[Max Carnage]

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Property bubble too fit to burst
Penny Pryor
September 13, 2010

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This has many international analysts and economists puzzled. They cannot believe that Australia will avoid the collapse in the housing bubble that the US seems still to be mired in.

However, there are structural differences to the Australian mortgage and housing market that should prevent it from following the US off a cliff. Our default rates on loans are very low for a start and we don't have the same percentage of non-recourse loans that the US has. This means we don't have the option to send the keys back to the bank if we decide we can't pay the mortgage any more. Even if we did, data suggests that most of us don't borrow too much beyond our means anyway.

A report out last week from Moody's Investors Service found that delinquency rates are still very low. For example 30+ days-past due delinquencies were 1.34 per cent in June compared to 1.39 per cent in May. That means that less than 2 per cent of loans are falling into arrears of 30 or more days past the due date.

The number of loans falling into arrears of 60+ days past the due date is even smaller at 0.79 per cent in June compared to 0.77 per cent in May.

In fact, many Australian households are pre-paying their mortgages. Major banks report that over 55 per cent of mortgagees are ahead on their payment schedules, with 40 per cent by more than a year. I doubt many US banks would have been in a similar situation just before their housing bubble burst

More: http://www.smh.com.a...0913-157vz.html

This qualifies for journalism these days? 'It's different here because here's a statistic from Australia whereas I doubt that the US was in the same situation before their bubble burst'.

Some facts:
- arrears rise when prices fall, prices don't fall because arrears rise. They fall when fewer buyers are willing and able to pay high prices and sellers must either drop their price or watch inventory (competition) increase.
- recourse loans have proved no impediment to arrears and defaults in the USA.
- recourse loans have proved no impediment to a home price crash in the UK or elsewhere.

A non-fact:
- given that in the USA, as in Australia, the vast bulk of mortgage holders bought before the boom, I suspect that many of them would have been ahead on their payment schedules. But I'd check my figures before drawing any conclusion from this suspicion.

[Max Carnage]

Max Carnage, on 15 September 2010 - 10:54 PM, said:

A non-fact:
- given that in the USA, as in Australia, the vast bulk of mortgage holders bought before the boom, I suspect that many of them would have been ahead on their payment schedules. But I'd check my figures before drawing any conclusion from this suspicion.

A short search turns up the following 2006 paper from the Chicago Fed, which strongly suggests she is wrong:
http://www.chicagofe...6/wp2006_05.pdf

>45% of households were ahead on mortgages either because they'd taken shorter (eg. 15 year) loans or chosen to make additional payments.

And that's despite the relatively much more attractive tax arrangements relating to mortgage-deductibility!

[Solomon]

Max Carnage, on 15 September 2010 - 10:54 PM, said:

Some facts:

- recourse loans have proved no impediment to arrears and defaults in the USA.
- recourse loans have proved no impediment to a home price crash in the UK or elsewhere.

Thanks Max for your posts.
I agree with your assessment.
It seems that a lot of economists and financial mouthpieces, agree with her about the non-recourse loan bit.

If a person reaches the point where it has all gone pear-shaped and they have no capacity to meet their mortgage payments, they will walk away, even if it means they end up with nothing but the clothes on their back.
In good times, the number of defaults of this type mean that banks can pursue them, with all the gusto of the mafia.
But if they were to face an avalanche of defaults that overwhelmed such as America is experiencing, they just do not have the resources or the capacity to pursue them.

Desperate human beings are resourceful creatures.
They will walk away in Australia, and as much as economists might rely on their figures, you simply can't get blood out of a stone. If people have nothing, they have nothing!
The last resort of course is to put them in jail, but what benefit is that to the bank?
I have dealt with people who have walked away from their business, their home, their possessions, everything, and simply started again from scratch. In that particular case, they had the support of family, but my point is they just relinquished the lot.

And it hurt, and there was a lot of pain leading up to the decision. But my point is they walked away.

So I fail to see how the line of argument of recourse loans, is grounds for avoiding a delinquincy.

[Sean]

Max Carnage, on 15 September 2010 - 10:54 PM, said:

Some facts:
- arrears rise when prices fall, prices don't fall because arrears rise. They fall when fewer buyers are willing and able to pay high prices and sellers must either drop their price or watch inventory (competition) increase.

I wouldn't agree with this exactly. If you 'paid too much' for your place, i.e. it is now worth less in the market than you paid, but you can still comfortably retire the mortgage payments, then you won't be in arrears, will you, and you won't be trying to sell the house? The paper loss will not be realised as you are holding the house and paying it off.

