Will the Australian Dream Lead Us Into a Debt Crisis?

What`s your take?

I watched The Big Short the other day, I know lending is totally different in Australia, but so many similar situation, including people working in RE

Will the Australian Dream Lead Us Into a Debt Crisis?

 

I dont think so. We dont have financial institutions chock full of junk rated RMBS. And we dont have non recourse loans. But APRA and ASIC are still taking steps to sure up the banks capital and impose stricter reponsible lending parameters...

 

Very prudent....the people who are unprepared will get cleaned out...happens every cycle...

 

That in itself is the worry.......this un-natural intervention may cause the next crisis.

Here is a scenario...let say people borrowed IO in Sydney...during the heydays of 2013-2015...if you borrowed $1m....the repayment on IO would only be 45k per year...but if rates wnet to say 6% and you had to pay principal also..it would be more like 66k per year...a 21 k increase....

This is called systemic risk.

 

Fully Agree...irrespective of the intention of the regulators, market intervention does have consequences. It's a dangerous macro-economic environment:

• Extremely leveraged investors will bear the brunt of it. Refinancing will not be an option as market would have turned and extreme leveraging would quickly (if not already) become negative equity. .95 LVR with a 7% transaction cost is already negative equity territory.
  
• Add the IO loans coming to an end. Serviceability will be a big issue as mentioned by sash.
  
• Chinese pulling out due to Chinese downturn and FIRB.
  
• Glut of apartments hitting Melbourne and Sydney this and next year. Good luck to CBDs.
  
• Some remaining Sydney cheques might be cashed in Brisbane and Hobart, and then what ? By and large Adelaide and Perth are falling knives, only for the brave and talented.
• Politics: No one wants to think about prime minister Shorten, but NG and CGT changes are adding to uncertainty. What's up with budget and DD ?
  
• Economy: Perth, Moranbah, Whyalla, might be mining related odd balls or cyclic, but could be canaries. What happens when the plug is formally pulled on car industry ?
• Banking System: Funny acronyms (APRA, Basel, ASIC,) and political interference (calls for royal commission) are not really helping the confidence.

Happy to batten down the hatches with baked beans and periscope, till weather clears or REA commissions are lower than RBA rates.

 

Last recession was 25 years ago and over time complacency has been built into the system represented. There is significant debt built in the system.

Also on the other side, question if asset price shouldnt be overlooked. Even if debt remain constant and can be serviced. It only take a small change in asset value to erase a large chunk of equity due to leverage.

 

I think we are living in the "euphoria" period, lot of people buy @ IO with not much time spent on selecting the right property or forecasting what will happen in future. Main driven has been buy as much as possible and banks have supported this position. People assume prices doubling up every 7 years in their forecast. I see RE as the stock market, prices go up and down and you can forecast as much as you want but no one has the crystal ball.

What will happen when after 10/15 years your loans change from IO to PI. Maybe the market will be down at the stage and if you haven`t been responsible with your money you`ll not have enough buffer to cover the risk. This could happen more or less at the same time for everyone, 4/5 years window.

Not saying it will happen but there is a risk. Just need to hope that everyone investing in RE is planning properly and taking weighted decisions.

 

I think changes are already occurring in the market place. Look how tight lending is already.

Look how much losses have been generated with people who have invested in mining towns etc.

 

@Skilled_Migrant - some good points there, I'll touch on a few:

• Leveraged investors will get hit hardest - that's the risk of leveraging
• Economic downturn is inevitable
• I/O loans - computer says no
• Car industry is dead and the doors are closing - no more fanfare announcements
• Bill Shorten - seriously? The anti-Trump.
• Housing construction forms only a small % of gdp so a slowdown or oversupply will only hurt the heavily indebted

 

Its time to batten the helms once again. Reduce debt or make sure you can service debt.

 

Hi Luca

Australian Property can not boom forever and finance is tightening, the writing is on the wall IMO

What I find very interesting is we are now seeing the opposite in US.

I have a friend in US currently researching various areas and property markets and in the main are going absolutely ballistic. Housing prices in some markets have gone back to 2007.

USA FHB now receive $15,000 towards buying homes and strong demand from locals and foreign investors around the world pushing prices up.

Its a double whammy as rental demand is also growing.

My properties in Atlanta - a seeing some major jumps and multiple applications from prospective tenants.

Housing construction is now in its first stage. I can just see pent up demand for properties, as there are multiple offers on anything and everything. BOOM

I am going to be focusing completely on US and increasing holdings as I can see there is money to be made here (income and appreciation)

MTR

 

Agree with a few and disagree with the others especially the significance of property on national economy (credit), employment and individual wealth/liability:

1. Property now Australia's biggest industry, Property Council says.
2. http://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf

Effect of car industry closure have not flowed to the economy as yet.

General consensus of the brokers on this forum does suggest that IO loans are becoming difficult to (re)finance and will only get worse.

Personal (dis)like of bill shorten aside, the NG and CGT policy implications on property are not trivial. Have happened in the past in other countries.

@MTR how does property finance for foreigners work in USA.

 

Do you realise that Perth is on a completely different scale to the other 2 single industry towns? Moranbah has a population of 9,000; Whyalla 22,000... whilst Perth is almost 2 million.

 

Yes. Detroit was similar to perth before GFC.

 

Perth is still shrinking/contracting.

 

At the very least lenders should be made to contact people on IO at least six months prior to reverting to P&I to let them know what they could be facing.

You would also hope the good brokers have a system in place to ensure contact is made to those on IO loans with the same buffer period to seriously consider an updated serviceability in current lending.

Simply waiting until its too late and not giving people an opportunity to plan or offload before they cannot service the debt is not good enough.
I appreciate this may be harder for a broker to do, especially those without systems that contain automation but banks really have no excuse.

 

Most brokers have CRM's and the good ones use them so that they can contact people at 1,2,3,4 and 5 year mark / roll over dates to check on things. Reprice old loans etc. Your right though many brokers don't put systems in place to manage this.

 

This is a almost laughable hypothesis. Detroit's population decreased from 1.8 million in 1950 to 700,000 in 2012. What makes you think Perth's population will do the same?

Perhaps some people with on-the-ground knowledge about Perth's economy can comment? @sanj @Aaron Sice

 

yeah don't even bother replying, Minh.

People that can't draw a comparison between a capital city and a regional centre just need to be ignored until they come to the self realisation that their level understanding needs revision.

Perth is holding it's head above water. It's a bit fragile in places and in some sectors but overall it's just not boom-town anymore; and I don't think too many people are whinging about it.

We all know this, just some keyboard economics-student warriors think they know better because their parents confirmed Home-and-Away's notions that Perth is the place to go when you leave a series or want to dig a hole.