Credit crunch spawns nation of mortgage prisoners

By Leith van Onselen

As Australia’s credit crunch lakes hold, a generation of mortgage prisoners has been born:

At the weekend, I ran into a very worried developer who in June and July had been selling his land as fast as he could get it on the market. Now demand has just stopped. A whole range of speculators who bought land on small deposits will soon have to come up with the money. Many will not be able raise the money and can’t sell their contracts…

About 40 per cent of home owners cannot now shift their place of residence, because they’ve borrowed sums to buy a dwelling that no bank will now lend to them…

And so if they sell their dwelling and move to a different location, looking to buy a similarly priced house or apartment, they will find their loan availability level will be slashed. And so they must stay where they are until APRA allows banks to relax the lending limits… many are also under mortgage stress…

Seriously, what did policy makers expect? If house prices continually outstrip wages growth there will eventually be a correction. The real takeaway is that one of the very foundations of the Australian economy is built on quicksand. That is, there is no depth in wealth generation beyond flogging houses to each other, leveraged by debt.

Gravity was always going to take hold eventually.

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Comments

  1. Millie Vanillie

    The question is whether APRA will relax their feather light restrictions and let this bad boy blow up again

      • Damn right.

        The investor speed limit has already been taken away, to provide for the level of churn needed to keep almost everyone on IO indefinitely, if required.

    • They might but we are seeing a number of clients now unable to refinance out of their current loans along with clients consistently being unable to borrow what they need to purchase. Whilst some of this demand is being met by Pepper and Liberty the cost of funding (interest rates) tends to defeat the purpose of the exercise (Cheaper rate for refinances and affordability for new purchases)

    • And so they must stay where they are until APRA allows banks to relax the lending limits… many are also under mortgage stress…

      Funny I thought the reason they were in mortgage stress in the first place was because of no APRA enforcement on loan limits… 😁

  2. Just sat in an update from the guys at AFG. They confirm this is happening for loans from the Big 4.
    However credit is still available via the non prime lenders at a slight premium. So while they did acknowledge they are processing plenty of valuation requests for refi and the like that don’t go any further as the equity isn’t there, to say the taps are off may be a bit much.

      • Peach – this is something I have been wondering. Thanks.

        I have also read however that the non bank lenders simply don’t have the capacity / funding to take up all the slack. That they are too small to physically / financially do enough business to fill the gap. Do you have any insights? Certainly 2 billion in six months sounds like a huge 4x increase but is it much in the overall context of the Aus housing market, or just a drop in the ocean?

      • The Penske FileMEMBER

        Arrow. Peachy’s figures are right from my intel and groups like Liberty are now settling $350+M per month and La Trobe has originated circa $3M in loans (including commercial low doc) in the last 3 months when they used to do that in 12 months. How I look at it is that the 1st tier lenders have pulled back heavily leaving the 2nd tier lenders to take their deals at their normal pricing. Like a little rate (plus fees) rise around the fringes. The 3rd tier lenders (private) are now feasting on the stuff that the 2nd tier lenders are letting go due to volume and their normal private borrowers are dead. Of all the stuff I see it’s RAMS that’s the scariest. They do some real edgy stuff and they don’t charge for it. Not sure where their client turnaround times are now however 3 months ago it was at 22 days which indicates a lot of volume. One of their members told me it was 50/50 full doc / low doc which also makes it messy.

      • Thanks Penske. I don’t really have that kind of info at fingertips anymore, as playing in that patch was really my previous life… you seem very close to it presently.

    • Hey Brett- yeah Pepper is great only issue is you pay an extra 50 to 100bps for the credit (for myself personally i think that is a bit more than a “slight” premium)

    • Pepper Essential Full Doc 80% Loan to value ratio- Interest Only Investment rate 5.14% –
      No fixed rates are available for I/O investment loans at Pepper – Big 4 and second tier’s on the other hand – ANZ 2 yr fixed I/O Investment loan 4.18% / Suncorp 2 year fixed I/O Investment 3.99% / CBA I/O Investment 2 year fixed – 4.19% / Westpac 2 year I/O Fixed – 4.15% – so yes the available credit is there – you are just going to pay through the absolute nose to get it.

  3. Shirley that cant be correct
    bjw 678 says its all good
    There is gunna be winners and losers out of this correction
    its probably too late to pick a side, its baked in.

      • for sure
        the recent closure of parliament, while the troops regroup, is a sure sign it is not run of the mill.
        that was the last straw for many punters, who although their own circumstance was in strife, looked to the politicians, mayors for moral support.
        As 2GB turn up the heat, fuzzy bear will wilt
        And so will the punters.

