World"s Longest Bull Market (55 Years) In Australian House Prices Is Over, According To UBS

This morning, CoreLogic released its monthly report on Australian house prices – the world’s longest running bull market. Finally, measures to tighten credit standards and dissuade overseas buyers (especially Chinese in Sydney and Melbourne) are beginning to bite and price rises ground to a halt last month. From the report...

Since moving through a peak rate of growth in November 2016, capital gains across Australia’s housing market have been losing momentum, with national dwelling values unchanged over the month of October. For October, conditions were flat across both the combined capital cities and the combined regional areas of Australia, however over the past twelve months growth in the capital cities (+7.0%) has outperformed the regional areas (+4.9%).

 

CoreLogic head of research Tim Lawless said, “The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers.” 

 

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples.  Additionally, interest only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties. 

 

“In fact, the peak rate of growth in dwelling values lines up closely with the peak growth rate for investment lending in late 2016.   We saw the housing market respond in a similar fashion through 2015, and the first half of 2016 as investors faced tighter credit conditions following the announcement from APRA that lenders couldn’t surpass a 10% speed limit on investment lending.”

The top line in CoreLogic’s summary table below shows that Sydney prices seem to be leading national prices lower.

Following the release of the data, Bloomberg reports that UBS is calling an end to the boom in Australian housing...

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS Group AG said.

 

National house prices were unchanged in October from September, while annual growth has slowed to 7 percent from more than 10 percent as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report.

 

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

 

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates.

 

The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

The regulatory crackdown on the insanely loose practice of lending on high loan to valuation ratios is well overdue. This was permitting speculators to use unrealized gains on one property as a down payment on another property, then another property as prices roses, and so on. See our post from last month “Australia Mortgage Market Is Now A $1.7 Trillion ‘House Of Cards.’”

As we noted at the times, over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt. But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

 

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

 

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

 

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

 

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

Earlier this month, the Bank for International Settlements (BIS) released a new working paper,  “Interest rates and house prices in the United States and around the world”.

This identified Australia’s 55-year housing bull market – 50 years from 1961-2010 then 2013-2017 without a downswing in between – as the longest in world. The US housing bull market from 1992-2006 was a mere 15 years. This was the BIS methodology.

Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The up swings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century.

Here are the results in tabular form – Australia is third from bottom...

Since 2000, the BIS found that Australia has seen the second largest increase in real house prices, only exceeded by New Zealand – where the new government has just banned foreign buyers from the market.

 

Our gut feeling is that today’s data signals the beginning of a “Minsky Moment” for the Australian housing market.

Australia Mortgage Market Is Now A $1.7 Trillion "House Of Cards"

Over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt.

But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

As LF Economics points out, just like the American mortgage bubble, the current ponzi scheme in Australia is also completely dependent on constantly rising prices.

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

And, just like the American bubble, much of the madness is being funded by unsuspecting foreign investors.

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

Meanwhile, there is no shortage of "success stories" from people who make next to no money doing their "day jobs" but have been able to acquire dozens of investment properties with nothing but debt.

Last month, a young Sydney couple revealed how they had racked up $1.2 million in debt on a portfolio of five properties in just two years.

Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of $135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.

Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.

Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. “Anytime you withdraw equity, you need to show income to service that new loan,” he said. “Sadly, the banks don’t value rental income as highly as they once did.”

Eddie Dilleen, a young investor with 10 properties worth about $2 million, last month said he was not fazed by tightening lending environment or talks of a housing bubble.

Mr Dilleen said the majority of his portfolio was positively geared, largely because he avoided borrowing against existing properties, instead saving up for each new deposit by working several jobs.

Conclusion: "Short everything that guy has touched."

Mortgage Crisis 2.0: BofA CEO Wants To Slash Down Payments To Help Poor Millennials

Among a host of other issues, one the critical things that contributed to the housing crisis of 2008 was the fact that speculative borrowers had nearly no "skin in the game."  Anyone who decided they wanted a piece of the rapidly inflating housing bubble could go out and buy multiple houses with no money down or, in some cases, even do "cash out" purchases whereby banks would finance more than 100% of the purchase price leaving "buyers" to pocket the excess.

Shockingly, such terrible underwriting standards was a really bad idea.  Turns out that offering investors infinite returns on capital, given that they could purchase millions of dollar worth of assets without ponying up a single penny, causes wild speculation resulting in devastating asset bubbles.

But, in the wake of one of the worst asset bubbles in history, new legislation came along requiring traditional mortgage borrowers to put 20% down when purchasing a new home. 

Ironically, the new owner of one of the worst mortgage lenders of the 2008 era, is now arguing that down payment requirements should be slashed in half.  Speaking to CNBC, Bank of America CEO Brian Moynihan, the proud owner of Countrywide Financial, said that his mission is to reduce mortgage down payment requirements to 10% for traditional loans.  Per CNBC:

"But, you know, I think at the end of the day is people forget that, at different points in your life and different points on what you"re doing in life requires you to think about housing differently as a place for you and your friends, as a place for you and maybe your significant other, and then ultimately, a place for family. That drives change. And so yes, it"s taken more time. And we talked a lot about this, you know, four or five years ago, that if you require a 20% down payment, it takes just a little more time to accumulate 20% than it would 3% or none, which is what the rules were for a short period of time."

"So our goal, going back to regulatory reform, is should you move the down payment requirement from 20% to 10%? Wouldn"t introduce that much risk."

"But would actually help a lot of mortgage to get done. And if you look at the statistics, the difference between 80 and 90 LTV –loan-to-value – isn"t much different as it is between 95 and 90. That"s when you start to see real differences in performance statistics. And so we don"t want to wish people into borrowing money that then they have trouble repaying."

Of course, we"re certain that Moynihan"s sole purpose for wanting to lower down payments is to help those poor millennials living in mom"s basement and has nothing to do with the fact that"s he"s lost a ton of fee revenue to government-backed loans that only require a 3% down payment.

But, why not?  Gradually destroying lending standards worked out really well last time around.