The poison of negative mortgage equity spreads

Via Domainfax:

Suburbs in Sydney’s inner west have borne the brunt of the city’s steepest annual drop in property prices since the Global Financial Crisis.

…“I think it reflects a combination of those areas being among the most popular. During the boom they were the key beneficiaries,” said Dr Shane Oliver, AMP Capital’s chief economist.

“That’s where investors played a bigger role in the boom times, therefore those areas have become more vulnerable when the market has turned down again.”

These price moves do not match the auction clearance rates which have been much worse in the Sydney mortgage belt, the ring of homes further out. That suggest to me that this correction has much further to run given outer ring prices obviously have further to fall and that will impact the move-up ladder which moves from out to in.

It will not be helped by this, also via Domainfax:

Back in 2015, it felt like a new Chinese gazillionaire was arriving in Sydney and setting up camp every other day.

…But it appears the party has come to a crashing end, no doubt heralded by the latest unsavoury headlines surrounding former Sydney regular, billionaire Richard Liu, known as Liu Qiangdong in China.

Meanwhile life has resumed to some semblance of normality around the leafy streets of Hunters Hill, with one of the suburb’s more prominent wealthy Chinese residents having flown the coop.

…PS anointed Sam Guo as the “Chinese Gatsby”, thanks to the lavish parties the kaftan-wearing Shenzhen money-bags threw with great frequency at his expansive multi-million-dollar compound Windermere.

…Nor have there been any recent sightings of China’s own queen of soft rock Tian Zhen, who joined the well-heeled residents of Point Piper three years ago, snapping up the penthouse in the Kilmory estate for $11.65 million.

…Also missing in action is Chinese actor Liu Xiaoqing who splashed $8.9 million on The Residences’ sub-penthouse overlooking Hyde Park in 2014.

Chinese money is gone and with CNY falling faster by the day, if anything, it seems capital controls will have to intensify.

It looks to me like Sydney is on the verge of a much larger wave of price falls and negative equity than in the 2003 correction.

The AFR has more on that front:

Sydney residential property owners who bought a median-priced home at the peak of the boom could face losses of up to $194,000 – or more than 18 per cent of their purchase price – if they decide to “flip” their asset into a falling market. A Melbourne owner in the same position could lose up to $152,000.

…Borrowers who purchased with a small deposit are also likely to find it hard to refinance because lenders are under intense pressure to lend more prudently and typically require minimum deposits of between 20 per cent and 30 per cent.

Separate research by Development Finance Partners found mortgage revaluations of second-hand homes in inner Brisbane are between 20 per cent and 30 per cent lower than the prices they originally exchanged for, one more sign of falling demand and over-supply in the Queensland capital.

DFP, which provides commercial loans to residential developers, warns this is having a knock-on effect for older apartments and townhouses as new supply comes on the market.

There are similar property pipelines in inner suburbs of Melbourne and Sydney.

The question becomes now to hold and hope for rebound or sell? With no sign of an end to price falls, an ongoing reset for interest-only loans for another three years, rising bank funding costs and mortgage rates, a fading economy with no inflation nor wage rises, plus an aged cycle heading into some kind external shock, I think we know the answer.

At least until it breaks the will of the RBA some time next year and it cuts rates. Even then what will the last two rate hikes, half kept by the banks, achieve?