  4. >Gravity was always going to take hold eventually.

    Perhaps, but it will only take hold when owners lose their jobs. Many will be locked in as prisoners. They cannot afford to sell and move, they will just have to keep on paying.

    If you borrow $1 Million for a home that is now worth only $800,000 you are not going to sell, as you cannot come up with the $200,000 to pay off the loan. This fact will stop prices falling too much as many people simply cannot afford to sell.

    • Yes, that’s right – until they start losing their jobs.

      Unemployment rate has been pretty low recently. It’s no accident.

      Once it’s on it will be on. But the grain of sand that will trigger the avalanche hasn’t fallen yet… not just yet.

      • ‘Digital Transformation’ is the flavour of the month among large corporates at the moment.

        Generally involves a bunch of redundancies, process automation and spill and fills for the remaining positions.

        ANZ, NAB, Telstra, Optus have all had fairly significant layoffs announced this year. Plenty more to come.

      • Peach ,
        All the EBAs around my site (massive manufacturer site) are taking 10 to 30 % pay cuts plus losing heaps of conditions. Just a matter of time before the feedback loop kicks in. The sheep are starting to stir.💪

    • Yes and no Lori. I agree that people won’t sell unless forced to. But for any that are forced to, they will have to take what the (credit-rationed) market is bidding. That could indeed be 20% down as your example shows.

      • …and when one house in one street does hit the blocks and gets sold ( say a Deceased Estate) then EVERY house in the surrounding area is going to have a new ‘official’ value based on actual turnover.
        This happens in the UK 30 odd years ago, when mortgage prisoners couldn’t sell. They moved, of course, and rented out what they ‘owned’ when the relocated, and rents went through the proverbial roof, even as sale prices continued to fall.

      • @Janet and those lower prices feed into valuations which then reduce the amount financed…. tick tock

      • Stomper …people have supposedly been hearing that tick tick for well over a decade…

        Might be inevitable, but so is the extinguishment of the Sun. What I mean to say is, might not live to see it.

    • Its the people that can afford to sell that will drop the price. Others that can’t will just watch their value fall.

    • This is exactly right.
      I see a slow grind lower (much like Perth) until the next external shock. Then it will be on like donkey kong.
      I have the same outlook for AUD.

    • I agree, you won’t sell if you are owner occupier and now have negative equity. However, if you are a speculator that bought a couple of years ago (i.e. have some equity margin), and can see the equity is likely to be eroded in the future, then you will sell, and sell before your neighbour come to the same conclusion.

    • Not exactly. There is fear of further price fall. If I had $1M home and price already fell 10%, I will plan for exit asap before it falls more than 10%. Just like greed pushes up the prices, fear pulls the prices down.

  5. Had an offer on my IP in May guy has taken forever to get finance Just received confirmation today that purchaser’s finance from ANZ has been approved and will exchange this week. Not sure reasons for delay? The good thing for me is price is as agreed in May even though prices have fallen since.

  6. “Seriously, what did policy makers expect? If house prices continually outstrip wages growth there will eventually be a correction. ”

    I honestly believe that no-one thought there would ever be a correction. Crazy? Yes. But the reality of Australia today.

    • Most people are acting like this correction won’t be big either.. Like it’s a short term blip. 🙂

  7. Jumping jack flash

    “The real takeaway is that one of the very foundations of the Australian economy is built on quicksand. That is, there is no depth in wealth generation beyond flogging houses to each other, leveraged by debt.”

    This.

    The act of locking in the debt slaves is all part of the plan.
    Can’t buy, can’t sell.
    No money, no sale.
    No sale, no revaluation.

    Nobody who has a choice will want to lose money on their house purchase. They’ll just sit and hold and wait until the debt is repaid, or retirement, whichever comes first.

    Don’t worry though, while the debt slaves are pinned against the wall, working their dead-end jobs with no wage inflation and soaring living costs, the economy will be fine. We have lined up a continent-load of consumers who are just waiting to come over here to keep the place ticking over.

  8. Australia has gone all in on property. Put all it’s eggs in one basket. Property is too-big-to-fail… and too-big-to-save.

  9. The Horrible Scott Morrison MP

    I’ve read all of the above negative comments. Quit going on and instead have a go at having a fair go before it’s gone!

  10. And yet housing credit growth continues to rise at 7% per annum? Thats a big number. When this decelerates significantly perhaps we may have some more substantive changes in house prices? Risks are rising.