Mortgage rejections soar to 40% of applications as LTI capped

Cross-posted from Martin North:

The root cause of the [house price] falls is simple; credit is harder to get. Our surveys show that up to 40% of applications for mortgages are now being turned down, compared with just 5% a year ago, as lenders apply more forensic analysis of applications received. For example, CBA is now looking at applications with a loan to income of 4.5 times and above. And I am getting more reports of households who are finding their available borrowing power is as much as 35% down on a year ago.

So unlike the small correction which occurred to the CoreLogic Index in 2015, as credit was harder to get briefly, and which reverted a few months later, we think it’s different this time.

Also at Domainfax:

In a bid to secure a sale in a cooling market, Sydney homeowners are discounting their properties at their highest level in five years.

Across the city, the average discount vendors accept on originally advertised house prices reached 6 per cent over the latest quarter – the largest markdown in prices since April 2013.

The average discount accepted for Sydney units, now at 5.5 per cent, is also at its highest rate in five years.

On like Donkey Kong.

Houses and Holes
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  1. wasabinatorMEMBER

    Bah, they will just lower this figure until property stops falling. Like all regulatory changes it gets undone very quickly when the reasons why it was brought it are forgotten, and human memory is incredibly short.

    • RBA will just lower teh rates again
      Dutton will just open teh gates wider.
      Can kicked down the road.

      • The RBA can’t do much when there’s only 1.50% left in the rate gun. Thats only 6 tiny moves.

        They are pretty much irrelevant anyway. The banks all say they are disconnected from the RBA as their funding is from European and other international sources.

        So if a bear shits in the woods in Italy, does it flow down hill to Australia?

    • I agree wasabinator.

      Although there is always the Teeny-weeny chance that it might get out of control before they turn the wick back up.

      • I dunno Royal Commission has put a spot light on bad banking. If anything lending is going to get tighter. I don’t see how it will boom again from here unless massive Chinese buying occurs, however… Look at Canada, London, New York etc.. they are all struggling now.

      • Jumping jack flash

        +1 Gavin,

        Banks are going to tighten credit until it is very difficult to get.
        House prices will fall a bit, but not too much before everyone stops selling.

        So long as nobody needs to sell for the paltry new maximum amounts of debt that are available, all the houses’ “values” will stay inflated. Houses are worth whatever the last pile of debt that was plonked onto them. If the last pile of debt is the biggest and best, the LVR will continue to look awesome so the banks can roll over their enormous debt lent out as mortgages when they need to, without needing to raise interest rates to do it, which would be completely disastrous, and keep their credit ratings intact.

        This is the same strategy the US devised and is taken from their book “How to Create a Booming Economy of Infinite Debt (And not much else), in 10 Easy Steps – The Definitive Central Banker’s Guide to National Economies in the Age of Asian Manufacturing”, Appendix A: “What to do if things go wrong…”.

        At the top of this list is “Batten the hatches and pretend everything is ok”.

        Our banks are now doing that.

        QE is on that list, too, but there’s a footnote that says “Only effective if you can print the world’s reserve currency”.

        Some people miss the footnote.

      • Thats the thing Jack, lots of people will have to sell.

        For example, lots of people are on 2 year deployments or contracts here in Darwin. We also have a lot people who cant take the climate or the tyranny of distance and move after 2-3 years. Then theres divorces and deaths which will involve forced sales.

        There are plenty of cases where people “have” to sell and market were buyers cant get funding is going to lead to dramatic increase in the amount of stock available. At this point prices fall and the buyer is king.

      • London is rejecting the Russian money, Canada taxing the chinese investors,
        so lots of mansion money to be laundered coming soon to Point Piper and Toorak.!

    • Hard to avoid the sense that it’s being going on long enough that if they were gonna, they woulda (the 2015 correction was back to old peak by now)

    • Depends how fast they can do it. Its easier to say “property always goes up” when it has mostly gone up for 30 years straight.

      Throw a big enough dip in there and you start getting anecdotes about “When the crash happened..”

  2. Youse guys have no idea. Farmers lead the way ! When you’re a farmer you set your price (usually about 50 to 100 % above value) and wait for the market to meet you ! There is no ‘meet the market’ with a farmer ! We are a greedy lot aren’t we ?

      • Yeah – seen that happen… Ask upwards of $750,000 when stuff barely sells around you at about $450,000 (oh – and blank plots of land sell for $120-140K)

        Problem is, can’t wait for the Pacific motorway to finish – it is distorting prices and rents like mad! He may still have the last laugh. Unless he croaks, at which point all bets are off.

      • The thing is, if they asked about $550k they’d probably have a chance that some idiot would overpay. When you’re getting up close to 75% more, chances have slimmed considerably.

    • With average income around $60k our LTI is way higher than 4.5. Therefore average local families can’t compete!
      Prices still rising.

    • You’ve reminded me of a small undeveloped block (30 acres) far from major cities with rocky, salty sandy soil, no water (aside from dams) on the side of a steep hill. Last I heard it sold for almost $200k.

