forced sales. I can also tell you the extend and pretend by the banks in Ireland was immense and still going in some circumstances, I should know, as I was one of them.Sorry for the long comment, thought you might like the insight!
Great read Tarric. The ability to backstop the Banks and defend property prices has to become near impossible with falling commodity prices. AUD would collapse.
The best thing the Government could do is make full recourse loans illegal. This will force the banks to do a proper risk analysis and, when [not if] the loan turns bad the bank cops the damage to its asset base, not the borrower.
Thanks for the great article. It seems that we will be heading for another game of "extend and pretend" in the not too distant future. Mass foreclosures will be the last thing the banks can afford..who would buy them?? It is the cascading effects of reduced spending, unemployment etc brought on by the impact of increased mortgage payments and reduced values that IMO will be the killer blow. Look forward to the next eye opening article.
Nice Tarric. Most punters have no idea what's coming. During the GFC China insulated Australia, NZ and Canada from what happened to much of the western world. This time China's property meltdown is coinciding with ours. This time Australia, NZ and Canada will be the bartender from Desperado, destined to "get it worse than anybody".
Great piece! As you said, Aus differs to the US with full recourse loans, but the feeling on the street strikes me as similar --- that buying a house in Aus includes a free put option --- because homeloans form such a large proportion of Aus bank's loan book. Meanwhile I recall depositors funds being guaranteed by the govt changed during the GFC. Thanks
A well set out piece with a strong basis of logic.
However, there may be some ameliorating factors to this scenario:
-The effect of tax concessions through negative gearing protecting investors to some degree
- Latent demand sitting on the sidelines in the form of Boomer super balances (yep Asx could crash)
- Extreme constriction of new builds due to effects of inflation on building industry pricing, restricting supply, increasing rents/yields. This may cause RE to go back to it’s yield driven roots. Could take years though.
- The peak interest rate scenario is accurate but is likely to be short lived - the real “extend and pretend” will be interest rate cuts in 12-18 months as economic demand has been destroyed.
No doubt the key premise of this article is accurate, there will be forced sales for the most recent buyers at ridiculous prices, the real question is how much damage Australian banks will take. Federal government deposit guarantees anyone?
Interesting stuff and not without a precedent. Most bullish commentators say that comparisons to Oz now and Ireland 14 years ago are not valid. As someone who worked in real estate in Ireland during the height of the boom and then during the bust, I can tell you the comparisons are very valid and slightly scary. There were very little sub prime mortgages issued in Ireland, but there was lots and lots of very high debt to income mortgages available, up to 10 times income was not uncommon. In addition, the bank of mum and dad came to the help of many marginal borrowers because mum and dads property value increased dramatically in the early 2000’s. All of this in a relatively low interest environment in what was a booming economy, low interest rate due to being in the euro zone. Does this all sound familiar? The other thing people may not know is that the market was on the slide before the black swan of Lehman Bros came about. Before then banks started to slow down lending and before to long there were very few qualified house buyers. It was the lack of buyers that killed the market. The very few sales that occurred were by the marginal seller ie death, divorce etc, there were very few repos or openly bank forced sales. I can also tell you the extend and pretend by the banks in Ireland was immense and still going in some circumstances, I should know, as I was one of them.Sorry for the long comment, thought you might like the insight!
Great read Tarric. The ability to backstop the Banks and defend property prices has to become near impossible with falling commodity prices. AUD would collapse.
The best thing the Government could do is make full recourse loans illegal. This will force the banks to do a proper risk analysis and, when [not if] the loan turns bad the bank cops the damage to its asset base, not the borrower.
Thanks for the great article. It seems that we will be heading for another game of "extend and pretend" in the not too distant future. Mass foreclosures will be the last thing the banks can afford..who would buy them?? It is the cascading effects of reduced spending, unemployment etc brought on by the impact of increased mortgage payments and reduced values that IMO will be the killer blow. Look forward to the next eye opening article.
Avid, is the national household median is $90.7k figure correct? Source? I believe that is the median individual income.
Nice Tarric. Most punters have no idea what's coming. During the GFC China insulated Australia, NZ and Canada from what happened to much of the western world. This time China's property meltdown is coinciding with ours. This time Australia, NZ and Canada will be the bartender from Desperado, destined to "get it worse than anybody".
Great piece! As you said, Aus differs to the US with full recourse loans, but the feeling on the street strikes me as similar --- that buying a house in Aus includes a free put option --- because homeloans form such a large proportion of Aus bank's loan book. Meanwhile I recall depositors funds being guaranteed by the govt changed during the GFC. Thanks
Hi Avid,
A well set out piece with a strong basis of logic.
However, there may be some ameliorating factors to this scenario:
-The effect of tax concessions through negative gearing protecting investors to some degree
- Latent demand sitting on the sidelines in the form of Boomer super balances (yep Asx could crash)
- Extreme constriction of new builds due to effects of inflation on building industry pricing, restricting supply, increasing rents/yields. This may cause RE to go back to it’s yield driven roots. Could take years though.
- The peak interest rate scenario is accurate but is likely to be short lived - the real “extend and pretend” will be interest rate cuts in 12-18 months as economic demand has been destroyed.
No doubt the key premise of this article is accurate, there will be forced sales for the most recent buyers at ridiculous prices, the real question is how much damage Australian banks will take. Federal government deposit guarantees anyone?
Great piece Tarric. Level headed & concise. Well done.