Yes, the Australian property market is falling, and this can only get worse because the basis of the market has been turned on its head, and that which made it such a wonderful punt in the past, is now turning into a game of musical chairs, and more and more people are finding they have nowhere left to sit, and they are going bust.
As the people go bust so do the mortgage companies. As the mortgage companies go bust so do the banks and the whole underlying fabric of society, writes property investor, John Clare.
How did things get this way?
I guess the answer is the usual one: greed. Rather than submitting truthful mortgage applications for their clients, some mortgage brokers and lenders have been fudging the numbers.
Here are a few examples:
- A lowly-paid deckhand described as a ship’s captain earning $150,000 a year.
- A 70-year old retired printer described on his loan paperwork as a “self-employed painter” – job he last held in the 1950s. His listed “employer” never even existed. His “salary” was listed as $49,000 a year.
- A 98-year-old woman persuaded to sign a document for a 30-year loan... prompting one Australian Senator to quip: “She must have a good doctor.”
The banks' audit departments should have picked up on these, but (I kid you not) banks specifically hired people who couldn’t speak English to verify whether a person was employed and earning the salary submitted on the loan application.
When, as part of the Royal Commission's investigation, senior counsel Rowena Orr asked an ANZ representative about this, he replied: “Our processes are we do nothing." So, even in the face of contrary evidence from their own information, banks approve loans that are masquerading as affordable when they quite clearly are not.
All this may seem absurd, but initially there was no problem with any of this. Let me explain.
If the local property market is rising, then you get a situation where someone applies for a mortgage. They can't afford it, but what is the risk? Property prices are rising at 10%+ p.a., so who cares? Fred and Emily apply for a mortgage of $100,000 to buy a house that is valued at $110,000. They get a low interest rate introductory loan. They buy the house and start paying the mortgage. After two years their interest rate goes up to the normal amount. Fred and Emily can't afford the new rate so they put their house up for sale. The price has been rising at 10% a year, so the place can now be sold for at least $130,000. After expenses the bank is covered and Fred and Emily maybe even make a few thousand on the sale. Everybody's happy. If the mortgage struggles on for another year the price of the house has probably risen to $145,000. Now everybody is making some very nice money out of what was originally an exceedingly dodgy deal.
This scenario works as long as house prices keep rising, and they need to rise enough to cover the cost of the deposit and the missed mortgage payments. If house price rises drop to only 5% a year, there is not enough increase in the value of the house to keep the party swinging. If prices are stable, the maths no longer stack up, and everybody is in trouble. Now prices have started falling. This means everyone loses on the deal, the buyers, the banks, and ultimately the whole economy.
An estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA. Hundreds of thousands of Aussie households face this huge rise in the cost of their mortgages. What's the betting they will have to sell, thus crashing the whole market?
Let's add another plank to this ghastly edifice; The Khoshaba principle. In 2006, Albert and Rose Khoshaba decided to challenge the validity of their mortgage loan in court. Their claim was based on what seemed like nothing more than bureaucratic technicalities on an unimportant piece of internal bank paperwork.
Unfortunately for the bank, and probably for the whole banking system, the faulty paperwork that went with the mortgage offer was enough to chop $60,000 off the loan.
Since then a man named Manfred Schmidt reduced his $450,000 loan to $0. The Di Benedettos reduced their $500,000 mortgage to $0. Jill and John O’Donnel, according to the Australian newspaper, “cut their [$500,000] mortgage by 75 per cent.”
Wait a minute. Let's go back to the top of this article. Mortgage application after mortgage application has been fixed with faulty information. All those mortgages are probably unenforceable. In short, the bank probably can't force the inhabitants to pay the premiums on their loans. This means there’s a chance Australia’s borrowers will launch a class action. They’re going to try and cancel their loans en masse. That is going to bankrupt the Australian banking system.
With house prices falling, who is going to buy? Auction houses are finding they are selling perhaps 40% of the properties submitted for sale. In short, as prices go down, people will either not buy, or will attempt to push down purchase prices even more. The more the prices go down the less houses will get sold until people see some kind of bottom has been reached. Meanwhile the unpaid loans stack up and banks start to go bust.
Let us just take one example, The Commonwealth Bank of Australia.
CBA is already facing fines of about a trillion dollars for nearly 54,000 breaches of Australia's money- laundering laws dating back to 2012. A trillion dollars, which is a thousand billion is about seven times Commonwealth Bank's market value. Now factor in several hundred thousand claims in a class action on the basis of the Khashaba ruling, and the bank is holding an insane amount of debt which is unenforceable. Now add in the serious drop in the value of the rest of the collateral due to the continued slide of house prices. Now multiply that across the whole banking sector and you have a crashed economy.
Oh yes, and now factor in foreign investment involvement, and you have the makings of another world-wide financial collapse. You don't need me to tell you to steer well clear of this, though there are plenty of reckless people out there.
Okay, you can steer well clear by not buying real estate in Australia, but what about the collateral damage to the international banking system? I'm sure everybody remembers what happened when the US mortgage system imploded.
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The author, John Clare, has "unusual property for sale" at Unique Property 'the oldest property site on the web' - founded in 1993
http://www.property.org.uk/unique/
