Housing bust?

[Duxnutz]

We do have quite a bit of flipping going on, heck there's construction on my street at every 3rd house.

A point I hadn't considered (pointed out by my wife who used to sell mortgages in the U.S.) is how differently debt is treated here in Oz.

It's a lot harder to (I'm sure bankruptcy laws have changed over there since) declare bankruptcy here and not be accountable for your debts. The banks have the ability to go after all your assets, including superannuation if I'm not mistaken.

[El Presidente]

Rob,

Some of your 5 reasons for why it won't crash don't make sense to me. They are reasons to support current prices but not reasons to prevent a crash.

2. 60% of buyers are foreigners. What if they decide Australia is too expensive and start sending their kids to another country like the US because it is cheaper? The West and East coast of the US is seeing that now with Chinese buyers. When the Chinese market corrects, I suspect the Australian real estate market will feel suffer greatly. I still remember the Japanese bubble in real estate back in the '80s here and suspect the same thing will happen with the Chinese. Possibly. Foreign students is currently one of our major "export industries". It has been since the early 2000's. It is not just Chinese kids but Indian, Malaysian, Indonesian, Singaporean. The benefits to studying in Oz from Asia is location, perceived quality of education, and price particularly with an exchange rate comparison to the Pound and USD. Thse fundamentals won't be changing any time soon.

4. Australians love affair with real estate. The US said the same thing right before our crash. Sentiment can shift. Millennials in this country now favor renting vs. buying. Huge demographic shifts do happen.

Aussies really will do anything before walking away from their house. They really can't. The bank will bankrupt them.

5. Low unemployment. This is why things are good now but If this changes, it will cause problems for real estate. In our case, it was the collapse in housing that lead to higher unemployment not the other way around. Granted.

I admit I know very little about your real estate markets. Most metrics seem stretched but not in bubble territory yet. It does seem that you do not have a lot of the factors that led to our correction like low down loans, flipping, and over building in many parts of the US. Prices can stay high for very long periods of time.

Corrections happen when you least expect them. Have been through a few and when it gets ugly, it get's ugly quick. When in banking a lifetime ago, I was in charge of property receiverships over $5 M for a major bank. In 2 years i looked after the sale down of 4 Billion dollars worth of property including The Japanese companies who went deep here. The market from boom to bust happened in 8 weeks. We aren't even close to those dynamics right now but I am aware how quickly things can change.

[polarbear]

I may not know banking but I do know that when I walked into my bank with $40k in my pocket and an income over $100k a year they still wanted a 30% deposit on a $450k loan.

I had no other debits at the time and the house I was planning on buying was valued around the low $500k mark (was buying it privately from a mate and got a good deal)

The bank went through me like a dose of salts and still wanted to me find an extra $30k cash to kick in.

Lending requirements like that don't make it sound like the banking sector in Aus is in danger of issues risky loans to people who can't afford them

[bambam]

Part of our problem was it was too easy to walk away. The term "jingle mail" was considered vogue. It was when you mailed the bank the keys to your house and said just have it.

[Coolio]

Surely property prices in melb and sydney aren't sustainable long term? I just can't believe the frenzy at auctions these days. You just shake your head.

I wish I hadn't sold my place in Melbourne before the boom. Bought in '93 for 150k. Sold it in '99 for 180k. Didn't need to sell, but for some stupid reason I did. Last year it sold again for 585k. I didn't buy in the same market when I sold, instead moved to Brisbane and bought a unit in Nundah. Which I then sold before Nundah took off. "You idiot" I've said to myself more than once.

The essence of my post is please don't ask me for investment advice!

[LordAnubis]

It's not a home loan, but i still can't get a credit card with Citibank. I earn a **** tonne of money, have bugger all expenses with no dependents, my investment properties pay themselves off etc etc, have a savings account with 6 digits, yet i still can't get a 10k credit card.

I'm reasonably certain the banks in Aus don't hand out loans like tic tacs.

[Fuzz AI]

Seriously? I get letters every month from Citibank, asking me to sign up to a platinum card... even though I already bloody well have one!!

[LordAnubis]

Ohh... it's probably cos i'm muslim then

[JohnS]

Surely property prices in melb and sydney aren't sustainable long term? I just can't believe the frenzy at auctions these days. You just shake your head.

I learnt on Saturday that a terrace house in Surry Hills, Sydney that is 3 metres wide and has a backyard that is 1 metre in length sold at auction for $AU965,000. I thought that was amazing until I learnt that a townhouse in a nearby suburb to me sold for $AU1.1 million. Instead of been elated because I live in a house, I instead worried that this sort of auction price is unsustainable...and at some point a correction must occur.

[Lotusguy]

What's a terrace house?

[LordAnubis]

Think london style matchbox houses... series of houses all sharing walls with the house next to them.

[Lotusguy]

Thanks - I guess that would be a townhouse in U.S. (And a Reihenhaus in Germany).

[sengjc]

Part of our problem was it was too easy to walk away. The term "jingle mail" was considered vogue. It was when you mailed the bank the keys to your house and said just have it.

Agree that this played a role - transfer some risk to the bank which then makes the buyer more likely to overstretch.

[paulF]

Couple of things here:

Why it won't crash

1. The banks are strong. Really strong with 30% of cap to be held in liquid assets (by legislation)....

I'm not sure that the big 4 are actually that strong as per your statement above Rob. here's an excerpt from a few weeks back from an analysis done by Chris Joey:

"Westpac only needs to suffer an increase in its residential mortgage default rates to 3.3 per cent before it wipes out all the equity it holds against these assets. That default rate, by the way, is less than levels experienced by British banks during the global financial crisis, and a fraction of the rates recorded in the US…"

I'll try and find the link for the article but it seems like our banks are highly leveraged to a point were even a small shock in the property market might get some banks to turn insolvent... Also, the Murray financial system enquiry warned about low capital by banks

Also banks have started implementing some form of macro prudential just from last week or so especially on property investor loans so i think they are feeling that things are getting a bit too risky.

[El Presidente]

In regards to the strength of the Major 4 banks here, they are required to hold LCR's (liquidity coverage ratio's) of $275 Billion in HQLA (High Quality Liquid Assets ) as per the Basel III liquidity standard. The $275 Billion was determined by APRA for 2015.

We don't have enough HQLA's in Oz to cover the banks and so they pay the RBA a fee (.15%)

To explain (and from Guy Debell, assistang governor Financial markets, RBA).

To address these circumstances, an important component of the liquidity regime in Australia is the committed liquidity facility (CLF) where, on the payment of a 15 basis point fee, banks will be able to obtain a commitment from the Reserve Bank to provide liquidity against a broad range of assets under repurchase agreement.

The banks have been complaining bitterly about the amount of the Liquid Coverage ratio. If the banks are complaining in this instance, then I suspect it is a good thing for the populace

[sengjc]

I hear that there is talk of further tightening of the Australian banking sector whereby banks are required to hold more capital - something like that.