What happened in the US, and could happen here, is that people cannot pay the mortgage they took on, either due to subprime or Alt-A teaser rates that turn into higher rates, loss of employment in the GFC, etc, and then they are forced to put their house on the market, only to find that countless others are in the same position, the market is swamped with houses for sale, it turns out the supply of housing is greater than demand, i.e. there is no 'shortage' and the gloss and delusion of the boom/bubble has worn off in any canny investor's or purchaser's eyes. So inevitably prices drop on an attempted resale 12 months after the peak.

There was a temptation for many also in the US when there was such a glut of cheaper houses on the market to simply walk away from their present dwelling and mortgage -- possibly taken on at 100% LVR anyhow, with no skin in the game -- and start over with a new near-identical place that was 20-30% cheaper due to the price crash! Assuming you could get away with wangling your credit scores following walking away from the first loan. This is a temptation even for people who are comfortably paying their current mortgage and not in any danger of going into arrears, as there would be a clear saving in interest payments over a long period.

(The other way to do that might be to arrange for a second IP purchase with a different lender while continuing to pay on your PPOR -- assuming you qualified for a 2nd loan -- then walk away from the first loan once you've comfortably gotten settled in your 'IP' -- some of this also depends on whether you're in a recourse or non-recourse state though -- non-recourse states have an advantage in scheming here.)

And Pres Obama was trying to remonstrate with Americans telling them it was 'unethical' to walk away frmo their jacked-up loans -- while banks and various scoundrels on Wall St and most businesses naturally walk away from stinking deals without a second thought as a 'sound business practice'!

[Max Carnage]

Solomon, on 15 September 2010 - 11:43 PM, said:

If a person reaches the point where it has all gone pear-shaped and they have no capacity to meet their mortgage payments, they will walk away, even if it means they end up with nothing but the clothes on their back.

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They will walk away in Australia, and as much as economists might rely on their figures, you simply can't get blood out of a stone. If people have nothing, they have nothing!

Thanks Solomon, I agree.
But I think it also goes further than that. There is a point at which a person may rationally choose to hand the house back to the bank rather than making further payments, even if they are able to make those payments.

Suppose I bought a $400k home with no money down.
Suppose prices fell 10% in a year (or whatever, time is not important).
The home is worth $360k and my mortgage $395k (guesstimate, not important).
I can see that homes around me continue to fall in price at the same rate, or maybe even an accelerating rate.
The bank will not let me sell the home because the sale will not cover the outstanding mortgage and they refuse to be left with a $35k unsecured loan.

The bank economists (and most commentators) would have you believe that I will continue to pay this mortgage, because if I walk away I will still get stuck with the $35k debt. But I know that if I walk away I'll cut my losses at the $35k mark. I know that if I stay there another year I'll be $70k in the red and later I'll be $100k in the red.

I'd walk.

Now, suppose I was a 'property millionaire' with a $2 million dollar 'portfolio' and $1.8 million dollars of debt...

[Max Carnage]

Sean, on 15 September 2010 - 11:50 PM, said:

I wouldn't agree with this exactly. If you 'paid too much' for your place, i.e. it is now worth less in the market than you paid, but you can still comfortably retire the mortgage payments, then you won't be in arrears, will you, and you won't be trying to sell the house? The paper loss will not be realised as you are holding the house and paying it off.

In which case you are not a participant in the market and your choice has no effect on prices. Prices are set by the few homes that turn over, not by the vast majority that do not.

But due to the (often amusing) way we value housing - imputing sold prices to unsold homes - the value of your house will be set by the actions of others. Specifically, the "fewer buyers willing and able to pay high prices" that I mentioned. Whether you like it or not!

[The Claw]

When prices are rising, defaults will tend to be very low.

A person in trouble will be "forced to sell" and the higher price will repay the bank with no default occurring.

When prices are falling, a person in trouble will be unable to sell and will be forced to default.

How many people are currently being forced to sell? I don't know.

[hamish]

Solomon, on 15 September 2010 - 11:43 PM, said:

Desperate human beings are resourceful creatures.
They will walk away in Australia, and as much as economists might rely on their figures, you simply can't get blood out of a stone. If people have nothing, they have nothing!
The last resort of course is to put them in jail, but what benefit is that to the bank?
I have dealt with people who have walked away from their business, their home, their possessions, everything, and simply started again from scratch. In that particular case, they had the support of family, but my point is they just relinquished the lot.

And it hurt, and there was a lot of pain leading up to the decision. But my point is they walked away.

So I fail to see how the line of argument of recourse loans, is grounds for avoiding a delinquincy.

I don't think they can send you to jail, unless you've committed fraud, you would just go bankrupt or enter into a debt agreement.

