Market drops 20% what actually happens to mortgages

Its likely i've got positive biases in my opinions, both towards regulators abilities (my team and i have nearly a decade under our belt working at/with key lending market regulators, we know & have a lot of respect for some of the people in charge) & my own personal vested interests (i'm a finance broker in sydney with a few mill in holdings in Syd, of course i don't want/believe there'll be a crash!).

Plus the regulators have managed a 26 year + non recessionary period, including a pre-post mining boom. That, by even doomsayer scorecards, is an amazing performance!

In recognising that, i still think what i think! No housing crash on the cards while the economy goes well in Aus. The design of our financial market & decent enough lending standards through the boom forms the basis of this opinion.

Jessica Irvine has commented on the positive side of this on SMH - she shares similar beliefs far more eloquently than I do.

The problem with property doomsayers

 

One of the most overrated economics reporters going around. It's more like opinion articles with a couple of vague economic terms thrown in.

Nevertheless - VERY interesting how in Sydney / Melbourne there is no balanced discussion anymore.

You are either optimistic, and sensible etc or a doomsayer, accused of being Prof Keen etc..

Also Jessica is buying her first property right now and looking at $1m OTP 2 bed apartments in Sydney inner city... this is your source?

 

So what actually happens when one isn't able to pay mortgages ?

Is it any different when the properties are either owner occupied or IPs ? Say, when the properties are valued at 20% lesser than what they were purchased at and assume an IO loan has continued and the debt owed hasn't reduced significantly.

If the banks foreclose, does this scar the mortgagees credit file and fry any chances of future buying ability ? Does LMI play a factor here (as in does the insurer pay the bank off )?

 

Not sure if this has been posted before.

What will sink the housing market and drown property investors? - ABC News (Australian Broadcasting Corporation)

 

> Australia has a housing bubble

Except if you are in Perth, Darwin, parts of Adelaide or outside capital cities.

 

Cliff why do you say 20% drop in Mount Druitt?

 

That's also based on suggestion that GFC won't be repeated. It's not like these events have a 8-10yr timeframe... 2008GFC, 1998-2000 Russian default/ tech crash.... 1987 - black Monday.... oh wait

How many years has it been now?

 

Generally LMI insurance will give a borrower a reprieve for up to 90 days and then the loan needs to be paid off. If made bankrupt then finance will be difficult to access (generally) for 5-7 years and if you earn a certain amount of money then you will be required to pay a proportion to your secured creditors. Very general advice though, you should check with a lawyer/ read the legislation for more detail. Bankruptcy, rather than debt agreements, still seems to be the best way to come out unscathed. Sometimes the period of finding it difficult to secure debt is shorter but this is rare and up to the court.

 

I had a client who couldn't pay the loans anymore and he did an ostrich - stuck his head in the sand. Bank eventually took possession but never chased him or his father who guaranteed the loan.

 

QUite possibly more . I was only using the 20 % quoted .

Historically that's what happen . Usually greater that 20 % in the Druitt . I've seen up to a 40 % drop in prices in the slumps in Mt Druitt . I'd be expecting medians to drop to something beginging with a 3 at some time in the next ten years in Mt Druitt .

Cliff

 

Cliff, do you have any historical price data for the Sydney housing market, specifically during the late 90s and early 00s?

 

What was the equity position? If the bank was able to recover the loan and costs, they probably don't care too much beyond that.

 

The numbers you quoted are based on if another GFC happened? Also why would you expect mediums to drop to 300k range?

I've been watching warren buffet and he is taking a lot of money out of the share market and putting it elsewhere so could be a sign of things to come...

 

Don't have access to those figures now , but have in past . This is Mt Druitt

Previous Cycles have seen drops of 100- 120 to 60-70 and 220-240 to mid 100's.

People out there don't manage their money well . When the market goes down , VERY VERY few people buy out there . Lots of highly motivated / mortgagee in possession sales .

Cliff

 

Agree that people don't manage their money well and I would also expect 20-30% drop if another major event happened.

What years was the cycle 100-120 medium and drop to 60-70?

I posted this in another thread about last cycle;

I had a look at the data and it showed in the last boom to trough (2003-2007) a 15% drop on average, An interesting note is a few properties sold for way more than medium in the trough period of 2007 of up to 100k but the s%it boxes (boarded up window spec) that needed major work did sell up to 70k less than medium and you could easily spend 50k on reno as inside and out needed work

 

It was actually negative. It surprised me that no chasing has been done.

 

@Terry_w that is a bit surprising. Perhaps they didn't want to hassle or bad publicity that goes alongside recovering money from a parental guarantee? Fortunately it's not something I've had much experience with, but I imagine at some level there's a cost-benefit analysis done that considers more than just money.

 

Its important to remember that a housing collapse is usually a symptom, not a cause.
Falls in housing prices are created when other market factors take hold.

If your seeing price falls you will also be in a position of tight credit, low/poor employment conditions, large scale corporate difficulties, etc etc etc.

In Australia a bank is unlikely to re-value its individual security unless there is a cause to do so (re-structure, missed payment etc). They may stop providing additional credit which if you are already stressed, and need the funds to survive will be your ultimate demise.

Imagine losing your job, cant pay your mortgage, but cant sell it for what the loan is worth, cant find another job as everyone is in the same position, and no one is hiring, while the bank vultures are circling.
In Australia the housing market is somewhat more secure than our US counterparts due to the fine print called "all money clause". If you cant pay your loan(s) the bank can keep coming at you. In the US, they cant.

Blacky