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

Australian Mortgages: Happened in 2011?

Australian Mortgages in 2011 from the rear view mirror

The fact that Australian mortgage delinquencies have declined in the third quarter in Australia points to the fact that the worst of mortgage stress may be over.

The return of the saver, and the virtue of saving

This year has seen more Australian households reining in their expenditures, and the biggest fatality of all this is the credit card. Australians seem to be shunning credit card debt like the plague as well as mortgage debt. This year has been credit card debt reduction as the biggest shift to saving has occurred.
That has to be a good thing for everyone, except retailers who have been milking Australians with over priced goods for generations.

The rise and rise of online sales

This year we have seen online sales surge to the point of critical mass, as Australians are starting buy online in a big way, and that has to mean better retail pricing and services in 2012. Even grumpy old Gerry Harvey has capitulated, and has online offers. [Not convinced Gerry, Sorry] If you want to buy superceded stock at new retail prices, shop Harvey Norman is may motto. His ads can shout at me all they like. I have only ever bought duds from Gerry. THat's why I never shop there anymore. But there is a suckerborn every minute, right Gerry?

The 2011 Christmas shopping season

This is one reason I feel that Christmas is going to be challenging for retail. Spending money you are yet to earn is becoming very unwise to savvy Australian shoppers, and those waiting for the Christmas sales to spend their holiday wages are being tempted with ever more attractive pre Christmas sales. And our high dollar means overseas spenders are less likely to come, and have less money to spend if they get here. At the same time cashed up Aussies are flying out and spending on holidays and spending their money overseas. But Australians know that the family home is more important than tinsel and glitter, and so only people with cash in hand seem to be shopping these days.

The banks are a multi-channel money machine

The banks however are doing OK, despite the loss of credit card revenues, and that is due to business loans growing to replace the shrinkage in credit card debt and home mortgage loans applications, which continue to fall away.
So mortgage delinquencies may have fallen, which is good for the banks, but that does not mean that new people want to be roped into 30 years of debt, so we are seeing a fall in housing prices in all capital cities, as interest rates fall and wages rise.

Did Real Estate become a Ponzi Scheme? I think so.

The combination of rising wages, full employment, lowering mortgage rates and falling house prices tells me that Australians have learnt the lesson from the US finance collapse. That Real estate prices can and do get ahead of themselves and must eventually collapse when they grow out of kilter with the wages and supply.
In this respect I feel that real estate price growth has been a massive Ponzi scheme, and that has deflated slowly in Australia, unlike what has occured in the US, the UK and Europe where house prices are down for possibbly a generation.
Suddenly a house is not an investment anymore, it is a way of securing your accommodation for the long haul. Isn't that what a home should be about?
So what will happen to Australia's 1.7 million residential home investors who lose more on their investment every year in the hope of seeing capital gains? Well they are the victims of their own folly. As tax rates have fallen, the attractiveness of these negative gearing schemes was only shored up by one off growth spurt on the early 2000's, and that was on the back of sales pitches historical housing figures that will not be repeated. So all this fluff and puff is behind us.Like all ponzi schemes, the ones holding the baby when the music stops carries the lose, as those out early get to spend their money. What a beautifu swindle! It's not legislation as a crime! So the perpetrators get out scott free.

What's ahead for Mortgages in 2012?

Whats ahead? A flat house market and steady house prices. Maybe a little more price easing. Hopefully a big fall in land prices that is the real problem in home prices.[Ever wonder why the biggest donations to political parties were from Property Developers? Hmmmm.]
Expect to see house price inflation in country areas where the mining boom is happening. Other areas will see falls in house prices I predict. Its already happening in residential land prices in the towns across Australia. If I were buying a home in a country town, I would want a 10 year mortgage with comfortable repayments. Otherwise renting would be my option. A thirty year mortgage only makes sense in the capital cities of Australia today, because are economy and our society is so dynamic, and mobile. You can't shift real estate.

Australia: Experts in Digging Holes and turning dirt into Gold

The great thing about Australia is that most of it is lousy for growing things, but the soil is rich in minerals. So we have become more into digging holes and shipping the dirt off for Gold. Not a bad earner.

What we have also become is the beacon for climate change and hopefully we can transform this into an energy creation earner. More renewal energy means less imports of oil, and less pollution. Can we export energy so produced, or at least the kit to make it happen. I hope so. My Crystal ball is telling me is that energy, clean air, clean water and food will all be at a premium in the years ahead. We should position the Nation for this inevitable future World.

The cost of money will rise in 2012

The banks are trying to warn people, but the Government is pretending not to listen. The Euro crisis, and in particular, the fact that the UK does not want to touch their baby [smart brave move], will mean that France's banks is caught holding that particular baby, so expect to hear the music stop anytime soon. Once that happens we will have a credit crunch, lower RBA cash rates, not all passed on by the banks because the cost of their borrowing will zoom up.

2012? A good time to be a Saver. A good time to be in Australia. Have a good one!

Source: Rick Adlam, Mr Mortgage [reprinted by permission]