Post-Boom Price Declines ‘Perfectly Normal’
A pair of reports provide an update on the soft landing in Australia. “High-risk lending in the recent housing boom has left some Australians struggling to meet mortgage repayments, forcing them to hand over properties to lenders. The housing bubble has burst and investors who jumped into the housing market 12 to 18 months ago are now seeking advice regarding problems with mortgages, says Sydney accounting firm partner Geoff McDonald.”
“‘You have had a culture of people who wanted to buy off the plan and borrow to buy, just to get in so they would not miss out and now (the market has) turned,’ he said.”
“All the signs are pointing to a very difficult road ahead for both homeowners and lending institutions, Mr McDonald said. ‘There are going to be some sad stories involving highly geared properties and mortgages that cannot be met,’ he said. Gearing is the ratio of debt to equity capital.”
“Mr McDonald said many investors borrowed 80-90 per cent of the value of the home and property values have dropped in some areas, leading to negative equity for some borrowers. ‘Not only are individual borrowers going to be hurt, but there may well be damage to lenders such as the banks and home loan originators,’ he said.”
“‘The last time we saw this happen was in the 1980’s and early 1990’s,’ Mr McDonald said. ‘The banks got caught badly and Westpac lost in the order of $1 billion.’ Mr McDonald questioned when the law suits would start rolling in against valuers for over pricing properties in deals done in 2003-2004.”
“He was not convinced that lenders have made adequate provisions for the possibilities of such a downturn. ‘I am seeing people who are admitting that there is a 10 to 20 per cent shortfall to the banks, and their bank hasn’t started to take action yet,’ he said.”
“Mr McDonald’s warnings were supported by the Australian Prudential Regulation Authority (APRA), which has voiced concern about high risk lending in the housing market. The concerns were raised after NSW Supreme Court showed a 60 per cent increase in repossession orders made against NSW homeowners last year, with more than 4,000 such orders in 2005 compared to about 3,000 in 2004.”
“For those investors who have overextended themselves in the housing market, ‘going bankrupt sooner, rather than later is something to seriously consider,’ said Mr McDonald.”
“Falling house prices in some places are ‘not a cause for alarm,’ the nation’s top central banker says. Reserve Bank governor Ian Macfarlane said the central bank had no troubles with the slowdown in the housing market, including where prices for homes had actually fallen.”
“‘The fact that on average over the country house prices are flat is something that gives us some encouragement,’ he said in evidence to a parliamentary committee today. ‘The fact that they are falling in some places is not a cause for alarm in our view, particularly if they’re falling in the place where they previously had the biggest boom, that seems to me perfectly normal.’”
Let the layoffs at banks begin!!!! Woohoo!!!!!!!
“All the signs are pointing to a very difficult road ahead for both homeowners and lending institutions, Mr McDonald said. ‘There are going to be some sad stories involving highly geared properties and mortgages that cannot be met,’ he said. Gearing is the ratio of debt to equity capital.”
Is this ever the handwriting on the wall? Gearing has to be astronomically high by historical standards for many FBs in the US. Bad times will soon follow.
“He was not convinced that lenders have made adequate provisions for the possibilities of such a downturn.”
No worries here — banks and their depositors have the FDIC (aka US taxpayers) to fall back on.
Unfortunately much of the mortgage lending, especially the most vulnerable sub-prime, has been done by non-bank lenders
‘The fact that they are falling in some places is not a cause for alarm in our view, particularly if they’re falling in the place where they previously had the biggest boom, that seems to me perfectly normal.’
What goes up, must come down. But what if the prices were pretty much booming all over the locally frothy place?
“Mr McDonald said many investors borrowed 80-90 per cent of the value of the home and property values have dropped in some areas, leading to negative equity for some borrowers.”
Borrowing ONLY 80 to 90 percent is considered prudent and conservative in US.
Piggyback loan = underwater from the outset
If this is what Australia is going through, and they only had 80 to 90% LTV, what will this mean for the frothy areas of the US. CA is going to get creamed, and many FBers will be crying the blues. Oh well, but you better buy before you are priced out forever.
“All the signs are pointing to a very difficult road ahead for both homeowners and lending institutions, Mr McDonald said. ‘There are going to be some sad stories involving highly geared properties and mortgages that cannot be met,’ he said. Gearing is the ratio of debt to equity capital.”
This quote is NOT from RONALD McDONALD…
In fact, it is serious statement that will no doubt be used as a TEMPLATE for countless towns and cities across the USA, once this financial fiasco gets well under way.
IN OTHER WORDS: we could keep this article, Micky D’s quotes and all of our blogger comments in literary bank…
and then pull it up each day to change CITY NAME and REPORTER NAME.
My gut tells me there are going to be hundreds of these REHASH’d stories inked all across the country… in the coming months.
80-90% LTV sounds downright conservative compared to what we have going over here, mates.
anyone know terms in UK
mostly ARM loans, don’t know what % are exotic, but their landing seems soft so far
they haven’t landed yet…
In Oz the loans are virtually all adjustable, but in my experience loan to value is typically lower than in the US. We put down 25% on our Sydney place and that was pretty standard.
Even though we have the FDIC in this country, I still worry a bit about a massive wave of bank failures and forced consolidations. Does anyone know an easy way to find out a bank’s exposure to RE loans?
“Even though we have the FDIC in this country, I still worry a bit about a massive wave of bank failures and forced consolidations. Does anyone know an easy way to find out a bank’s exposure to RE loans?”
Weiss Ratings has a list on their site you can look at for free of the top rated banks in the country. If your bank is not one of these banks, you can get a rating on your bank instantly from them by paying with your credit card. I think it still costs less than $20. Exposure to RE loans is one of the things covered in their report.
Weiss blacklisted Enron for questionable accounting months before the Enron scandal broke out. They don’t get any money from the companies they rate, so they are as unbiased as you can find.
You are wise not to count on the FDIC. The FDIC will not be able to cover a widespread failure of banks.
even with this kind of ratings you have to be careful. Some Dutch banks that also operate in the US and get good ratings usually are up to their ears into real estate. There are problaby very few big banks left that are not in some kind of way highly leveraged into real estate. Even the biggest international crime syndicates have most of their money in real estate.