Three years of bankruptcy sounds much better to me than decades struggling to pay off an impossibly large debt. You might lose the house (which you couldn't really afford anyway), but you get an opportunity to start afresh.

Would be interesting to hear the experience of somebody who has gone bankrupt.

[Charles Bukowski]

Max Carnage, on 15 September 2010 - 10:54 PM, said:

Some facts:
- arrears rise when prices fall, prices don't fall because arrears rise. They fall when fewer buyers are willing and able to pay high prices and sellers must either drop their price or watch inventory (competition) increase.
- recourse loans have proved no impediment to arrears and defaults in the USA.
- recourse loans have proved no impediment to a home price crash in the UK or elsewhere.

Arrears rise when prices fall, because distressed sellers are invisible during a rising market. They cant afford repayments, they sell, make a profit, bank gets its money, everyones happy, they can start again. When prices are falling its like suddenly shining an infa red light on a sleazy hotel room that you thought was clean.

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A non-fact:
- given that in the USA, as in Australia, the vast bulk of mortgage holders bought before the boom, I suspect that many of them would have been ahead on their payment schedules. But I'd check my figures before drawing any conclusion from this suspicion.

Many who bought before the boom used their rapidly rising equity to buy four-wheel drives, boats, and, of course... investment properties during the boom.

[Bernard L. Madoff]

Charles Bukowski, on 16 September 2010 - 03:55 AM, said:

Many who bought before the boom used their rapidly rising equity to buy ... investment properties during the boom.

I have family who did just that. Used the $400K equity to buy 4 on 75%LVR, then 8 etc.

A 30% correction will wipe them clean. In fact one just started selling and at 20% discount for No1 for quick sale (good) and is then buying a 30% overvalued piece of crap in QLD (bad). Wildebeeste.

[Ruffian]

The Claw, on 16 September 2010 - 12:32 AM, said:

How many people are currently being forced to sell? I don't know.

I know one.

An idiot member of my extended family fell in love with an unrenovated house which they then maneuvered the existing owners into selling.

Less than one year later they are unable to meet the mortgage (they borrowed yet more to make ends meet), and have put the house on the market.

They are aiming to get more than $150k more than they paid for it.

I could not follow the maths when they first bought it, and I still can't follow the damn maths a year later.

They bought at about $850, plan to sell at 'around $1M' - in my experience that means they want more - and will re-buy a place near by at around $750.

Given that he is kind of half-arsed self employed, and she is a part-time teacher, I just can't make the figures work.

They have a couple of kids and a track record of 'break-even' (ie undisclosed loss) real estate transactions.

I worked out that they have paid off a moderate mortgage in transaction costs alone, over the years. Meanwhile he wears $400 sunnies and she has sent the kids to private school.

(That weird sound you hear is me grinding my teeth...)

This post has been edited by Ruffian: 16 September 2010 - 09:09 AM

[tux]

Max Carnage, on 15 September 2010 - 11:53 PM, said:

The bank economists (and most commentators) would have you believe that I will continue to pay this mortgage, because if I walk away I will still get stuck with the $35k debt. But I know that if I walk away I'll cut my losses at the $35k mark. I know that if I stay there another year I'll be $70k in the red and later I'll be $100k in the red.

I'd walk.

Now, suppose I was a 'property millionaire' with a $2 million dollar 'portfolio' and $1.8 million dollars of debt...

You're forgetting about the numeracy skills level of a majority of people in Australia. The bank economists might be fully aware of the numeracy situation and therefore know that with clever marketing and editorials, people will continue to dig deeper holes on the premise that in 20 years time their house will be back to the value it is today if they just hang in there.

Then there is the pride factor. No-one wants their neighbours turning up to the mortgagee sale. What will the Ramsays think?

[tux]

Ruffian, on 16 September 2010 - 09:06 AM, said:

I know one.

An idiot member of my extended family fell in love with an unrenovated house which they then maneuvered the existing owners into selling.

Less than one year later they are unable to meet the mortgage (they borrowed yet more to make ends meet), and have put the house on the market.

They are aiming to get more than $150k more than they paid for it.

I could not follow the maths when they first bought it, and I still can't follow the damn maths a year later.

They bought at about $850, plan to sell at 'around $1M' - in my experience that means they want more - and will re-buy a place near by at around $750.

Given that he is kind of half-arsed self employed, and she is a part-time teacher, I just can't make the figures work.

They have a couple of kids and a track record of 'break-even' (ie undisclosed loss) real estate transactions.

I worked out that they have paid off a moderate mortgage in transaction costs alone, over the years. Meanwhile he wears $400 sunnies and she has sent the kids to private school.

