It “Hit The Mortgage Market Over The Head With A Baseball Bat”

Authored by Wolf Richter via,

8 ‘boots-on-the-ground’ findings from Sydney’s deflating housing bubble…

Australia’s housing market is getting rattled. The mortgage industry is in turmoil. Banks are battered by incessant revelations of misconduct.  Home prices in the Sydney and Melbourne metros, after surging to an astounding degree, are deflating. And the once splendid and vast game of real-estate speculation just isn’t fun anymore.

Lindsay David, of LF Economics in Sydney — who has long played a role in exposing misconduct in Australia’s banking system including, in early 2016, by calling for a Royal Commission investigation into the mortgage sector — put some findings of his boots-on-the-ground analysis into a note to clients. Here are some of them:

1. Drop-off in Speculative Demand:

“We spent countless hours” in recent months “observing buyer turnouts to scheduled property inspections of houses for sale,” he writes. “While there may still be a small sum of properties on market that continue to see very large turnouts, there was a clear visual drop-off of engaged interest from buyers and indeed ‘property snoops’ across the majority of properties for sale that we had observed.”

“On many occasions, we observed either no interested parties, or less than 4 parties inspecting a property across a very decent chunk of offerings on the market,” he writes. “This lower rate of turnouts was something we simply had not observed over the years at such a dramatic scale.”

2. Sharper drop in selling prices than shown in official data:

According to CoreLogic (the official data), home prices in Sydney fell 4.6% in June compared to a year ago, with house prices down 6.2%, and prices of condos down 0.7%. In the most expensive quartile, prices fell 7.3%.

But Lindsay David writes: “It is our view based on all the resources made available that house prices in the Sydney area have broadly fallen somewhere between 11% and 15% over the comparison period.”

3. Sudden eagerness by property agents to negotiate

“We also observed a systemic increase in property agents’ willingness to negotiate and follow up on the majority of very low-ball offers made for properties they are selling. This negotiation approach for buyers was simply not possible twelve months ago,” David writes.

4. Less access to “Jumbo Loans” because rules suddenly matter to banks (a little):

David writes in the note:

As we have always argued, Australian banks had for years been flooding the housing market with “jumbo loans” that were well in breach of the National Consumer Credit Protection Act 2009 (NCCPA). When benchmarking the ability now to ascertain a loan outside the scope of the NCCPA, it appears the majority have lenders are now simply skirting in and around the laws of the NCCPA versus the outright disregard of this law, which for many years was industry standard.

This shift in lending practices brings lenders closer to the rules of the law and thus resulted in a significant reduction in the overall borrowing capacity of your standard Sydney property buyer. Sydney property buyers were leveraging at the highest ratios in the country (indeed globally) on the back of the easiest of lending environments. This now more broadly appears to be in the past versus the present.

5. The Royal Commission did it:

In 2017, the Australian government finally and reluctantly established The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, as it’s called, to investigate and report on misconduct in the financial services industry, particularly in the mortgage sector. It found a treasure trove of misconduct and “continues to expose cases of bank malpractice,” David writes:

The publicly released evidence provided consensus that our research into illegal conduct and regulatory capture in the mortgage market was spot on. We anticipate captured regulators will struggle to release the noose of the banks borrowing power without repercussions.

Under scrutiny, banks are now curtailing some of these practices and some of their riskiest lending, such as interest-only mortgages to investors who cannot afford them, and this has caused lending conditions to tighten particularly for speculative buyers.

The changes “appear to have hit the mortgage market over the head with a baseball bat,” David writes. “In our opinion, this is the primary reason the Sydney property bubble got pricked.”

6. Underwater interest-only mortgages:

Property price declines hit interest-only mortgages the hardest because there may be little or no equity cushion. Once a home is worth less than the mortgage, and is thus “underwater,” it cannot be sold because the proceeds won’t suffice to pay off the mortgage. Investors, often with negative cash-flows in the property, are stuck contemplating doom and gloom.

7. “Non-transparency” increases sharply

“The Sydney housing market is synonymous for non-transparency,” David writes. “We have continued to observe an ever-increasing lack of transparency when it comes to house prices (asking price and sale price)”:

  • More properties that are for sale are advertised without an asking price.
  • The number of transactions where the price is not disclosed has surged. This also appears to be the case in Sydney’s weekly auction results, thus preventing the median sale price at auction from falling faster than what it likely has in reality.
  • On many occasions, properties are being put on market only to be taken off market two or three months later. However, many of these properties are still for sale, but no longer advertised or have a ‘for sale’ sign posted on the front lawn.

“It could be argued that the property culture in Australia is to make sure everyone knows how high houses are selling for – unless the market is falling,” he writes.

8. Local Media, hooked on real-estate & bank ads, downplay Bad News

“The local mainstream media (MSM) have made great efforts to play down the systemic nature of the early findings of the Royal Commission along with the fall in house prices in Sydney,” David writes:

‘House Prices will fall, but not crash’ is the chorus despite Sydney house prices falling through the floor on the back of rising funding costs and weakening credit conditions. No doubt, revenues from real-estate and bank advertising remain a critical revenue component for Australian MSM news sites, relative to their international peers.

Humorously, the MSM has also begun to turn their attention on smaller housing markets that are showing signs of strength and increased credit expansion, such as Hobart, Tasmania, which has a population of just 220,000.

And the bottom line?

There are repercussions. Lindsay David, from his perch at LF Economics, concludes the note:

We stand with the view the Sydney housing bubble appears to have been pricked, and we are confident that house prices will continue to fall at a moderate to fast pace over the coming months. This should eventually have knock-on effects to the banking system and its stability and ability to maintain profits.

Furthermore, we can expect the residential construction sector to feel the pressure as more developers come to the realization that there is now no real profit to be made in a falling market. In a feedback-loop economy so reliant on rising land prices, the risk of eventual job losses filtering through the Sydney economy appears to be on the increase which could easily spill into the broader Australian economy.

But even the official reports are no longer brimming with optimism. “Recent home buyers could be facing negative equity,” warns CoreLogic. Read… Update on Deflating Property Bubbles in Sydney & Melbourne 

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Author: Tyler Durden

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