Market drops 20% what actually happens to mortgages

Has this ever happened in the past history? If this happened the whole Australia would be in trouble, I think?
If there ever was a need it would work on similar basis as margin loans, or commercial loans as mentioned before....
However if we assume 65% home ownership and 35% investors, I doubt all owners would move out under the sky or bridge to live, so if all investors suffered there is still less risk in property then...wouldn't you agree?

 

The examples from my previous post were in Moranbah. The clients who bought there aren't happy about it, some are under financial stress but they are still paying their mortgages and haven't had the bank ask them to repay the loan.

Let's also keep in mind that most people have been in the major property markets for more than a few years. Some of my own properties have doubled in value since I bought them, then doubled again. I bought a townhouse in Brunswick for $211k in 2000. If it halved in value tomorrow, it would still be worth almost $400k. I'd still be at a 60% LVR on the current debt over this property (which the rent easily covers).

Part of the GFC challenge in the US was that people lost their jobs and had to move elsewhere to find new employment. In some markets there were huge numbers of vacant properties which contributed to the housing crisis (not the only factor, this is very simplified). Australia has a much smaller, more centralised population and employment centres. A wholesale evacuation of Melbourne, Sydney or any capital is unlikely. Certainly we could see smaller regional towns be derelict, but not where most of the population is.

 

Thanks for detail Redom.

Wow so the banks would take the hit in terms of their balance sheets... I wonder how they would try and recoup those lost profits

 

Have any of your clients been able to refinance or change loan structure in Moranbah post drop?

 

there is no point to discuss what happens when properties drop >50% if it can't happen... government has a list with 10+ measures to stop such trend.

... and the correct question is not what bank will do, but what investor will do... when rent goes down and they can't make payments.

 

I was actually discouraging people from buying there before the crash, so I've only got two clients that bought houses in 2011. To me it was fairly obvious that the only thing holding up that market was the mining boom. Without mining, there's no justification at all for the prices people were paying. You also didn't need a crystal ball to tell you that the mining boom would end eventually, my only surprise was how soon and how abruptly this occurred.

Neither of them have been able to refinance or sell. I've been in touch with both fairly recently as their interest only periods have expired, but combined with APRA lending restrictions, there's no chance the lenders will extend this. Fortunately their exposure isn't heavy (1-2 properties each). I don't believe they're going backrupt, but it is stopping them from moving ahead.

Therein lies part of the problem for these investors. They have a large loan with low cash flow. It's sucked the life out of their finances and they've got no serviceability left. Combine that with APRAs lending restrictions and there's no prospect of serviceability for a very, very long time. They can't sell the properties due to the huge negative equity position unless they sell something else that has performed really well. Overall they're left with very few options.

 

One factor that sets the Australian banking system apart from the US situation is that we have full recourse loans ie you can't walk into the bank, hand back your keys and have the debt forgiven.

There were other factors contributing to the downward spiral in the US including the end of low interest rates on loans which were reset to much higher repayments (unaffordable for many), these people would not have qualified for loans if it wasn't for the availability of super cheap money, when loans reset, lost their low-paying jobs, economy went south etc they walked away from their loans.

 

Commercial? No idea. Residential? Nothing, as long as people make their loan repayments.

 

If it was Sydney etc it would be such a big problem it would become political and banks would not be allowed to foreclose on LVR reasons alone without payment default. No way jose.

 

I have a colleague who is Irish and had a portfolio of circa 20 properties in Ireland when the property market collapsed there, he lost millions and all properties are still to this day are worth less than the amount of debt owed from what I understand. The banks didn't foreclose on any of them because that would realise their losses - whereas if they just let everyone tick along they will slowly see the debts erode and everyone can get out of the mess.

Much to some peoples surprise - banks do not want to foreclose on people regardless of the situation - they will only do so as a last resort if they cannot recoup their funds through other means.

 

A 50% price drop would be utter chaos and madness FYI. Unemployment would likely triple, wages fall, exchange rate plummet, major banks fall over, financial system crash, etc. Complete chaos - like nothing we've seen before, except those 90 year olds that were around for the great depression.

