ABC The Business does the building housing bust

From ABC’s The Business:

Spot on.

Comments

  1. This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

  2. Tassie TomMEMBER

    I think George is a bit optimistic to think that bad debts won’t be a part of the medium-term future. Once the house price tide starts going out, we’re going to see a whole lot of people swimming naked.

      • +1. I am sure he worked out that price falls means equity falls means difficult to refinance means forced sales means price drops means..

    • @TassieTom I think he was holding back and probably agrees with everything your saying and more. He just doesnt want to sound to bad.

  3. An interest only loan is renting from the bank, while owning the capital appreciation/depreciation risk. It is really no different than option trading.
    If you agree with the assumption that people take out interest only loans mostly either to speculate on house prices as investors, or because they simply cannot afford to pay the principal, then it is unlikely that any speculators will go “all-in” with principal plus interest loans in a falling market. Most will elect to cut their losses or capture gains, in many cases BEFORE their loans convert. While those interest only loans come due over a period of 3-4 years, most speculators will want to get out at the same time and once prices start dropping they will run for the exits – why would they want to be the ones holding the bag? Those who simply could not afford the payments will be forced to sell. As the reality of Australia’s housing market is understood by global investors, the cost of money will increase for Australian banks, causing a rise in interest rates that is totally out of the RBA’s control. Any retirees who are looking to downsize or sell will also rush for the exits. It is going to be ugly. I thought this would be happening 10 years ago and it would have been bad then. Now, Australia is staring down the barrel of the mother of all housing crashes. As he says in this interview, home loans should not be more than 4 x household income. I would argue that home prices should not be more than 3-4 x household income. That means in many neighborhoods a median home should be $300,000 to $400,000, not $750,000 to $1,000,000. Once unemployment increases and wages drop, these numbers will get even worse.

    • For property investors with an outstanding loan on a PPoR, using IO on any IP loans likely makes sense from an accounting / tax minimisation perspective. They would typically be better off paying down their loan book starting with the one for their own home, the interest of which is not tax deductible.

      • in a falling market lot of them will not be able to come up with additional deposit in order to refinance.

      • Cost of Groceries each week is crazy, $200 last night at Coles and I reckon we will still go back 2-3 times before end of week..I wouldn’t be surprised if we spent $300-$400 p/week on groceries and it’s just the missus and I (+dog).

      • That’s the problem with you young blokes!
        You expect to own a mortgage yet you think you can do it by eating groceries 1+ times a week. Gimme a break FFS.

      • I know you’re both joking (or at least I hope you are), but since I moved out of home at 25 I decided I would spend my money on good quality healthy food first and foremost. I’d rather a punnet of Raspberries than a pint of beer. My reasoning is simple, if you invest in your health and eating good food, you’ll be able to think clearer, won’t get sick as often and really the most important asset we have is our health.

        I would give up many vices to pay for a home to live in, but I would never trade my long term health for it. I’d rather rent forever. 😀

    • You know, Michael, sometimes I’m totally convinced that the more obvious an issue is the less likely a lot of sheeple will agree with it. In fact, that’s why politicians can get away with so much codswallop, ah?

      • because the punters are sitting on their sofa’s watching Master Chef rather than painting placards and marching in the streets.

    • Correct and well said, particularly the bit about IO loans being the same as renting from the bank. I’ve been spruiking that to a few of my property owning friends recently, and they don’t seem to grasp the concept.

      • Probably because they don’t realise paying Interest Only means they are not paying off the house. 😀

      • LSWCHP, “renting” from a bank would mean that you could walk away at the end of the lease. An interest only loan commits you to refinance at the end of the term or sell to liquidate your liability.
        B I G FRIGGIN DIFFERENCE, buddy!

      • Treibs and LWSCHP have it right – it’s like renting from the bank except unlike a normal renter you are up for the costs of rates, maintenance and repairs, plus you can’t move house without paying a huge transfer cost (stamp duty, agent’s fees). Sounds fun.

        Repeat after me. Interest payments are dead money.