      I’ve often wondered how the hell you extract $200k of value out of that land. I know the answer- its a hobby block for someone who can pay. As long as its handed hobbyist to hobbyist it’ll keep going up in value. No farmer will ever get $200k out of it using sheep/goats/cattle/chicken, anything.

      • So, what you’re saying is that if you sell it to Reusa-types – he’ll be able to have relation-parties on that make it worth its price. The number of f*cks-per-square meter is going to be through the roof!

      • and the number of f*cks per square metre is what a hobby farmer is paying for.

        The peace and quiet are worth it to many people.

    • When it costs you nothing to HODL and you’re not particularly hungry, then what else do you expect?

  3. nil_allMEMBER

    Wacking on a LTI cap is not doing “more forensic analysis of loan applications”. Sure credit is harder to get which is all very well but it’s nothing to do with analysing anything

    • Maybe they analysed away a little bit of the fake income I.e. “income boosts”?

  4. Martin
    What do you mean CBA is looking at loan to income of 4.5 or higher
    Are you saying that if you earn $100k base you can now only borrow $450k
    It used to be $550k

  5. Many about to learn the other, nasty side of leverage. Really sick of being given advice how all that matters is servicing costs and principal part doesn’t matter.

  6. I’ll just translate:

    35% of mortgages provided during the last couple of years can be considered very high risk by today’s lending standards.

  7. In addition, Comprehensive Credit Reporting is shining light on a whole bunch of liar loans.

    Investors who basically lie that they don’t have other loans are going to be exposed. As you see in the above link, the new information provided actually now contains any other loans they may have, in addition to negative events. This is currently partially rolled out, but will be fully rolled out by July.

    • Super Phoenix

      All the bad things tend to come out at more or less the same time – and this is not unique to housing markets. Share markets are the same – one profit downgrade usually leads to a string of bad events.

      Basically, bad things have been visible in plain sight for ages but they have been sort of condoned or brushed aside until, suddenly, they can no longer – aka the Minsky moment.

  8. I have mentioned to folks for years now that easy credit is a large part of the current housing price boom. I say “mentioned” as I gave up years ago trying to help people understand the drivers behind Aussie house prices. Indeed many of them think this is normal and there is no bubble. So I say it once if asked and leave it at that and change the topc. Horses, meet water. The rest is up to you.

    • The physical “shortage” of housing means that a certain number of families must physically miss-out on independent housing.

      This is manifest in price to buy and price to rent. These prices must (rise to) achieve a level high enough to “price-out” the given number of families.

      Precisely how high price must be to achieve “pricing-out” is different for rent and for buying…

      House-rent-price is essentially set by wages, because generally WAGES are used by people to pay rent.
      House-buy-price is essentially set by mortgage lending, because generally LOANS are used by people to buy houses.

      Why is there a shortage of housing?
      Because population growth due to immigration and local births is greater than the growth in the number of houses and associated government-provided infrastructure such as transport, schools, hospitals, etc. That is the shortage mentioned earlier. The population is outstripping the good stuff required by the population.

    • Jumping jack flash


      I think pretty much everyone has admitted it now. Our multi-decadal housing boom was only a result of missing superannuation, greed, and debt.

      Before they all freely admitted it, it was talked about in hushed tones. Everyone knew cheap debt – debt with risk that is incorrectly priced, and in many cases, its risk ignored altogether, was behind it, but it was kind of like an Emperor’s New Clothes kind of thing.

      Besides, you can’t lose on property so it makes perfect sense for a bank to throw as much debt as they can at it, and then some.

  9. Guy bought on the weekend Townhouse Inner West Sydney, passed in on Thursday night auction, they were the only bidders, $1.1m. They negotiated higher to $1.12m on Saturday, owners were keen to sell!! I didn’t ask why they negotiated higher.
    Last sold $1.05m 2015
    Gain $70k
    Minus stamp duty and agents commission, minus renovations, minus interest paid = loss

      • Exactly. Add in rent saved (or rent earned, if leased out) and it’s clearly a winner!

    • I didn’t ask why they negotiated higher.

      Because if they’d offered $900k everyone would have looked at them like they had just landed from Mars!
      “We” have been conditioned to offer more to get what we want, and lowering the offer isn’t part of The Game…


        Too right!
        Negotiating downwards is so bourgeois!
        ‘Old money’ types (the aristocracy and those with a fresh $1.0m credit line) would never deign to offer less than the ‘ask’ and offering to pay more proclaims their immense wealth, their breeding, charm and rightful place amongst the landed gentry.

      • Jumping jack flash

        Houses are worth whatever the last pile of debt that is plonked onto them.

        Should have put 2m on it. Then it’d be worth 2m.
        And all the houses around it too!

        Sweet, instant, capital gains!
        But not due to the debt at all.
        Oh, no no no no no no no!

    • Yeah as much as people hear talk about Texas house prices being so affordable they usually forget to factor in depreciation. You see in Texas a new house might cost as little as $300K new but the same house will sell for less than $250K once it has been lived in and often sell for less than $200K five years on.
      Up front Affordability comes with its own set of problems.