Simply, the government won't let this happen.

Also in terms of 'likelihood' of price drops - while the financial macros suggest that there may be some price adjustment - few who actually look at the fundamentals believe it will be this large (20%, etc).

Price adjustments of this magnitude just don't happen when an economy is performing very very well. Its not often you have booming economic performance and house price collapses. The collapses do often correspond with a change in economic conditions (Ireland was the darling economy of the world in the 90's, house prices boomed, economy crashed & house prices went with it, Moranbah lost its mining investment, etc).

Take one look at NSW public sector investment thats been committed for the next 3-5 years, and you can rule a property price crash out for the next few years here.

Simply, there is a massive unprecedented level of infrastructure investment going in, bigger than anything before, playing out. Its going to reach its 'peak points' in the next 2-3 years with construction activity in full swing. The size of some of these individual projects in NSW (Westconnex, Sydney Metro, etc), literally outweigh every single road/transport project in the entire country put together. This is the construction investment stage too - very high multipliers & economic activity at this stage of a project, employment will grow, wages should follow, etc. Your talking 2-3% of state based GDP activity happening from these public infrastructure spending increase alone year on year (add to that all flow on impacts, higher incomes, etc etc).

Add to this a multi-billion dollar surplus year on year from NSW govt - its likely to set to continue. There's so much flow on too - land is being rezoned everywhere around much of this infrastructure, which should naturally lead to continued strong performance in private housing construction, business conditions, etc.

What doomsayers or those from interstate who cannot comprehend why prices can be x5, there's very much an economic boom playing out in NSW, and it looks set to continue.

Lending hasn't been as bad as UBS want the world to believe. Those with jobs that got loans will likely continue to be able to meet their repayments, even if they do switch over to P&I terms. Sure there'll be some trouble around the edges, but thats normal. Those who have a change in their household income, they may be in trouble. Hence why house price collapses usually follow economic collapses.

What they said will happen (a transition from mining investment to other investment) is happening. Mining investment was in whoop whoop regions and 'spread' across the country. E.g. the Melbournite would fly up, earn his coin & then come back and spend it in Melbourne. Now this new 'investment boom' is across the country & particularly centralised in Sydney.

No 20% price drop is happening while this is going on. Afterwards, definitely possible if the economy slows down and there aren't other levers to support it.

Those expecting to wait for a crash & then buy in Sydney - you may be waiting a bit longer than you think.

 

That is just astonishing @Redom. Very useful write up too.

 

Immigrants and foreign investors will happily purchase rental stock for ppl to move into at high yields with a weak AUD too!

 

cool graph and health of NSW economy well explained. Infrastructure is something that's taken a turn for the better, that's for sure. I'll bet that inland rail is underestimated, though.

 

Simply, the government won't let this happen

Redom - the data on infrastructure spend will be positive and add 1.5% to national GDP and relatively more to NSW economy.

However I know the markets have been controlled by central bankers and now politicians like Trump (very strong year!) for the last decade....

BUT I get very very worried by statements like the above. Governments should not be controlling participants in a well functioning market.[/QUOTE]

 

I don't disagree with any of the above apart from reference to Govt controlling market... this is Australia right not China or Russia

Otherwise some context would be useful.. This infrastructure spending will contribute ~2% to NSW economy.

Consumer spending makes up about 60% of NSW GDP, therefore a 10% drop in consumer spending due to interest rates / sentiment / rising U/E / No Sydney team in NRL grand final or whatever will be 3X a more powerful impact

 

But those factors you're talking about are secondary to employment. Australia101: get a job, buy a house.

 

Prices can and have fallen by 50% in some parts of the country. We have recently had to sell 2 properties in Gladstone with similar losses. The banks didn't repossess we sold knowing we had made a big mistake. One of our loans had reverted to P&I and the rents had fallen by 50% too. We couldn't continue servicing the loans and the banks were very patient in trying to come to some arrangement where a firesale was avoided.

 

@Redom saw that exact chart just recently - was pretty interesting to see the amount of work that's on the cards and already in play.