(That weird sound you hear is me grinding my teeth...)

As I was saying, numeracy level 1 probably.

This post has been edited by tux: 16 September 2010 - 10:10 AM

[hamish]

tux, on 16 September 2010 - 10:08 AM, said:

You're forgetting about the numeracy skills level of a majority of people in Australia. The bank economists might be fully aware of the numeracy situation and therefore know that with clever marketing and editorials, people will continue to dig deeper holes on the premise that in 20 years time their house will be back to the value it is today if they just hang in there.

Then there is the pride factor. No-one wants their neighbours turning up to the mortgagee sale. What will the Ramsays think?

I think there is quite a bit of truth in what you say here, that there is a very strong (percieved?) social stigma associated with financial failure in Australia, and the lenders take full advantage of it.

[Bernard L. Madoff]

Ruffian, on 16 September 2010 - 09:06 AM, said:

I know one.

An idiot member of my extended family fell in love with an unrenovated house which they then maneuvered the existing owners into selling.

Less than one year later they are unable to meet the mortgage (they borrowed yet more to make ends meet), and have put the house on the market.

They are aiming to get more than $150k more than they paid for it.

I could not follow the maths when they first bought it, and I still can't follow the damn maths a year later.

They bought at about $850, plan to sell at 'around $1M' - in my experience that means they want more - and will re-buy a place near by at around $750.

Given that he is kind of half-arsed self employed, and she is a part-time teacher, I just can't make the figures work.

They have a couple of kids and a track record of 'break-even' (ie undisclosed loss) real estate transactions.

I worked out that they have paid off a moderate mortgage in transaction costs alone, over the years. Meanwhile he wears $400 sunnies and she has sent the kids to private school.

(That weird sound you hear is me grinding my teeth...)

Oh dear. I hope they aren't using the $250K 'assumed' profit (150 bump up and 100 downgrade) for the toys and image.

They'll be on ACA/TT and in the Herald Sun weeping pitifully and begging for the govt to do something in 6 months.

Keep us updated on that sale Ruffian sounds intriguing.

[Solomon]

hamish, on 16 September 2010 - 01:01 AM, said:

I don't think they can send you to jail, unless you've committed fraud, you would just go bankrupt or enter into a debt agreement.

Three years of bankruptcy sounds much better to me than decades struggling to pay off an impossibly large debt. You might lose the house (which you couldn't really afford anyway), but you get an opportunity to start afresh.

Would be interesting to hear the experience of somebody who has gone bankrupt.

Thanks Hamish.
I was being over dramatic.
You are correct, and yet there is a strong belief in our society that you can go to jail for not paying your debts.
So how do we educate the wider public, that they can relinquish their debts and walk away?

I actually wonder whether it wouldn't be liberating to suddenly discover you don't have any debts, and no material possessions to burden your life. Yes, initial pain may be involved, but longer term, it would surely be a freedom that so many in our society can only dream about.

So thanks again for correcting any misconception I gave in my previous post.

[Easy Tiger]

Solomon, on 15 September 2010 - 11:43 PM, said:

If a person reaches the point where it has all gone pear-shaped and they have no capacity to meet their mortgage payments, they will walk away, even if it means they end up with nothing but the clothes on their back.

Dude, where's our car?

Interesting read

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The month has finally arrived where we cannot pay the rent. We've long-since downgraded from a pristine rental with an elegant balcony and professionally-landscaped yard in a desireable suburb to a rickety, rambling old house in downtown, a stone's throw from the train tracks and the homeless shelter. Even so, with our savings gone and having reduced our expenses to near-zero, we still can't cover our nut

[Max Carnage]

Easy Tiger, on 17 September 2010 - 03:35 AM, said:

Dude, where's our car?
Interesting read

Interesting, but still clueless:
1] You call that a vege garden? (Besides, it looks like it was taken long ago when your children were much smaller...)


2] Second-hand bikes are cheap and reliable. You're so poor you did what?

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After a week of riding around on my ancient, barely-functioning Schwinn, I was glad that my workhorse, entry-price cruiser finally arrived and had been assembled at the bike store (at left). And just in time as the Schwinn finally broke beyond repair, and I was supposed to take the toddlers to an Easter party the next morning. The problem? The bike was delivered to the wrong location, ten miles away. I made my way there (bus system? Fail. Resorted to a painfully-expensive cab ride,) and rode home the ten hilly, high traffic ten miles in a downpour with high winds. Got some concerned looks, but arrived home with no permanent damage to my body or spirit.

Then what did you do?

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Daughter Rainer's new bike.

I smell a marketing exercise - a former used-house salesperson looking for a new income stream that involves minimal actual work.