      • Super Phoenix

        Nothing wrong with that. That is what you expect from buying a new car. You would still be financially better off than keep renting one.

      • You would still be financially better off than keep renting one.
        I dont’ know.
        $300K loan at 4% = $1.5K/month (30 year)
        Land taxes, Hospital/schools etc are about 2% = $800/month
        Sewerage and water = $100/month
        Upkeep amd maintance = $100/month

        yearly cost of ownership= $2.5K*12 = $35K
        Real estate agent selling costs about 3% @ 250K = $7.5K
        Transfer costs about 1% I think = $2.5K
        Depreciation over 5 years = $50K
        Buying Selling and depreciation costs per year = $12K

        Add the $35K plus $12K = $57K/year housing cost of ownership.

        $5K per month rents you a big house in Texas.

      • Super Phoenix

        If you plan to sell the new house in 5 years then there is no point in buying one. You wouldn’t buy a new car at an airport just to sell it after a few weeks?

      • You wouldn’t buy a new car at an airport just to sell it after a few weeks?

        You would, if, like Australian houses, they were guaranteed to double in value given any arbitrary time increment.

      • All I was really saying is that most human systems have biases and those systems often function is such a way as to reinforce the human biases.
        If you expect to lose $10K per year on new home depreciation than generally (even if you don’t specifically do it) this depreciation cost gets added into the equation. Similarly if everyone expects to make $10K per year from property appreciation than this fact also gets included into the purchase price.
        That leaves you with the two end cases a social belief in
        Depreciation becoming Appreciation
        Appreciation becoming Depreciation

        The last case is the only one that any average Joe really needs to worry about because it just not properly priced into anyone’s game plan.

      • Super Phoenix

        Very good, Robert. What is happening in Straya is essentially just that – people bidding up new cars at every airport exit, just because people see car prices going up. They don’t question what is causing the prices to rise or anything complicated. Talk about a self-fulfilling prophecy.

      • @SP

        I’ve always thought that the main justification for house prices having grown more than wages over the last twenty years is the fact that they’ve grown a lot more than wages. If it happened that house prices stopped growing at such a pace on a large enough scale that most people noticed then mean reversion would be a vicious teacher.

  10. I’m going to laugh when the Royal Commission proves to be a flop and the banks get away with what they have done with some bullshit $100 million dollar fine as has been proven with past results. The fear of crashing the market and the fact that Malcolm Turnball is an ex banker (Goldman Sach boy) does nothing for my confidence in this government dealing with the banks effectively in the consumers interest. In fact the new laws Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2017 show exactly how the public will suffer most if anything from what comes next. Whats even worse is that people are sleep walking into a digital currency age, where you will have no control at all of your finances !!

  11. The thing that was not hard to miss after the GFC was that the people that benefit from the system also control the system. It was carnage after the GFC as well and sure enough the policies to protect the model came along. I’m not saying it will never end, but we hypothesised that they would throw the kitchen sink at the ‘problem’ and we were right.

    Right now, there are so many more policy steps that can be undertaken to protect asset prices and to sustain price growth or price stability – there is a big vested interest in not letting this go under. Super cash, government support for deposits, rates etc etc.

    I’m not holding my breath.

    • I feel the opposite is true aj , i think the global crash has been planned from the beginning, Why use the sword when you can use the pen to enslave and control the world in a new digital order. Just look at the EU, what a nice stitch up that was. There are no more independent countries in Europe, technocrats control it from Brussels and nobody gets to vote as to who is elected. Austerity measures are put in place to bail out banksters, whilst the people commit suicide because they have no money to feed their families. China has gone complete facial recognition so you can not even protest without them knowing who you are. Australia is getting the same system very soon. There’s no accident or coincidence with what is occurring, it is all planned. This was all conspiracy theories years ago, well its here now !!!

      • Super Phoenix

        Yes, when I wrote a bunch of alternative Star Wars episodes a few years ago I thought some were far-fetched at the time.

        Not now.

  12. The Wealth Navigator

    it seems a lot of people here are carrying on as if house prices have never dropped before. Have a look at a chart MB published in the weekend
    and go to the chart Australia – Sydney Real estate downturns and return to peak
    And guess what, property in Sydney is just doing what it has done for the last 30 years, peaks then pulls back for a number of years and then goes back to the last peak and beyond.
    And the price drop so far has not be as much as other drops. So a 4% drop so far is a third of the drop i lived through in the 88-94 period
    If you think it is different this time, i suggest think again. The only thing that will vary is how long. WIll it be six years like 88-94 or shorter like most other cycles.

    Also core logic research for Sydney is showing that the drop in the top end houses are what is causing Sydney median to fall (just like in previous cycles) but lower priced housing is still going up in value

    So right now the Sydney market is doing what it has done for decades and is nothing new – You jut need to understand the different property markets and dont wait for a 50% price drop across the board – it wont happen. Some houses will fall 50% (as some houses in Australia have already fallen 50% in the last 5 years) and others will continue to go up.