      • And if house prices do drop and the loan is underwater, then not only does the IO loan not get any capital gain but the mortgagee can end up owing the bank. #liferuined.

    • TailorTrashMEMBER

      Excellent stuff …..and a loss of continuity of employment will the the killer in this ………pity so much of it is also rolled up into the ponzi itself

    • Yes – you have made a good point. Flies in the face of some viewpoints that are expressed here but that is what makes a market.

  4. GERMAN investors on the GC appear to have sounded a barely-audible retreat bugle, without firing a development shot, at the vibrant lakefront suburb that is Varsity Lakes.
    A group of Deutschlanders plunged $26.4 million into a gem of a site fronting Lake Orr 11 years ago and at one point appeared poised to press the go button on a major project.
    It now has emerged that the mixed-use 5.4ha holding, known as Bermuda Point, very discreetly has been waved under the noses of potential buyers.
    WW massive amounts of land going on the market here, now.

  5. harry petropoulosMEMBER

    finally house prices will be easing and bring some normality into the market place………………..im astounded that no-one is considering independent mortgage rate increases by the banks……………………you might as well take another 10% off house prices.All these million dollar suburbs will suffer steep losses!!!!

  6. My banker was concerned 8 months ago. He had several Eastern suburbs couples with $10m in investment loans and no wiggle room. The tide is going out….

    • Steve was too far ahead of his time. It is one thing to make a forecast but another to encapsulate it in a specific time frame. As J M Keynes observed Markets can remain irrational for longer than one can remain solvent. Can’t remember the exact wording but you get my gist.

  7. reusachtigeMEMBER

    Someone needs to take that traitorous banking guy out for saying such blasphemous stuff… it’s rubbish! The next boom is building strongly, everyone who is anyone knows this!!

    • Reusa, you’re a national treasure. I’m looking forward to an invite to one of your relos shindigs. If the going gets too rough, I’ll put me pants on and go back home, buddy.

    • Forget the banker, it’s the ABC spreading its biased unbalanced views which must be in clear violation of editorial codes. It’s time hard-partying investors took up a complaint to the national broadcaster about this so-called fake news.

    • Reusa – I haven’t quite made up my mind as to whether you are simply taking the piss out of most people or sincerely believe in what you write. Time will tell.

      • Reusa has taken cynicism and made it a separate identity.

        We revel in his evil real estate spruiker alter ego.

      • darklydrawlMEMBER

        It’s an art. And he is most excellent at it. The back story is a good one. 🙂

    • I dunno Reusa, you’ve been right in the past, but I think “this time it’s different”.

  8. Arrow, on the subject of interest and rent being “dead money”, food is dead money too, tell ’em to grow their own vegies and raise their own farm animals and slaughter them……he he he he he

      • Yes, you can eat Dandelions, the roots can also be roasted as a alternative to coffee and is reputed to be a good diuretic.

        The leaves are bitter and rather nasty and as a coffee, it will make you piss more. Such is the price of free food.

  9. He supports what Steve Keen said 10 years ago. Its the growth in borrowing which supports increasing house prices and when credit growth turns negative house prices fall.

  10. its already playing out in WA!! Sellers still dreaming we’re in a mining boom, buyers unable to borrow enough to even bid up to the reserve price at most auctions!! Laughable

    • rentsailorMEMBER

      Can confirm this Bendy Wire.

      The dreamers I encounter, whenever I go through Perth for work. From Uber drivers to Mortgage Brokers who have swallowed their own lies that “Mining is picking up again”

      NSW (Sydney) punters should consider Perth’s post boom immediate shrinkage in Real Estate. (But won’t)

      When I lived in WA I never knew anyone who did the IO thing.. and yet a lot of people fell hard.. fast forward to my share house in Eastern Subs where all the cool kids have IO loans for their 800k, 1 bedders – “bought” 14 months ago looking to make big gains to pay for their Audi.

      This video is spot on as artice says..

      Almost hard to believe he was allowed by the media handlers for such true speak, nice of him to put a soft spun explanation.. shame the people who need to watch this clip either: just won’t, won’t get it, refuse to accept it.