Mortgage Crunch for Australian Landlords?

As housing values thaw across Australia, so does the dreams of a nest egg built on a housing bubble.
Australian real estate has avoided the mass loss of property values seen in the US and the UK, partly because Australia's economy was sheltered from the problems of the US lead GFC.

Better banking regulations and less credit to sub prime lenders saved Australia

In Australia we did not see the shonky lending practices that allowed people to buy homes they could not afford, and then refinance on the ballooning growth of their asset to make the repayments and buy cars and such till the music stopped.
So the music didn't stop suddenly like it did in the US. But property values in most capital cities are heading south, and look to be lower for many years to come. [in the US they say that is a whole generation, which is 30 years, because nobody will believe that property is a good investment in the US after what was allowed to happen over there.]

Two recent RBA interest rate drops in a month have not encouraged home buyers to invest in a home. They have seen values shrink and know there may be carnage ahead. The mum and dad property investor and landlord.

Trouble ahead for Australian Property Investors.
It is estimated that there are 1.7 million landlords in Australia, and most have wagered their own homes on property values rising.

Formula for success or homelessness?

1. The idea was that you have equity in your home, and you use that as the deposit on the next property. 
2. You then get a five year interest only loan [to minimise repayments and maximise the tax offset of those repayments.] Works a charm when homes prices rise. 
3. But like all leveraged investment, they can spell doom if values go against you longer than you can hold out. If property values fall continuously it will all go pear shaped for property investors.

For the mum and dad property investor that means as long as you both have jobs, [the can meet the repayments], and as long as the loan does not have to be refinanced. This is where its going to hit the fan in my view. Here's the thing. As long as these landlords can refinance, they are safe.

The Euro could be the last straw that breaks the back of the Australian property market
If the Euro crisis does not end well, we should expect the worst, because we would be in for a credit squeeze. The banks will then refuse border line loans, and that will send properties falling further. As these values were the basis on which the loans were first made, if these values don't stack up, then these Landlords will be forced to sell or find or funding from non bank lenders.
If we in the non bank mortgage industry can't find the finance, then property will flood the market.

So this is the thin edge for property investors in Australia's housing market.

And here's the real reason that this property values are likely to tank.
Australia's home values have risen far beyond what's affordable for Australian homeowners and home buyers since the 1980's.
What has happened is that as the wife went to work her wages were snaffled to be part of the affordability of home buyers.
This in my view is what has caused the housing inflation. The winners were real estate agents who got to drive "mercs" and "bemmers", and the banks who got to serve to mega loans. The losers were all those who got a 30 year mortgage based on two incomes, because that meant you could pay more than you could have before.
House prices and salaries: The gap
Housing affordability and credit guidelines have gone from 30% of the average Joe's gross wages on a twenty year mortgage, to 40% of Joe and Joe's partners wages on a 30 year mortgage! Some people are paying 50% of their wages before tax. The solution? Get more credit in the shape of a credit card!

So in real terms homes cost double what they used to. And we have the credit to pay for all this! Thanks for that!

That's why the US experts keep saying that Australian home values will fall 40%. If economists were running the housing market, this what the price drops would look like.
But they don't. However we must factor in their savvy, and the fact that the Australian Government may be paying attention.

So I feel that the values may have 20% still to fall, and that is if it does not get real ugly in Europe. 

If it does then banks will shut the lending gates and the amount of loans that they will be able to do will shrink. That mean less buyers and more property.
Can you here the sound of a distant Property Crash getting closer?

2012 should be the year Australians, get their credit cards paid out, their car loans paid off, and get a 100% mortgage offset account home loan that allows them to stash their savings against their mortgage, helping to pay it off sooner, and also having the cash their for a rainy day.

Source: Rick Adlam, Mr Mortgage